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Executives

Matthew C. Diamond – Chairman and CEO

James K. Johnson – President and COO

Joseph Frehe – CFO

Jodi Smith - IR

Analysts

Nick Forte – Blackfoot Capital

Steven Martin - Slater Capital

Andrew Miles - Quartz Capital

Paul Solit - Potomac Capital Management

Alloy, Inc. (ALOY) F4Q07 Earnings Call March 26, 2008 5:00 PM ET

Operator

Good afternoon. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Alloy Full Year and Fourth Quarter Fiscal 2007 Results Conference Call.

(Operator Instructions) Thank you. Ms. Smith, you may begin your conference.

Jodi Smith

Thank you. Good afternoon. Thank you for taking the time to join us for our conference call on Alloy’s Full Year and Fourth 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 full year in fourth quarter fiscal 2007 earnings after the close of the market today. If you had not previously received a copy of the press release, it’s available on Alloy’s website at www.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 update on recent events. We will then open up the discussion for questions and answers.

Our press release and its presentations 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 to 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 to the SEC’s Regulation G. Certain remarks that we may make during this call about future expectations, plans and prospects for Alloy constitutes overlooking statements for purposes of a safe harbour provision 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 over the fiscal year ended January 31, 2007, and in our other periodic SEC filings that are on file with the SEC and available on their website at www.sec.gov. Please refer to those filings for a full description of those factors.

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

Joe Frehe

Thank you, Jodi. Good afternoon and thank you for joining Alloy’s Full Year and Fourth Quarter Fiscal 2007 Conference Call.

Revenue for our fiscal year ended January 31, 2008, which I’ll refer to as fiscal 2007, increased $3 million to $199.1 million from $196.1 million. Revenue in the Media segment increased while the Promotion and Placement segments declined.

Media segment revenue increased 36% or $16.5 million to $62.8 million from $46.3 in fiscal 2006. This increase was driven by our acquisitions of Frontline and Channel One at higher Alloy Entertainment revenues partially offset by lower display board sales.

Promotion segment revenue decreased 13% or $12.6 million to $83.4 million. This decrease was primarily driven by a decline in our promotional events and sampling revenues, partially offset by an increase on campus marketing sales.

Placement segment revenue decreased 2% or $900,000 to $52.9 million. This decrease was primarily due to reductions both multi-cultural and college newspaper revenue.

Except for EBITDA, which we define as operating income flow to depreciation and amortization, non-cash stock-based compensation, and special charges for the year decreased approximately $8.6 million to $10.4 million from $19 million in fiscal 2006. The decrease in adjusted EBITDA was primarily due to lower possibilities in the Media segment and later to the Channel One acquisition and reduced display board business.

We performed our annual review of our goodwill and long lived assets for possible impairment and hired a third party evaluation firm to assist with the analysis. Impairment is calculated based on a discounted cash flow and market comparable models. Based on this review, we were required to record a non-cash impairment charge for our Media and Placement segments of $71.6 million. This expense is reflected in special charges.

Operating income decreased $82.8 million to a loss of $70.1 million in fiscal 2007 from $12.7 million in fiscal 2006. The decrease in operating income is primarily due to lower adjusted EBITDA and higher special charges.

During the year we recorded an extraordinary gain of $5.7 million related to our acquisition of Channel One. This was the result of our actual liabilities being lower than our initial estimate. As you may recall in fiscal 2006, we recorded a $17.9 million expense related to the conversion of $67.9 million of our convertible Debentures. It was no debt conversion expense recorded in fiscal 2007.

Net loss increased $57.2 million to a loss of $64.4 million in fiscal 2007, from a net loss of $7.2 million in fiscal 2006. Net income for diluted shares in fiscal 2007 was -$4.82 from 0.58 for basic share in 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, both depreciation and amortization, amortization of debt discount, non-cash stock-based compensation, debt conversion expenses, and special charges less capital expenditures for fiscal 2007 decreased approximately $21.6 million to -$6.7 million from $14.9 million in fiscal 2006. This decrease is due to lower earnings and increase in capital expenditures, which are partially offset by lower interest expense.

Free cash flow per share in fiscal 2007 was -$0.50 per diluted share, compared with $1.19 per diluted share in fiscal 2006. Our weighted average shares used in the computation of free cash flow per share increased 7%, primarily as a result of issuance of common stock related to the Frontline acquisition and employee stock issuances partially offset by our stock repurchase program.

Reviewing the fourth quarter results, revenue for our fourth quarter ended January 31, 2008, increased $2.2 million to $43.1 million from $40.9 million in the fourth quarter of fiscal 2006. Revenue in the Media segments increased while the Promotions and Placement segments declined.

Adjusted EBITDA for the quarter decreased approximately $2.7 million to a loss of $300,000 from $3 million in the fourth quarter of fiscal 2006. The decrease in adjusted EBITDA was primarily driven by the impact of lower revenue in our Promotion, display board and newspaper businesses.

Turning to our balance sheet—our balance sheet is strong as of January 31st. Our cash and marketable securities were at $21.3 million. This balance includes $9 million in optional securities. Since January 31st, we have been able to liquidate $4.2 million in optional securities and currently reflect a balance of $4.8 million. Our holdings primarily include municipal securities and all of our securities are triple AAA rated. We have an appropriate amount of liquidity within our business based on our cash flow and credit facility with Bank of America. Our working capital was $29 million, our bank loan payable was $4 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 previous year-end balance as a result of the first quarter acquisition and normal seasonal increases. DSO, or day sales outstanding, at the end of the quarter was about 86 days compared with 66 days at January 31, 2007. We are working on efforts to reduce our DSO to the prior year level.

Our capital expenditures for the year finished at $17.1 million versus $2.4 million in the prior year. This increase is primarily due to the equipment operating for Channel One and the Frontline store expansion. With that, let me turn the discussion over to Matt.

Matt Diamond

Thank you, Joe. As Joe mentioned, we finished fiscal 2007 at $10.4 million of EBITDA, on the high side of our previously stated guidance of $9-11 million. Despite producing reduced EBITDA versus the prior year, we believe we have significantly increased the valuation potential of the company by executing our strategic plan in 2007 that will pay off for us in the 2008 fiscal year and beyond.

Fundamentally, our company is now much stronger and more capable of growth than it was two or even one year ago. Our products and services have significantly improved from a client perspective. They’re in growing markets and buying large—they represent larger, long-term revenue and profit opportunities for the company.

Four months ago, we communicated to you that our 2008 projections call for between $225-240 million in revenues and approximately $20-24 million in EBITDA. We are now in the fiscal 2008 and at better visibility than we had four months ago. We remain confident in our guidance and are extremely excited about turning in a record performance in 2008.

I would like to ride a more specific update on our major strategic initiatives and why we believe $20-24 million of EBITDA in 2008 is achievable. As we have stated, we are most focused on our Media business segment because that is the area where we can create the most long-term dye. To that end, we made two important acquisitions in 2007: Channel One and Frontline. As we stated before, Channel One was a loss-making entity for the company in 2007 and we spent significant time and resources rebuilding elements of the network. We have completed this transition and are within weeks of fulfilling our promise of a complete digital upgrade of the network. This transition and the digital upgrade will provide significant network and operating costs benefits going forward.

The organization has been rebuilt with very strong leadership and was able to achieve financial momentum in a back cap in 2007. From an EBITDA perspective, the last two quarters in 2007 were slightly positive and the first quarter is on track with profitability as well.

At this point, we are comfortable forecasting a turn-around from a loss in 2007 to a nice EBITDA profit in 2008. Equally important, we believe that the future of Channel One network is bright and that it’ll become a key business driver for us going forward.

We also acquired Frontline Marketing in 2007 as an entrée into the in-store marketing space. Frontline is a nicely profitable and growing business and is well positioned in a growing in-store, out-of-home market space. Frontline does not have the turn around characteristics of a Channel One, but we are forecasting year over year, EBITDA growth and will benefit from the inclusion of a full year of Frontline results in our 2008 fiscal year versus only a partial year in 2007. Longer term, we believe that Frontline will provide an excellent platform for growth in our out-of-home business.

Also in our Media segment we launched our Teen.com display media network, the leading teen-focused advertising network of high-end publishers. Advertising networks has been attracting increasing amount of advertising dollars over the last year and we believe we are uniquely positioned to succeed in operating a high-end teen network. Alloy is known and respected in the advertising community for providing published content that is safe for advertisers as a result of over ten years of experience in the United States. We now own and represent over 20 million unique visitors from high-end publishers, up from approximately 3 million at the beginning of last year. This represents a significant and incremental opportunity for us in 2008. We are starting to see profit results in the first quarter and expect it to continue throughout the year.

Alloy Entertainment has shown excellent growth over the last few years, based on deals already contracted and we expect to surpass our 2007 results in fiscal 2008. Gossip Girl has been a successful television show on the CW Network and twenty-two episodes has been ordered for season two. Another of our property, Samurai Girl, has been ordered by ABC Family for a six-hour event series in August, based primarily on the Gossip Girl success. CW has also ordered a presentation pilot of another Alloy Entertainment property and this will go into production at the end of this month.

In Films, The Sisterhood of Traveling Pants Part II will be released in August with Alcon and Warner Brothers, and run post production with Summit Entertainment for a movie release in October.

Alloy Entertainment will also launch the first DVD of “The Clique” in November, and is the first of a series of direct-to-DVD movies with Warner Premiere. All of this activity will meet increased producer fees, write payments, as well as, the marketing and awareness that will drive incremental book sales.

Outside of our Media segment, I’d like to touch on a few points. First, our AMP Agency had a difficult 2007. Our pre-book business for 2008 is substantially ahead of last year. Looking at the amount of book business at a given time is the clearest indicator of the strengthened business and right now we believe that we will increase revenues by approximately $10-15 million from 2007 to 2008, and an appropriate increase in EBITDA driven by this increase.

In our Media Placement segment, we continue to monitor sales and are cross-structured based on the market demand. We feel that we are realizing some of the declining economic market trends but we have already built this into our reforecast. To be sure, we have some challenges in front of our business and we have to execute throughout 2008, but overall, we believe we are well positioned to achieve $225-240 million in revenue and $20-24 million in EBITDA. To clarify our 2008 quarters, we project each quarter to have meaningfully increased revenue versus the prior year. In terms of EBITDA, we will slightly increase EBITDA the first quarter and meaningfully increase EBITDA in the second, third, and fourth quarter. This is in part because of the Channel One acquisition taking place in the late parts of the first quarter of last year.

Now, I’d like to open the call up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

One moment please for the first question. Your first question comes from the line for Nick Forte with Blackfoot Capital.

Nick Forte – Blackfoot Capital

Hi gentlemen. Could you give me a quick sense of what you expect for capital expenditures for this year?

Joe Frehe

We expect about $12 million in 2008 and about half of that will probably relate to completing the Channel One upgrade.

Operator

Your next question comes from the line of Steven Martin - Slater Capital.

Steven Martin - Slater Capital

Hi guys. Just a follow on to that last question: With all the write-offs, what is depreciation look like next year?

Joe Frehe

I don’t know off hand but most of the write-off that we did were related to goodwill so our intangibles didn’t go down too much. So the depreciation will change slightly but not a lot.

Steven Martin - Slater Capital

Okay. The receivables you talked about…I’m not quite sure I understand why the acquisition last year would affect your receivable balance of January 31st is really a function to your fourth quarter revenues. So revenues were up $2 million and receivables were up $11 million.

Joe Frehe

But when we’re comparing to January 31, 2007, Frontline and Channel One weren’t included in that number.

Steven Martin - Slater Capital

But they weren’t also included in the revenues?

Joe Frehe

Right.

Steven Martin - Slater Capital

Okay, but your days outstanding jumped up huge. What do you do to bring that back down?

Joe Frehe

Yeah, I mean that’s something we working on. We’re not pleased with the results there but it’s an area we’re working on.

Matt Diamond

I would say, just to put in perspective, there’s no question that we look at that and say we need to do a better job with our days outstanding. I will say from a risk perspective, these are Fortune 500 companies and we’re certainly significantly reserved and are comfortable with it. Having said that, we need to do a better job—and we know it—of getting those balances down.

Operator

Your next question comes from the line of Andrew Miles - Quartz Capital.

Andrew Miles - Quartz Capital

Thanks. What are your interest rates stocks-based compensate for 2008?

Matt Diamond

We haven’t projected to that but it shouldn’t be materially different than 2007 or past years. There’s nothing significant changing.

Andrew Miles - Quartz Capital

So, around $3.5 million?

Joe Frehe

That sounds about right.

Matt Diamond

Yeah, I don’t think there’s anything significant changing from year to year. It’s whatever our normal practice is. Nothing has changed.

Andrew Miles - Quartz Capital

Okay, and your reported tax rate of the year for 2008?

Joe Frehe

It’s still around relatively low, similar to 2007, because we’re not paying federal tax. I think it’s around 11%.

Andrew Miles - Quartz Capital

Is that 11% a good number also for what your cash tax rate is?

Joe Frehe

I’m not sure. I’ll have to review it further.

Operator

Your next question comes from the line of Paul Solit - Potomac Capital Management.

Paul Solit - Potomac Capital Management

So, on the Teen.com, 20 million unique versus 3 million a year ago, can you put any revenue or profit numbers on that or talk about the economics going forward as that grows? How can we review that?

Matt Diamond

Sure, we’ll certainly give you some trends. We don’t break out at you know in this specific Media segment. However, it is definitely safe to assume that, as we talked about in the fourth quarter, as we get the uniques up that we own—that is a leading indicator of sales, and we are seeing that. We are seeing it in the first quarter. I guess it’s worth knowing that time margin in a sense that what we’re seeing in the market is what’s often called display dollars, which are shared media on websites as opposed to promotion on a website. We’re seeing high demands for our segment, being the Youth market. We’re also seeing high demands for just the Internet in general. So, from a trend perspective, we can’t get into our guidance but I can tell you it’s one of the reasons we feel so confident and comfortable with our guidance, is we’re seeing such a nice trend there. It’s offsetting. For example, some of the clients we’ve seen from the economy in Placement, but the Internet is definitely a great growth area for us. We look at other people in the market and we feel very confident that we are well ahead and in best position to capitalize on it.

Paul Solit - Potomac Capital Management

Do you have—I mean, I guess it’s not really a pipeline business—but in terms of panning network partners, is there a pipeline or is it just sort of steady smaller sites that you’re adding on, or could there be some more meaningful add?

Matt Diamond

That’s a valid question. We’re uniquely positioned, we believe, where we get frequently, I would say, more than one a day on average at certain times, request to join the network. We don’t take everybody that wants to join our network. Now, there are other network places out there that would take anyone. The problem with that is the revenues don’t necessarily justify taking everybody that comes your way. And second, we need to be very comfortable with the partners we have are going to befit our network, meaning that they can place an ad on it. We know it’s going to be quality content. We know it’s not going to be something an advertiser’s going to get upset about and I think that plays to our strengths, and that’s what we’ve done.

And to answer your question, we do have a pipeline of networks that are either waiting to be added or that we’re evaluating. We’ll continue to do that and we’ll continue to balance that with the demand. I would say right now though, we’re in a real good place with the amount of partners that we have combined with what we’re seeing out there in the ad space and we’re seeing a nice growth. I mean, I think it’s worth noting that the fourth quarter, which is traditionally the big quarter—these aren’t big numbers but—we’re seeing trends that are surpassing that in the first quarter already. So, these are all reasons to be very bullish for us—and not just this year but well beyond—for what’s happening in the Internet space. We just think we’re by far the best positioned company out there to capitalize on this.

Operator

Your next question is a follow up question from the line of Nick Forte with Blackfoot Capital.

Nick Forte – Blackfoot Capital

Could you give us some sense of what is the economic sensitivity of some parts of your business and how you have incorporated that? What kind of assumptions you have used for your projections?

Matt Diamond

Sure, I guess I would state as a general statement that we’re probably not the most economically sensitive in the sense that we’re in the youth market. It’s not the first thing a marketer’s necessarily going to cut in their spending. We’re in some high growth segments like Interactive and Out-of-Home that any decline in the economy is masked by the growth in those segments. However, having said that, some of our business segments, particularly Newspaper, have historically been the most sensitive to economic downturns and that’s offset slightly by they’re also the group that gets the benefit of the Olympics and the Elections. However, we’ve assumed very little benefits from both the Olympics and the Election and a downturn in that segment. So, that is in our guidance. As I said earlier, that’s offset by some of the growth we’re seeing in, for example, our Internet segments but at the same time it is baked into our numbers and I think we’ve been pretty conservative as to what we anticipate this year.

Nick Forte – Blackfoot Capital

Okay, thank you.

Matt Diamond

Thank you.

Operator

Your next question is a follow up question from the line of Paul Solit from Potomac Capital Management.

Paul Solit - Potomac Capital Management

Hi, it’s PJ again. I just got cut off. Just wanted to touch on, I guess—based on your guidance for $20-24 million in EBITDA and where the stock is—you’re trading in inter pause variety to EBITDA of less than four times forward in a world where non-traditional advertising and media play is—not to mention advertising networks online like Teen.com—trade at two, three, four times this multiple—So you’ve got an incredible disconnect here. I just think you need to look at doing something more aggressive on the share buyback to take advantage of that. It could be meaningfully accretive.

Matt Diamond

Yeah, but certainly as you know, we put the buyback in place and we did buy about half a million dollars worth last year, obviously, even more towards the tail end. There were some factors that limited us a little bit after we put it back in place—a combination of, frankly, some of the NASDAQ restrictions. Some days when we were more aggressive we’re just limited by what we could actually purchase. And other times, it’s worth noting that there were periods we were not in the market and we pulled back in part because of strategic opportunities that did present themselves and, as you know, with our multiple where it is, we did not want to even consider using equity at that time. And therefore, it would’ve been use of cash and we felt with that opportunity in particular was very accretive-potentially transaction we ended up not following through for various reasons, but that didn’t take us away.

We agree and we acknowledge that where we’re trading at versus what we expect for next year means that something we should be looking at constantly, as far as, a buyback is concerned. So, we’ll continue to do it. At the same time, the combination of what’s going on in the market, the cash crunch in other areas—it’s just something we think we’ll be prudent about but we aren’t going to shy away from future buybacks.

Paul Solit - Potomac Capital Management

I think you should look into a plan that allows you to bond. It takes the legal aspect down whether you’re restricted or not and allows you to just buy in a set at a certain price, and say, “Hey, we’re going to buy $5 million of stocks,” if the stocks at these levels.

Matt Diamond

Just so you’re aware, we do have that in place. We’ve included it through our blackout period as an example in order to legally do some of those things. So, there are still some limits beyond that that we couldn’t get over when we wanted to be more active. So, we did project a 10b5 program in place.

Paul Solit - Potomac Capital Management

Maybe we need to go to a tender then. All right, thanks a lot.

Matt Diamond

Yes, thanks.

Operator

There are no further questions at this time.

Matt Diamond

Thank you all very much for joining us for this 2007 Fiscal Year End Call. We look forward to updating you at the end of our first quarter and continue to execute on our plan for increased growth, both in revenue and profit, for 2008. Thank you.

Operator

Thank you. This concludes today’s Alloy Full Year and Fourth Quarter Fiscal 2007 Results Conference Call.

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