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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~April~~July 3031, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-26023

Alloy, Inc.

(Exact name of registrant as specified in its charter)


Delaware		04-3310676
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

151 West 26th Street, 11th Floor, New York, NY		10001
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(212) 244-4307

Former name, former address and fiscal year, if changed since last report:

None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of the registrant’s common stock issued and outstanding as of ~~May~~August 31, 2010 was 12,~~983~~874,~~196~~123, excluding treasury shares.

ALLOY, INC.

TABLE OF CONTENTS

		Page
~~PART I—FINANCIAL INFORMATION~~	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets, as of April 30, 2010 (unaudited) and January 31, 2010	3
	Consolidated Balance Sheets, as of July 31, 2010 (unaudited) and January 31, 2010	3
	Consolidated Statements of Operations, Three Months Ended April 30, 2010 and 2009 (unaudited)	4
	Consolidated Statements of Operations, Three and Six-Month Periods Ended July 31, 2010 and 2009 (unaudited)	4
	Consolidated Statements of Cash Flows, Three Months Ended April 30, 2010 and 2009 (unaudited)	5
	Consolidated Statements of Cash Flows, Six Months Ended July 31, 2010 and 2009 (unaudited)	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1516
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2325
Item 4.	Controls and Procedures	2325
~~PART II—OTHER INFORMATION~~	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	2426
Item 1A.	Risk Factors	2427
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2528
Item 3.	Defaults Upon Senior Securities	2529
Item 4.	Reserved	2529
Item 5.	Other Information	2529
Item 6.	Exhibits	2529
	Signatures	2630
	Exhibit Index	2731

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALLOY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	April 30,2010			January 31,2010
	July 31,2010			January 31,2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2360,~~610~~501		$	26,178
Accounts receivable, net of allowance for doubtful accounts of $835 and $851, respectively		28,145			30,759
Accounts receivable, net of allowance for doubtful accounts of $837 and $851, respectively		29,263			26,764
Unbilled accounts receivable		97,~~729~~670			5,989
Inventory		75,~~912~~389			3,478
Other current assets		64,~~040~~802			5,~~710~~607
Total current assets		75,436			72,114
Current assets of discontinued operations		—			4,098
Fixed assets, net		21,700			22,119
Total current assets		107,625			72,114
Goodwill		55,434			55,297
Fixed assets, net		18,786			19,352
Intangible assets, net		6,504			6,951
Goodwill		46,092			45,085
Other assets		1,671			1,657
Intangible assets, net		5,923			6,776
Total assets	$	160,745		$	158,138
Other assets		975			1,656
Noncurrent assets of discontinued operations		—			13,155
Total assets	$	179,401		$	158,138
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1819,~~523~~806		$	1110,~~036~~886
Deferred revenue		1011,~~720~~424			1110,~~050~~305
Accrued expenses and other current liabilities		2320,~~743~~912			2617,~~858~~655
Total current liabilities		52,986			48,944
Current liabilities of discontinued operations		—			10,098
Deferred tax liability		2,804			2,668
Total current liabilities		52,142			48,944
Other long-term liabilities		3,086			3,112
Deferred tax liability		2,717			2,668
Total liabilities		58,876			54,724
Other long-term liabilities		3,568			3,112
Total liabilities		58,427			54,724
Stockholders’ equity:
Common stock; $.01 par value: authorized 200,000 shares; issued and outstanding: 16,858 and 16,600, respectively		171			165
Common stock; $.01 par value: authorized 200,000 shares; issued and outstanding: 16,925 and 16,600 respectively		172			165
Additional paid-in capital		~~456~~457,~~228~~634			454,896
Accumulated deficit		(~~323~~305,~~656~~959	)		(321,546	)
		132,743			133,515
		151,847			133,515
Less treasury stock, at cost: 4,061 and 3,963 shares, respectively		(30,874	)		(30,101	)
Less treasury stock, at cost: 4,064 and 3,963 shares, respectively		(30,873	)		(30,101	)
Total stockholders’ equity		~~101~~120,~~869~~974			103,414
Total liabilities and stockholders’ equity	$	~~160~~179,~~745~~401		$	158,138

See accompanying notes to consolidated financial statements

ALLOY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months EndedApril 30,
	Three Months EndedJuly 31,						Six Months EndedJuly 31,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
Revenues:
Services revenue	$	4335,~~796~~024		$	3732,~~253~~767		$	72,087		$	65,263
Product revenue		518,~~567~~209			516,~~725~~056			23,776			21,781
Total revenue	$	4953,~~363~~233		$	4248,~~978~~823		$	95,863		$	87,044
Cost of Goods Sold:
Costs of goods sold- services		2015,~~548~~772			1612,~~876~~840			33,158			27,300
Costs of goods sold- product		16,~~263~~318			15,~~268~~285			7,581			6,553
Total costs of goods sold	$	2122,~~811~~090		$	18,~~144~~125		$	40,739		$	33,853
Expenses:
Operating		2225,~~323~~490			2022,~~481~~855			46,286			42,134
General and administrative		54,~~084~~801			5,~~184~~261			9,774			10,445
Depreciation and amortization**		1,~~974~~618			1,~~738~~547			3,271			3,028
Total expenses		29,381			27,403
Special charges		1,056			—			1,165			—
Operating loss		(1,829	)		(2,569	)
Total expenses		32,965			29,663			60,496			55,607
Interest expense		(5	)		(1	)
Operating income (loss) from continuing operations		(1,822	)		1,035			(5,372	)		(2,416	)
Other income (expense)		(7	)		11
Interest expense		(4	)		(17	)		(9	)		(18	)
Loss before income taxes		(1,841	)		(2,559	)
Interest income and other		(387	)		6			(394	)		17
Income tax expense		(269	)		(164	)
Income (loss) before income taxes		(2,213	)		1,024			(5,775	)		(2,417	)
Net loss	$	(2,110	)	$	(2,723	)
Income tax expense		(249	)		(33	)		(477	)		(156	)
Net loss per basic share	$	(0.18	)	$	(0.22	)
Income (loss) from continuing operations		(2,462	)		991			(6,252	)		(2,573	)
Income from discontinued operations, net of income taxes		20,159			963			21,839			1,804
Net income (loss)	$	17,697		$	1,954		$	15,587		$	(769	)
Net income (loss) per basic share:
Income (loss) from continuing operations	$	(0.21	)	$	0.08		$	(0.54	)	$	(0.22	)
Income from discontinued operations		1.72			0.08			1.88			0.15
Net income (loss) - Basic		1.51			0.16			1.34			(0.07	)
Net income (loss) per diluted share:
Income (loss) from continuing operations	$	(0.21	)	$	0.08		$	(0.54	)	$	(0.22	)
Income from discontinued operations		1.56			0.07			1.71			0.14
Net income (loss) - Diluted		1.35			0.15			1.17			(0.08	)

** Includes amortization of intangibles of $~~807~~777 and $~~643~~689 for the three ~~months~~month periods ended ~~April~~July 3031, 2010 and 2009, respectively, and includes amortization of intangibles of $1,555 and $1,298 for the six-month periods ended July 31, 2010 and 2009, respectively.

See accompanying notes to consolidated financial statements.

ALLOY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Three Months EndedApril 30,
	Six Months EndedJuly 31,
	2010			2009
	(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(2,110	)	$	(2,723	)
Net income (loss)	$	15,587		$	(769	)
Adjustments to reconcile net loss to net cash used in operating activities:
Less net income from discontinued operations	$	21,839		$	1,804
Depreciation and amortization of fixed assets		1,167			1,095
Net loss from continuing operations	$	(6,252	)	$	(2,573	)
Deferred tax expense		136			—
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Amortization of intangible assets		807			643
Loss on sale of operating assets		—			311
Provision for losses on accounts receivable		9			22
Depreciation and amortization of fixed assets		1,714			1,729
Compensation charge for restricted stock and issuance of options		1,303			802
Deferred tax expense		221			—
Impairment charge on investments		109
Amortization of intangible assets		1,557			1,298
Provision for losses on accounts receivable		68			135
Stock compensation		2,646			1,833
Changes in operating assets and liabilities:
Accounts receivable		(14,~~135~~248	)		49,~~865~~469
Inventory and other assets		(~~4,778~~533	)		(63,~~478~~387	)
Accounts payable, accrued expenses, and other		413,~~182~~685			(~~925~~4,733	)
Net cash used in operating activities		(419	)		(2,699	)
Net cash provided by (used in) operating activities attributable to discontinued operations		(1,780	)		2,272
Net cash provided by operating activities		7,187			6,354
Cash Flows from Investing Activities
Capital expenditures		(~~748~~1,146	)		(~~895~~1,488	)
Contingent consideration payments related to prior acquisitions		(300	)		—
Acquisitions, net of cash acquired		—			275
Purchase of domain name / mailing list / marketing rights		(363	)		(290	)
Contingent consideration payments related to prior acquisitions		(940	)		—
Net cash used in investing activities		(1,411	)		(1,185	)
Purchase of domain name / mailing list / marketing rights		(704	)		(609	)
Net proceeds on the sale of operating assets		—			122
Net cash provided by (used in) investing activities attributable to discontinued operations		30,600			(693	)
Net cash provided by (used in) investing activities		27,810			(2,393	)
Cash Flows from Financing Activities
Issuance of common stock		3599			—
Treasury stock transactions		(773	)		(730	)
Repurchase of common stock		(773	)		(4,169	)
Net cash used in financing activities		(~~738~~674	)		(~~730~~4,169	)
Net change in cash and cash equivalents		(234,~~568~~323	)		(~~4,614~~208	)
Cash and cash equivalents:
Beginning of period	$	26,178		$	32,116
End of period	$	2360,~~610~~501		$	2731,~~502~~908

See accompanying notes to consolidated financial statements

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

1. Business and Financial Statement Presentation

Alloy, Inc. (the “Company” or “Alloy”) 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 digital, 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~~have tomarket ~~receive~~ recognition, such as Alloy Education, Alloy Entertainment, ~~Alloy~~ Alloy Marketing and Promotions (“AMP”), Alloy Access and On Campus Marketing (“OCM”).

Each of the Company’s businesses falls into 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 digital, display board, database, specialty print, educational programming and entertainment businesses. The Placement segment is comprised 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 college guides, giving us significant reach into the targeted demographic audience and providing our advertising clients with significant exposure to the intended market.

~~The~~On ~~accompanying~~June 7, ~~unaudited~~2010, ~~consolidated financial~~Alloy ~~statements~~Media, ~~have~~LLC, an ~~been~~indirect ~~prepared~~wholly-owned bysubsidiary of the Company ~~pursuant~~(“Alloy toMedia”), ~~the~~sold ~~rules~~substantially all of ~~the~~its ~~Securities~~assets ~~and~~used ~~Exchange~~exclusively ~~Commission~~in its FrontLine Marketing division (“~~SEC~~FrontLine”)., ~~These~~together ~~financial~~with ~~statements~~certain ~~should~~liabilities, befor ~~read~~approximately $39,286 in ~~conjunction~~cash, ~~with~~resulting in net cash proceeds to the ~~more~~Company ~~detailed~~of ~~financial~~approximately ~~statements~~$36,451, ~~and~~excluding ~~notes thereto~~estimated ~~included~~tax. inA net gain of $19,648 related to the sale was recorded. The disposition was deemed to be material to the Company’s ~~Annual~~requiring ~~Report~~pro onforma information, which was filed in Form 108-K ~~for~~in conjunction with the ~~fiscal~~sale. ~~year~~The ~~ended~~sale ~~January 31,~~of ~~2010~~FrontLine ~~(“fiscal~~is ~~2009”)~~fully discussed in Note 7 to the Consolidated Financial Statements.

InFor ~~the opinion of management,~~ all ~~adjustments,~~periods ~~consisting of only normal and recurring adjustments~~presented, ~~necessary for a fair statement of~~ the financial ~~position, results of consolidated~~ operations and ~~cash~~financial ~~flows~~position of ~~the~~FrontLine ~~Company~~are ~~for the periods presented, have been made. Certain previously~~ reported ~~amounts~~as ~~have~~discontinued been reclassified to conform to the current presentation. The Company’s business is seasonal. The Company’s third quarter has historically been its most significant in terms of revenue and operating income with the majority of the Company’s revenues and operating income being earned during the third and fourth quarters of its fiscal year. The results of operations ~~for the three month period ended April 30, 2010 is not necessarily indicative of the operating results for a full fiscal year~~.

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the more detailed financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010 (“fiscal 2009”), taking into account the differences for discontinued operations

In the opinion of management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial position, results of consolidated operations and cash flows of the Company for the periods presented, have been made. Certain previously reported amounts have been reclassified to conform to the current presentation. The Company’s business is seasonal. The Company’s third quarter has historically been its most significant in terms of revenue and operating income with the majority of the Company’s revenues and operating income being earned during the third and fourth quarters of its fiscal year. The results of operations for the three month period ended July 31, 2010 is not necessarily indicative of the operating results for a full fiscal year, particularly in light of the disposition of FrontLine.

Use of Estimates – The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Discontinued Operations – The Company determined, in accordance with generally accepted accounting principles (“GAAP”), that for reporting purposes the operations of FrontLine should be reported as discontinued operations for all periods presented.

Management’s plan to divest and the divesture of FrontLine both occurred within the Company’s second fiscal quarter of fiscal 2010. FrontLine has been classified in the Company’s Consolidated Financial Statements as discontinued operations. The discontinued operations on the Statement of Operations have been reported, net of applicable income taxes. Additionally, segment information does not include the results of businesses classified as discontinued operations.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

Recently Issued Accounting Pronouncements

Revenue Recognition

In September 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition guidance on multiple deliverable arrangements. It updates the existing multiple-element revenue arrangements guidance currently included under the Accounting Standards Codification (“ASC”) 605-25. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) requires the use of the relative selling price method to allocate the entire arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after the fiscal year ending January 31, 2012 (“fiscal 2011”), with early adoption permitted, provided that the revised guidance is retroactively applied to the beginning of the year of adoption. Management is currently evaluating the impact of adopting this guidance on the Company’s consolidated financial statements.

2. Net Earnings Per Share and Stock-Based Compensation

On February 1, 2009 the Company adopted changes issued by the FASB which require the Company to include all unvested restricted stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in computing earnings per share (“EPS”) using the two-class method. The calculation of earnings per share for common stock presented here has been reclassified to exclude the income attributable to the unvested restricted stock awards from the numerator and exclude the dilutive impact of those shares from the denominator. The Company has retroactively applied the provisions of this guidance.

~~The~~During ~~Company~~the ~~does~~three-month ~~not~~period ~~have~~ended July 31, a2010 ~~diluted earnings~~and ~~per~~the ~~share~~six-month ~~calculation~~periods ended July 31, as2010 and 2009, respectively, the Company was in a net loss position. As a result, unvested shares of restricted stock of 1,161, 1,161 and 941 were excluded in the ~~first~~calculation ~~quarter~~ of EPS using the ~~fiscal~~two-class ~~year~~method ~~ending~~for ~~January~~the three-month period ended July 31, ~~2011~~2010 ~~(“fiscal~~and six-month periods ended July 31, 2010”) and 2009, respectively, because the ~~first~~effect ~~quarter~~would ofbe ~~fiscal~~antidilutive ~~2009~~due to the net loss for the period.

~~The~~Diluted ~~following~~earnings ~~table~~(loss) ~~sets~~per ~~forth~~share is calculated by dividing net earnings (loss) by the ~~computation~~weighted average number of ~~basic~~shares ~~loss~~of ~~per~~common ~~share~~stock outstanding ~~for~~and all dilutive potential common shares that were outstanding during the ~~three~~period. ~~months~~The ~~ended~~Company ~~April 30~~excludes outstanding stock options, ~~2010~~and warrants to purchase common stock, and ~~April 30~~common stock subject to repurchase or which has been issued, but ~~2009:~~has not vested, from the calculation of diluted earnings (loss) per common share in cases where the inclusion of such securities would be antidilutive.

	Three months endedApril 30,
	2010			2009
Basic
Numerator:
Net loss	$	(2,110	)	$	(2,723	)
Denominator:
Weighted-average common shares
Weighted-average basic shares outstanding		11,464			12,244
Loss per basic share	$	(0.18	)	$	(0.22	)

The computation of basic and diluted earnings per share from continuing operations under the two-class method is as follows:

3. Stock-Based Compensation


	Three Months Ended July 31,					Six Months Ended July 31,
	2010			2009		2010			2009
Net income (loss) from continuing operations	$	(2,462	)	$	991	$	(6,252	)	$	(2,573	)

Less: income allocated to participating securities from continuing operations		—			72		—			—


Income (loss) available to common stockholders from continuing operations	$	(2,462	)	$	919	$	(6,252	)	$	(2,573	)


Weighted-average common shares outstanding - basic		11,733			11,922		11,607			11,841

Effect of dilutive employee restricted stock		—			941		—			—


Weighted-average common shares and share equivalents outstanding - diluted		11,733			12,863		11,607			11,841


Earnings (loss) per share from continuing operations - basic	$	(0.21	)	$	0.08	$	(0.54	)	$	(0.22	)


Earnings (loss) per share from continuing operations - diluted	$	(0.21	)	$	0.08	$	(0.54	)	$	(0.22	)

The total stock-based compensation expense (for stock option and restricted stock grants) for the three-month periods ended April 30, 2010 and 2009 was $1,303 and $802, respectively, of which $504 and $409, respectively, were included in operating costs in the Consolidated Statement of Operations, and $799 and $393, respectively, were included in general and administrative expenses in the Consolidated Statement of Operations.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

3. Stock-Based Compensation

The total stock-based compensation expense (for stock option and restricted stock grants) for the three-month periods ended July 31, 2010 and 2009 was $1,342 and $1,029, respectively, of which $593 and $510, respectively, were included in operating expenses in the Consolidated Statement of Operations, and $749 and $427, respectively, were included in general and administrative expenses in the Consolidated Statement of Operations. For the six-month periods ended July 31, 2010 and 2009, the total stock-based compensation expense was $2,646 and $1,833, respectively, of which $1,098 and $920, respectively, were included in operating expenses in the Statement of Operations and $1,548 and $913, respectively, were included in general and administrative expenses in the Statement of Operations.

Stock Options

The weighted-average fair value of each option as of the grant date was $3.65 and $1.87 for the ~~three~~six months ended ~~April~~July 3031, 2010 and 2009, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Three Months EndedApril 30, 2010		Year EndedJanuary 31, 2010
	Six Months EndedJuly 31, 2010		Year EndedJanuary 31, 2010
Risk-free interest rate	21.5898	%	2.57	%
Expected lives (in years)	4.5		4.5
Expected volatility	4745.36	%	47.3	%
Expected dividend yield	—		—

Forfeitures are estimated on the date of grant. On an annual basis, the forfeiture rate and compensation expense are adjusted and revised, as necessary, based on actual forfeitures.

The following is a summary of stock option activity for the ~~three~~six-month period ended ~~April~~July 3031, 2010:

	Options		Weighted-AverageExercise Price PerShare
Outstanding at January 31, 2010	2,270		$	10.21
Options granted	204			8.50
Options exercised	(513	)		7.0137
Options forfeited or expired	(2383	)		1514.7133
Outstanding at April 30, 2010	2,446		$	10.02
Outstanding at July 31, 2010	2,378		$	9.92
Fully vested and exercisable at April 30, 2010	1,625		$	11.20
Fully vested and exercisable at July 31, 2010	1,600		$	11.06
Available for future grants	1,~~321~~089

Restricted Stock

The Company has historically awarded restricted shares of common stock to directors and certain employees that typically vest over periods of up to three years although in some instances vesting dates have been longer. The majority of these awards are service based, but a portion of these awards combine service and market based components for vesting requirements. Compensation expense related to the restricted stock awards, equals the fair market value on the date of grant net of estimated forfeitures, and is expensed ratably over the vesting period. In the three-month period ended ~~April~~July 3031, 2010, the Company awarded ~~253~~183 restricted shares with a weighted-average life of three years and a fair market value of $21,~~071~~534.

Unearned compensation expense related to restricted stock grants at July 31, 2010 was $6,947. This expense is expected to be recognized over a weighted-average period of approximately 2.1 years. Total compensation expense attributable to restricted stock grants for the three-month periods ended July 31, 2010 and 2009 was $1,006 and $767, respectively. For the six-month periods ended July 31, 2010 and 2009, total compensation expense attributable to restricted stock grants was $1,967 and $1,269, respectively.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

~~Unearned~~The ~~compensation~~following ~~expense related to restricted stock grants at April 30, 2010 was $6,583. This expense~~ is ~~expected to be recognized over~~ a ~~weighted-average~~summary ~~period~~ of ~~approximately 2.1 years. Total compensation expense attributable to~~ restricted stock ~~grants~~activity for the ~~three~~six-month ~~periods~~period ended ~~April~~ July 3031, 2010: ~~and 2009 was $960 and $503, respectively.~~

The following is a summary of restricted stock activity for the three-month period ended April 30, 2010:


	Shares		Weighted-Average Fair Value Per Share
Unvested at January 31, 2010	1,247		$	6.78
Granted	439			8.10
Vested	(496	)		6.97
Forfeited	(30	)		5.50


Unvested at July 31, 2010 (unaudited)	1,160		$	7.23

	Shares		Weighted-AverageFair ValuePer Share
Unvested at January 31, 2010	1,247		$	6.78
Granted	253			7.99
Vested	(421	)		6.98
Forfeited	—			—
Unvested at April 30, 2010 (unaudited)	1,079		$	6.99

Warrants

At ~~April~~July 3031, 2010, there were 255 warrants outstanding and exercisable with an average exercise price of $76.52 per share and a weighted average contractual term of 1.75 years.

4. Goodwill and Intangible Assets

Goodwill

The acquired goodwill as of ~~April~~July 3031, 2010 and January 31, 2010, is as follows:

	April 30, 2010		Adjustments			January 31, 2010
	July 31, 2010		Adjustments				January 31, 2010
	(Unaudited)
Promotion	$	2425,~~863~~733	$	37907	(1)	$	~~24,826~~$	24,826
Media		3019,~~055~~843		100			~~29,955~~	19,743
Placement		516		—			~~516~~	516
Total	$	5546,~~434~~092	$	~~137~~1,007		$	~~55,297~~$	45,085

(1)	During the first six months of fiscal 2010, the Company recorded a contingent payment of $907 related to the Fulgent earnout.

Intangibles

The acquired intangible assets as of ~~April~~July 3031, 2010 and January 31, 2010 are as follows:

	GrossCarryingAmounts		AccumulatedAmortization		Net
At April 30, 2010:
At July 31, 2010:
(Unaudited)
Amortizable intangible assets:
Client relationships	$	87,~~109~~989	$	6,~~398~~374	$	1,~~711~~615
Noncompetition agreements		2,~~388~~348		1,~~769~~761		~~619~~587
Websites		1,~~892~~893		1,~~180~~292		~~712~~601
Mailing lists		4,~~724~~805		3,~~001~~310		1,~~723~~495
Marketing rights		175		~~146~~160		2915
		17,288		12,494		4,794
		17,210		12,897		4,313
Indefinite-lived intangible assets:
Trademarks		1,~~710~~610		—		1,~~710~~610
Total intangible assets	$	18,~~998~~820	$	12,~~494~~897	$	65,~~504~~923
At January 31, 2010:
Amortizable intangible assets:
Client relationships	$	87,~~109~~809	$	65,~~096~~818	$	21,~~013~~991
Noncompetition agreements		2,~~288~~168		1,~~709~~642		~~579~~526
Websites		1,893		1,069		824
Mailing lists		4,463		2,682		1,781
Marketing rights		175		131		44
		16,928		11,687		5,241
		16,508		11,342		5,166
Indefinite-lived intangible assets:
Trademarks		1,~~710~~610		—		1,~~710~~610
Total intangible assets	$	18,~~638~~118	$	11,~~687~~342	$	6,~~951~~776

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

5. Unbilled Accounts Receivable

Unbilled accounts receivable are a normal part of the Company’s business. Placement and Media segment receivables are typically invoiced in the month following the receipt of the proof-of-performance documentation. At ~~April~~July 3031, 2010 and January 31, 2010, there were $97,~~729~~670 and $5,989, respectively, of unbilled receivables.

6. Detail of Certain Balance Sheet Accounts

	April 30, 2010		January 31, 2010
	July 31, 2010		January 31, 2010
	(Unaudited)
Accrued expenses and other current liabilities
Accrued acquisition costs	$	~~6,342~~972	$	~~6,605~~905
Accrued compensation and sales commissions		35,~~093~~604		75,~~279~~906
Program accrual (1)		54,~~673~~381		54,~~927~~323
Promotions accrual (2)		1,~~178~~455		1,274
Other		78,~~457~~500		5,~~773~~247
	$	2320,~~743~~912	$	2617,~~858~~655

⁽¹⁾	The program accrual consists primarily of program costs including other commissions, labor, supplies, printing, delivery and fulfillment.

⁽²⁾	The promotions accrual consists primarily of hourly outside labor costs and travel and expense related fees.

7. Discontinued Operations

As discussed in Note 1, on June 7, 2010, Alloy Media sold substantially all of its assets used exclusively in its FrontLine business, together with certain liabilities, for approximately $39,300 in cash, resulting in net cash proceeds to the Company of approximately $36,500, excluding estimated tax.

Below is a summary of the financial statement information for FrontLine which is included as part of discontinued operations for all interim periods presented:

FrontLine Balance Sheet


	July 31, 2010		January 31, 2010
	(Unaudited)

Accounts receivable, net	$	—	$	3,995
Other assets		—		103

Total current assets		—		4,098

Fixed assets, net		—		2,768
Goodwill		—		10,212
Intangible assets, net		—		175

Total assets	$	—	$	17,253


Accounts payable	$	—	$	150
Deferred revenue		—		745
Accrued expenses		—		9,203

Total liabilities	$	—	$	10,098

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

7.FrontLine ~~Common~~Statement ~~Stock~~of Operations

Common Stock Transactions


	Three Months Ended July 31,						Six Months Ended July 31,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
Total revenue	$	2,389		$	5,399		$	9,122		$	10,156

Total cost of goods sold		(1,178	)		(2,837	)		(4,340	)		(5,253	)

Total expenses		(688	)		(1,552	)		(2,538	)		(3,011	)


Income from discontinued operations	$	523		$	1,010		$	2,244		$	1,892

Gain on sale of FrontLine		20,276			—			20,276			—

Income taxes		(640	)		(47	)		(681	)		(88	)


Net income from discontinued operations	$	20,159		$	963		$	21,839		$	1,804

~~During~~The ~~the~~computation ~~first quarter~~ of ~~fiscal~~basic ~~2010,~~and ~~employees~~diluted ~~surrendered~~earnings toper ~~the~~share ~~Company~~from ~~approximately~~discontinued 98operations ~~shares~~under ofthe ~~common~~two-class method ~~stock~~is toas ~~satisfy tax-withholding~~follows: ~~obligations.~~

Common Stock Transactions – Stock Repurchase Program


	Three Months Ended July 31,				Six Months Ended July 31,
	2010		2009		2010		2009
	(Unaudited)				(Unaudited)
Net income from discontinued operations	$	20,159	$	963	$	21,839	$	1,804

Less: income allocated to participating securities from continuing operations		1,815		70		1,985		133


Income available to common stockholders from discontinued operations	$	18,344	$	893	$	19,854	$	1,671


Weighted-average common shares outstanding - basic		11,733		11,922		11,607		11,841

Effect of dilutive employee restricted stock		1,161		941		1,161		941


Weighted-average common shares and share equivalents outstanding - diluted		12,894		12,863		12,768		12,782


Earnings per share from discontinued operations - basic	$	1.72	$	0.08	$	1.88	$	0.15


Earnings per share from discontinued operations - diluted	$	1.56	$	0.07	$	1.71	$	0.14

During the first quarter of fiscal 2010, the Company did not repurchase any shares under the Company’s stock repurchase program.

At April 30, 2010, the Company had an unused authorization of approximately $3,005.

Common Stock Outstanding

The number of shares of common stock outstanding as of April 30, 2010 was 16,857,818, or 12,797,226 excluding treasury shares.

8. Segment Reporting

	Three Months EndedApril 30,
	2010			2009
	(Unaudited)
Revenue:
Promotion	$	14,537		$	15,066
Media		22,664			18,462
Placement		12,162			9,450
Total revenue	$	49,363		$	42,978
Operating income (loss):
Promotion	$	(1,336	)	$	(200	)
Media		2,735			869
Placement		386			233
Corporate		(3,614	)		(3,471	)
Total operating loss	$	(1,829	)	$	(2,569	)

	At April 30, 2010		At January 31, 2010
	(Unaudited)
Total Assets:
Promotion	$	39,914	$	35,949
Media		78,217		77,909
Placement		11,645		11,085
Corporate		30,969		33,195
Total assets	$	160,745	$	158,138

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

9.Goodwill ~~Income~~and ~~Taxes~~Intangible Assets of Discontinued Operations

~~For~~In ~~the~~conjunction ~~three~~with ~~months ended April 30, 2010~~ the ~~Company~~sale ~~recorded income tax expense~~ of ~~$269~~FrontLine, ~~which~~the ~~was~~Company aallocated ~~combination~~to ofdiscontinued ~~state~~operations ~~taxes, alternative~~all ~~minimum~~intangible ~~tax,~~assets ~~interest~~that ~~and~~were ~~penalties on uncertain tax positions and income tax expense~~ recorded onin conjunction ~~books~~with ~~and~~the ~~tax~~April ~~basis~~2007 ~~differences~~acquisition, ~~related~~including tocontingent ~~certain~~consideration ofpayments ~~the~~that ~~Company’s~~were ~~prior~~made ~~year acquisitions. The Company continues~~ to ~~maintain~~FrontLine ~~a full valuation allowance against its net deferred tax assets~~executives.

~~For~~The ~~the~~conclusion ~~three~~was ~~months~~reached ~~ended~~primarily ~~April 30,~~due ~~2009~~to the ~~Company~~fact ~~recorded income~~that ~~tax~~FrontLine ~~expense~~continued ofto ~~$164,~~maintain ~~which~~its’ ~~was~~own ~~primarily~~operational ~~attributable~~infrastructure toand management ~~state taxes~~team, ~~federal~~essentially ~~alternative~~operating ~~minimum~~on ~~tax,~~a ~~interest~~standalone ~~and~~basis ~~penalties~~since onApril ~~uncertain tax positions~~2007. The Company ~~maintained~~allocated a$10,212 ~~full~~of ~~valuation~~goodwill ~~allowance~~and ~~against~~$175 ~~its~~of ~~net~~intangible ~~deferred~~assets ~~tax~~to ~~assets~~FrontLine.

AtGain ~~April 30,~~on ~~2010,~~Sale the Company’s total liability for net unrecognized tax benefits, including the liability for interest and penalties as described above, was $832. At January 31, 2010, the liability was $818. The Company did not settle any of ~~its~~Discontinued ~~uncertain~~Operations ~~tax positions during the three months ended April 30, 2010.~~

The Company’s ~~subsidiaries~~recognized ~~join~~a ingain, ~~the~~net ~~filing~~ of ataxes, ~~United~~on ~~States~~the ~~federal~~sale ~~consolidated income tax return. The United States federal statute~~ of ~~limitations~~FrontLine ~~remains~~in ~~open for~~ the ~~years~~amount ~~2004~~of ~~onward~~$19,648. ToThe ~~the~~following ~~Company’s~~table ~~knowledge,~~details itthe significant iscomponents ~~not~~of ~~currently under examination by~~ the ~~Internal~~net ~~Revenue~~gain: ~~Service.~~

State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.


	June 7, 2010
	(Unaudited)
Purchase price per asset sale agreement	$	36,000
Working capital adjustment		3,286

Gross cash proceeds		39,286
Less total transaction costs		2,835


Net cash proceeds		36,451
Less:
FrontLine net assets sold		16,175

Income tax on gain on sale		628


Gain on sale of FrontLine, net of income taxes	$	19,648

8. Special Charges

The “special charges” line item on the Consolidated Statements of Operations is comprised of the following:


	Three months ended July 31, 2010
	Promotion		Media		Placement		Corporate		Total
Impairment of auction rate securities	$	—	$	—	$	—	$	110	$	110
Merger transaction costs		—		—		—		946		946

Total special charges	$	—	$	—	$	—	$	1,056	$	1,056


	Six months ended July 31, 2010
	Promotion		Media		Placement		Corporate		Total
Impairment of auction rate securities	$	—	$	—	$	—	$	110	$	110
Merger transaction costs		—		—		—		1,055		1,055

Total special charges	$	—	$	—	$	—	$	1,165	$	1,165

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

10As described in the Form 8-K filed on June 28, 2010, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Alloy Media Holdings, L.L.C., ~~Commitments~~a Delaware limited liability company (“Parent”), and ~~Contingencies~~Lexington Merger Sub Inc., a wholly-owned subsidiary of Parent (“Merger Subsidiary”). Parent is a newly-formed entity to be owned by ZM Capital, L.P. and other co-investors. In addition, certain members of management of Alloy, including Matthew C. Diamond, Chief Executive Officer and James K. Johnson, President and Chief Operating Officer, in connection with such transaction will exchange a portion of their Alloy shares for an equity interest in Parent. Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Subsidiary will merge with and into Alloy, and Alloy will become a wholly-owned subsidiary of Parent (the “Merger”). The Company received notice that the Federal Trade Commission and the Department of Justice terminated the mandatory waiting period under the Hart-Scott-Rodino Act on July 23, 2010 and the Company is waiting SEC approval to distribute to its stockholders the definitive proxy statement soliciting their votes to approve the merger. The Company expects this transaction to close during its third fiscal quarter. The merger transaction costs above include legal and accounting expenses related to such merger.

9. Common Stock

Common Stock Transactions

During the second quarter of fiscal 2010, employees surrendered to the Company approximately 1 share of common stock to satisfy tax-withholding obligations.

Common Stock Transactions – Stock Repurchase Program

During the first six months of fiscal 2010, the Company did not repurchase any shares under the Company’s stock repurchase program.

At July 31, 2010, the Company had an unused authorization of approximately $3,005.

Common Stock Outstanding

The number of shares of common stock outstanding as of July 31, 2010 was 16,924,773, or 12,860,959 excluding treasury shares.

10. Segment Reporting

The following table sets forth the Company’s financial performance by reportable operating segment:


	Three Months Ended July 31,						Six Months Ended July 31,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
Revenue:
Promotion	$	27,645		$	27,155		$	42,182		$	42,221
Media		14,993			14,768			30,924			28,473
Placement		10,595			6,900			22,757			16,350


Total revenue	$	53,233		$	48,823		$	95,863		$	87,044


Operating income (loss) from continuing operations:
Promotion	$	4,035		$	3,558		$	2,699		$	3,357
Media		(1,892	)		1,121			(877	)		1,109
Placement		599			14			985			247
Corporate		(4,564	)		(3,658	)		(8,179	)		(7,129	)


Total operating income (loss) from continuing operations	$	(1,822	)	$	1,035		$	(5,372	)	$	(2,416	)

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)


	At July 31, 2010		At January 31, 2010
	(Unaudited)
Total Assets:
Promotion	$	36,664	$	35,949
Media		61,519		60,656
Placement		12,464		11,085
Corporate		68,754		33,195


Total Assets	$	179,401	$	140,885

11. Income Taxes

For the three and six months ended July 31, 2010 and 2009, the Company recorded income tax expense from continuing operations of $249 and $33, and $477 and $156, respectively, which was a combination of state taxes, alternative minimum tax, interest and penalties on uncertain tax positions and income tax expense recorded on books and tax basis differences related to certain of the Company’s prior year acquisitions. The Company continues to maintain a full valuation allowance against its net deferred tax assets. As noted below the Company utilized a portion of its deferred tax assets to offset the gain resulting from the sale of FrontLine.

As of July 31, 2010, the Company’s total liability for net uncertain tax positions, including the liability for interest and penalties as described above, was $883. At January 31, 2010 the liability was $818. During the six-month period ended July 31, 2010, the Company did not settle any of its uncertain tax positions.

During the six-month period ended July 31, 2010, the Company expensed approximately $30 of interest expense and penalties related to the unrecognized tax benefits.

The Company’s subsidiaries join in the filing of a United States federal consolidated income tax return. The United States federal statute of limitations remains open for the years 2004 onward. To the Company’s knowledge, it is not currently under examination by the Internal Revenue Service.

State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. During the six-month period ended July 31, 2010, the Company did not reverse any uncertain tax positions due to expiring statutes.

It is expected that the amount of uncertain tax positions will change in the next 12 months; however, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

Gain on Sale of FrontLine

As more fully discussed in Note 7, the Company sold the assets and certain liabilities of FrontLine and recognized a book gain of $20,276. The taxable gain on the sale of FrontLine totaled $22,415, all of which will be offset by the Company’s net operating losses for federal income tax purposes. For state income tax purposes, the Company applied an effective state income tax rate to the taxable gain. The Company, will however, be subject to alternative minimum tax for federal income tax purposes. The Company recorded $478 in federal income tax expense and $359 in state income tax expense related to the gain for the three and six months ended July 31, 2010. These amounts were offset by a reversal of a deferred tax liability in the amount of $209, which represented the differences between the book basis and the tax basis in FrontLine’s assets as of the date of sale.

12. Commitments and Contingencies

Other

The Company received an information request in late January 2009 from the New York State Attorney General (“NYS AG”) inquiring about the Company’s activities in marketing credit cards to college students. The Company subsequently was informed that the NYS AG is conducting an investigation into the Company’s marketing practices in this area. The Company is cooperating with the NYS AG in the investigation and is without sufficient information to determine the extent, if any, of potential monetary liability or other restrictions on its activities that may result from the investigation of the NYS AG. The Company’s last communication with the NYS AG was in July 2009.

Litigation

On or about November 5, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York naming as defendants Alloy, specified company officers and investment banks, including James K. Johnson, Jr., Matthew C. Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain Rauscher Wessel and Ladenburg Thalmann & Co., Inc. The complaint purportedly was filed on behalf of persons purchasing the Company’s stock between May 14, 1999 and December 6, 2000, and alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 19, 2002, the plaintiffs amended the complaint to assert violations of Section 10(b) of the Exchange Act. The claims ~~mirror allegations asserted~~ against scores of other issuers. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson were dismissed from the litigation without prejudice. By opinion and order dated February 19, 2003, the District Court denied in part and granted in part a global motion to dismiss filed on behalf of all issuers. With respect to Alloy, the Court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11 claim. In June 2004, as a result of a mediation, a settlement agreement was executed on behalf of the issuers (including Alloy), insurers and plaintiffs and submitted to the Court. While final approval of the settlement was pending, on December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification order with respect to nine focus group cases and remanded the matter for further consideration. On June 25, 2007, as a result of the Second Circuit’s decision, the settlement agreement was terminated. On August 14, 2007, plaintiffs filed second amended complaints against nine focus group issuers. By opinion and order dated March 26, 2008, the District Court denied in part and granted in part motions to dismiss the amended complaints. Specifically, the District Court dismissed claims brought under Section 11 of the Securities Act by those plaintiffs who sold their securities for a price in excess of the initial offering price and claims brought by plaintiffs who purchased securities outside of the previously certified class period and denied the remainder of the motions. After many months of negotiation, on April 2, 2009, the representative class plaintiffs and the defendants filed a Notice of Motion for Preliminary Approval of Settlement accompanied by a global Stipulation and Agreement of Settlement. The proposed Settlement provides that all claims against the issuers and underwriters will be dismissed with prejudice in exchange for the aggregate payment of $586 million. Under the terms of the proposed Settlement, neither the Company nor Messrs. Johnson or Diamond are required to pay any portion of the $586 million payment. The proposed Settlement is subject to numerous contingencies, including, but not limited to, preliminary Court approval, certification of a settlement class and final approval after providing members of the plaintiff class with notice. On or about June 10, 2009, the Court granted Plaintiff’s motion for an order: (i) preliminarily approving the proposed stipulation; (ii) certifying the Settlement classes for the purposes of the proposed stipulation only; (iii) approving the form and program of class notice described in the stipulation; and (iv) scheduling a hearing before the Court to determine whether the proposed stipulation should be finally approved. On October 5, 2009, the Court granted final approval of the settlement. Various members of the plaintiff class have filed notices of appeal seeking to challenge the terms of the settlement. At this point, there can be no assurance that the settlement will be affirmed.

~~The~~14 Company is involved in additional legal proceedings that have arisen in the ordinary course of business. The Company believes that, apart from the actions set forth above, there is no claim or litigation pending, the outcome of which could have a material adverse effect on the Company’s financial condition or operating results.

ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share amounts)

(Unaudited)

mirror allegations asserted against scores of other issuers. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson were dismissed from the litigation without prejudice. By opinion and order dated February 19, 2003, the District Court denied in part and granted in part a global motion to dismiss filed on behalf of all issuers. With respect to Alloy, the Court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11 claim. ~~Subsequent~~In ~~Event~~June 2004, as a result of a mediation, a settlement agreement was executed on behalf of the issuers (including Alloy), insurers and plaintiffs and submitted to the Court. While final approval of the settlement was pending, on December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification order with respect to nine focus group cases and remanded the matter for further consideration. On June 25, 2007, as a result of the Second Circuit’s decision, the settlement agreement was terminated. On August 14, 2007, plaintiffs filed second amended complaints against nine focus group issuers. By opinion and order dated March 26, 2008, the District Court denied in part and granted in part motions to dismiss the amended complaints. Specifically, the District Court dismissed claims brought under Section 11 of the Securities Act by those plaintiffs who sold their securities for a price in excess of the initial offering price and claims brought by plaintiffs who purchased securities outside of the previously certified class period and denied the remainder of the motions. After many months of negotiation, on April 2, 2009, the representative class plaintiffs and the defendants filed a Notice of Motion for Preliminary Approval of Settlement accompanied by a global Stipulation and Agreement of Settlement. The proposed Settlement provides that all claims against the issuers and underwriters will be dismissed with prejudice in exchange for the aggregate payment of $586 million. Under the terms of the proposed Settlement, neither the Company nor Messrs. Johnson or Diamond are required to pay any portion of the $586 million payment. The proposed Settlement is subject to numerous contingencies, including, but not limited to, preliminary Court approval, certification of a settlement class and final approval after providing members of the plaintiff class with notice. On or about June 10, 2009, the Court granted Plaintiff’s motion for an order: (i) preliminarily approving the proposed stipulation; (ii) certifying the Settlement classes for the purposes of the proposed stipulation only; (iii) approving the form and program of class notice described in the stipulation; and (iv) scheduling a hearing before the Court to determine whether the proposed stipulation should be finally approved. On October 5, 2009, the Court granted final approval of the settlement. Various members of the plaintiff class have filed notices of appeal seeking to challenge the terms of the settlement. At this point, there can be no assurance that the settlement will be affirmed.

On June 729, 2010, ~~Alloy~~the ~~Media~~Company, its directors, and ZelnickMedia LLC (~~the~~ “~~Company~~Zelnick”) were named as defendants in a putative class action complaint, ancaptioned ~~indirect~~Teitelbaum ~~wholly-owned~~v. ~~subsidiary~~Diamond., et al., C.A. No. 5604, filed in the Court of Chancery of the State of Delaware. On July 8, 2010, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned City of Livonia Employees Retirement System v. Diamond, et al., C.A. No. 5626. This lawsuit also named as defendants Alloy Media Holdings, L.L.C., Lexington Merger Sub Inc., (“Natixis Caspian Private Equity, LLC, Rosemont Solebury Co-Investment Fund, L.P. and Genspring Family Offices, LLC. On July 26, 2010, the actions were consolidated under the caption In re Alloy”), Inc. Shareholder ~~sold~~Litigation, ~~substantially~~C.A. ~~all~~No. 5626. On August 9, 2010, plaintiffs filed an amended complaint, purportedly on behalf of a class of stockholders, alleging that the ~~assets~~intrinsic value of Alloy common stock is materially in excess of the ~~Company~~amount offered ~~used~~for ~~exclusively~~those securities in the ~~Company’s~~merger ~~FrontLine~~and ~~Marketing~~that ~~division~~our ~~(“FrontLine”)~~directors breached their fiduciary duties by agreeing to the merger price, ~~for~~thereby ~~approximately~~depriving ~~$36.0~~plaintiffs ~~million~~of inthe ~~cash~~opportunity (to realize any increase in the ~~“Purchase~~value ~~Price”)~~of ~~together~~Alloy ~~with~~stock. ~~certain~~The amended ~~liabilities~~complaint ~~associated~~also ~~with~~alleges that the ~~FrontLine~~Preliminary ~~business~~Proxy omits material information concerning the merger and is materially misleading. The amended complaint further alleges that Zelnick, ~~resulting~~Parent, inMerger ~~net~~Sub ~~cash~~and ~~proceeds~~the toother ~~Alloy~~additional defendants named therein, aided and abetted the supposed breaches of ~~approximately~~fiduciary ~~$32~~duty by our directors.9 ~~million~~The action seeks injunctive and other equitable relief, ~~excluding~~damages, ~~estimated~~fees ~~tax~~and costs. ~~The~~Simultaneously ~~Purchase~~with ~~Price~~filing istheir ~~subject~~amended tocomplaint, ~~adjustment~~plaintiffs ~~based~~filed ~~upon~~a motion for expedited proceedings, seeking an order setting a schedule for expedited discovery and a hearing on their application for injunctive relief prior to the ~~final~~shareholder ~~determination~~meeting. ofOn August 25, 2010, the ~~Company’s working~~court ~~capital~~denied asplaintiffs’ ofmotion. ~~June~~On August 727, 2010., ~~The~~defendants ~~Purchase~~filed ~~Agreement~~motions ~~contains~~to ~~representations,~~dismiss ~~warranties~~the amended complaint and ~~indemnities~~to stay discovery pending resolution of the motions to dismiss. The Company believes that ~~are~~the ~~customary~~claims asserted in ~~asset~~the ~~purchase~~lawsuits ~~transactions~~are without merit.

The ~~sale~~Company ofis ~~FrontLine,~~involved ~~part~~in ofadditional ~~Alloy’s~~legal ~~Media~~proceedings ~~segment,~~that ~~was~~have aarisen ~~material~~in ~~disposition, and accordingly~~ the ~~Company~~ordinary ~~filed~~course aof ~~Form~~business. ~~8-K~~The ~~on June~~Company 8,believes ~~2010~~that, apart ~~which~~from ~~provided,~~the ~~among~~actions ~~other~~set ~~items~~forth above, athere ~~pro~~is ~~forma~~no ~~Consolidated~~claim ~~Balance~~or ~~Sheet~~litigation aspending, ofthe ~~January~~outcome ~~31,~~of ~~2010~~which ~~and~~could ~~pro~~have ~~forma~~a ~~Consolidated~~material ~~Statements~~adverse ofeffect ~~Operations~~on ~~for~~ the ~~fiscal~~Company’s ~~years~~financial ~~ended~~condition ~~January~~or ~~31,~~operating ~~2010, 2009, and 2008, respectively~~results.

As15 a result of the sale of FrontLine, Alloy expects all future and historical results of FrontLine to be reported as discontinued operations in its financial statements beginning in the second quarter of fiscal 2010.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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, 2010 (“fiscal 2009”). 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 digital, display, direct mail, content production and educational programming. Collectively, our businesses operate under the umbrella name Alloy Media + Marketing, but the division brand names have their own recognition in the market, including 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 digital, display board, 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.

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 historically expanded our Media segment through acquisitions and internally generated growth. 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 Alloy Digital business, we continue to expand our online network, to deliver original, short-form video programming to increase our attractiveness to advertisers. 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. In our Promotion and Placement segments, we plan to continue to try to maximize profitability through cost management, not necessarily growth. However, with respect to all segments, we continually review our strategy and consider possible acquisition and divestiture opportunities.

On June 24, 2010, the Company announced that an investor group led by Zelnick agreed to acquire the Company for $9.80 per share in cash and that certain members of Alloy’s senior management will invest in the transaction in conjunction with Zelnick. This transaction is subject to Alloy stockholder approval, the satisfaction of certain financial conditions and other customary terms and conditions. The Company received notice that the Federal Trade Commission and the Department of Justice terminated the mandatory waiting period under the Hart-Scott-Rodino Act on July 23, 2010. The Company is awaiting SEC approval to distribute to its stockholders the definitive proxy statement soliciting their votes to approve the merger. The Company expects this transaction to close during its third fiscal quarter.

If the proposed merger is not completed or we are not otherwise acquired, the Company’s board of directors will review and consider other strategic alternatives, including, among other things, the possible sale of certain of our lines of business, maintaining the status quo, returning capital to stockholders, divesting certain non-core assets to focus on the media segment, seeking a minority investment from a strategic or financial partner or attempting to implement a sale of the Company with either a financial or strategic buyer.

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 41,000 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; and (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 7,900 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, commercial entertainment properties primarily geared toward teens, young adults and families. These properties typically begin as a book property and are subsequently developed into television series, feature films or web series.

Results of Operations and Financial Condition

The principal components of our expenses are cost of goods or services, which includes placement, production and distribution costs (including advertising placement fees, catalog and signage fees, temporary help and production costs), operating expenses (including personnel costs, commissions, promotions and bad debt expenses), general and administrative expenses, depreciation and amortization and special charges.

The Promotion segment has considerable variable costs. As a result, an increase or decrease in revenue will typically result in segment operating income increasing or decreasing by a similar percentage.

The Media segment has relatively low variable costs. As a result, in a period of rising revenue, segment operating income will typically increase at a rate that exceeds the increase in revenue. Conversely, in a period of declining revenue, segment operating income will typically decrease at a rate that exceeds the decrease in revenue.

The Placement segment has a combination of variable and fixed costs. As a result, an increase in revenue will typically result in segment operating income increasing in relation to the increase in revenue. As well, a decrease in revenue will typically result in segment operating income decreasing by a greater percentage due to the segment’s fixed costs.

The Corporate segment has primarily fixed costs, but these may increase or decrease depending upon the amount of stock compensation, professional fees, medical benefits and other variable expenses.

Three Months Ended ~~April~~July 3031, 2010 Compared with Three Months Ended ~~April~~July 3031, 2009

	Three months ended April 30, 2010 (Unaudited)
	Three months ended July 31, 2010 (Unaudited)
	Promotion			Media	~~Media~~		Placement		Corporate			Total
Revenues:
Services revenue	$	89,~~970~~436		$	$14,993	~~22,664~~	$	1210,~~162~~595		—		$	4335,~~796~~024
Product revenue		518,~~567~~209			—	—		—		—			518,~~567~~209
Total revenue	$	1427,~~537~~645		$	$14,993	~~22,664~~	$	1210,~~162~~595		—		$	4953,~~363~~233
Cost of goods sold:
Cost of goods sold – services	$	4,~~915~~262		$	$3,843	~~6,368~~	$	97,~~265~~667		—		$	2015,~~548~~772
Cost of goods sold – product		16,~~263~~318			—	—		—		—			16,~~263~~318
Total cost of goods sold	$	610,~~178~~580		$	$3,843	~~6,368~~	$	97,~~265~~667		—		$	2122,~~811~~090
Expenses:
Operating	$	811,~~458~~713		$	$11,342	~~11,550~~	$	21,~~221~~998	$	94437		$	2225,~~323~~490
General and administrative		~~911~~993			636	~~604~~		~~285~~327		32,~~284~~845			54,~~084~~801
Depreciation and amortization		~~326~~324			1,064	~~1,407~~		54		~~236~~226			1,~~974~~618
Total expenses	$	9,695			$	13,561	$	2,511	$	3,614		$	29,381
Special charges		—			—			—		1,056			1,056
Operating income (loss)	$	(1,336	)		$	2,735	$	386	$	(3,614	)	$	(1,829	)
Total expenses	$	13,030		$	13,042		$	2,329	$	4,564		$	32,965
Operating income (loss)	$	4,035		$	(1,892	)	$	599	$	(4,564	)	$	(1,822	)

	Three months ended April 30, 2009 (Unaudited)
	Three months ended July 31, 2009 (Unaudited)
	Promotion			Media	~~Media~~		Placement	~~Placement~~		Corporate	~~Corporate~~			Total	~~Total~~
Revenues:
Services revenue	$	911,~~341~~099		$	$14,768	~~18,462~~	$	$6,900	~~9,450~~		—	—		$	$32,767	~~37,253~~
Product revenue		516,~~725~~056			—	—		—	—		—	—			16,056	~~5,725~~
Total revenue	$	1527,~~066~~155		$	$14,768	~~18,462~~	$	$6,900	~~9,450~~		—	—		$	$48,823	~~42,978~~
Cost of goods sold:
Cost of goods sold – services	$	45,~~962~~993		$	$1,657	~~4,995~~	$	$5,190	~~6,919~~		—	—		$	$12,840	~~16,876~~
Cost of goods sold – product		15,~~268~~285			—	—		—	—		—	—			5,285	~~1,268~~
Total cost of goods sold	$	611,~~230~~278		$	$1,657	~~4,995~~	$	$5,190	~~6,919~~		—	—		$	$18,125	~~18,144~~
Expenses:
Operating	$	710,~~725~~954		$	$9,852	~~10,769~~	$	$1,275	~~1,672~~	$	$774	~~315~~		$	$22,855	~~20,481~~
General and administrative		1,~~099~~130			1,052	~~541~~		415	~~617~~		2,664	~~2,927~~			5,261	~~5,184~~
Depreciation and amortization		~~212~~236			1,085	~~1,288~~		6	9		220	~~229~~			1,547	~~1,738~~
Total expenses	$	912,~~036~~320		$	$11,989	~~12,598~~	$	$1,696	~~2,298~~	$	$3,658	~~3,471~~		$	$29,663	~~27,403~~
Operating income (loss)	$	~~(200~~3,557	)	$	$1,122	~~869~~	$	$14	~~233~~	$	$(3,658	~~(3,471~~)	)	$	$1,035	~~(2,569~~	)

Revenue

Revenue in the ~~first~~second quarter of ~~the~~ fiscal ~~year ending January 31, 2011 (“fiscal~~ 2010”) was $4953,~~363~~233, an increase of $64,~~385~~410, or ~~14.~~ 9.0%, from revenue of $48,823 in the ~~first~~second quarter of fiscal 2009 ~~of $42,978~~. ~~This~~Revenue ~~increase~~increased ~~was attributable to increases~~ in ~~revenue~~each ~~in our Media and Placement segments~~ of ~~$4,202 and $2,712, respectively, which were partially offset by a decrease in~~ our ~~Promotion~~ ~~segment of $529~~segments.

Promotion

Promotion segment revenue in the ~~first~~second quarter of fiscal 2010 was $1427,~~537~~645, aan ~~decrease~~increase of $~~529~~490, or 31.58%, from revenue of $27,155 in the second ~~first~~ quarter of fiscal 2009. Revenue increased in the Company’s OCM businesses of $152,~~066.~~150, ~~The~~respectively, ~~decrease~~partially ~~was~~offset ~~primarily~~by ~~due~~a todecrease ~~decreases~~ in ~~revenue~~the ~~in our~~ AMP Agency ~~($320)~~ and ~~on-campus~~sampling ~~marketing~~business ~~($160)~~of ~~businesses~~$1,660.

Media

Media segment revenue in the ~~first~~second quarter of fiscal 2010 was $2214,~~664~~993, an increase of $4225,~~202,~~ or 221.85%, from revenue of $14,768 in the second ~~first~~ quarter of fiscal 2009 ~~of $18,462~~. The increase was primarily due to anincreases ~~increase~~ in ~~revenue~~our inDigital, ~~our~~Alloy ~~display~~Education ~~board~~and ~~($800),~~Display ~~digital~~Board (businesses of $~~500)~~790, ~~education (~~$~~400)~~720, and ~~entertainment businesses (~~$1190,~~000)~~ respectively, which ~~was~~were partially offset by adecreases ~~decrease~~ in our Channel One business of ($~~900)~~1,000 and Alloy Entertainment and print businesses of $470.

Placement

Placement segment revenue in the ~~first~~second quarter of fiscal 2010 was $1210,~~162~~595, an increase of $23,~~712~~695, or 2853.76 %, from revenue of $6,900 in the ~~first~~ second quarter of fiscal 2009 ~~of $9,450~~. The increase was primarily due to increases ~~across~~in ~~all~~military, ~~lines of our newspaper business: college ($1~~multicultural,~~000),~~ broadcast ~~($800)~~, ~~military ($700)~~ and ~~multicultural~~general market advertising (of $~~300)~~3,610.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold in the ~~first~~second quarter of fiscal 2010 was $610,~~178~~580, ~~and~~a ~~remained~~decrease ~~consistent~~of ~~with~~$698, or 6.2%, from cost of goods sold of $11,278 in the ~~first~~ second quarter of fiscal 2009. ofThe decrease was primarily due to temporary labor ($~~6,230~~530) and production costs ($210).

1819

Media

Media segment cost of goods sold in the ~~first~~second quarter of fiscal 2010 was $63,~~368,~~843 an increase of $12,~~373~~186, ~~or 27.5%,~~ from cost of goods sold of $1,657, in the ~~first~~second quarter of fiscal 2009 ~~of $4,995~~. The increase was primarily due to ~~higher~~an increase in net production costs for Channel One ($12,~~300~~130) and increased payroll costs ($~~140~~100), ~~partially~~which were offset by ~~lower~~a decrease in temporary labor ($3025).

Placement

Placement segment cost of goods sold in the ~~first~~second quarter of fiscal 2010 was $97,~~265~~667, an increase of $2,~~346~~477, or 3347.97%, from cost of goods sold in the ~~first~~second quarter of fiscal 2009 of $65,~~919~~190. The increase ~~was~~is ~~primarily~~in ~~due~~direct proportion to anthe increase in ~~marketing fees ($2,350)~~revenue.

Operating Expenses

Promotion

Promotion segment operating expenses in the ~~first~~second quarter of fiscal 2010 were $811,~~458~~713, an increase of $~~733~~759, or 96.59%, from operating expenses of $10,954 in the ~~first~~second quarter of fiscal 2009 ~~of $7,725~~. The increase was primarily due to ~~higher~~increases in payroll ($470), travel costs ($~~550~~140), ~~corporate~~marketing costs ($~~150~~120), and facilities costs ($80105), ~~partially~~which were offset by ~~lower~~a ~~printing/~~decrease in mailing costs ($~~180~~225).

Media

Media segment operating expenses in the ~~first~~second quarter of fiscal ~~2010~~2009 were $11,~~550,~~342 an increase of $~~781~~1,490, or 715.31%, from operating ~~expenses~~ expenses of $9,852 in the ~~first~~second quarter of fiscal 2009 ~~of $10,769~~. The increase was primarily due to increases in ~~payroll~~general corporate costs ($~~500~~1,295), ~~corporate~~payroll costs ($~~360~~415), and facilities costs ($~~110~~280), ~~partially~~which were offset by adecreases ~~decrease~~ in maintenance ($555) and consulting costs ($~~170~~115).

Placement

Placement segment operating expenses in the ~~first~~second quarter of fiscal ~~2009~~2010 were $21,~~221~~998, an increase of $~~549~~723, or 3256.87%, from operating expenses of $1,275 in the ~~first~~second quarter of fiscal 2009 ~~of $1,672~~. The increase was primarily due to ~~higher~~an ~~payroll~~increase ~~($310)~~in ~~and~~payroll ~~corporate~~ costs ($~~230~~800), ~~partially~~which was offset by ~~lower~~a ~~bad~~decrease ~~debt~~in general corporate costs ($30135).

Corporate

The Corporate segment operating expenses in the ~~first~~second quarter of fiscal 2010 were $94437, a decrease of $~~221~~337, or 7043.25% , from operating ~~expenses~~ expenses of $774, in the ~~first~~second quarter of fiscal 2009 ~~of $315~~. The decrease was primarily due to ~~decreases~~a decrease in ~~general~~information ~~corporate~~technology costs ($70385), ~~payroll~~which ~~($70),~~was ~~and~~offset ~~lower~~by ~~information~~an ~~technology~~increase in general corporate costs ($3050).

General and Administrative

Promotion

Promotion segment general and administrative expenses in the ~~first~~second quarter of fiscal 2010 were $~~911~~993, a decrease of $~~188~~137, or 1712.1%, ~~from~~as ~~general~~compared ~~and~~to ~~administrative~~$1,130 ~~expenses~~ in the ~~first~~second quarter of fiscal 2009 ~~of $1,099~~. The decrease was primarily due to ~~lower~~a decrease in general corporate costs ($140).

Media

Media segment general and administrative expenses in the ~~first~~second quarter of fiscal 2010 were $~~604~~636, ana ~~increase~~decrease of $63416, or 11$39.65%, ~~from~~as ~~general~~compared ~~and~~to ~~administrative~~$1,052 ~~expenses~~ in the ~~first~~second quarter of fiscal 2009 ~~of $541~~. The ~~increase~~decrease was primarily due to ~~higher~~decreases in general corporate costs ($63430) and payroll costs ($85).

Placement

Placement segment general and administrative expenses in the ~~first~~second quarter of fiscal 2010 were $~~285~~327, a decrease of $~~332~~88, or 5321.82%, ~~from~~as compared to general and administrative expenses of $415 in the ~~first~~second quarter of fiscal 2009 ~~of $617~~. The decrease was primarily due to ~~lower~~a decrease in general corporate costs.

Corporate

The Corporate segment general and administrative expenses in the ~~first~~second quarter of fiscal 2010 were $32,~~284~~845, an increase of $~~357~~181, or 126.28%, ~~from~~ from general and administrative expenses of $2,664 in the ~~first~~second quarter of fiscal 2009 ~~of $2,927~~. The increase was primarily due to anhigher ~~increase~~general incorporate cost ($325), and stock based compensation ~~costs~~expense ($240), ~~partially~~which were offset by ~~lower~~a decrease in payroll ($260) ~~costs~~and professional fees ($135).

Income Taxes

Income tax expense in the first quarter of fiscal 2010 was $269, an increase of $105, or 64%, from income tax expense in the first quarter of fiscal 2009 of $164. In the first quarter of fiscal 2010, the annualized effective tax rate was 14.6%, and in the first quarter of fiscal 2009, the annualized effective tax rate was 6.4%. Our income tax provision for the first quarter of fiscal 2010 consisted of alternative minimum tax, on our pretax income, state income taxes, interest and penalties on our uncertain tax provisions and book and tax basis differences on certain of our prior acquisitions. Our tax provision for the first quarter of fiscal 2009 consisted of alternative minimum tax on our pretax income, state income taxes and interest and penalties on our uncertain tax positions. Due to our history of incurring operating losses, we have established a valuation allowance on all of our deferred tax assets.

Special Charges

Special charges for the second quarter of fiscal 2010 were $1,056, which included $946 of merger transaction costs and an impairment charge to our auction rate securities of $110. There were no special charges recorded during the second quarter of fiscal 2009.

Six Months Ended July 31, 2010 Compared with Six Months Ended July 31, 2009


	Six months ended July 31, 2010 (Unaudited)
	Promotion		Media			Placement		Corporate			Total
Revenues:
Services revenue	$	18,406	$	30,924		$	22,757		—		$	72,087
Product revenue		23,776		—			—		—			23,776


Total revenue	$	42,182	$	30,924		$	22,757		—		$	95,863
Cost of goods sold:
Cost of goods sold – services	$	9,177	$	7,049		$	16,932		—		$	33,158
Cost of goods sold – product		7,581		—			—		—			7,581


Total cost of goods sold	$	16,758	$	7,049		$	16,932		—		$	40,739
Expenses:
Operating	$	20,171	$	21,365		$	4,219	$	531		$	46,286
General and administrative		1,904		1,238			612		6,020			9,774
Depreciation and amortization		650		2,150			9		462			3,271
Special charges		—		—			—		1,165			1,165


Total expenses	$	22,725	$	24,753		$	4,840	$	8,178		$	60,496


Operating income (loss)	$	2,699	$	(878	)	$	985	$	(8,178	)	$	(5,372	)


	Six months ended July 31, 2009 (Unaudited)
	Promotion		Media		Placement		Corporate			Total
Revenues:
Services revenue	$	20,440	$	28,473	$	16,350		—		$	65,263
Product revenue		21,781		—		—		—			21,781


Total revenue	$	42,221	$	28,473	$	16,350		—		$	87,044
Cost of goods sold:
Cost of goods sold – services	$	10,955	$	4,236	$	12,109		—		$	27,300
Cost of goods sold – product		6,553		—		—		—			6,553


Total cost of goods sold	$	17,508	$	4,236	$	12,109		—		$	33,853
Expenses:
Operating	$	18,679	$	19,419	$	2,947	$	1,089		$	42,134
General and administrative		2,229		1,593		1,032		5,591			10,445
Depreciation and amortization		448		2,116		15		449			3,028


Total expenses	$	21,356	$	23,128	$	3,994	$	7,129		$	55,607


Operating income (loss)	$	3,357	$	1,109	$	247	$	(7,129	)	$	(2,416	)

Revenue

Revenue for the six months ended July 31, 2010 was $95,863, an increase of $8,819, or 10.1%, from revenue of $87,044 for the six months ended July 31, 2009. Revenue increased in our Placement and Media segments by $6,400 and $2,450, respectively, which were offset by a slight decrease in our Promotion segment.

Promotion

Promotion segment revenue for the six months ended July 31, 2010 was $42,182, a decrease of $39, or 0.1%, from revenue of $42,221 for the six months ended July 31, 2009. Revenue decreased in the Company’s AMP Agency business of $1,840, which was offset by an increase in the OCM business of $1,800.

Media

Media segment revenue for the six months ended July 31, 2010 was $30,924, an increase of $2,451, or 8.6%, from revenue of $28,473 for the six months ended July 31, 2009. The increase was primarily due to increases in our Alloy Digital, Display Board, and Alloy Education and Alloy Entertainment businesses of $1,630, $1,190, $1,170, and $790, respectively, which were offset by a decrease in our Channel One and print businesses of $1,940 and $440, respectively.

Placement

Placement segment revenue for the six months ended July 31, 2010 was $22,757 an increase of $6,407, or 39.2 %, from revenue of $16,350 for the six months ended July 31, 2009. The increase was primarily due to increases in college, multicultural, military, broadcast and general market advertising of $6,480.

Cost of Goods Sold

Promotion

Promotion segment cost of goods sold for the six months ended July 31, 2010 was $16,758, a decrease of $750, or 4.3%, from cost of goods sold of $17,508 for the six months ended July 31, 2009. The decrease was primarily due to decreases in payroll and temporary labor costs ($695), and production costs ($130), which were offset by an increase in travel costs ($80).

Media

Media segment cost of goods sold for the six months ended July 31, 2010 was $7,049, an increase of $2,813, or 66.4%, from cost of goods sold of $4,236 for the six months ended July 31, 2009. The increase was primarily due to increases in net production costs for Channel One ($2,535), and payroll costs ($350).

Placement

Placement segment cost of goods sold for the six months ended July 31, 2010 was $16,932, an increase of $4,823, or 39.8%, from cost of goods sold of $12,109 for the six months ended July 31, 2009. The increase is in direct proportion to the increase in revenue.

Operating Expenses

Promotion

Promotion segment operating expenses for the six months ended July 31, 2010 were $20,171, an increase of $1,492, or 8.0%, from operating expenses of $18,679 for the six months ended July 31, 2009. The increase was primarily due increased payroll ($1,020), travel costs ($215), and general corporate costs ($180), which were partially offset by a decrease in mailing costs ($405).

Media

Media segment operating expenses for the six months ended July 31, 2010 were $21,365, an increase of $1,946, or 10.0%, from operating expenses of $19,419 for the six months ended July 31, 2009. The increase was primarily due to increases in general corporate costs ($1,640), payroll costs ($630), and facilities costs ($375), which were offset by decreases in maintenance costs ($720) and consulting costs ($170).

Placement

Placement segment operating expenses for the six months ended July 31, 2010 were $4,219, an increase of $1,272, or 43.2%, from operating expenses of $2,947 for the six months ended July 31, 2009. The increase was primarily due to increases in payroll related costs ($1,100) and general corporate costs ($110).

Corporate

The Corporate segment operating expenses for the six months ended July 31, 2010 were $531, a decrease of $558, or 51.2%, from operating expenses of $1,089 for the six months ended July 31, 2009. The decrease was primarily due to decreases in information technology costs ($420), payroll costs ($65), and general corporate costs.

General and Administrative

Promotion

Promotion segment general and administrative expenses for the six months ended July 31, 2010 were $1,904, a decrease of $325, or 14.6%, as compared to general and administrative expenses of $2,229 for the six months ended July 31, 2009. The decrease was primarily due to decreases in general corporate costs ($345) and travel costs ($15), which were offset by an increase in payroll costs ($50).

Media

Media segment general and administrative expenses for the six months ended July 31, 2010 were $1,238, a decrease of $355, or 22.3%, as compared to general and administrative expenses of $1,593 for the six months ended July 31, 2009. The decrease was primarily due to decreases in general corporate costs ($200) and payroll related costs ($130).

Placement

Placement segment general and administrative expenses for the six months ended July 31, 2010 were $612, a decrease of $420, or 40.7%, as compared to general and administrative expenses of $1,032 for the six months ended July 31, 2009. The decrease was primarily due to a decrease in general corporate costs ($410).

Corporate

The Corporate segment general and administrative expenses for the six months ended July 31, 2010 were $6,020, an increase of $429, or 7.7%, from general administrative expenses of $5,591 for the six months ended July 31, 2009. The increase was primarily due to increases in stock based compensation ($645), general corporate costs ($600) and information technology costs ($80), which were offset by lower payroll costs ($585) and professional fees ($300).

Special Charges

Special charges for the six months ended July 31, 2010 were $1,165, which included $1,055 of merger transaction costs and an impairment charge to our auction rate securities of $110. There were no special charges recorded during the six months ended July 31, 2009.

Liquidity and Capital Resources

Cash from Operations

Cash ~~used~~provided inby operating activities was $~~419~~7,187 infor the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July 31, 2010. ~~Factors~~Net ~~contributing~~loss tofrom ~~our~~continuing ~~cash~~operations ~~used in operating~~was ~~activities were our net loss of~~ $26,~~110~~252 and uses of working capital ofitems totaled $18,~~731~~904, ~~mainly~~which ~~attributable~~was primarily due to increases in ~~inventory and~~ accounts receivable due to lower collections, offset by anhigher ~~increase in~~ accrued expenses. These uses of cash for continuing operations were offset by ~~noncash~~non cash items ~~totaling~~ of $36,~~422~~315, which ~~included~~were primarily depreciation, ~~and~~ amortization, and stock based compensation. ~~expense~~Net cash provided by discontinued operations totaled $1,780, consisting of FrontLine’s net income of $21,839 and non-cash depreciation and amortization, offset by the gain on the sale of FrontLine of $20,276.

Cash ~~used~~provided in by operating activities was $26,~~699~~354 infor the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July 31, 2009. Factors contributing to our cash ~~used~~provided inby operating activities were ~~our~~uses ~~net~~of ~~loss~~working capital of $21,~~723~~349, ~~and~~primarily ~~uses~~as a result of ~~working~~improvements ~~capital~~in our accounts receivable collections, non-cash items of $24,~~538~~995, ~~mainly~~which ~~attributable~~included todepreciation ~~increases~~and inamortization, ~~inventory~~bad debt and ~~prepaid~~stock ~~payroll~~based ~~and~~compensation ~~a decrease~~expense. inThese ~~accrued~~items ~~expenses,~~were offset by ~~lower~~our ~~accounts~~net ~~receivable.~~loss ~~These~~of ~~uses~~$769 and the loss on the sale of ~~cash~~assets ~~were~~related ~~offset~~to bythe ~~noncash~~health ~~items~~club ~~totaling~~network of $2311. Net income from discontinued operations was $1,~~562~~804, which ~~included~~was ~~depreciation~~primarily ~~and~~related ~~amortization~~to the net income earned by FrontLine. Net cash provided by discontinued operations totaled $2,272, ~~and~~consisting ~~stock~~primarily ~~based~~of ~~compensation~~the ~~expense~~net income of FrontLine of $1,804.

Investing Activities

Cash ~~used~~provided inby investing activities was $127,~~411~~810 induring the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July 31, 2010. The increase during the six months ended July 31, as2010, ~~compared~~was primarily due to the cash ~~used~~provided inby ~~investing~~discontinued ~~activities~~operations of $30,600, consisting of $36,450 of proceeds received on the sale of FrontLine, offset by $5,700 of contingent consideration paid to FrontLine and $153 of capital expenditures. The net cash provided by discontinued operations was offset by capital expenditures of $1,~~185~~146, incontingent consideration payments of $940 related to the ~~first~~Fulgent ~~quarter~~Media Group, Inc. and Pixel Bridge, Inc. earnouts, and purchases of ~~fiscal~~mailing lists ~~2009~~and other intangible assets of $704.

~~Capital~~Cash ~~expenditures~~used ~~were $748~~ in ~~the~~investing ~~first~~activities ~~quarter~~was ~~of fiscal 2010~~$2,393 asduring ~~compared to $895 in~~ the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July ~~2008~~31, 2009. Capital expenditures ~~for~~were ~~the~~$1,488 ~~first~~and ~~quarter~~purchases of ~~fiscal~~mailing ~~2010~~lists ~~were~~and ~~primarily~~other ~~for~~intangible ~~general~~assets ~~operating~~totaled ~~purposes~~$609. WeThese ~~purchased~~uses ~~$363~~were offset by sources of ~~mailing~~net ~~lists~~cash ~~and~~through ~~other~~acquisitions ~~intangible~~and ~~assets~~the ~~during~~sale of the ~~first~~health ~~quarter~~club ofnetwork. ~~fiscal 2010,~~Net ascash ~~compared~~used toby discontinued operations was $~~290~~693 ~~during~~and ~~the~~consisted ~~first~~primarily ~~quarter~~of capital expenditures of ~~fiscal~~FrontLine ~~2009~~for the period.

In the first quarter of fiscal 2010, we paid approximately $300 in earnout payments related to prior acquisitions.

Financing Activities

Cash ~~provided~~used byin financing activities in the amount of $35674 for the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July 31, 2010, was ~~due~~primarily the result of shares of common stock surrendered to the ~~exercises~~Company by our employees to satisfy their tax withholding obligations upon the vesting of ~~Company~~their restricted stock ~~options~~ of $773, offset by ~~employees~~the exercise of employee stock options of $99.

Cash used in financing activities inwas ~~the amount of~~ $~~773~~4,169 induring the ~~first~~six ~~quarter~~months ofended ~~fiscal~~July 31, ~~2010~~2009, ~~was primarily~~as ~~the~~a result of ~~shares~~repurchases of ~~common stock surrendered to the Company by~~ our ~~employees to satisfy their tax withholding obligations upon the vesting of their restricted~~ common stock.

Cash used in financing activities was $730 in the first quarter of fiscal 2009, primarily as a result of shares of common stock surrendered to the Company by our employees to satisfy their tax withholding obligations upon the vesting of their restricted stock.

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 enter into a new credit facility or raise additional capital. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution. Alternatively, or in addition to equity related funding, we may seek various short term and term credit facilities, such as those that we have had in the past, with one or more institutional lenders. If financing is not available for working capital and for investment, we may have to adjust our operations and restrict our product development and enhancement as well as curtail acquisitions of products and services that expand our offerings. There is no assurance that we will be able to obtain financing when needed, or on terms that are acceptable to management. A lack of financing in sufficient amounts to our requirements could adversely ~~effect~~affect our growth and ability to respond to competitive pressures. Any of these events could have a material and adverse effect on our business, results of operations and financial condition.

At ~~April~~July 3031, 2010, our auction rates securities balance was $~~1,052~~504. In ~~May 2010~~August, we liquidated ~~$438~~the ~~related~~remaining tooutstanding portion of our auction rate securities balance for $504 in cash.

AtAs ~~May 31,~~a ~~2010~~condition to the Zelnick merger agreement, ~~our~~Alloy ~~auction~~has ~~rates~~agreed ~~securities~~to ~~balance~~pay ~~was~~Zelnick a termination fee of $~~614.~~3,900 Weif dothe ~~not~~merger ~~believe~~agreement ~~that~~is weterminated ~~will~~for becertain ~~able~~reasons, including if there is an adverse recommendation change, which includes Alloy failing to make, or ~~liquidate~~withdrawing ~~our~~or ~~remaining~~modifying ~~security~~in ~~within~~a manner adverse to Zelnick, the ~~next~~recommendation ~~twelve~~of ~~months~~Alloy’s board of directors to Alloy’s stockholders to approve and ~~consider~~adopt ~~this~~the ~~asset~~merger ~~long-term~~agreement in(or ~~nature~~recommend an acquisition proposal or take any action or make any statement inconsistent with the recommendation of Alloy’s board of directors to approve and adopt the merger agreement). Alloy has also agreed to reimburse Zelnick up to $2,500 for expenses actually incurred in certain circumstances, including if the merger is not completed by December 15, 2010 or if stockholder approval has not been obtained or if there is a material, uncured breach by Alloy under the merger agreement that would cause the failure of a closing condition.

Critical Accounting Policies and Estimates

During the first ~~quarter~~six months of fiscal 2010, 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 for fiscal 2009, for additional information relating to our use of estimates and other critical accounting policies.

~~Off-Balance~~Discontinued ~~Sheet~~Operations ~~Arrangements~~– The Company determined, in accordance with generally accepted accounting principles (“GAAP”), that for reporting purposes the operations of FrontLine should be reported as discontinued operations for all periods presented.

WeManagement’s doplan ~~not~~to ~~maintain~~divest ~~any~~and ~~off-balance~~the ~~sheet~~divesture ~~transactions,~~of ~~arrangements,~~FrontLine ~~obligations~~both oroccurred ~~other~~within ~~relationships~~the ~~with~~Company’s ~~unconsolidated~~second fiscal quarter of fiscal ~~entities~~2010. orFrontLine ~~others~~has ~~that~~been ~~are~~classified ~~reasonably~~in ~~likely~~the toCompany’s ~~have~~Consolidated aFinancial ~~material~~Statements ~~current~~as ordiscontinued ~~future~~operations. ~~effect~~The discontinued operations on ~~our~~the ~~financial~~Statement ~~condition,~~of ~~changes~~Operations inhave ~~financial~~been ~~condition~~reported, ~~revenues~~net orof ~~expenses,~~applicable ~~results~~income oftaxes. ~~operations~~Additionally, segment ~~liquidity,~~information ~~capital~~does ~~expenditures~~not orinclude ~~capital~~the ~~resources~~results of businesses classified as discontinued operations.

2124

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;

•

litigation that may have an adverse effect on our financial results or reputation;

•

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, please see the risks discussed in our Annual Report on Form 10-K for fiscal 2009 in Item 1A—Risk Factors and the risks discussed in this Quarterly Report.

22The forward-looking statements and our evaluation of the Company should take into consideration the proposed going private transaction that is subject to shareholder approval and a number of conditions that must satisfied to be able to consummate the transaction and the current and future costs payable by the Company.

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.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

We do not own any derivative financial instruments in our portfolio. Accordingly, we do not believe there is any material market risk exposure with respect to derivatives or other financial instruments that would require disclosure under this item.

Item 4.

Controls and Procedures.

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that all material information required to be included in this quarterly report has been made known to them in a timely fashion.

Our Chief Executive Officer and Chief Financial Officer also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to affect, our internal control over financial reporting. Based on the evaluation, there have been no such changes during the quarter covered by this report.

2325

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

Other

Litigation

On or about November 5, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York naming as defendants Alloy, specified company officers and investment banks, including James K. Johnson, Jr., Matthew C. Diamond, BancBoston Robertson Stephens, Volpe Brown Whelan and Company, Dain Rauscher Wessel and Ladenburg Thalmann & Co., Inc. The complaint purportedly was filed on behalf of persons purchasing the Company’s stock between May 14, 1999 and December 6, 2000, and alleged violations of Sections 11, 12(a)(2) and 15 of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 19, 2002, the plaintiffs amended the complaint to assert violations of Section 10(b) of the Exchange Act. The claims mirror allegations asserted against scores of other issuers. Pursuant to an omnibus agreement negotiated with representatives of the plaintiffs’ counsel, Messrs. Diamond and Johnson were dismissed from the litigation without prejudice. By opinion and order dated February 19, 2003, the District Court denied in part and granted in part a global motion to dismiss filed on behalf of all issuers. With respect to Alloy, the Court dismissed the Section 10(b) claim and let the plaintiffs proceed on the Section 11 claim. In June 2004, as a result of a mediation, a settlement agreement was executed on behalf of the issuers (including Alloy), insurers and plaintiffs and submitted to the Court. While final approval of the settlement was pending, on December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated the District Court’s class certification order with respect to nine focus group cases and remanded the matter for further consideration. On June 25, 2007, as a result of the Second Circuit’s decision, the settlement agreement was terminated. On August 14, 2007, plaintiffs filed second amended complaints against nine focus group issuers. By opinion and order dated March 26, 2008, the District Court denied in part and granted in part motions to dismiss the amended complaints. Specifically, the District Court dismissed claims brought under Section 11 of the Securities Act by those plaintiffs who sold their securities for a price in excess of the initial offering price and claims brought by plaintiffs who purchased securities outside of the previously certified class period and denied the remainder of the motions. After many months of negotiation, on April 2, 2009, the representative class plaintiffs and the defendants filed a Notice of Motion for Preliminary Approval of Settlement accompanied by a global Stipulation and Agreement of Settlement. The proposed Settlement provides that all claims against the issuers and underwriters will be dismissed with prejudice in exchange for the aggregate payment of $586 million. Under the terms of the proposed Settlement, neither the Company nor Messrs. Johnson or Diamond are required to pay any portion of the $586 million payment. The proposed Settlement is subject to numerous contingencies, including, but not limited to, preliminary Court approval, certification of a settlement class and final approval after providing members of the plaintiff class with notice. On or about June 10, 2009, the Court granted Plaintiff’s motion for an order: (i) preliminarily approving the proposed stipulation; (ii) certifying the Settlement classes for the purposes of the proposed stipulation only; (iii) approving the form and program of class notice described in the stipulation; and (iv) scheduling a hearing before the Court to determine whether the proposed stipulation should be finally approved. On October 5, 2009, the Court granted final approval of the settlement. Various members of the plaintiff class have filed notices of appeal seeking to challenge the terms of the settlement. At this point, there can be no assurance that the settlement will be affirmed.

On June 29, 2010, the Company, its directors, and ZelnickMedia LLC (“Zelnick”) were named as defendants in a putative class action complaint, captioned Teitelbaum v. Diamond., et al., C.A. No. 5604, filed in the Court of Chancery of the State of Delaware. On July 8, 2010, a second lawsuit was filed in the Court of Chancery of the State of Delaware, captioned City of Livonia Employees Retirement System v. Diamond, et al., C.A. No. 5626. This lawsuit also named as defendants Alloy Media Holdings, L.L.C., Lexington Merger Sub Inc., Natixis Caspian Private Equity, LLC, Rosemont Solebury Co-Investment Fund, L.P. and Genspring Family Offices, LLC. On July 26, 2010, the actions were consolidated under the caption In re Alloy, Inc. Shareholder Litigation, C.A. No. 5626. On August 9, 2010, plaintiffs filed an amended complaint, purportedly on behalf of a class of stockholders, alleging that the intrinsic value of Alloy common stock is materially in excess of the amount offered for those securities in the merger and that our directors breached their fiduciary duties by agreeing to the merger price, thereby depriving plaintiffs of the opportunity to realize any increase in the value of Alloy stock. The amended complaint also alleges that the Preliminary Proxy omits material information concerning the merger and is materially misleading. The amended complaint further alleges that Zelnick, Parent, Merger Sub and the other additional defendants named therein, aided and abetted the supposed breaches of fiduciary duty by our directors. The action seeks injunctive and other equitable relief, damages, fees and costs. Simultaneously with filing their amended complaint, plaintiffs filed a motion for expedited proceedings, seeking an order setting a schedule for expedited discovery and a hearing on their application for injunctive relief prior to the shareholder meeting. On August 25, 2010, the court denied plaintiffs’ motion. On August 27, 2010, defendants filed motions to dismiss the amended complaint and to stay discovery pending resolution of the motions to dismiss. The Company believes that the claims asserted in the lawsuits are without merit.

The Company is involved in additional legal proceedings that have arisen in the ordinary course of business. The Company believes that, apart from the actions set forth above, there is no claim or litigation pending, the outcome of which could have a material adverse effect on the Company’s financial condition or operating results.

Item 1A.

Risk Factors

24Due to the proposed Merger transaction and the related diversion of our management’s attention from the operation of our business, our business and results of operations may be adversely affected.

As described in the Company’s Form 8-K, filed with the SEC on June 28, 2010 and preliminary proxy statement filed August 30, 2010, we have entered into the Merger Agreement, which, subject to stockholder approval and various other conditions, would result in our being acquired by an investment group. As a result of the proposed Merger transaction, our management and board of directors have spent and will continue to spend a significant amount of time on the proposed Merger transaction and the Company has incurred associated expenses of approximately of $1,055. Our business and operating results may suffer due to the diversion of management’s attention, and expenses, and if the Merger is not consummated these costs may have a material impact on our financial results.

If the proposed Merger is not completed and we are not otherwise acquired, our business could be harmed and our stock price could decline.

The consummation of the Merger is conditioned upon, among other things, the adoption of a Merger Agreement by our stockholders, regulatory approvals and other customary closing conditions. Therefore the Merger may not be completed or may not be completed in a timely manner. If the Merger Agreement is terminated and there are no other bidders for the Company, the market price of our common stock will likely decline, and, as noted above, our business may have been adversely affected due to the diversion of management’s attention from the operations of our business. Our stock price may decline as a result of the fact that we have incurred and will continue to incur significant expenses related to the Merger prior to its closing that will not be recovered if the Merger is not completed. In addition, our employees may be concerned due to the possibility that any party that acquires the Company may make personnel changes or eliminate employees. This could result in our employees seeking opportunities with other employers. If we lose employees due to the fact that we may be acquired, we may have difficulty rehiring or replacing those workers if we are not acquired, which would adversely affect our operations.

If the proposed Merger is not completed or we are not otherwise acquired, we may have to consider other strategic alternatives, including the possible sale of certain of our lines of business.

Our board of directors may have to consider other strategic alternatives, including the possible sale of certain of our lines of business, if the proposed Merger is not completed or we are not otherwise acquired. If the proposed Merger is not completed, our board of directors will review and consider various alternatives available to the Company, including, among others, maintaining the status quo, returning capital to stockholders, divesting certain non-core assets to focus on the media segment, seeking a minority investment from a strategic or financial partner or attempting to implement a sale of the Company with either a financial or strategic buyer. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed Merger, the risk we may be unable to consummate any such alternative transaction, valuation issues, more limited access to capital, and other variables which may adversely affect our operations. To the extent the Company divests certain businesses in order to focus on its media and entertainment sectors, the Company will face various challenges associated with both dramatically reducing the scope of, and restructuring, its businesses. Additionally, as a much smaller company following any restructuring, the Company would likely be unattractive and uneconomic as a public company and would continue to lack any institutional coverage by securities analysts. Our business and operating results may suffer due to any restructuring transactions and our business and operating results may suffer due to diversion of management’s attention.

The Merger Agreement contains provisions that could discourage or make it difficult for a third party to acquire the Company prior to the completion of the proposed Merger.

The Merger Agreement contains provisions that make it difficult for the Company to entertain a third-party proposal for an acquisition of the Company. These provisions include the general prohibition on Alloy’s soliciting or engaging in discussions or negotiations regarding any alternative acquisition proposal, subject to certain exceptions, and the requirement that Alloy pay a termination fee of $3,900 to Alloy Media Holdings, L.L.C. if the Merger Agreement is terminated in specified circumstances.

These provisions might discourage an otherwise-interested third party from considering or proposing an acquisition of the Company, even one that may be deemed of greater value than the proposed Merger to our stockholders. Furthermore, even if a third party elects to propose an acquisition, the concept of a termination fee may result in that third party’s offering of a lower value to our stockholders than such third party might otherwise have offered.

Failure to complete the proposed Merger could negatively impact our business, financial condition, results of operations or stock price.

The completion of the proposed Merger is subject to a number of conditions and there can be no assurance that the conditions to the completion of the proposed Merger will be satisfied or that the proposed Merger will otherwise occur. If the proposed Merger is not completed, we will be subject to several risks, including:

•

the current price of our common stock may reflect a market assumption that the proposed Merger will occur, meaning that a failure to complete the proposed Merger could result in a decline in the price of our common stock;

•

we may be required to pay a termination fee of $3,900 and reimbursement expenses up to $2,500 to Alloy Media Holdings, L.L.C. if the Merger Agreement is terminated under certain circumstances which would negatively affect our liquidity;

•

we expect to incur substantial transaction costs in connection with the proposed Merger whether or not the proposed Merger is completed;

•

we would not realize any of the anticipated benefits of having completed the proposed Merger; and

•

under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the proposed Merger, which restrictions could adversely affect our ability to realize certain of our business strategies.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

During the ~~first~~second quarter of fiscal 2010, we did not purchase any shares under the Company’s stock repurchase program. At ~~April~~July 3031, 2010, we had an unused authorization of approximately $3,005.

The following table provides information with respect to purchases by the Company of shares of its common stock during the ~~first~~second quarter of fiscal 2010:

(Amounts in thousands, except per share amounts)

	Total Numberof SharesPurchased		Average Priceper Share		Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs	Approximate DollarValue of Shares thatMay Yet bePurchased Underthe Plans orPrograms
Month of:
February-10	6	(1)	$	7.72	—	$	3,005
May-10	—		$	—	—	$	3,005
March-10	74	(1)	$	8.05	—		3,005
June-10	—		$	—	—		3,005
April-10	18	(1)	$	8.48	—		3,005
July-10	1	(1)	$	9.50	—		3,005
Total	981				—	$	3,005

⁽¹⁾	Represent shares of common stock surrendered to us by our employees to satisfy their tax withholding obligations upon the vesting of their restricted stock, valued at the closing price of the common stock as reported by The NASDAQ Stock Market on the date of the surrender.

Item 3.

Defaults upon Senior Securities.

Not applicable.

Item 4.

Reserved.

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits.

(a) Exhibits

The exhibits that are in this report immediately follow the index.

2529

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALLOY, INC.

By:		/S/ JOSEPH D. FREHE
		Joseph D. Frehe
		Chief Financial Officer
		(Principal Financial Officer and
		Duly Authorized Officer)
Date:		~~June~~September 9, 2010

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EXHIBIT INDEX

EXHIBITNUMBER
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1*		Certification of Matthew C. Diamond, Chief Executive Officer, dated ~~June~~September 9, 2010, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Joseph D. Frehe, Chief Financial Officer, dated ~~June~~September 9, 2010, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.

2731

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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