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Executives

Jody Smith - Investor Relations

Joseph D. Frehe - Chief Financial Officer

Matthew C. Diamond - Chairman of the Board, Chief Executive Officer

James K. Johnson - President, Chief Operating Officer, Director

Analysts

William Martin

Steve Martin

Ed Boden

P.J. Sollitt

Greg Rochmorten

Bill Blazek

Robert Moses

Unidentified Analyst

Dan Fielding

Alloy, Inc. (ALOY) F3Q07 Earnings Call December 5, 2007 5:00 PM ET

Operator

Good afternoon. My name is Tasha and I will be your conference operator today. At this time, I would like to welcome everyone to the Alloy Q3 earnings conference call. (Operator Instructions) Ms. Smith, you may begin your conference.

Jody Smith

Thank you. Good afternoon. Thank you for taking the time to join us for our conference call on Alloy's third quarter fiscal 2007 earnings. Participating in today’s discussion are Matt Diamond, Chief Executive Officer; Jim Johnson, Chief Operating Officer; and Joe Frehe, Chief Financial Officer.

Alloy reported its third quarter fiscal 2007 earnings after the close of the market today. If you have not previously received a copy of the press release, it’s available on Alloy's website at alloymarketing.com.

Joe will begin by providing a discussion of our financial results and position, followed by Matt who will provide a discussion of our operational highlights and an update on recent events. We will then open the session up for questions and answers.

Our press release and this presentation reference several non-GAAP financial measures; specifically, adjusted EBITDA and free cash flow. We have included these non-GAAP measures because we believe that they are important in evaluating the company’s operating performance.

Because they are not calculated in accordance with GAAP, they should not be considered in isolation of or as a substitute for net income as an indicator of operating performance or net cash flow provided by operating activities as a measure of liquidity.

At the end of our press release, we have provided supplemental disclosures to reconcile the non-GAAP financial measures to their GAAP counterparts in accordance with the SEC’s Regulation G. Certain remarks that we may make during this call about future expectations, plans and prospects for Alloy constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those that are discussed in our annual report on Form 10-K for the fiscal year ended January 31, 2007 and in our other periodic SEC filings, which are on file with the SEC and available on the SEC’s website at sec.gov. Please refer to those filings for a full description of those factors.

I’ll now turn over the program to Joe Frehe.

Joseph D. Frehe

Thank you, Jody. Good afternoon and thank you for joining Alloy's third quarter fiscal 2007 conference call. I’d like to begin by highlighting some of the key financial information for the quarter.

Revenue for our third quarter ended October 31, 2007 increased $2.8 million to $66.5 million from $63.7 million in the third quarter of fiscal 2006. Revenue in the media and placement segment increased while the promotion segment declined.

Media segment revenue increased 47% or $6.9 million to $21.7 million. This increase was driven by our acquisitions of Frontline and Channel One and higher Alloy entertainment revenue, partially offset by lower display board sales.

Placement segment revenue increased 11%, or $1.9 million, to $18.9 million. This increase was principally attributed to a $3.6 million increase in broadcast placement and multicultural newspaper revenue, partially offset by a 10% reduction in college newspaper placement revenue.

Promotion segment revenue decreased 19% or $6 million to $25.9 million. This decrease was primarily driven by a decline in our promotional and sponsorship revenues versus the same quarter of last year.

Adjusted EBITDA, which we define as operating income plus depreciation and amortization, non-cash stock-based compensation and special charges, for the quarter decreased approximately $1.8 million to $9.3 million from $11.1 million in the third quarter of fiscal 2006. The decrease in adjusted EBITDA was primarily driven by the impact of lower revenue in our promotion, sponsorship and display board businesses and a higher medical benefit expenses in our corporate segment.

Operating income decreased $2.4 million to $7 million in the third quarter of fiscal 2007 from $9.4 million in the third quarter of fiscal 2006. The decrease in operating income is due to lower adjusted EBITDA, higher stock-based compensation, and higher depreciation and amortization.

During the quarter, we recorded an extraordinary gain of $5.5 million related to our acquisition of Channel One. This was a result of our actual acquisition costs being lower than our initial estimate.

As you may recall, in the third quarter of 2006 we recorded a $15.8 million expense related to the conversion of $56.6 million of our convertible debentures. There was no debt conversion expense recorded during the third quarter of 2007.

Our net income increased $19.5 million to $12.4 million in the third quarter of fiscal 2007 from a net loss of $7.1 million in the third quarter of fiscal 2006. Net income per diluted share in the third quarter of fiscal 2007 was $0.90 from a negative $0.55 per basic share in the third quarter of fiscal 2006.

We believe free cash flow is an important measure of any company’s operating performance as it represents the amount of cash available for debt service, acquisitions, and stock repurchases.

Our free cash flow, which we define as net income or loss plus depreciation and amortization, amortization of debt discount, non-cash stock-based compensation, debt conversion expenses, and special charges less capital expenditures, for the third quarter of fiscal 2007 decreased approximately $1.7 million to $8.1 million from $9.8 million in the third quarter of fiscal 2006. This decrease is due to lower earnings, an increase in capital expenditures that were partially offset by lower interest expense.

Free cash flow per share in the third quarter of fiscal 2007 was $0.59 per diluted share compared with $0.77 per diluted share in the third quarter of fiscal 2006.

Our weighted average shares used in the computation of free cash flow per share increased 8%, principally as a result of the issuance of common stock related to the 2006 conversion of the debentures and the Frontline acquisition, partially offset by our repurchase of nearly 1 million shares of common stock at the end of December 2006.

Turning to our balance sheet, our balance sheet is strong at October 31st. Our cash and marketable securities were $25.8 million. This balance includes a $4 million advance on a revolving credit facility. Our working capital was $37.5 million and our senior convertible debt outstanding remained at $1.4 million.

Our accounts receivable at the end of the quarter were higher than our year-end balance as a result of the first quarter acquisition and normal seasonal increases. DSO, or days sales outstanding at the end of the quarter was about 69 days compared with 65 days at January 31, 2007.

Our capital expenditures for the year are now projected at $14.6 million versus $16 million. The reduction primarily relates to an adjustment in the equipment upgrade schedule for Channel One. We now expect this upgrade to be completed during the first quarter of 2008.

With that, let me turn the discussion over to Matt.

Matthew C. Diamond

Thanks, Joe. As Joe mentioned, EBITDA for the third quarter was $9.3 million versus $11.1 million last year. This is slightly below where we [expected to be] and is primarily the result of some second half softness in our promotion segment. I will speak about this business more fully below but first I want to provide an update as to how we’re progressing toward our top level strategy and what it will mean for the upcoming fiscal year.

As we have stated, our goal is profitable growth, both organic and through acquisitions, particularly in our media segment. We believe this will significantly increase our corporate value for three principal reasons.

First, the financial profile of our media segment can be much higher margin than our other businesses and therefore should carry a higher earnings multiple. Second, as a small public company, we have a meaningful fixed corporate cost as a percentage of our revenue and earnings. Additional EBITDA without increased corporate costs improves our operating leverage.

Third, we operate in a fast-paced and growing media and marketing environment where the market demands new and improved businesses and services, so we must continually be reinventing ourselves. We continue to be committed to this strategy.

Although 2007 EBITDA is down, we believe that we have put ourselves in a position to have a significantly stronger fiscal year in 2008. As we mentioned in our press release, we expect 2008 revenues to be $225 million to $240 million and our EBITDA to be approximately $20 million to $24 million. We have four quantifiable reasons for why we believe we will achieve these results.

First, 2008 will include a full year contribution from Channel One and Frontline Marketing. As we have said before, Channel One had a negative EBITDA this year as we had to rebuild this business. The business is progressing nicely and in fact was slightly above break-even this quarter. We expect Channel One to be a positive contributor in 2008. This swing will meaningfully impact year-over-year performance. In addition, we will pick up an additional EBITDA from the inclusion of a full year and growth associated with Frontline, as that business was acquired in late April of 2007.

The second reason is that at the end of last year, our owned and represented interactive web properties generated approximately 3 million unique users. These sites currently generate about 17 million unique users. This is a 5.5 times increase in very targeted, sellable ad inventory and will lead to meaningful revenue and EBITDA growth in 2008.

Third, as we previously stated, we made several data acquisitions for our database group in 2007 and revenue and EBITDA will start to be generated on these acquisitions in fiscal 2008.

Finally, although our promotions business is experiencing a weaker-than-expected second half of 2007, we believe this is temporary as we show significant strength in pre-booked business for 2008. AMP Agency is close to $9 million ahead of last year at this time in pre-booked or committed business for the following year. In total, we have already pre-booked 83% of the group’s 2007 revenue two months before 2008 begins. For this reason, we are able to forecast solid growth for the group next year.

Based on these facts and our estimates in our business, we are very comfortable with our guidance for 2008. In addition, as noted in our press release, we intend to repurchase shares in the open market as part of a stock repurchase plan. Based on our expectations for 2008, we believe our stock to be very attractive at today’s valuation.

While we will continue to look aggressively for acquisitions and business development opportunities, we believe [inaudible] [to be effectively deployed] in buying back our stock at these valuations.

Now I would like to open the call to Q&A. Operator, could you open it up for questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Martin.

William Martin

Thanks for taking my question. On Channel One, can you just talk a little bit about the ongoing CapEx requirements for that business?

Matthew C. Diamond

Sure. Actually, as you can tell, I have a very bad cold so it’s hard for me, so I’m going to let Joe on to address that.

Joseph D. Frehe

The main issue for the CapEx for Channel One is that we expected most of the DVR receiver upgrades to be completed this year and we are projecting that total CapEx for Channel One to be about 9.9 this year. But we do believe around $5 million to $6 million in CapEx will still be required for Channel One next year and basically that’s just carry over the existing program we are working on currently.

William Martin

So even though you have 8,500 schools in that network and a fairly old network where Primedia didn’t spend a lot of money on upgrades, you’re going to be able to spend less than $1,000 per year per school on an ongoing basis?

Matthew C. Diamond

We spend a lot more than that on operations on an ongoing basis. In fact, it’s a significant investment in the school and the entire franchise. What we’re referring to is specifically what we don’t expense through our income statement and is part of the CapEx. And yes, we’re able to get significant leverage through some partnerships with some manufacturers to build out the network. These are basically high-end digital video equipment and I don’t think it’s an accurate statement to say that Primedia didn’t invest in the infrastructure at all. They definitely did.

They invested a substantial amount year over year. What they didn’t do, which is what we immediately did, is upgraded the entire network from an analog to a digital platform. And so we’ve been working closely with the schools. I can tell you where we put the DVRs in place and it’s part of our rollout plan now. The feedback has been fantastic. They are excited about it. We have other schools that have asked us to join the network because of it and frankly, we’re just moving forward as aggressively as we can.

William Martin

That’s great. My second question deals with the success of Gossip Girl, and I was curious if you could comment on the economics of that and the prospects for another season, and also just comment on the second Sisterhood movie and what potential impact that may have.

Matthew C. Diamond

Sure. [We are in essence] producers/authors for Gossip Girl and a series of other books and television and movie productions now in the pipeline and it’s a pretty exciting piece of our business that we’re very bullish on and one of the reasons why next year’s guidance, we’re comfortable giving and do feel it will be approximately two times the EBITDA that it was this year. Alloy Entertainment is one of those positive contributors.

Gossip Girl has been picked up for another season so we are excited about that. In picking that up, there are some economics. We don’t break out specifically what they are. They are confidential agreements but obviously they are six figure benefits to us.

In addition to that, we have book fees every time -- the success of the show, we sell more books which helps our financials and the contract itself with Gossip Girl, as well as the other TV contracts, are basically episode-by-episode fee, so every time they get picked up or renewed, we get a benefit.

Your other question was related to the movies, sequels to Sisterhood as well as some others that are in the pipeline. We have a movie coming out this summer or fall with Summit Partners that we are excited about. All of those again are fees that we get as the movies get produced and then obviously if they are successful, there’s some back-end opportunity.

So we are excited about it. It’s been an investment we’ve made for many years and they’ve been on a nice roll and we see that continuing certainly into 2008 and probably beyond.

William Martin

Great. Thank you very much.

Operator

Your next question comes from the line of Steve Martin.

Steve Martin

Well, a couple of my questions have been asked already but can you talk about what the sales mix looks like at Channel One and why you are so comfortable about the improvement for next year? I guess I’m a little surprised it made money this quarter.

Matthew C. Diamond

Yeah, it’s gone extremely well. A few things to answer your question; the entertainment category, which is the first category that Alloy could hit the ground running, simply because of our current relationships, we were able to capitalize on right away.

A significant part of the challenge that Channel One had from a revenue perspective the last couple of years is they just didn’t have account coverage. The interest from the market was definitely there. We’ve cleaned up what we accept on the advertising side as far as our guidelines are very strict with regard to food and junk food and things like that, and people that want to support the schools and support the program -- I can tell you it was met very, very positively.

So we’ve been able to one, hit the ground running with entertainment category as well as I would say wireless is a category we’re pretty bullish on next year and we think some other key areas that have always been big areas for Alloy we’ve been able to extend.

The second part though from an income statement perspective was the full year impact and now we’re getting the benefit in this back half of the year of a lot of the contracts that we either renegotiated or negotiated as part of the restructured Channel One. And we see as an example for next year, we’ll get the benefit of that full year. We’re getting the benefit of that partnership right now, as I think NBC is as well.

We have the full year impact next year and it’s starting to benefit us a little bit this year of a renegotiated contract with our service provider on the back-end to service the schools. That too is a little bit higher now because the digital upgrade isn’t complete, but will go down, but even with that we were able to get slightly above break-even this quarter.

Steve Martin

Where do you see your -- where are you in the expense reduction? When you look out to next year, what does the expense level look like and is that going to be your base?

Matthew C. Diamond

I would say right now -- what we have now is our full renegotiated and accurate cost structure with the exception that once the full upgrade is done, the costs will come down again on the maintenance side and we expect that in the first quarter, middle of the first quarter to be completed. So we’re pretty close. That’s the big change.

And then frankly, it is about leveraging that base and continuing to work with advertisers that are appropriate for the network.

Steve Martin

All right. And can you -- the placement business had an increase. Can you talk a little bit about that? Although it was not at the EBITDA line.

Matthew C. Diamond

The placement business, really that business in general is often cross-sold and we’ve done well just getting out there in the marketplace with our existing cross-selling sales force, so that’s why that did well for the quarter. It was largely driven by broadcast and the benefit of that, which has a little bit lower margin and that’s why you don’t see as much to the bottom line.

Steve Martin

Thank you.

Operator

Your next question comes from the line of Ed [Boden].

Ed Boden

I guess I just have a couple of questions; you guys kind of alluded to in your comments that the Channel One revenues and that would be profitable into next year. Do you guys expect that to be profitable every quarter or is just the overall year going to be profitable?

Matthew C. Diamond

We haven’t decided at this point how much of that -- we don’t break out our media segment in those segments. There’s just frankly too many of them. Having said that, we’ll certainly give some of the trend guidance for something as significant as a Channel One. We haven’t done that yet but we will. So we’ll have to take a good look at that and see. Q2 would be the one quarter, just because you’ve got the summer months and you don’t have revenue associated with really June and July, so that’s the one month that most likely would be negative but we’ll have to take a good look at that and give some of that guidance.

But we won’t break out in future quarters how Channel One or any of the other media segments are doing. The reason why we made a point of doing it now was frankly people have seen the trajectory over the last six months as we acquired Channel One, incurred some losses. We thought we’d make it break even by next year but we’ve already got it there and that’s one of the reasons we’re so bullish on next year.

Ed Boden

And I think that’s great. Thanks for doing that. The CapEx shift that you guys are talking about, does that have to do with how you see or how you want to roll that out? Or does that have something to do with something not going correct in the rollout and sort of having to take that slower approach?

Matthew C. Diamond

It really just came down to the timing of when the machines, the new equipment came into our warehouse. It really had nothing to do with anything else. It’s given us a chance to test some things and aggressively promote the ones that we do have but at the end of the day, it ultimately just came down to when we got the machines and how quickly we can get them into the schools.

Ed Boden

And just a follow-on that, just the comments you have on the growth in the promotion segment next year, do you guys see that getting back to the fiscal year ’06 levels? So it would be flat compared to ’06 levels or do you see that being slightly less than that?

Matthew C. Diamond

We haven’t gotten to that level of detail yet. However, we do feel that you are hitting on a key point and that is the promotions business is a bit cyclical and we’ve seen in our business over the last few years those ebbs and flows and that too is one of the reasons why we feel good as we look at the pipeline, that we can return to the levels that we saw in ’06 and we will certainly break down the guidance a little bit better into the promotions, media and placement segment, be able to look at ’06 and see how it compares to that.

But right now, it’s looking very, very strong and I would say it’s fair to look at ’06 as a pretty good guide.

Ed Boden

Great. Good job, everyone.

Operator

Your next question comes from the line of Paul [Celit].

P.J. Sollitt

It’s P.J. [Sollitt]. With Channel One, I know part of your thesis was once that you upgraded the technology to digital and could have two-way communications and better data on compliance and participation and other things, that it would lead to more of an opportunity with advertisers. Is it too early to get a read on that?

Matthew C. Diamond

No, in fact, our Nielsen ratings are probably on average 15% to 20% above what they were a year ago already, so -- not to suggest it’s going to go much higher than that, but the benefit of that upgrade, the benefit of communicating with the schools and really I think meeting their needs has -- the whole picture has helped us greatly with the Nielsen ratings and of course what that translates into is sales. So we’re real happy with that.

P.J. Sollitt

How much of the Nielsen improvement is just that it’s being measured correctly now, versus the school’s --

Matthew C. Diamond

It’s of course hard to sometimes break that out. I think a portion of it it is measured more accurately but a big portion of it is the digital screens are simply better. It’s a big difference between the analog picture and the digital picture and the schools appreciate it.

I also think the program itself, I think if you look at the program and the great job that NBC is doing, the teachers love it and the feedback that we get on a daily basis from the schools, the teachers, and how they use the program and how it’s integrated very much into their teaching also leads to compliance and viewership.

P.J. Sollitt

And the 17 million unique on the online network, do I remember right that last quarter that was only 10 million, or was that two quarters ago?

Matthew C. Diamond

It was approximately a little less than 10, I believe and now it’s over 17. What we’ve done, and we’re very, very excited about it is we’ve aggressively gone out and partnered with key sites that we believe fit in well with our network and we’re able to sell because of our relationships with advertisers.

So it’s a combination of our existing traffic on our own sites as well as partner sites that we’re able to monetize right away. So we do think it’s a nice leading indicator of revenue. We will update with another announcement soon a little more detail on that 17 million because we do feel very strongly that it’s got incredible potential and we know already from tests that we’ve done with some select group of advertisers that the market really likes it. It’s a unique network that really can target this demographic.

So we’ll do a little update later with some specifics as to what those sites are and what some of the new partnerships we’ve signed.

P.J. Sollitt

Okay, so we haven’t seen the benefit yet of higher rates based on the higher uniques, right? That will be coming forward into ’08 here?

Matthew C. Diamond

And it will come forward we do think in -- and it’s already embedded. I don’t want to suggest --

P.J. Sollitt

In the guidance.

Matthew C. Diamond

Yeah, a little bit in the guidance but having said that, this is an interesting test for us. We think there’s some upside to what we’ve done. That’s why we feel comfortable with the guidance and if we can execute what we think we can, there’s some positive potential there.

P.J. Sollitt

Yeah, that’s great. One last thing on the AMP, you said 87% of it was pre-booked for ’08, is that right?

Matthew C. Diamond

It was actually 83%.

P.J. Sollitt

Eighty-three -- historically, how much sort of I guess you’d call it spot business, non pre-booked business going into a year would you pick up?

Matthew C. Diamond

We would clarify some, P.J. --

James K. Johnson

I’ll answer this. I just want to be clear -- it’s 83% of this year’s revenue number has already been booked for next year, so we are already 83% of the way two months before we start next year what we finish with this year.

We typically -- it can range how much additional revenue we get once we are in the -- we book once we are in the year but it’s pretty significant. It’s usually another 50% or so, so we feel like we have a big head start on next year, certainly comparatively to where we were last year and we feel like it’s going to be a really, really good year for that group in 2008.

P.J. Sollitt

That’s great. Actually, one last thing is with the receivables up just seasonally, what do you think the cash will normalize at towards year-end?

James K. Johnson

If I had to take a crack at it, it would probably be slightly lower than where it is in -- or say lower than it is where we ended third quarter, so it may be a little bit lower than $25 million. It depends a little bit on what we do with the debt facility, obviously but I think that -- yeah, and obviously the stock buy-back is something that will [have to be flesh out] as well during the fourth quarter but normally, normally we generate a little bit of cash -- actually, third quarter to fourth quarter I think we are pretty flat, from quarter end to quarter end on cash generation. That’s just our normal flow of the business and then we’ll have a little bit of CapEx and we’ll have a little bit of a stock buy-back, which will be factors as well.

P.J. Sollitt

We don’t mind cash usage on a buy-back. All right. Thank you. Congratulations.

Operator

Your next question comes from the line of Greg [Rochmorten].

Greg Rochmorten

Could you give us a little color on your expected tax rate going forward? I know you don’t give out a lot of detailed guidance and you are working to improve that but could you give us any color on that?

Joseph D. Frehe

Well, right now we have a lot of NOLs that we are still utilizing so most of our taxes are state-based or relate to AMP so the rate is somewhere between 8% and 11%.

Greg Rochmorten

Okay, and what’s the present value of the NOLs that you are currently using?

Joseph D. Frehe

I don’t know that off hand.

Greg Rochmorten

Okay, and then just one other question; as you look out to Q4 for promotion revenues, will that grow year over year or will the troubles you’ve been having there, will that continue?

Matthew C. Diamond

We don’t give guidance to that specific level but certainly it is accurate to say that the -- I would say weaker promotions performance this year isn’t -- we don’t expect that to be -- it’s not going to change in Q4.

Greg Rochmorten

Okay. All right, thanks, guys.

Operator

Your next question comes from the line of Bill [Blazek].

Bill Blazek

I wanted to get a sense of what the market is like for the advertising revenue and is the fact that you have Channel One now and the 17 million unique users on the Internet, is that starting to open some doors with advertisers and improve the productivity of your sales force?

Matthew C. Diamond

Yeah, it’s -- I would say to answer your first question, you know, we read the same things where people are predicting slower growth and concerns over media revenue. We haven’t seen it directly. Part of it is I think in our market, both the youth market as well as some of our segments, like the Internet, they are not forecast down. So in general the sentiment is relatively positive going into next year.

I think that our traffic with Internet, Channel One and others, don’t necessarily open new doors. What they do is they allow us to leverage those existing relationships deeper. Because if you look at the breadth of advertisers that we’ve got, it’s pretty broad. Our key and our challenge is how do we go deeper into those relationships, how do we tap into other budgets, how do we get a bigger portion of those budgets and be a more meaningful part of their campaigns.

I think both Channel One and the growth in our interactive have both contributed very positively to that and -- I think that the other thing to keep in mind that the growth in general of both our interactive segment as well as Channel One are two key areas of our media segment that we want to continue to focus on, as well as database. These are areas that we’ve invested in. We said at the very end of last fiscal year that we will focus an investment in certain areas. We’ve done it. I think the traffic levels that you see on our interactive level as well as obviously investment in Channel One reflected and the advertising dollars are starting definitely to come our way because of it.

Bill Blazek

So what do the numbers look like on the interactive side?

Matthew C. Diamond

Well, as we said, 17 million uniques are now -- we’re able to represent and sell 17 million uniques as of right now.

Bill Blazek

But in terms of revenue or EBITDA?

Matthew C. Diamond

We don’t break out our media segment by any of the divisions.

Bill Blazek

Okay, thanks.

Operator

(Operator Instructions) Your next question comes from the line of Robert Moses.

Robert Moses

Good afternoon. Just maybe for Joe, I just wanted to clarify on capital spending for ’07. I think you said $9.9 million for Channel One. What would be the full company number for ’07? And maybe if you have guidance for ’08 at this point?

Joseph D. Frehe

We expect the full year CapEx this year to be around $14.6 million. And we haven’t worked through what we expect our CapEx to be for 2008 at this point.

Robert Moses

But you said 5 to 6 for Channel One, and just assuming there’s no extraordinary programs, is it typically a couple million bucks for the core Alloy business, give or take?

Joseph D. Frehe

Yes, that would be fair.

Robert Moses

Okay, and then just on that same note then, really no reason you think beyond ’08 for that $5.5 million to $6 million in Channel One -- I mean, the chances that that could go a bit lower you think in ’09, just if things play out the way you expect? Or do you think there is some likelihood that that would continue at that pace for Channel One?

Matthew C. Diamond

The real question ends up being -- to answer that question, it really ends up being driven by the direction we take with Channel One. As we grow it and expect to grow it and evolve it, we have a project internally we call Channel One 2.0, which is looking at lots of different options to work with the schools.

As the business grows, generates more EBITDA, clearly we’ll have some options and invest some of that in CapEx. Depending on that growth and how aggressive that is, we can make some of those decisions.

Joseph D. Frehe

I think that’s fair to say. It’s really driven by Channel One. I don’t think there is anything in the core business that would cause CapEx to be over the couple million bucks a year that it has been historically, so it’s really all about Channel One in terms of the CapEx story and we don’t really know enough or have anything specifically on the table at this point to really speak to that.

Robert Moses

But it would be discretionary and to some extent, if you are seeing say the business rather than a $20 million revenue run-rate kind of getting to $30 million or -- I’m just making these numbers up, but some level to do that based on what you are seeing in demand. In theory, you could maybe ramp up CapEx to fund some projects?

Matthew C. Diamond

That’s right. That’s right.

Robert Moses

Okay, so do you have the depreciation and amortization for what you are expecting for ’07 and just a guess at ’08 in front of you?

Joseph D. Frehe

Unfortunately I do not have that with me.

Robert Moses

Okay, I’ll follow-up with you on that. Just lastly then, should we think maybe of the promotions business and kind of the pre-booking that you are having in ’08, perhaps some of the weakness you are seeing in ’07 is just kind of more of a timing and kind of a lot of the money that’s earmarked perhaps for that just kind of going into ’08 or is it not really a timing, there’s just kind of weakness that you are seeing in the second half of the year?

Matthew C. Diamond

It’s sort of all of the above. It’s not necessarily weakness and it’s not all related to timing though. That business is just cyclical and it does ebb and flow and it’s just lumpy. So what’s happened is if you look at it this year, it’s been lumpy and down but as we look at the projects that we’ve been contracted for towards next year, it’s much higher, as it was a year ago. So it’s just a lumpy business.

We control costs I think pretty well within it as those lumps go up and down but that’s really the drivers. So yes, some of it is definitely timing. I wouldn’t go so far as to say weakness because it’s one or two big accounts that you just don’t have aren’t necessarily weakness. They just didn’t spend as much.

It’s very driven by product launches and new initiatives, so as a big client does less with new initiatives, you get less money.

Robert Moses

Just lastly, maybe just -- I don’t know if you can financially quantify the investments. I know the database, the interactive side there’s been -- I guess even kind of out of home as well, there’s been some discrete investments. I think you’ve broken out maybe in the past of several hundred thousand, maybe $1 million. Do you have a sense of what was spent in ’07 on new platforms and programs that will bear fruit and revenue in ’08?

Matthew C. Diamond

I would say between about $1 million and $2 million, and you can see some of that on our cash flow statement. For example, about a $1 million acquisition associated with names is a good example.

One of the things we’ve said about our business that does give us encouragement is at the beginning of the year when we said we needed to invest internally and we said it was going to be a challenging year from an EBITDA perspective because of some of the decisions, we were saying that these were pretty quick returns and they weren’t $5 million to $10 million. They were relatively low amounts.

We believe that’s happened. We believe we’ve invested in what we needed to invest in those key areas and I think we’re getting some of that return pretty rapidly and you’ll see it next year. So I would say $1 million to $2 million and yes, you are going to see that return in those key areas, particularly interactive database and then obviously Channel One next year.

Robert Moses

Okay. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of John [inaudible].

Unidentified Analyst

Can you hear me?

Matthew C. Diamond

Yes, we hear you fine.

Unidentified Analyst

I missed -- when you were going through your reasons for your better expectations for fiscal 2009, I didn’t get the third point about acquisitions. Can you redo that?

Matthew C. Diamond

Yes. What I said -- I’ll try to read it again without breaking up as much. As we previously stated, we made several data acquisitions for our database group in 2007 and revenue and EBITDA will start to be generated on these acquisitions in fiscal 2008.

We acquired numerous -- we did some partnerships and acquired names associated with our data group, where we partner with everything from colleges to other lead generation opportunities, so that’s a business that the more names you have frankly the more revenue you generate. So we made some key investments that not only got us a larger, to generate more revenue but it also moves us up the totem pole with clients. We become a more important data source and you get a premium both in names but as well as just total and they [deduct] them when they match them up with other name sources. You get the benefit of that.

Unidentified Analyst

Okay, and on your promotions business looking forward, is that coming from any particular industry or segment of the advertising world?

Matthew C. Diamond

I’m sorry, could you say that again?

Unidentified Analyst

On your promotions business, looking out to the future, I know you’ve booked 83% of this year’s business. Do you see any trends where that -- any particular industry groups or is it all apparel, is it make-up, is it music? Can you -- do you see any trends there?

Matthew C. Diamond

Really where we’ve been traditionally strong in our existing clients that have just stepped up for bigger programs for next year, so we’ve been traditionally strong in some key categories like wireless and footwear and those are the key categories that have just stepped up.

So I wouldn’t go so far as to say some major trend in one huge area. It’s really just been our traditional strength has stepped up and is looking for bigger programs next year.

Unidentified Analyst

Okay. Great quarter. Thanks.

Operator

Your next question comes from the line of Dan [Fielding].

Dan Fielding

Most of my questions have been answered. I just have one. Can you give me a little more detail on the gain you showed from acquisitions?

Joseph D. Frehe

The gain we booked related to Channel One? Sure. When we acquired Channel One, if you look back at the history, we received cash and working capital from Primedia and we had an initial estimate for what our liabilities were -- some exit costs, some employment agreements, some operating expenses. And as we went through the last six months and evaluated which accruals were needed and are necessary, we just trued that up. So that’s how we arrived at the $5.5 million this quarter.

Dan Fielding

So there is going to be some line item on the balance sheet that is going to come down, some --

Joseph D. Frehe

Right. Accrued expense. Accrued other expense came down.

Dan Fielding

Okay, I gotcha. All right. Thank you.

Matthew C. Diamond

Thank you all for joining us for this call. I apologize for my voice but we look forward to our Q4 call and a much stronger 2008. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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