##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K


|  |  |                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended January 31,
    2004                                                  
| 
|o |  | 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: 000-26023

Alloy, Inc.

Exact name of registrant as specified in
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
office)


(212) 244-4307

(Registrants telephone number, including
area code)


SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT:

NONE


SECURITIES REGISTERED PURSUANT TO
SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01


PREFERRED STOCK PURCHASE RIGHTS


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.     Yes o          No þ

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The aggregate market value, based upon the
closing sale price of the shares as reported by the NASDAQ
National Market, of voting and non-voting common equity held by
non-affiliates as of July 31, 2003 was $267,940,666
(excludes shares held by executive officers, directors, and
beneficial owners of more than 10% of the Registrants
common stock). Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of
management or policies of the Registrant or that such person is
controlled by or under common control with the Registrant.

The number of shares of the Registrants
Common Stock outstanding as of May 14, 2004 was 42,965,836.

Certain information in the Registrants
definitive proxy statement for its 2004 Annual Meeting of
Stockholders, which is expected to be filed with the Securities
and Exchange Commission within 120 days of the
Registrants fiscal year end, is incorporated by reference
into Part III of this Report.



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INDEX

|                                                            |  |                                                                                           |     |      |    | 
|----------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                            |  |                                                                                           |     | Page
|                                                            |  |                                                                                           |     |     
|PART I                                                     
|Item 1.                                                     |  | Business                                                                                  |     |      | 2  | 
|Item 2.                                                     |  | Properties                                                                                |     |      | 18 | 
|Item 3.                                                     |  | Legal Proceedings                                                                         |     |      | 19 | 
|Item 4.                                                     |  | Submission of Matters to a
    Vote of Security Holders                                   |     |      | 20 | 
|PART II                                                    
|Item 5.                                                     |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |     |      | 20 | 
|Item 6.                                                     |  | Selected Financial Data                                                                   |     |      | 22 | 
|Item 7.                                                     |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |     |      | 23 | 
|Item 7A.                                                    |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |     |      | 36 | 
|Item 8.                                                     |  | Financial Statements and
    Supplementary Data                                           |     |      | 37 | 
|Item 9.                                                     |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |     |      | 37 | 
|Item 9A.                                                    |  | Controls and Procedures                                                                   |     |      | 37 | 
|PART III                                                   
|Item 10.                                                    |  | Directors and Executive
    Officers of the Registrant                                    |     |      | 38 | 
|Item 11.                                                    |  | Executive Compensation                                                                    |     |      | 38 | 
|Item 12.                                                    |  | Security Ownership of
    Certain Beneficial Owners and Management                        |     |      | 38 | 
|Item 13.                                                    |  | Certain Relationships and
    Related Transactions                                        |     |      | 38 | 
|Item 14.                                                    |  | Principal Accounting Fees
    and Services                                                |     |      | 39 | 
|PART IV                                                    
|Item 15.                                                    |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |     |      | 39 | 
|SIGNATURES                                                  |  |                                                                                           |     |     
|Signatures                                                  |  |                                                                                           | 40  |     
|EXHIBITS                                                    |  |                                                                                           |     |     
|Exhibit Index                                               |  |                                                                                           | 41  |     
|CONSOLIDATED FINANCIAL
    STATEMENTS AND SCHEDULE          |  |                                                                                           |     |     
|Index to Consolidated Financial Statements and
    Schedule |  |                                                                                           | F-1 |     
|EMPLOYMENT AGREEMENT                                       
|EMPLOYMENT AGREEMENT                                       
|PURCHASE AGREEMENT                                         
|SUBLEASE AGREEMENT                                         
|SUBSIDIARIES OF ALLOY, INC.                                
|CONSENT OF KPMG LLP                                        
|CERTIFICATION                                              
|CERTIFICATION                                              
|CERTIFICATION                                              
|CERTIFICATION                                              



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PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a media, marketing services, direct
marketing and retail company targeting Generation Y, the
approximately 60 million boys and girls in the United
States between the ages of 10 and 24. Our business integrates
direct mail catalogs, retail stores, print media, display media
boards, websites, on-campus marketing programs and promotional
events, and features a portfolio of brands that are well known
among Generation Y consumers and advertisers. We reach a
significant portion of Generation Y consumers through our
various media assets, marketing service programs, direct
marketing activities, and retail stores. As a result, we are
able to offer advertisers targeted access to the youth market.
We sell third-party branded and private label products in key
Generation Y spending categories, including apparel, action
sports equipment and accessories, directly to the youth market.
Additionally, our assets have enabled us to build a
comprehensive database that includes information about
approximately 26 million Generation Y consumers.

We believe we are the only
Generation Y-focused media company that combines
significant marketing reach with a comprehensive consumer
database, providing us with a deep understanding of the youth
market. This market is large. According to the United States
Census Bureau, more than 35% of the United States population is
under the age of 24. According to studies by Harris Interactive,
the projected annual income for Generation Y is about
$211 billion and annual spending is about $172 billion
per year  about $3,000 in spending per person. Harris
Interactive studies have also shown that the college market is
large and influential, with approximately 15.8 million
college students in the United States who control about
$46.5 billion annually in discretionary spending.

We were incorporated in January 1996, launched
our Alloy website in August 1996 and began generating meaningful
revenues in August 1997 following the distribution of our first
Alloy catalog. Since then, we have grown rapidly, both
organically and through the completion of strategic
acquisitions. Our consolidated revenues have increased from
$2.0 million for the fiscal year ended January 31,
1997 to $371.9 million for the fiscal year ended
January 31, 2004.

We believe our business should continue to grow
as we capitalize on the following key assets:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Broad Access to
    Generation Y.Our collection of
    media, marketing and retail assets enables us to reach a
    significant portion of the over 60 million
    Generation Y consumers by:



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | circulating over 65 million direct mail
    catalogs annually;                                                                                                                       
|
| |  | producing college guides, books and recruitment
    publications;                                                                                                                    
|
| |  | owning and operating 61 dELiA*s retail stores,
    including six outlet stores, in 22 states;                                                                                        
|
| |  | owning and operating over 30,000 display media
    boards on college and high school campuses throughout the United
    States;                                                      
|
| |  | placing advertising in over 2,500 college and
    high school newspapers; and                                                                                                        
|
| |  | interacting with our registered online user base
    that, as of January 31, 2004, comprised of almost
    5 million individuals who subscribed to our targeted e-mail
    magazines.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Comprehensive Generation Y
    Database.As of January 31, 2004,
    our database contained information about approximately
    26 million individuals, including approximately
    8.2 million individuals who have purchased products
    directly from us. In addition to names and addresses, our
    database contains a variety of valuable information that may
    include age, purchasing history, stated interests, online
    behavior, educational level and socioeconomic factors. We
    continually refresh and grow our database with information we
    gather through our media properties, marketing services, retail
    stores and direct marketing programs, as well as through
    acquisitions of companies that have database information. We

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | analyze this data in detail, which we believe
    enables us to not only improve response rates from our own
    direct sales efforts but also to offer advertisers
    cost-effective ways of reaching highly targeted audiences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Established Media and Marketing
    Franchises.Our principal media and
    marketing franchises are well known by Generation Y
    consumers and by advertisers that target this market. Alloy,
    dELiA*s, CCS and Dans Comp are recognized brands among
    Generation Y consumers. Each of these multi-media brands
    targets a specific segment of the youth market through retail
    stores, catalogs and/or websites. For advertisers, our portfolio
    of marketing businesses includes established marketers that
    target the youth market such as Market Place Media, CASS
    Communications, 360 Youth, Alloy Marketing and Promotions,
    On Campus Marketing and Private Colleges &
    Universities, which collectively have over 60 years of
    experience in creating and implementing advertising and
    marketing programs targeting the youth market.
|
| |  | Strong Relationship with Advertisers and
    Marketing Partners.We provide
    advertisers and marketing partners with highly targeted,
    measurable and effective means to reach the Generation Y
    audience. Our seasoned advertising sales force of over
    100 professionals has established strong relationships with
    youth marketers. During fiscal 2003, we had over 1,800
    advertising clients, including AT&T Wireless, Citibank,
    Hershey, LOreal, New Balance, Paramount Pictures,
    Procter & Gamble and Verizon Wireless.                                                                                                                                                                                                                                                                                                                            

We generate revenue from three reportable
segments:



| |   |                                                
| | - | -----------------------------------------------
| |  | DIRECT MARKETING (formerly
    MERCHANDISING)
|
| |  | RETAIL STORES                                  
|
| |  | SPONSORSHIP AND OTHER ACTIVITIES               

Direct Marketing Segment

Effective September 2003, and following our
acquisition of dELiA*s Corp. we changed the name of our catalog
and online commerce business from the merchandising
segment to the direct marketing segment. Our
direct marketing segment derives revenues from sales of
merchandise to consumers through our catalogs and websites. Net
merchandise revenues in our direct marketing segment for the
fiscal years ended January 31, 2002 (fiscal
2001), January 31, 2003 (fiscal 2002) and
January 31, 2004 (fiscal 2003) were
$124.1 million, $167.6 million and
$156.8 million, respectively.

Each of our catalogs and associated websites
targets a particular segment of Generation Y and offers
products of interest to its audience.

Alloy
Our Alloy catalog ranges in length from 48 to 84 pages and
offers for sale an assortment of apparel, accessories, footwear
and room furnishings targeting Generation Y girls. During
fiscal 2003, we mailed 15 versions of the Alloy catalog and
allocated up to nine pages per catalog to our advertising
clients and marketing partners. Our flagship website
(WWW.ALLOY.COM) provides a broad range of merchandise,
community, and content for Generation Y girls. Through this
website, we offer the apparel items, outerwear, accessories,
footwear, cosmetics and room furnishings that are available in
our Alloy catalogs, as well as additional products and special
offers.

dELiA*s
Our dELiA*s catalog, which targets Generation Y girls and
offers a variety of apparel, accessories and home furnishings,
ranges from 48 to 112 pages in length. We acquired dELiA*s
in September 2003. From September 6, 2003 through
January 31, 2004, six versions of the dELiA*s catalog were
mailed. Our dELiA*s website (WWW.dELiAs.COM) is designed to
complement the catalog and offers the same accessories, apparel
items and footwear as are offered in the catalog, as well as
additional products and special offers.

CCS Our
CCS catalog, which targets Generation Y boys, ranges from
40 to 104 pages in length and offers an assortment of
action sports equipment, such as skateboards and snowboards, and
related apparel, accessories and footwear. We mailed
10 versions of the CCS catalog during fiscal 2003 and
allocated up to

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eight pages per catalog to our advertising
clients and marketing partners. Our CCS website (WWW.CCS.COM)
features products, content and community for action sports
enthusiasts. We offer the same action sports equipment and
related accessories, apparel items and footwear that are found
in our CCS catalogs, as well as additional products and special
offers.


Dans
Comp Our Dans Comp
catalog, which also targets Generation Y boys, ranges from
36 to 108 pages, focuses on the BMX bike market and offers
BMX bikes, parts and safety equipment, as well as related
apparel, accessories and footwear. We mailed eight versions of
the Dans Comp catalog during fiscal 2003. Our Dans
Comp website (WWW.DANSCOMP.COM) is a popular online destination
for BMX bike enthusiasts through which we offer consumers the
same BMX bike sports equipment and related accessories, apparel
items and footwear that we offer in our Dans Comp
catalogs, as well as additional products and special offers.

Girlfriends LA
Our Girlfriends LA catalog targets Generation Y girls
and offers a variety of accessories, footwear, apparel and room
furnishings. During fiscal 2003, we mailed eight versions of the
Girlfriends LA catalog, ranging from 48 to 64 pages in
length. Our Girlfriends LA website (WWW.GIRLFRIENDSLA.COM)
is designed to complement the catalog and offers the same
accessories, apparel items and footwear, as well as additional
products and special offers. In an effort to focus on our core
direct marketing brands, we plan to discontinue the production
of the Girlfriends LA catalog during the fiscal year ending
January 31, 2005 (fiscal 2004).

Old
Glory Our Old Glory
catalog principally targets both Generation Y boys and
girls, and offers music and entertainment related lifestyle
products including apparel, accessories and collectibles. Our
Old Glory website (WWW.OLDGLORY.COM) is designed to complement
the catalog, and offers the same apparel, accessories and
collectibles, as are offered in the catalog as well as
additional products and special offers. During fiscal 2003, we
mailed five versions of the Old Glory catalog, all of which were
64 pages. In an effort to focus on our core direct marketing
titles, we plan to discontinue the production of the Old Glory
catalog during fiscal 2004.



| |                          
| | -------------------------
| | Direct Marketing Strategy

Our direct marketing strategy is designed to
minimize our exposure to trend risk and facilitate speed to
market and product assortment flexibility. Our primary objective
is to reflect, not lead, Generation Y styles and tastes. We
select merchandise from what we believe are quality designers
and producers, allowing us to stay current with the tastes of
the market rather than to predict future trends. Our buyers and
merchandisers work closely with our many vendors to tailor
products to our specifications. Through this strategy, we
believe we are able to minimize design risk and make final
product selections only two to three months before the products
are brought to market, not the typical six to nine months
required by many apparel retailers.

We have designed our operational processes to
support our direct marketing strategy. Our buyers have years of
experience working with Generation Y retail and direct
marketing companies. We believe our staff has a proven ability
to identify desirable products and ensure that our vendors meet
specific guidelines regarding product quality and production
time. At present, we primarily use domestic vendors who have the
ability to produce and ship products within two to eight weeks.
This speed to market gives us flexibility to incorporate the
latest trends into our product mix and to better serve the
evolving tastes of Generation Y.

Our direct marketing strategy also enables us to
manage our inventory levels efficiently. We attempt to limit the
size of our initial merchandise orders and rely on quick
re-order ability. Because we do not make aggressive initial
orders, we believe we are able to limit our risk of excess
inventory. Additionally, we use our websites to offer special
product prices and periodically mail various sales catalogs to
our customers to sell slower moving inventory, complementing the
selling capacity of our dELiA*s outlet stores.

Because Alloy, dELiA*s, CCS and Dans Comp
are recognized and popular brands among Generation Y
consumers, our websites and catalogs are a valuable marketing
tool for our vendors. As a result, our vendors often grant us
online and catalog exclusivity for products we select. We
believe this exclusivity makes the merchandise in the Alloy,
dELiA*s, CCS and Dans Comp catalogs more attractive to our
target audience and

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protects us from direct price comparisons. Our
merchandise selection includes products from more than 500
vendors. dELiA*s primarily carries its own branded merchandise
as well as merchandise from well known names including Paul
Frank, Billabong, and Puma. Brands currently offered through
Alloy include nationally recognized names such as Vans, Roxy/
Quiksilver and Skechers, as well as smaller, niche labels,
including Paris Blues and Free People. CCS carries merchandise
and equipment from major action sports brands such as World
Industries, Osiris and Birdhouse. Dans Comp merchandise
includes a complete line of BMX-style bicycles, parts, safety
equipment, apparel and accessories from brands including Huffy,
Hoffman and Free Agent bikes, and Etnies, Split and DC apparel
and footwear.




| |                                               
| | ----------------------------------------------
| | Ordering, Fulfillment and Customer
    Service

In order to take, fulfill and ship orders for our
Alloy, CCS, Old Glory and Girlfriends LA merchandise
businesses, we have used a full-service, integrated call center
and fulfillment center staffed with trained personnel and owned
and operated by NewRoads, Inc. (NewRoads), a
specialized third-party fulfillment services company. In
Martinsville, Virginia, NewRoads has over 400,000 square
feet of warehouse space to support Alloys activity, and a
250-seat call center to handle both Alloy and
Girlfriends LA inquiries. In addition, NewRoads has over
300,000 square feet of warehouse space in Portland,
Tennessee to support CCS and Girlfriends LA warehouse and
fulfillment activities, and a 150-seat call center in
San Luis Obispo, California to handle CCS inquiries. We
monitored our NewRoads relationship closely, in part by having
several of our employees working on site at each NewRoads
facility.

We process Dans Comp orders through our own
47-seat call center and warehouse facility located in
Mt. Vernon, Indiana. We staff our Dans Comp call
center and warehouse with our own employees. The Dans Comp
fulfillment center has approximately 29,000 square feet of
warehouse space. We initially processed Old Glory orders through
a 30-seat call center and warehouse facility located in
Westbrook, Connecticut which was owned and operated by the
former owners of Old Glory. In April 2003, we transferred the
Old Glory call center and warehouse operations to NewRoads,
which handles the Old Glory call center functions at its
San Luis Obispo, California location and the Old Glory
warehousing activities from its Portland, Tennessee location.

We process dELiA*s customer orders and retail
stock shipments through a warehouse and fulfillment center in
Hanover, Pennsylvania. Our 200-seat call center is staffed with
personnel in Westerville, Ohio. Following our acquisition of
dELiA*s, we shipped an average of 23,000 units to retail
stores and 5,000 customer packages per day from this center. Our
busiest shipping days for dELiA*s involved shipping
82,000 units to retail stores and 16,000 customer packages
for the direct marketing segment. We use an integrated picking,
packing and shipping system with a live connection to our direct
order entry system. The system monitors the in-stock status of
each item ordered, processes orders and generates warehouse
selection tickets and packing slips for order and fulfillment
operations that we acquired in connection with our acquisition
of dELiA*s.

During the third quarter of fiscal 2003, we made
the strategic decision to transfer substantially all of our
fulfillment activities for our Alloy and CCS units to our
recently acquired distribution center in Hanover, Pennsylvania
during fiscal 2004. We notified New Roads that we would be
exiting the New Roads facilities during the first half of
fiscal 2004. As of April 2004, we transferred the Alloy call
center operations to our Westerville, Ohio location and began to
fulfill and ship Alloy orders from our Hanover, Pennsylvania
warehouse. In May 2004, we transferred order-taking,
fulfillment, and shipments related to our CCS direct marketing
brand to our call center in Westerville, Ohio and our warehouse
in Hanover, Pennsylvania.

We believe that high levels of customer service
and support are critical to the value of our services and to
retaining and expanding our customer base. We routinely monitor
customer service calls at each of our call centers for quality
assurance purposes. Additionally, we review our call and
fulfillment centers policies and distribution procedures
on a regular basis. A majority of our catalog and Internet
orders are shipped within 48 hours of credit approval. In
cases in which the order is placed using another persons
credit card and exceeds a specified threshold, the order is
shipped only after we have received confirmation from the

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cardholder. Customers generally receive orders
within three to ten business days after shipping. Our shipments
are generally carried to customers by United Parcel Service and
the United States Postal Service.


Trained customer service representatives and
sales personnel historically have been available for the Alloy
and Girlfriends LA brands 24 hours a day, 7 days
a week through multiple toll-free telephone numbers. CCS and Old
Glory trained customer service representatives historically have
been available from 5:00 A.M. to 10:00 P.M. Eastern
Standard Time, Monday through Friday; 5:00 A.M. to
9:30 P.M. on Saturday; and 9:30 A.M. to
10:00 P.M. on Sunday, while sales personnel are available
24 hours a day, 7 days per week. Dans Comp
customer service representatives and sales personnel are
available from 9:00 A.M. to 10:00 P.M. Eastern
Standard Time, Monday through Friday; from 10:00 A.M. to
8:00 P.M. on Saturday, and from 12 P.M. to 8 P.M.
on Sunday. dELiA*s trained customer service representatives are
available from 8:00 A.M. to 2:00 A.M. Eastern Standard
Time, 7 days per week, while sales personnel are available
24 hours a day, 7 days per week. The same management
team, with dedicated personnel for each brand, now handle Alloy
and CCS customer service and sales calls, all during the same
service hours. The representatives guide customers through the
order process, monitor order progress and provide general
information about our products such as sizing advice and product
features.

Retail Stores Segment

Our retail stores segment derives revenue
primarily from the sale, through dELiA*s retail and outlet
stores, of apparel, accessories and home furnishings to
consumers. Our dELiA*s retail stores display merchandise
exclusively in mall stores and sell directly to customers who
visit those locations. As of January 31, 2004, we operated
61 dELiA*s stores, including six outlet stores, in
22 states. The six outlet stores are located in Riverhead,
New York; Central Valley, New York; Tannersville, Pennsylvania;
Jackson, New Jersey; San Marcos, Texas; and Clinton,
Connecticut. Our retail stores range in size from 2,500 to
5,100 square feet, with an average size of approximately
3,700 square feet. We began operation of the dELiA*s stores
upon the acquisition of dELiA*s in September 2003. Retail store
revenues from the date of acquisition through the end of fiscal
year 2003 were $30.1 million.

Store Operations.Each store has a manager, one or more assistant managers, and
approximately six to twelve part-time sales associates. District
managers supervise approximately five to eight stores covering a
wide geographic area, and approximately four or five district
managers report to a regional manager. We have two regional
managers. District managers, store managers, assistant store
managers and part-time sales associates participate in a bonus
program based on achieving predetermined levels of sales in
their respective stores. dELiA*s stores are open during mall
shopping hours. dELiA*s has well-established store operating
policies and procedures and an extensive in-store training
program for new store managers and assistant store managers. We
place great emphasis on our loss prevention program in order to
control inventory shrinkage.

Store Expansion.During fiscal 2003 we did not open any new dELiA*s stores.
dELiA*s site selection strategy historically has been to
locate its stores primarily in regional malls serving markets
that meet its demographic criteria, including average household
income and population density. It also has considered mall sales
per square foot, the performance of other retail tenants serving
teens and young adult customers, anchor tenants and occupancy
costs. As part of our ongoing evaluation of the dELiA*s
operations, we have completed our assessment of dELiA*s
store portfolio and estimated store exit, lease costs, and
severance related to 17 dELiA*s retail stores. The growth
of our retail store operations depends upon our ability to
operate stores on a profitable basis. If we decide to open
additional retail stores, our ability to expand our retail store
operations successfully will be dependent upon a number of
factors, including sufficient demand for our merchandise in
existing and new markets, our ability to locate and obtain
favorable store sites, negotiate acceptable lease terms, obtain
adequate merchandise supply, and hire and train qualified
management and other employees.

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Sponsorship and Other Activities
Segment

Our sponsorship and other activities segment
derives revenue largely from traditional, blue chip advertisers
that seek highly targeted, measurable and effective marketing
programs to reach Generation Y. Advertisers can reach
Generation Y through integrated marketing programs that
include our catalogs, books, websites, and display media boards,
as well as through promotional events, product sampling, college
and high school newspaper advertising, customer acquisition
programs and other marketing services that we provide.
Sponsorship and other revenues for fiscal years 2001, 2002 and
2003 were $41.6 million, $131.8 million, and
$185.0 million respectively.



| |                            
| | ---------------------------
| | Sponsorship and Advertising

360 Youth is our media and marketing arm,
which includes the assets and experience of several college and
teen marketing companies, including CASS Communications, Market
Place Media (All Campus Media and Armed Forces Communications),
YouthStream, Private Colleges & Universities and
others, to provide sales and marketing solutions targeting young
adults. 360 Youth enables Fortune 500 companies and
other advertising clients to reach approximately 25 million
Generation Y consumers each month through a comprehensive
mix of programs incorporating proprietary media assets such as
school-based media boards, websites and catalogs, as well as
college, high school, military base and multi-cultural
newspapers. We own and operate over 30,000 display media boards
that are located in high traffic areas on college and high
school campuses. These one, two or three panel display media
boards often feature full color, backlit advertising as well as
scrolling electronic messaging. Through our newspaper
advertising units, we are able to connect advertisers with more
than 55 million readers throughout the United States.

On Campus Marketing is our college-focused
specialty marketing business, which provides to college students
and their parents a variety of college- or university-endorsed
products. Products range from residence hall linens to care
packages to diploma frames. During fiscal 2003, we acquired
substantially all of the assets and liabilities of OCM Direct,
Inc., Collegiate Carpets, Inc. and Carepackages, Inc., all of
which were wholly owned subsidiaries of Student Advantage, Inc.,
which businesses are held by our wholly owned subsidiaries, On
Campus Marketing, LLC, Collegiate Carpets, LLC and Care
Packages, LLC.



| |                      
| | ---------------------
| | Promotional Marketing

Alloy Marketing and Promotions (AMP) is our
promotional marketing unit specializing in event and field
marketing, sampling and acquisitions programs, Internet design
services and consumer research. During fiscal 2002, we
consolidated under AMP the assets and experience of established
promotion agencies and marketing services companies, including
the 360 Youth business of MarketSource Corporation (though
we have transferred the 360 Youth name to our media and
marketing arm), Triple Dot Communications, Y-Access and Target
Marketing & Promotions, to deliver effective,
customized promotions. AMP clients include AT&T, Verizon
Wireless, Maybelline, Garnier, Hasbro, Panasonic, New Balance
and Paramount Pictures.



| |                      
| | ---------------------
| | Print Media/ Websites

We reach Generation Y consumers through
catalogs, custom publications and the Internet.

Alloy/ CCS
Catalogs Our catalogs
enable our advertising clients and marketing partners to reach
the Generation Y audience through print advertisements. We
have included advertising pages in certain of our catalogs.
During fiscal 2003, we allocated up to nine pages of
advertising per Alloy catalog and up to eight pages per CCS
catalog.

Private Colleges &
Universities Under the
Private Colleges & Universities brand, we publish over
30 editions of targeted college guides providing information
about private colleges and universities and the admissions
process to college-bound high school students, their parents,
and high-school guidance counselors. Our editions target
students based on academic achievement, geography and special
interests such as science and medicine, among others. We
distribute our guidebooks to college-bound students across the
United

7



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States. Complementing our published college and
university guides, our Private Colleges & Universities
websites (WWW.PRIVATECOLLEGES.COM and WWW.COLLEGEXPRESS.COM)
provide information on colleges and universities to
college-bound high school students. Hundreds of colleges and
universities advertise their programs and recruit students via
these websites.


Alloy/dELiA*s/ CCS/ Dans Comp
Websites Our direct
marketing websites complement our catalogs of the same name and
enable our advertisers and clients to reach our
Generation Y audience online.

eStudentLoan
Our eStudentLoan websites (WWW.ESTUDENTLOAN.COM and WWW. 
 ABSOLUTELYSCHOLARSHIPS.COM) feature college scholarship and
financial aid database search engines. These websites complement
our college recruitment publications and websites to serve the
college-bound segment of Generation Y.

College
Club Our college club
website (WWW.COLLEGECLUB.COM) features e-mail, clubs, chat,
personal sites, student discounts and advice, and enables
advertisers to reach the college market online.

Careers and
Colleges Our Careers and
Colleges website (WWW.CAREERSANDCOLLEGES.COM) features a virtual
guidance counselor that helps students explore career and
college options. The website provides essential advice for
choosing a career, selecting a school, and paying for college.



| |        
| | -------
| | Content

Alloy Entertainment/ 17th Street
Productions Through Alloy
Entertainment and 17th Street Productions, we develop youth
entertainment properties including books and concepts for
television series and motion pictures. We believe we are the
largest packager of books for the teen market. Some of our
properties include Roswell, Sweet Valley High, Fearlessand The Sisterhood of the Traveling Pants.



| |                                 
| | --------------------------------
| | Sales & Marketing
    Salesforce

Our advertising sales organization includes over
100 sales professionals who are either account managers
generally responsible for specific geographic regions or product
specialists. Our account managers and product specialists work
closely together to cross-sell our media assets and marketing
capabilities to existing advertising customers and to build
relationships with new advertisers. Our account managers are
trained and motivated to sell the entire portfolio of our media
and advertising services including:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | advertising in our custom publications, catalogs
    and websites;                                        
|
| |  | advertising on our display media boards;                                                                  
|
| |  | marketing programs such as product sampling,
    customer acquisition programs and promotional events; and
|
| |  | advertising in college, high school, military
    base and multi-cultural newspapers.                     

Our advertising sales organization has grown
through a combination of external hiring and our acquisitions of
Private Colleges & Universities, CASS Communications,
360 Youth, Market Place Media and On Campus Marketing, each
of which had an experienced sales force.

Our advertisers come from a wide range of
industries that target the Generation Y audience including
apparel, consumer goods and electronics, cosmetics,
entertainment, financial services, food and beverage and others.
Our advertising revenue base is well diversified, and no single
advertiser represented more than 4% of our total sponsorship and
other activities revenue in fiscal 2003.

Infrastructure, Operations and
Technology

Our operations are dependent on our ability to
maintain our computer and telecommunications systems in
effective working order and to protect our systems against
damage from fire, natural disaster, power loss,
telecommunications failure or similar events.

8



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Where appropriate, we have implemented disaster
recovery programs for our various businesses. Critical files are
copied to backup tapes each night and regularly stored at
off-site storage facilities. Arrangements have also been made
for the availability of third-party hot sites as
well as telecommunications recovery capability. Our servers are
powered by an uninterruptible power supply to provide back-up
power at the operations facilities within milliseconds of a
power outage. Redundant Internet connections and providers
deliver similar protection for our online services. We
implemented these various redundancies and backup measures in
order to minimize the risk associated with damage from fire,
power loss, telecommunications failure, break-ins, computer
viruses, denial of service (DOS) attacks, hacking and other
events beyond our control.

We strive for no downtime in our online services.
All critical components of the system are redundant, which
allows continuous service in case of unexpected component
failure, maintenance or upgrades.

Currently, we license commercially available
technology whenever possible in lieu of dedicating our financial
and human resources to developing proprietary online
infrastructure solutions. We provide most services related to
maintenance and operation of our websites internally, under the
direction of our Chief Technology Officer. Since April 2002,
Exodus, a Cable & Wireless Service (recently acquired
by SAVVIS Communications Corp), and Equinix Inc., third-party
providers located in Sterling, Virginia and Ashburn, Virginia,
respectively, have provided us with co-location and bandwidth
(i.e., our Internet connection). Our infrastructure is scaleable
which allows us to adjust quickly to our expanding user base.
Steps were taken upon the acquisition of dELiA*s to migrate its
commercial systems from the Cable & Wireless data
center in Jersey City, New Jersey into Alloys standard,
redundant facility in Virginia. We expect to complete this
process by the end of the second quarter of fiscal 2004. Other
data and voice systems in the call center and fulfillment center
are being hardened and made redundant with the addition of
backup circuits, Sonet rings, backup generators and other system
upgrades. We also expect to complete these processes by the end
of the second quarter of fiscal 2004.

Competition

Competition for the attention of
Generation Y consumers is considerable. Our catalogs
compete with other catalog retailers and direct marketers, some
of which specifically target our customers. We also compete with
a variety of other companies serving segments of the
Generation Y market including various mail-order and
web-based retailers, promotions and marketing services firms,
youth-targeted traditional retailers either in their physical or
online stores, and online service providers that offer products
of interest to Generation Y consumers. Our dELiA*s retail
stores compete with traditional department stores, as well as
specialty retailers, for teen and young adult customers.

We compete for users and advertisers with many
media companies, including companies that attempt, as we do, to
target Generation Y consumers. These include
Generation Y-focused magazines such as Seventeen, YM,
Teenand Teen People; teen-focused television and
cable channels such as the WB Network and MTV; websites
primarily focused on the Generation Y demographic group;
and online service providers with teen-specific channels, such
as America Online.

Many of our current and potential competitors
have longer operating histories, larger customer or user bases
and significantly greater financial, marketing and other
resources than we do. In addition, competitors could enter into
exclusive distribution arrangements with our vendors or
advertisers and deny us access to their products or their
advertising dollars. If we face increased competition, our
business, operating results and financial condition may be
materially and adversely affected.

We believe that our principal competitive
advantages are:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | the size and level of detail in our database;                                                                                             
|
| |  | our relationships with advertisers and marketing
    partners;                                                                            
|
| |  | the consumer and media brands we have developed
    in the Generation Y market;                                                           
|
| |  | our knowledge of the Generation Y audience
    and our ability through our marketing franchises to continually
    analyze the market; and
|
| |  | our ability to deliver targeted Generation Y
    audiences to advertisers through cost-effective, cross-media
    advertising programs.   

9



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Seasonality

Our historical revenues and operating results
have varied significantly from quarter to quarter due to
seasonal fluctuations in consumer purchasing patterns and the
impact of acquisitions. Sales of apparel, accessories, footwear
and action sports equipment through our websites, catalogs and
retail stores have been higher in our third and fourth fiscal
quarters, which contain the key back-to-school and holiday
selling seasons, than in our first and second fiscal quarters.
We believe that advertising and sponsorship sales follow a
similar pattern, with higher revenues in the third and fourth
quarters (particularly the third quarter) as marketers more
aggressively attempt to reach our Generation Y audience
during these major spending seasons and capture student interest
at the outset of the school year.

Intellectual Property

We have registered the Alloy name, among other
trademarks, with the United States Patent and Trademark Office.
Applications for the registration of certain of our other
trademarks and service marks are currently pending. We also use
trademarks, trade names, logos and endorsements of our suppliers
and partners with their permission. We are not aware of any
pending material conflicts concerning our marks or our use of
others intellectual property.

Government Regulation

We are subject, directly and indirectly, to
various laws and governmental regulations relating to our
business. The Internet is rapidly evolving and few laws or
regulations directly apply to online commerce and community
websites. Due to the increasing popularity and use of the
Internet, governmental authorities in the United States and
abroad may adopt laws and regulations to govern Internet
activities. Laws with respect to online commerce may cover
issues such as pricing, taxing, distribution, unsolicited email
(spamming) and characteristics and quality of
products and services. Laws with respect to community websites
may cover content, copyrights, libel, obscenity and personal
privacy. Any new legislation or regulation or the application of
existing laws and regulations to the Internet could have a
material and adverse effect on our business, results of
operations and financial condition.

Governments of other states or foreign countries
might attempt to regulate our transmissions or levy sales or
other taxes relating to our activities even though we do not
have a physical presence and/ or operate in those jurisdictions.
As our products and advertisements are available over the
Internet anywhere in the world, and we conduct marketing
programs in numerous states, multiple jurisdictions may claim
that we are required to qualify to do business as a foreign
corporation in each of those jurisdictions.

Our failure to qualify as a foreign corporation
in a jurisdiction where we are required to do so could subject
us to taxes and penalties for the failure to qualify. It is
possible that state and foreign governments might also attempt
to regulate our transmissions of content on our website or
prosecute us for violations of their laws. For example, a French
court has ruled that a website operated by a United States
company must comply with French laws regarding content, and an
Australian court has applied the defamation laws of Australia to
the content of a U.S. publisher posted on the
companys website. We cannot assure you that state or
foreign governments will not charge us with violations of local
laws or that we might not unintentionally violate these laws in
the future, or that foreign citizens will not obtain
jurisdiction over us in a foreign country, subjecting us to
litigation in that country under the laws of that country.

The United States Congress enacted the
Childrens Online Privacy Protection Act of 1998
(COPPA) and the Federal Trade Commission
(FTC) promulgated implementing regulations, which
became effective in 2000. The principal COPPA requirements apply
to websites, or those portions of websites, directed to children
under age 13. COPPA mandates that individually identifiable
information about minors under the age of the 13 not be
collected, used or displayed without first obtaining informed
parental consent that is verifiable in light of present
technology, subject to certain limited exceptions. As a part of
our efforts to comply

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with these requirements, we do not knowingly
collect personally identifiable information from any person
under 13 years of age and have implemented age screening
mechanisms on certain of our websites in an effort to prohibit
persons under the age of 13 from registering. This will likely
dissuade some percentage of our customers from using our
website, which may adversely affect our business. While we use
our best efforts to ensure that our websites are compliant with
COPPA, our efforts may not have been successful. If it turns out
that one or more of our websites is not COPPA compliant, we may
face litigation with the FTC or individuals or face a civil
penalty, which could adversely affect our business.


A number of government authorities both in the
United States and abroad, as well as private parties, are
increasing their focus on privacy issues and the use of personal
information. The FTC and attorneys general in several states
have investigated the use of personal information by some
Internet companies. In particular, an attorney general may
examine privacy policies to ensure that a company fully complies
with representations in the policies regarding the manner in
which the information provided by consumers and other visitors
to a website is used and disclosed by the company. As a result,
we review our privacy policies on a regular basis and we believe
we are in compliance with relevant federal and state laws.
However, our business could be adversely affected if new
regulations or decisions regarding the use and/ or disclosure of
personal information are made, or if government authorities or
private parties challenge our privacy practices.

In December, 2003, the Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003
(CAN-SPAM) was enacted by the United States
Congress. This legislation is effective as of January 1,
2004, and regulates commercial electronic mail
messages, (i.e., email) the primary purpose of which is to
promote a product or service. Among its provisions are ones
requiring specific types of disclosures in covered emails,
requiring specific opt-out mechanisms and prohibiting certain
types of deceptive headers. Violations of its provisions may
result in civil money penalties and criminal liability. CAN-SPAM
further authorizes the FTC to establish a national
Do-Not-E-Mail registry akin to the recently adopted
Do Not Call Registry. Any entity that sends commercial email
messages, such as Alloy and our various subsidiaries, and those
who re-transmit such messages, must adhere to the CAN-SPAM
requirements. Compliance with these provisions may limit our
ability to send certain types of emails on our own behalf and on
behalf of various of our advertising clients, which may
adversely affect our business. While we intend to operate our
businesses in a manner that complies with the CAN-SPAM
provisions, we may not be successful in so operating. If it
turns out we have violated the provisions of CAN-SPAM we may
face litigation with the FTC or face civil penalties, which
could adversely affect our business.

The European Union Directive on the Protection of
Personal Data may affect our ability to make our websites
available in Europe if we do not afford adequate privacy to
European users. Similar legislation was recently passed in other
jurisdictions and may have a similar effect. Legislation
governing privacy of personal data provided to Internet
companies is in various stages of development and implementation
in other countries around the world and could affect our ability
to make our websites available in those countries as future
legislation is made effective.

Employees

As of January 31, 2004, we had
1,274 full-time and 2,733 part-time employees. Of the
1,274 full-time employees, 40 were senior management; 345
worked in sales, marketing and sales support; 75 worked in
finance; 241 worked in warehouse/fulfillment/customer service;
395 worked in other management and personnel; and 178 were
employed by our dELiA*s retail stores. Of the
2,733 part-time employees, 1,541 worked for The Staffing
Authority, LLC, one of our subsidiaries, 275 were Alloy, Inc.
temporary staff and 917 were part-time associates at dELiA*s
retail stores. None of our employees are covered by a collective
bargaining agreement. We consider relations with our employees
to be good.

Financial Information About Segments

Financial information about our segments is
summarized in Note 19 to consolidated financial statements
referenced in Item 8 of this Annual Report on
Form 10-K and presented in the annex, beginning at
page F-1,

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as well as our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to such reports.


Website Access to Reports

Our corporate website is WWW.ALLOYINC.COM. Our
periodic and current reports are available free of charge on the
Investor Relations page of this website as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission (the SEC). The items and information on
our website are not a part of this Annual Report on
Form 10-K.

Risk Factors That May Affect Future
Results

The following risk factors and other information
included in this report should be carefully considered. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we deem immaterial may also impair our business
operations. If any of the following risks actually occur, our
business, financial condition or results of operations could be
materially and adversely affected.

Risks Related to Our Businesses



| |                                                             
| | ------------------------------------------------------------
| | We may not be able to achieve or maintain
    profitability.

Since our inception in January 1996, we have
incurred significant net losses. We have reported positive net
income for only one full fiscal year (fiscal 2002). As of
January 31, 2004, we had an accumulated deficit of
approximately $127.2 million.



| |                                             
| | --------------------------------------------
| | Our business may not grow in the
    future.

Since our inception, we have rapidly expanded our
business, growing from revenues of $2.0 million for fiscal
1997 to $371.9 million for fiscal 2003. Our continued
growth will depend to a significant degree on our ability to
increase revenues from our direct marketing and retail
businesses, to maintain existing sponsorship and advertising
relationships and develop new relationships, to identify and
integrate successfully acquisitions, and to maintain and enhance
the reach and brand recognition of our existing media franchises
and new media franchises that we create or acquire. Our ability
to implement our growth strategy will also depend on a number of
other factors, many of which are or may be beyond our control
including (i) the continuing appeal of our media and
marketing properties to Generation Y consumers,
(ii) the continued perception by participating advertisers
and sponsors that we offer an effective marketing channel for
their products and services, (iii) our ability to select
products that appeal to our customer base and to market such
products effectively to our target audience, (iv) our
ability to attract, train and retain qualified employees and
management and (v) our ability to make additional strategic
acquisitions. There can be no assurance that we will be able to
implement our growth strategy successfully.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may fail to use our Generation Y
    database and our expertise in marketing to Generation Y
    consumers successfully, and we may not be able to maintain the
    quality and size of our database.

The effective use of our Generation Y
consumer database and our expertise in marketing to
Generation Y are important components of our business. If
we fail to capitalize on these assets, our business will be less
successful. As individuals in our database age beyond
Generation Y, they may no longer be of significant value to
our business. We must therefore continuously obtain data on new
individuals in the Generation Y demographic in order to
maintain and increase the size and value of our database. If we
fail to obtain sufficient new names and information, our
business could be adversely affected. Moreover, there are other
Generation Y- focused media businesses possess similar
information about some segments of Generation Y. We compete
for sponsorship and advertising revenues based on the
comprehensive nature of our database and our ability to analyze
and interpret the data in our database. Accordingly, if one or
more of our competitors were to create a database similar to
ours, or if a competitor were able to analyze its data more
effectively than we are able to analyze ours, our competitive
position, and therefore our business, could suffer.

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| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success depends largely on the value of
    our brands, and if the value of our brands were to diminish, our
    business would be adversely affected.

The prominence of our Alloy, dELiA*s, CCS and
Dans Comp catalogs and websites among our
Generation Y target market, and the prominence of our
Market Place Media, CASS Communications, 360 Youth and
Private Colleges & Universities brands and media
franchises with advertisers are key components of our business.
If our consumer brands or their associated merchandise and
content lose their appeal to Generation Y consumers, our
business would be adversely affected. The value of our consumer
brands could also be eroded by misjudgments in merchandise
selection or by our failure to keep our content current with the
evolving preferences of our audience. These events would likely
also reduce sponsorship and advertising sales for our
merchandise and publishing businesses and may also adversely
affect our marketing and services businesses. Moreover, we
anticipate that we will continue to increase the number of
Generation Y consumers we reach, through means that could
include broadening the intended audience of our existing
consumer brands or creating or acquiring new media franchises or
related businesses. Misjudgments by us in this regard could
damage our existing or future brands. If any of these
developments occur, our business would suffer and we may be
required to write-down the carrying value of our goodwill.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Our revenues and income could decline due
    to general economic trends, declines in consumer spending and
    seasonality.

Our revenues are largely generated by
discretionary consumer spending or advertising seeking to
stimulate that spending. Advertising expenditures and consumer
spending all tend to decline during recessionary periods, and
may also decline at other times. Accordingly, our revenues could
decline during any general economic downturn. In addition, our
revenues have historically been higher during our third and
fourth fiscal quarters, coinciding with the start of the school
calendar and holiday season spending, than in the first half of
our fiscal year. Therefore, our results of operations in any
given quarter may not be indicative of our full fiscal year
performance.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We compete with other retailers for sales
    and locations in our retail store operations.

The Generation Y girl retail apparel
industry is highly competitive, with fashion, quality, price,
location, in-store environment and service being the principal
competitive factors. We compete for retail store sales with
specialty apparel retailers, department stores and certain other
apparel retailers, such as Wet Seal, Hot Topic, bebe, Express,
Forever 21, Gap, H&M, Pacific Sunwear, and Urban
Outfitters. We also compete for favorable site locations and
lease terms in shopping malls. Many of our competitors are large
national chains, which have substantially greater financial,
marketing and other resources than we do. While we believe we
compete effectively for sales and for favorable site locations
and lease terms, competition for prime locations within malls,
in particular, and within other locations is intense and we
cannot assure you that we will be able to obtain new locations
or maintain our existing locations on terms favorable to us, if
at all.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Closing stores or curtailing certain
    operations could result in significant asset impairments and
    significant costs to us.

In the fourth quarter of fiscal 2003, we made a
strategic decision to close up to 17 dELiA*s retail stores and
to discontinue production of our Girlfriends LA and Old
Glory catalogs due to their poor financial results and their
limited ability to become profitable in the future in a highly
competitive market, and so we could focus on our core direct
marketing brands. In the future, we could decide to close
dELiA*s retail stores (in addition to the 17 stores already
identified for shutdown) or curtail operations that are
producing continuing financial losses. If we do so, we would be
required to write down the carrying value of these impaired
assets to realizable value, a non-cash event that would
negatively impact our earnings and earnings per share. In
addition, if we decide to close any dELiA*s stores before the
expiration of their lease terms, we may incur payments to
landlords to terminate or buy out the remaining term
of the lease. We also may incur costs related to the employees
at such stores. These costs would negatively impact our
financial results and cash position.

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| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | dELiA*s exclusive branding activities could
    lead to increased inventory obsolescence and could harm our
    relations with other vendors.

dELiA*s promotion and sale of dELiA*s branded
products will increase our exposure to risks of inventory
obsolescence and other exposures normally associated with
manufacturers. Accordingly, if a particular style of product
does not achieve widespread consumer acceptance, we may be
required to take significant markdowns, which could have a
material adverse effect on our gross profit margin and other
operating results. Additionally, there can be no assurance that
dELiA*s promotion of its dELiA*s branded products will not
negatively impact its and our relationships with existing
vendors of branded merchandise. Moreover, dELiA*s exclusive
brand development plans may include entry into joint venture
and/or licensing/distribution arrangements, which may limit our
control of these operations.



| |                                                           
| | ----------------------------------------------------------
| | We depend largely upon a single
    distribution facility.

Following our decision to terminate our
relationship with New Roads and assume fulfillment activities
for our Alloy and CCS units, the distribution functions for our
Alloy, CCS and dELiA*s catalogs and all of our dELiA*s retail
stores are handled from a single, owned facility in Hanover,
Pennsylvania. Any significant interruption in the operation of
this distribution facility due to natural disasters, accidents,
system failures or other unforeseen causes could delay or impair
our ability to distribute merchandise to our customers and
retail stores, which could cause our sales to decline. This
would have a material adverse effect on our operations and
results.



| |                                                        
| | -------------------------------------------------------
| | We may be required to recognize impairment
    charges.

Pursuant to generally accepted accounting
principles, we are required to perform impairment tests on our
identifiable intangible assets with indefinite lives, including
goodwill, annually or at any time when certain events occur,
which could impact the value of our business segments. Our
determination of whether an impairment has occurred is based on
a comparison of the assets fair market values with the
assets carrying values. Significant and unanticipated
changes could require a provision for impairment in a future
period that could substantially affect our reported earnings in
a period of such change. For instance, during the fourth quarter
of fiscal 2003 we completed our annual impairment review and
recorded a $56.7 million charge to reduce the carrying
value of goodwill and an approximate $3.9 million charge to
reduce the carrying value of indefinite-lived intangible assets.
The combined $60.6 million charge is reflected as a
component of operating income in the accompanying consolidated
statement of operations.

Additionally, pursuant to generally accepted
accounting principles, we are required to recognize an
impairment loss when circumstances indicate that the carrying
value of long-lived tangible and intangible assets with finite
lives may not be recoverable. Managements policy in
determining whether an impairment indicator exists, a triggering
event, comprises measurable operating performance criteria as
well as qualitative measures. If a determination is made that a
long-lived assets carrying value is not recoverable over
its estimated useful life, the asset is written down to
estimated fair value, if lower. The determination of fair value
of long-lived assets is generally based on estimated expected
discounted future cash flows, which is generally measured by
discounting expected future cash flows identifiable with the
long-lived asset at our weighted-average cost of capital.
Pursuant to SFAS No. 144, we performed an analysis of
the recoverability of certain long-lived assets during the
fourth quarter of fiscal 2003 and recorded an asset impairment
charge of $1.3 million.



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy contemplates strategic
    acquisitions. Our inability to acquire suitable businesses or to
    manage their integration could harm our business.

A key component of our business strategy is to
expand our reach by acquiring complementary businesses, products
and services. We compete with other media and related businesses
for these opportunities. Therefore, even if we identify targets
we consider desirable, we may not be able to complete those
acquisitions on terms we consider attractive or at all. We could
have difficulty in assimilating personnel and operations of the
businesses we have acquired and may have similar problems with
future acquisitions. These difficulties could

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disrupt our business, distract our management and
employees and increase our expenses. Furthermore, we may issue
additional equity securities in connection with acquisitions,
potentially on terms that could be dilutive to our existing
stockholders.




| |                                            
| | -------------------------------------------
| | Our catalog response rates may
    decline.

Catalog response rates usually decline when we
mail additional catalog editions within the same fiscal period.
In addition, as we continue to increase the number of catalogs
distributed or mail our catalogs to a broader group of new
potential customers, we have observed that these new potential
customers respond at lower rates than existing customers have
historically responded. We cross-mail our Alloy catalogs to
dELiA*s catalog customers, and dELiA*s catalogs to Alloy
catalog customers, which may result in lower response rates for
each. Additionally, response rates for dELiA*s catalogs
historically have declined in geographic regions where it opens
new stores. If and when we open additional new dELiA*s stores,
we expect aggregate catalog response rates to decline further.
These trends in response rates have had and are likely to
continue to have a material adverse effect on our rate of sales
growth and on our profitability and could have a material
adverse effect on our business.



| |                                                    
| | ---------------------------------------------------
| | We rely on third-party vendors for
    merchandise.

Our business depends on the ability of
third-party vendors and their subcontractors or suppliers to
provide us with current-season, brand-name apparel and
merchandise at competitive prices, in sufficient quantities,
manufactured in compliance with all applicable laws and of
acceptable quality. We do not have long-term contracts with any
supplier and are not likely to enter into these contracts in the
foreseeable future. In addition, many of the smaller vendors
that we use have limited resources, production capacities and
operating histories. As a result, we are subject to the
following risks, which could have a material adverse effect on
our business:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our key vendors may fail or be unable to expand
    with us;                                                                                                                                  
|
| |  | we may lose or cease doing business with one or
    more key vendors;                                                                                                                         
|
| |  | our current vendor terms may be changed to
    require increased payments in advance of delivery, and we may
    not be able to fund such payments through our current credit
    facility; or
|
| |  | our ability to procure products may be limited.                                                                                                                                               

A portion of dELiA*s merchandise is sourced from
factories in the Far East and Latin America. These goods are,
and will be, subject to existing or potential duties, tariffs or
quotas that may limit the quantity of some types of goods which
may be imported into the United States from countries in those
regions. We will increasingly compete with other companies for
production facilities and import quota capacity. Sourcing more
merchandise abroad will also subject our business to a variety
of other risks generally associated with doing business abroad,
such as political instability, currency and exchange risks and
local political issues. Our future performance will be subject
to these factors, which are beyond our control. Although a
diverse domestic and international market exists for the kinds
of merchandise sourced by us, there can be no assurance that
these factors would not have a material adverse effect on our
results of operations. We believe that alternative sources of
supply would be available in the event of a supply disruption in
one or more regions of the world. However, we do not believe
that, under current circumstances, entering into committed
alternative supply arrangements is warranted, and there can be
no assurance that alternative sources would in fact be available
at any particular time.



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | We must effectively manage our vendors to
    minimize inventory risk and maintain our margins.

We seek to avoid maintaining high inventory
levels in an effort to limit the risk of outdated merchandise
and inventory write-downs. If we underestimate quantities
demanded by our customers and our vendors cannot restock, then
we may disappoint customers who may then turn to our
competitors. We require many of our vendors to meet minimum
restocking requirements, but if our vendors cannot meet these
requirements and we cannot find alternative vendors, we could be
forced to carry more inventory than we have in the past.

15



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##### Table of Contents



Our risk of inventory write-downs would increase
if we were to hold large inventories of merchandise that prove
to be unpopular.




| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Competition may adversely affect our
    business and cause our stock price to decline.

Because of the growing perception that
Generation Y is an attractive demographic for marketers,
the markets in which we operate are competitive. Many of our
existing competitors, as well as potential new competitors in
this market, have longer operating histories, greater brand
recognition, larger customer user bases and significantly
greater financial, technical and marketing resources than we do.
These advantages allow our competitors to spend considerably
more on marketing and may allow them to use their greater
resources more effectively than we can use ours. Accordingly,
these competitors may be better able to take advantage of market
opportunities and be better able to withstand market downturns
than us. If we fail to compete effectively, our business will be
materially and adversely affected and our stock price will
decline.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties for some essential
    business operations, and disruptions or failures in service may
    adversely affect our ability to deliver goods and services to
    our customers.

We currently depend on third parties for
important aspects of our business. We have limited control over
these third parties, and we are not their only client. In
addition, we may not be able to maintain satisfactory
relationships with any of these third parties on acceptable
commercial terms. Further, we cannot be certain that the quality
of products and services that they provide will remain at the
levels needed to enable us to conduct our business effectively.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our key personnel to operate
    our business, and we may not be able to hire enough additional
    management and other personnel to manage our
    growth.

Our performance is substantially dependent on the
continued efforts of our executive officers and other key
employees. The loss of the services of any of our executive
officers or key employees could adversely affect our business.
Additionally, we must continue to attract, retain and motivate
talented management and other highly skilled employees to be
successful. We may be unable to retain our key employees or
attract, assimilate and retain other highly qualified employees
in the future.



| |                                                                                
| | -------------------------------------------------------------------------------
| | We may be required to collect sales tax in
    our direct marketing operations.

At present, we do not collect sales or other
similar taxes in respect of direct shipments of goods to
consumers into most states. However, various states or foreign
countries may seek to impose state sales tax collection
obligations on out-of-state direct mail companies. Additionally,
dELiA*s has been named as a defendant in an action by the
Attorney General of the State of Illinois for failure to collect
sales tax on purchases made online. We can give no assurance
that other states in which dELiA*s maintains a retail store will
not take similar action, and can give no assurance regarding the
results of any such action. A successful assertion by one or
more states that we or one or more of our subsidiaries should
have collected or be collecting sales taxes on the direct sale
of our merchandise could have a material adverse effect on our
business



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could face liability from, or our
    ability to conduct business could be adversely affected by,
    government and private actions concerning personally
    identifiable data, including privacy.

Our direct marketing and database dependent
businesses are subject to federal and state regulations
regarding maintenance of the confidentiality of the names and
personal information of our customers and the individuals
included in our database. If we do not comply, we could become
subject to liability. While these provisions do not currently
unduly restrict our ability to operate our business, if those
regulations become more restrictive, they could adversely affect
our business. In addition, laws or regulations that could impair
our ability to collect and use user names and other information
on our websites may adversely affect our business. For example,
COPPA currently limits our ability to collect personal
information from website visitors who may be under age 13.
Further, claims could also be based on other misuses of personal
information, such as for

16



---



##### Table of Contents



unauthorized marketing purposes. If we violate
any of these laws, we could face civil penalties. In addition,
the attorneys general of various states review company websites
and their privacy policies from time to time. In particular, an
attorney general may examine such privacy policies to assure
that the policies overtly and explicitly inform users of the
manner in which the information they provide will be used and
disclosed by the company. If one or more attorneys general were
to determine that our privacy policies fail to conform with
state law, we also could face fines or civil penalties, any of
which could adversely affect our business.




| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We could face liability for information
    displayed in our print publication media or displayed on or
    accessible via our websites.

We may be subjected to claims for defamation,
negligence, copyright or trademark infringement or based on
other theories relating to the information we publish in any of
our print publication media and on our websites. These types of
claims have been brought, sometimes successfully, against
marketing and media companies in the past. We may be subject to
liability based on statements made and actions taken as a result
of participation in our chat rooms or as a result of materials
posted by members on bulletin boards on our websites. Based on
links we provide to third-party websites, we could also be
subjected to claims based upon online content we do not control
that is accessible from our websites.



| |                                                                      
| | ---------------------------------------------------------------------
| | We could face liability for breaches of
    security on the Internet.

To the extent that our activities or the
activities of third-party contractors involve the storage and
transmission of information, such as credit card numbers,
security breaches could disrupt our business, damage our
reputation and expose us to a risk of loss or litigation and
possible liability. We could be liable for claims based on
unauthorized purchases with credit card information,
impersonation or other similar fraud claims. These claims could
result in substantial costs and a diversion of our
managements attention and resources.

Risks Relating to Our Common Stock



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our stock price has been volatile, is
    likely to continue to be volatile, and could decline
    substantially.

The price of our common stock has been, and is
likely to continue to be, volatile. In addition, the stock
market in general, and companies whose stock is listed on The
NASDAQ National Market, including marketing and media companies,
have experienced extreme price and volume fluctuations that have
often been disproportionate to the operating performance of
these companies. Broad market and industry factors may
negatively affect the market price of our common stock,
regardless of our actual operating performance.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock could be delisted from the NASDAQ
    National Market, which could reduce the liquidity of our common
    stock and cause our stock price to decline.

As a result of the late filing of this Annual
Report on Form 10-K, we received a notice from the NASDAQ
staff indicating that we are no longer in compliance with the
requirements for continued listing on the NASDAQ National
Market, and that, as a result, our common stock is subject to
delisting from the NASDAQ National Market. While we believe that
the filing of this Annual Report on Form 10-K will bring us
into compliance with applicable NASDAQ listing requirements, and
that our request for continued listing will be granted, we can
give no assurance that NASDAQ will grant our request for
continued listing. If NASDAQ declines our request, our common
stock could be delisted from the NASDAQ National Market, which
could adversely affect our stocks liquidity and cause our
stock price to decline.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We are a defendant in class action and
    other lawsuits and defending these litigations could hurt our
    business.

We have been named as a defendant in a securities
class action lawsuit relating to the allocation of shares by the
underwriters of our initial public offering. We also have been
named as a defendant in several purported securities class
action lawsuits which have been consolidated by the court. The
allegations include, without limitation, misrepresentation of
our business and financial condition and results of operations
during the period

17



---



##### Table of Contents



March 16, 2001 through January 23,
2003. For more information see Part I, Item 3, Legal
Proceedings, of this Annual Report on Form 10-K.


Additionally, dELiA*s has been named as a
defendant in a False Claims Act action brought by the Illinois
Attorney General for its alleged failure to collect sales taxes
on direct sales to Illinois residents.

While we believe there is no merit to these
lawsuits and intend to defend them vigorously, defending against
them could result in substantial costs and a diversion of our
managements attention and resources, which could hurt our
business. In addition, if we lose any of these lawsuits, or
settle any of them on adverse terms, or on terms outside of our
insurance policy limits, our stock price may be adversely
affected.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Terrorist attacks and other acts of wider
    armed conflict may have an adverse effect on the United States
    and world economies and may adversely affect our
    business.

Terrorist attacks and other acts of violence or
war, such as those that took place on September 11, 2001,
could have an adverse effect on our business, results of
operations or financial condition. There can be no assurance
that there will not be further terrorist attacks against the
United States or its businesses or interests. Attacks or armed
conflicts that directly impact the Internet or our physical
facilities could significantly affect our business and thereby
impair our ability to achieve our expected results. Further, the
adverse effects that such violent acts and threats of future
attacks could have on the United States and world economies
could similarly have a material adverse effect on our business,
results of operations and financial condition. Finally, further
terrorist acts could cause the United States to enter into a
wider armed conflict, which could further disrupt our operations
and result in a material adverse effect on our business, results
of operations and overall financial condition.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Delaware law and our organizational
    documents and stockholder rights plan may inhibit a
    takeover.

Provisions of Delaware law, our Restated
Certificate of Incorporation or our bylaws could make it more
difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders.

In addition, our Board of Directors has adopted a
stockholder rights plan, the purpose of which is to protect
stockholders against unsolicited attempts to acquire control of
us that do not offer a fair price to all of our stockholders.
The rights plan may have the effect of dissuading a potential
acquirer from making an offer for our common stock at a price
that represents a premium to the then current trading price.






|        |           
|------- | ----------
|Item 2. | Properties

The following table sets forth information
regarding the principal facilities, excluding retail stores,
that we used during fiscal 2003. Except for the property in
Hanover, PA, which we own, all such facilities are leased. We
believe our facilities are well maintained and in good operating
condition.

|                  |  |                                                       |  |           |         | 
|----------------- |  | ----------------------------------------------------- |  | --------- | ------- | 
|                  |  |                                                       |  | Appr. Sq.
|Location          |  | Use                                                   |  | Footage  
|                  |  |                                                       |  |          
|New York, NY      |  | Corporate office                                      |  |           | 40,000  | 
|Chicago, IL       |  | Advertising and sales office                          |  |           | 16,000  | 
|Los Angeles, CA   |  | Advertising and sales office                          |  |           | 7,400   | 
|Santa Barbara, CA |  | Market Place Media                                    |  |           | 20,000  | 
|Boston, MA        |  | Advertising and sales office                          |  |           | 18,000  | 
|Mt. Vernon, IN    |  | Dans Comp general office, call center,
    warehouse |  |           | 40,000  | 
|Cranbury, NJ      |  | 360 Youth general office, AMP warehouse               |  |           | 80,000  | 
|New York, NY      |  | dELiA*s general office space                          |  |           | 36,000  | 
|Westerville, OH   |  | Call center                                           |  |           | 15,000  | 
|Hanover, PA       |  | Warehouse and fulfillment center                      |  |           | 360,000 | 

18



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##### Table of Contents








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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
us, 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
our common stock between May 14, 1999 and December 6,
2000 and alleges violations of Sections 11, 12(a)(2) and 15
of the Securities Act of 1933 (the Securities Act)
and Section 10(b) of the Securities Exchange Act of 1934
(the 34 Act) and Rule 10b-5
promulgated thereunder. On or about April 19, 2002,
plaintiff filed an amended complaint against us, the individual
defendants and the underwriters of our initial public offering.
The amended complaint asserts violations of Section 10(b)
of the 34 Act and mirrors allegations asserted
against scores of other issuers sued by plaintiffs
counsel. Pursuant to an omnibus agreement negotiated with
representatives of the plaintiffs counsel,
Messrs. Diamond and Johnson have been dismissed from the
litigation without prejudice. In accordance with the
Courts case management instructions, we joined in a global
motion to dismiss the amended complaints, which was filed by the
issuers liaison counsel. By opinion and order dated
February 19, 2003, the District Court denied in part and
granted in part the global motion to dismiss. With respect to
us, the Court dismissed the Section 10(b) claim and let the
plaintiffs proceed on the Section 11 claim. Accordingly,
the remaining claim against us will focus solely on whether the
registration statement filed in connection with our initial
public offering contained an untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statement therein not
misleading. Although we have not retained a damages expert at
this time, the dismissal of the Section 10(b) claim likely
will reduce the potential damages that plaintiffs can claim.
Management believes that the remaining allegations against us
are without merit. We and the individual defendants have
retained Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC in
connection with this matter. We participated in the
Court-ordered mediation with the other issuer defendants, the
issuers insurers and plaintiffs to explore whether a
global resolution of the claims against the issuers could be
reached. To this end, a memorandum of understanding setting
forth the proposed terms of a settlement was signed by counsel
to several issuers, including our counsel, which is not binding
upon us. In a press release dated June 26, 2003,
plaintiffs counsel announced that the memorandum of
understanding had been signed, and that the process of obtaining
the approval of all parties to the settlement was underway. We
are participating in that process. Any definitive settlement,
however, will require final approval by the Court after notice
to all class members and a fairness hearing.

On or about March 8, 2003, several putative
class action complaints were filed in the United States District
Court for the Southern District of New York naming as defendants
us, James K. Johnson, Jr., Matthew C. Diamond and Samuel A.
Gradess. The complaints purportedly were filed on behalf of
persons who purchased our common stock between August 1,
2002 and January 23, 2003, and, among other things, allege
violations of Section 10(b) and Section 20(a) of the
34 Act and Rule 10b-5 promulgated thereunder stemming
from a series of allegedly false and misleading statements made
by us to the market between August 1, 2002 and
January 23, 2003. At a conference held on May 30,
2003, the Court consolidated the actions described above. On
August 5, 2003, Plaintiffs filed a consolidated class
action complaint (the Consolidated Complaint) naming
the same defendants, which supersedes the initial complaint.
Relying in part on information allegedly obtained from former
employees, the Consolidated Complaint alleges, among other
things, misrepresentations of our business and financial
condition and the results of operations during the period from
March 16, 2001 through January 23, 2003 (the
class period), which artificially inflated the price
of our stock, including without limitation, improper
acceleration of revenue, misrepresentation of expense treatment,
failure to properly account for and disclose consignment
transactions, and improper deferral of expense recognition. The
Consolidated Complaint further alleges that during the class
period the individual defendants and the Company sold stock and
completed acquisitions using our stock. We and the individual
defendants filed a joint answer to the Consolidated Complaint on
September 26, 2003. The individual defendants have retained
the law firm of Cahill, Gordon & Reindel in connection
with this matter. We have retained the law firm of Katten Muchin
Zavis Rosenman in connection with this matter. Management
believes that the allegations against the Company and
Messrs. Diamond, Gradess and Johnson are without merit and
intends to vigorously defend the action.

19



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##### Table of Contents



dELiA*s currently is party to a purported class
action litigation, which originally was filed in two separate
complaints in Federal District Court for the Southern District
of New York in 1999 against dELiA*s Inc. and certain of its
officers and directors. These complaints were consolidated. The
consolidated complaint alleges, among other things, that the
defendants violated Rule 10b-5 under the 34 Act
by making material misstatements and by failing to disclose
certain allegedly material information regarding trends in the
business during part of 1998. The parties have reached an
agreement on a full settlement of the action, which was approved
by the court on April 21, 2004. The entire settlement
amount will be covered by dELiA*s insurance carrier.

On or about February 1, 2002, a complaint
was filed in the Circuit Court of Cook County, Illinois naming
dELiA*s as a defendant. The complaint purportedly was filed on
behalf of the State of Illinois under the False Claims Act and
the Illinois Whistleblower Reward and Protection Act and seeks
unspecified damages and penalties for dELiA*s alleged failure to
collect and remit use tax on items sold by dELiA*s through its
catalogs and website to Illinois residents. On April 8,
2004, the complaint was served on dELiA*s by the Illinois
Attorney Generals Office, which assumed prosecution of the
complaint from the original filer. dELiA*s has retained the law
firm of Katten Muchin Zavis Rosenman in connection with this
matter. Management believes the proceedings are without merit
and intends to defend the action vigorously.

We are involved in additional legal proceedings
that have arisen in the ordinary course of business. We believe
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 our financial condition or operating
results.






|        |                                                      
|------- | -----------------------------------------------------
|Item 4. | Submission of Matters to Vote of Security
    Holders

No matter was submitted to a vote of our security
holders during the fourth quarter of the fiscal year covered by
this Annual Report on Form 10-K.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market Information

Our common stock has traded on The NASDAQ
National Market under the symbol ALOY since our
initial public offering in May 1999. The last reported sale
price for our common stock on May 21, 2004 was
$4.75 per share. The table below sets forth the high and
low sale prices for our common stock during the periods
indicated.

|                                     |  |             |       |     |  |   |       | 
|------------------------------------ |  | ----------- | ----- | --- |  | - | ----- | 
|                                     |  |            
|                                     |  | Common     
|                                     |  | Stock Price
|                                     |  |            
|                                     |  | High        |       | Low
|                                     |  |             |       |    
|FISCAL 2002 (Ended January 31, 2003) |  |             |       |     |  |   |       | 
|First Quarter                        |  | $           | 21.38 |     |  | $ | 10.55 | 
|Second Quarter                       |  |             | 14.76 |     |  |   | 8.90  | 
|Third Quarter                        |  |             | 11.50 |     |  |   | 6.81  | 
|Fourth Quarter                       |  |             | 14.75 |     |  |   | 4.15  | 
|FISCAL 2003 (Ended January 31, 2004) |  |             |       |     |  |   |       | 
|First Quarter                        |  | $           | 6.35  |     |  | $ | 4.28  | 
|Second Quarter                       |  |             | 8.00  |     |  |   | 5.85  | 
|Third Quarter                        |  |             | 7.40  |     |  |   | 4.04  | 
|Fourth Quarter                       |  |             | 5.69  |     |  |   | 4.11  | 

These prices represent inter-dealer prices,
without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. As discussed herein
(See Risk Factor Risks Relating To Our

20



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##### Table of Contents



Common Stock), the Company is at risk of
being delisted from The NASDAQ National Market. If such
delisting occurs, no assurance can be given that a liquid
trading market will be available to our shareholders.


Stockholders

As of May 14, 2004, there were approximately
142 holders of record of our common stock.

Dividends

We have never declared or paid cash dividends on
our capital stock. Currently, we intend to retain any future
earnings to finance the growth and development of our business,
and we do not anticipate paying cash dividends in the
foreseeable future.

Unregistered Sales of Securities

On or about April 10, 2003, we issued an
aggregate of 1,545,947 shares of common stock to
MarketSource Corporation, a Delaware corporation, as performance
based consideration for our prior acquisition of substantially
all of the assets used in its 360 Youth business.

On or about November 10, 2003, as
performance based consideration for our prior acquisition of all
of the issued and outstanding capital stock of Target
Marketing & Promotions, Inc., a Massachusetts
corporation (Target), we issued an aggregate of
619,101 shares of common stock to the two former owners of
Target.

The securities issued in the foregoing
transactions were offered and sold in reliance upon exemptions
from the registration requirements of Section 4(2) of the
Securities Act, and any regulations promulgated thereunder,
relating to sales by an issuer not involving a public offering.
No underwriters were involved in the foregoing sales of
securities.

Equity Compensation Plan Information

The following table contains information about
our equity compensation plans as of January 31, 2004.

|                                                              |  |                            |           |                      |  |                           |       |  |  |  |           | 
|------------------------------------------------------------- |  | -------------------------- | --------- | -------------------- |  | ------------------------- | ----- |  |  |  | --------- | 
|                                                              |  |                            |           |                      |  | Number of Securities     
|                                                              |  |                            |           |                      |  | Remaining Available for  
|                                                              |  | Number of Securities to    |           | Weighted Average     |  | Future Issuance Under    
|                                                              |  | Be Issued upon Exercise of |           | Exercise Price of    |  | Equity Compensation Plans
|                                                              |  | Outstanding Options,       |           | Outstanding Options, |  | (Excluding Securities    
|                                                              |  | Warrants and Rights        |           | Warrants and Rights  |  | Reflected in Column (A)) 
|Plan Category                                                 |  | (A)                        |           | (B)                  |  | (C)                      
|                                                              |  |                            |           |                      |  |                          
|Equity Compensation Plans Approved by
    Stockholders(1)     |  |                            | 6,805,920 |                      |  |                           | 10.37 |  |  |  | 9,296,576 | 
|Equity Compensation Plans Not Approved by
    Stockholders(2) |  |                            | 994,735   |                      |  |                           | 6.58  |  |  |  | 983,765   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of our Amended and Restated 1997
    Employee, Director and Consultant Stock Option and Stock
    Incentive Plan (the 1997 Plan), our 1999 Employee
    Stock Purchase Plan, the dELiA*s Amended and Restated 1996 Stock
    Incentive Plan, the dELiA*s 1998 Stock Incentive Plan, and the
    iTurf 1999 Amended and Restated Stock Incentive Plan, each as
    amended to date.
|   
|(2) | Consists of our Amended and Restated 2002
    Incentive and Non-Qualified Stock Option Plan, as amended (the
    2002 Plan). The material features of the 2002 Plan
    are described in Note 14 to the consolidated financial
    statements referenced in Item 8 of this Annual Report on
    Form 10-K and presented in the annex hereto.                                               

21



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##### Table of Contents








|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The following selected financial data are derived
from our consolidated financial statements and notes thereto.
Selected financial data should be read in conjunction with our
Financial Statements and the corresponding Notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial
information included elsewhere in this Annual Report on
Form 10-K.

|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |         | 
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------- | ------- | ------ |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                               |                                                                         |                                                
|                                                                                               |                                                                         | Year Ended January 31,                         
|                                                                                               |                                                                         |                                                
|                                                                                               |                                                                         | 2000                                            |         | 2001   |  | 2002 |         | 2003   |  | 2004
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |     
|                                                                                               |                                                                         |                                                
|                                                                                               |                                                                         | (In thousands, except share and per share data)
|STATEMENTS OF OPERATIONS DATA(1):                                                              |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Net direct marketing revenues(2)                                                               |                                                                         | $                                               | 30,952  |        |  | $    | 76,736  |        |  | $    | 124,052 |        |  | $ | 167,572 |         |  | $ | 156,821 |        
|Retail stores revenues(2)                                                                      |                                                                         |                                                 |        |        |  |      |        |        |  |      |        |        |  |   |        |         |  |   | 30,103  |        
|Sponsorship and other activities revenues(2)                                                   |                                                                         |                                                 | 2,912   |        |  |      | 14,452  |        |  |      | 41,570  |        |  |   | 131,758 |         |  |   | 185,024 |        
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Total revenues                                                                                 |                                                                         |                                                 | 33,864  |        |  |      | 91,188  |        |  |      | 165,622 |        |  |   | 299,330 |         |  |   | 371,948 |        
|Cost of revenues                                                                               |                                                                         |                                                 | 13,765  |        |  |      | 37,757  |        |  |      | 68,858  |        |  |   | 145,148 |         |  |   | 189,379 |        
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Gross profit                                                                                   |                                                                         |                                                 | 20,099  |        |  |      | 53,431  |        |  |      | 96,764  |        |  |   | 154,182 |         |  |   | 182,569 |        
|Operating expenses:                                                                            |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|                                                                                               | Selling and marketing                                                   |                                                 |         | 30,520 |  |      |         | 60,814 |  |      |         | 81,829 |  |   |         | 108,791 |  |   |         | 145,715 | 
|                                                                                               | General and administrative                                              |                                                 |         | 5,423  |  |      |         | 10,659 |  |      |         | 13,516 |  |   |         | 17,240  |  |   |         | 33,970  | 
|                                                                                               | Amortization of goodwill and other intangible
    assets                |                                                 |         | 332    |  |      |         | 8,573  |  |      |         | 18,316 |  |   |         | 5,554   |  |   |         | 7,887   | 
|                                                                                               | Impairment of goodwill and other indefinite-lived
    intangible assets |                                                 |         |       |  |      |         |       |  |      |         |       |  |   |         |        |  |   |         | 60,638  | 
|                                                                                               | Impairment of other long-lived assets                                   |                                                 |         |       |  |      |         |       |  |      |         |       |  |   |         |        |  |   |         | 1,315   | 
|                                                                                               | Restructuring charges                                                   |                                                 |         |       |  |      |         |       |  |      |         |       |  |   |         | 2,571   |  |   |         | 730     | 
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Total operating expenses                                                                       |                                                                         |                                                 | 36,275  |        |  |      | 80,046  |        |  |      | 113,661 |        |  |   | 134,156 |         |  |   | 250,255 |        
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|(Loss) income from operations                                                                  |                                                                         |                                                 | (16,176 | )      |  |      | (26,615 | )      |  |      | (16,897 | )      |  |   | 20,026  |         |  |   | (67,686 | )      
|Interest income (expense), net                                                                 |                                                                         |                                                 | 1,307   |        |  |      | 1,119   |        |  |      | 935     |        |  |   | 1,700   |         |  |   | (2,003  | )      
|Realized (loss) gain on sale of marketable
    securities and write-off of investments         |                                                                         |                                                 |        |        |  |      | (4,193  | )      |  |      | 658     |        |  |   | 97      |         |  |   | (247    | )      
|Provision (benefit) for income taxes                                                           |                                                                         |                                                 |        |        |  |      |        |        |  |      | 296     |        |  |   | (1,472  | )       |  |   | 5,279   |        
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Net (loss) income                                                                              |                                                                         | $                                               | (14,869 | )      |  | $    | (29,689 | )      |  | $    | (15,600 | )      |  | $ | 23,295  |         |  | $ | (75,215 | )      
|Non-cash charge attributable to beneficial
    conversion feature of preferred stock issued(3) |                                                                         |                                                 |        |        |  |      |        |        |  |      | 6,745   |        |  |   |        |         |  |   |        |        
|Preferred stock dividends and accretion of
    discount                                        |                                                                         |                                                 | 13      |        |  |      |        |        |  |      | 3,013   |        |  |   | 2,100   |         |  |   | 1,944   |        
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        
|Net (loss) income attributable to common
    stockholders                                      |                                                                         | $                                               | (14,882 | )      |  | $    | (29,689 | )      |  | $    | (25,358 | )      |  | $ | 21,195  |         |  | $ | (77,159 | )      
|                                                                                               |                                                                         |                                                 |         |        |  |      |         |        |  |      |         |        |  |   |         |         |  |   |         |        

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|                                                                                        |  |                                                 |            |      |  |      |            |      |  |      |            |   |  |   |            |  |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- |  |  | - | ---------- | -
|                                                                                        |  |                                                
|                                                                                        |  | Year Ended January 31,                         
|                                                                                        |  |                                                
|                                                                                        |  | 2000                                            |            | 2001 |  | 2002 |            | 2003 |  | 2004
|                                                                                        |  |                                                 |            |      |  |      |            |      |  |     
|                                                                                        |  |                                                
|                                                                                        |  | (In thousands, except share and per share data)
|Basic net (loss) earnings attributable to common
    stockholders per common share(4)   |  | $                                               | (1.17      | )    |  | $    | (1.61      | )    |  | $    | (1.02      | ) |  | $ | 0.55       |  |  | $ | (1.87      | )
|                                                                                        |  |                                                 |            |      |  |      |            |      |  |      |            |   |  |   |            |  |  |   |            |  
|Weighted average basic common shares outstanding                                        |  |                                                 | 12,718,318 |      |  |      | 18,460,042 |      |  |      | 24,967,678 |   |  |   | 38,436,256 |  |  |   | 41,175,046 |  
|                                                                                        |  |                                                 |            |      |  |      |            |      |  |      |            |   |  |   |            |  |  |   |            |  
|Diluted net (loss) earnings attributable to
    common stockholders per common share(4) |  | $                                               | (1.17      | )    |  | $    | (1.61      | )    |  | $    | (1.02      | ) |  | $ | 0.53       |  |  | $ | (1.87      | )
|                                                                                        |  |                                                 |            |      |  |      |            |      |  |      |            |   |  |   |            |  |  |   |            |  
|Weighted average diluted common shares outstanding                                      |  |                                                 | 12,718,318 |      |  |      | 18,460,042 |      |  |      | 24,967,678 |   |  |   | 40,071,412 |  |  |   | 41,175,046 |  
|                                                                                        |  |                                                 |            |      |  |      |            |      |  |      |            |   |  |   |            |  |  |   |            |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 3 to the consolidated financial
    statements for a description of the effect of our acquisitions
    on the comparability of our selected financial information.                                                                                                                                                                                             
|   
|(2) | See Note 19 to the consolidated financial
    statements for financial data by reportable segment. In 2002, we
    changed the composition of our reportable segments. As a result,
    the amounts in the 2000 and 2001 segment disclosures have been
    restated to conform to the 2002 composition of reportable
    segments.                                      
|   
|(3) | See Note 11 to the consolidated financial
    statements for a description of the beneficial conversion
    features of our Series A and Series B Convertible
    Preferred Stock. The net loss attributable to common
    stockholders reflects the intrinsic value of the realization of
    a contingent beneficial conversion feature of preferred stock
    issued.
|   
|(4) | See Note 16 to the consolidated financial
    statements for an explanation of the determination of the number
    of common shares used in computing the amount of basic and
    diluted net loss per common share and net loss attributable to
    common stockholders per common share.                                                                              

|                                                                      |  |                |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                                      |  |               
|                                                                      |  | January 31,   
|                                                                      |  |               
|                                                                      |  | 2000           |        | 2001 |  | 2002 |         | 2003 |  | 2004
|                                                                      |  |                |        |      |  |      |         |      |  |     
|                                                                      |  |               
|                                                                      |  | (In thousands)
|BALANCE SHEET DATA:                                                   |  |                |        |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents                                             |  | $              | 12,702 |      |  | $    | 9,338   |      |  | $    | 61,618  |  |  | $ | 35,187  |  |  | $ | 27,273  | 
|Working capital                                                       |  |                | 30,179 |      |  |      | 25,400  |      |  |      | 65,430  |  |  |   | 45,737  |  |  |   | 32,292  | 
|Total assets                                                          |  |                | 57,668 |      |  |      | 106,908 |      |  |      | 310,207 |  |  |   | 434,600 |  |  |   | 449,391 | 
|Long-term debt and capital lease obligation, less
    current portion |  |                |       |      |  |      | 103     |      |  |      | 358     |  |  |   | 93      |  |  |   | 743     | 
|Convertible redeemable preferred stock, net                           |  |                |       |      |  |      |        |      |  |      | 15,046  |  |  |   | 15,550  |  |  |   | 14,434  | 
|Senior Convertible Debentures Due 2023                                |  |                |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   | 69,300  | 
|Total stockholders equity                                            |  |                | 45,208 |      |  |      | 88,282  |      |  |      | 249,734 |  |  |   | 345,442 |  |  |   | 281,295 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion of our financial
condition and results of operation should be read in conjunction
with the consolidated financial statements and the related Notes
included elsewhere in this Annual Report on Form 10-K.
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,

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including, but not limited to, those in
Item 1 of Part I, Business  Risk
Factors That May Affect Future Results and elsewhere in
this Annual Report on Form 10K.


Executive Summary and Outlook

Fiscal 2003 was a transitional year for us. As
was the case in prior years, we completed several acquisitions
in fiscal 2003; however, our acquisition of dELiA*s Corp. in
September 2003 was unique. Not only was it our first acquisition
of a business with retail stores, but it was also our first
acquisition of a business that was losing significant amounts of
money. During the fourth quarter of fiscal 2003, we decided to
close the catalog operations of our Girlfriends LA and Old
Glory brands, both of which we acquired in fiscal 2002, in order
to focus on our core direct marketing brands  dELiA*s
and Alloy for girls, and CCS and Dans Comp for boys. We
also made the decision to reduce the number of catalogs we
mailed in fiscal 2003 in an effort to focus circulation on the
more productive names in the database to drive more profitable
direct marketing segment operations. Although we expected
revenues of Alloys catalog titles to be lower as a result
of this decision, we did not expect the sharp year-over-year
decline in response rates we experienced for catalogs mailed
during the second half of the year. We attribute the response
rate decline primarily to merchandise selections that did not
receive expected levels of customer demand. The result of
reduced catalog circulation and lower response rates was a
significant drop in revenues of our direct marketing segment in
Alloys legacy titles, which was partially offset by the
sales generated by dELiA*s direct marketing operations after the
acquisition.

Primarily as a result of the write-down of
goodwill and other indefinite-lived intangible assets in our
direct marketing segment, which resulted from our annual
evaluation of segment goodwill and other indefinite-lived
intangible assets, along with the write-down of trademarks in
our sponsorship and other segment, the losses associated with
the acquired dELiA*s operations, the performance downturn in our
other catalog titles, and increased corporate expenses due to
our enlarged business and costs we faced as a result of
increased litigation and our internal investigation, we
transitioned from income from operations of $20.0 million
in fiscal 2002 to a loss from operations in fiscal 2003 of
$67.7 million. Although our financial performance declined
materially in fiscal 2003, and we are still evaluating
dELiA*s overall operations, in particular its retail
stores, we believe that the synergies we expect to result from
combining operations and leveraging our scale, selling across
our combined databases while controlling the absolute number of
catalogs mailed, and moving the majority of our fulfillment
operations in house by making use of dELiA*s warehouse and
fulfillment operations in Hanover, Pennsylvania should begin to
be demonstrated in fiscal 2004.

We believe that our available cash and marketable
investments aggregating approximately $46.3 million at
January 31, 2004 and other working capital and cash flows
from operating activities will be sufficient to meet our
operating and capital requirements for at least the next
24 months. At the end of fiscal 2003, we had working
capital of $32.3 million, which included unrestricted cash,
cash equivalents, and short-term investments of
$46.3 million. This compares with working capital of
$45.8 million, including cash, cash equivalents and
short-term investments of $50.8 million at the end of
fiscal 2002. The primary reasons for these decreases are our
repayment of acquired company debt, our capital expenditures,
our repurchase of common stock and our cash used for corporate
acquisitions in fiscal 2003, which was partially offset by our
sale of $69.3 million of our Debentures (See Liquidity and
Capital Resources).

Since September 2003, we have focused significant
attention on evaluating and improving the acquired dELiA*s
operations. As part of that evaluation, management has completed
its assessment and estimated store exit, lease costs, and
severance related to 17 under performing dELiA*s retail
stores. We also continue to evaluate our legacy direct marketing
businesses and continue to review the expansion of our
sponsorship and other businesses. After the addition of our new
chief executive officer of our Retail and Direct Consumer
division who joined in October, a number of key management
changes have been made in strategic areas to establish the
creative, buying and planning teams necessary to execute the
successful selection and presentation of merchandise to gain
consumer acceptance. We have also added a number of individuals
in our sponsorship divisions as a result of acquisitions and
other hires. We believe that these individuals are highly
qualified for the positions for which they were hired and bring
with them extensive cross-functional

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management skills. We also plan to remain focused
in our previously announced efforts to separate our media and
merchandising businesses at an opportune time in the foreseeable
future.


We believe that the benefits of these strategic
efforts will begin to be seen with our customers during fiscal
2004.

Finally, during the fourth quarter of fiscal
2003, our Audit Committee, with the assistance of the law firm
Mayer, Brown, Rowe & Maw, LLP and the forensic
accounting firm Huron Consulting Group LLC, conducted an
investigation into the allegations of accounting irregularities
raised in the consolidated class action complaint filed against
Alloy in August 2003 and the derivative action filed in October
2003. We are pleased to report that the investigation did not
result in the substantiation of any of the allegations.
Unfortunately, the costs of the investigation were quite high,
and were a contributing factor to our fiscal 2003 operating loss.

Critical Accounting Policies and
Estimates

Managements Discussion and Analysis of
Financial Condition and Results of Operations
(MD&A) discusses, among other things, our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate
our estimates and judgments, including those related to product
returns, bad debts, inventories, investments, intangible assets,
income taxes, and contingencies and litigation. We base our
estimates and judgments on historical experience and on various
other factors 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.

In December 2001, the SEC requested that all
registrants list their three to five most critical
accounting policies in MD&A. The SEC indicated that a
critical accounting policy is one that is both
important to the portrayal of a companys financial
condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of
the need to make estimates about the effect of matters that are
inherently uncertain. Our significant accounting policies are
more fully described in Note 2 to our consolidated
financial statements. We believe, however, the following
critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of
our consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

Direct marketing revenues are recognized at the
time products are shipped to customers, net of any promotional
price discounts and an allowance for sales returns. The
allowance for sales returns is estimated based upon our return
policy, historical experience and evaluation of current sales
and returns trends. Merchandise revenues also include shipping
and handling billed to customers. Shipping and handling costs
are reflected in Selling and Marketing expenses in the
accompanying consolidated statements of operations, and
approximated $11.8 million, $14.7 million and
$12.9 million for fiscal 2001, fiscal 2002 and fiscal 2003,
respectively.

Retail store revenues are recognized at the point
of sale, net of any promotional price discounts and an allowance
for sales returns. The allowance for sales returns is estimated
based upon our return policy, historical experience and
evaluation of current sales and returns trends.

Sponsorship revenues consist primarily of
advertising provided for third parties in our media properties
or via marketing events or programs we execute on the
advertisers behalf. Revenue under these arrangements is
recognized, net of the commissions and agency fees, when the
underlying advertisement is published, broadcasted or otherwise
delivered pursuant to the terms of each arrangement. Delivery of
advertising in other media forms is completed either in the form
of the display of an impression or based upon the
provision of

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contracted services in connection with the
marketing event or program. In-catalog print advertising
revenues are recognized as earned pro rata on a monthly basis
over the estimated economic life of the catalog. Billings in
advance of advertising delivery are deferred until earned.


Other revenues consist of book
development/publishing revenue and other service contracts.
Publishing revenues are recognized upon publication of each
property. Service revenues are recognized as the contracted
services are rendered. In our advertising placement activities,
an analysis of our pricing and collection risk, among other
tests, is made to determine whether revenue is reported on a
gross or net basis.



| |              
| | -------------
| | Catalog Costs

Catalog costs consist of catalog production and
mailing costs. Catalog costs are capitalized and charged to
expense over the expected future revenue stream, which is
principally three to four months from the date the catalogs are
mailed.

An estimate of the future sales dollars to be
generated from each individual catalog drop is used in our
catalog costs policy. The estimate of future sales is calculated
for each catalog drop using historical trends for similar
catalog drops mailed in prior periods as well as the overall
current sales trend for the catalog brand. This estimate is
compared with the actual sales generated-to-date for the catalog
drop to determine the percentage of total catalog costs to be
classified as prepaid on our consolidated balance sheets.
Prepaid Catalog Costs on the consolidated balance sheets and
Selling and Marketing Expenses on the consolidated statements of
operations and comprehensive (loss) income are affected by these
estimates.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market value. Cost is principally determined by the first-in,
first-out method. We record adjustments to the value of
inventory based upon our forecasted plans to sell our
inventories. The physical condition (e.g., age and quality) of
the inventories is also considered in establishing its
valuation. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from the amounts
that we may ultimately realize upon the disposition of
inventories if future economic conditions, trends, or
competitive conditions differ from our estimates and
expectations. These estimates affect the balance of Inventory on
our consolidated balance sheets and Cost of Goods Sold on our
consolidated statements of operations and comprehensive (loss)
income.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

A portion of our accounts receivable will not be
collected due to customer credit issues and bankruptcies. We
provide reserves for these situations based on the evaluation of
the aging of our accounts receivable portfolio and a
customer-by-customer analysis of our high risk customers. Our
reserves contemplate our historical write-offs on receivables,
specific customer situations, and the economic environments in
which we operate. Estimating an allowance for doubtful accounts
requires significant management judgment and is dependent upon
the overall economic environment and our customer viability.
These estimates affect the balance of Accounts Receivable on our
consolidated balance sheets and Selling and Marketing Expenses
on our consolidated statements of operations and comprehensive
(loss) income.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

Goodwill, which represents the excess of purchase
price over the fair value of net assets acquired, was being
amortized on a straight-line basis over the expected future
periods to be benefited, ranging from three to five years.
Effective February 1, 2002, we adopted Statement of
Financial Accounting Standards (SFAS)
SFAS No. 142, which eliminates amortization of
goodwill and intangible assets deemed to have indefinite lives,
and requires these assets to be subject to annual impairments
tests. Intangible assets consist of trademarks, mailing lists,
customer relationships, noncompetition agreements, websites and
marketing rights acquired in connection with our business
acquisitions. Trademarks currently have indefinite lives;
however, the other identified intangible assets are amortized
over their expected benefit periods, ranging from two to eight
years.

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| |                                                                        
| | -----------------------------------------------------------------------
| | Impairment of Goodwill and Other
    Indefinite-Lived Intangible Assets

Goodwill impairment is determined using a
two-step process. The first step of the goodwill impairment test
is designed to identify potential impairment by comparing the
fair value of a reporting unit (generally, our reportable
segments) with its net book value (or carrying amount),
including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair
value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in
a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The
impairment test for other indefinite-lived intangible assets
consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the
intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess.

Determining the fair value of a reporting unit
under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities
of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is
judgmental in nature and often involves the use of significant
estimates and assumptions. Similarly, estimates and assumptions
are used in determining the fair value of other intangible
assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and
also the magnitude of any such charge. To assist in the process
of determining goodwill impairment, we obtain appraisals from an
independent valuation firm. In addition to the use of an
independent valuation firm, we perform internal valuation
analyses and consider other market information that is publicly
available. Estimates of fair value are primarily determined
using discounted cash flows and market comparisons. These
approaches use significant estimates and assumptions including
projected future cash flows (including timing), discount rates
reflecting the risk inherent in future cash flows, perpetual
growth rates, determination of appropriate market comparables
and the determination of whether a premium or discount should be
applied to comparables.

Using these methods, during the fourth quarter of
fiscal 2003 we completed our annual impairment review and
recorded a $56.7 million charge to reduce the carrying
value of goodwill in our direct marketing segment and an
approximate $1.9 million and $2.0 charge to reduce the
carrying value of other indefinite-lived intangible assets in
our direct marketing segment and sponsorship and other segment,
respectively. The combined $60.6 million charge is
reflected as a component of operating income in the accompanying
consolidated statement of operations.

Considerable management judgment is necessary to
estimate the fair value of our reporting units which may be
impacted by future actions taken by us and our competitors and
the economic environment in which we operate. These estimates
affect the balance of Goodwill and Intangible and Other Assets
on our consolidated balance sheets and Operating Expenses on our
consolidated statements of operations and comprehensive (loss)
income.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which the
Company adopted in 2002, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of the
asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the

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carrying amount of the asset exceeds the fair
value of the assets. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.


Pursuant to SFAS No. 144, the Company
performed an analysis of the recoverability of certain
long-lived assets during the fourth quarter of fiscal 2003 and
recorded an asset impairment charge of $1.3 million in the
direct marketing segment. We determined that the carrying
amounts of the non-competition agreement of $144,000 related to
Old Glory, the website of $31,000 related to Old Glory and the
non-competition agreement of $23,000 related to
Girlfriends LA were impaired as we plan to discontinue
marketing our Old Glory and Girlfriends LA brands. Other
assets of these businesses, namely mailing lists, were not
deemed impaired as they are and can be used by other parts of
our direct marketing segment. In addition, the future cash flows
related to Dans Comp could not fully support the carrying
amount of Dans Comps long-lived assets. As a result,
an impairment charge related to the non-competition agreement of
$209,000, property and equipment of $159,000, and mailing list
of $749,000 was recorded.

Results of Operations and Financial
Condition



| |                                       
| | --------------------------------------
| | Consolidated Results of
    Operations

The following table sets forth our statement of
operations data for the periods indicated, reflected as a
percentage of revenues:

|                                                                                                  |                   |                        |       |      |   |      |       |     |  |  |       |       |  
|------------------------------------------------------------------------------------------------- | ----------------- | ---------------------- | ----- | ---- | - | ---- | ----- | --- |  |  | ----- | ----- | -
|                                                                                                  |                   |                       
|                                                                                                  |                   | Year Ended January 31,
|                                                                                                  |                   |                       
|                                                                                                  |                   | 2002                   |       | 2003 |   | 2004
|                                                                                                  |                   |                        |       |      |   |     
|STATEMENTS OF OPERATIONS DATA                                                                     |                   |                        |       |      |   |      |       |     |  |  |       |      
|Net direct marketing revenues                                                                     |                   |                        | 74.9  | %    |   |      | 56.0  | %   |  |  | 42.2  | %    
|Retail stores revenues                                                                            |                   |                        |      |      |   |      |      |     |  |  | 8.1   |      
|Sponsorship and other revenues                                                                    |                   |                        | 25.1  |      |   |      | 44.0  |     |  |  | 49.7  |      
|Total revenues                                                                                    |                   |                        | 100.0 |      |   |      | 100.0 |     |  |  | 100.0 |      
|Cost of revenues                                                                                  |                   |                        | 41.6  |      |   |      | 48.5  |     |  |  | 50.9  |      
|Gross profit                                                                                      |                   |                        | 58.4  |      |   |      | 51.5  |     |  |  | 49.1  |      
|Operating expenses:                                                                               |                   |                        |       |      |   |      |       |     |  |  |       |      
|Selling and marketing                                                                             |                   |                        | 49.4  |      |   |      | 36.3  |     |  |  | 39.2  |      
|General and administrative                                                                        |                   |                        | 8.2   |      |   |      | 5.8   |     |  |  | 9.1   |      
|Amortization of goodwill and other intangible
    assets                                          |                   |                        | 11.0  |      |   |      | 1.9   |     |  |  | 2.1   |      
|Impairment of goodwill and other indefinite-lived
    intangible assets                           |                   |                        |      |      |   |      |      |     |  |  | 16.3  |      
|Impairment of long-lived assets                                                                   |                   |                        |      |      |   |      |      |     |  |  | 0.4   |      
|Restructuring charges                                                                             |                   |                        |      |      |   |      | 0.8   |     |  |  | 0.2   |      
|Total operating expenses                                                                          |                   |                        | 68.6  |      |   |      | 44.8  |     |  |  | 67.3  |      
|(Loss) income from operations                                                                     |                   |                        | (10.2 | )    |   |      | 6.7   |     |  |  | (18.2 | )    
|Interest income (expense), net                                                                    |                   |                        | 0.6   |      |   |      | 0.6   |     |  |  | (0.5  | )    
|Realized gain (loss) on available-for-sale
    marketable securities and write-off of investments |                   |                        | 0.4   |      |   |      |      |     |  |  | (0.1  | )    
|Provision (benefit) for income taxes                                                              |                   |                        | (0.2  | )    |   |      | 0.5   |     |  |  | 1.4   |      
|                                                                                                  | Net (loss) income |                        |       | (9.4 | ) |      |       | 7.8 |  |  |       | (20.2 | )
|Non-cash charge attributable to beneficial
    conversion feature of preferred stock issued       |                   |                        | 4.1   |      |   |      |      |     |  |  |      |      
|Preferred stock dividends and accretion of
    discount                                           |                   |                        | 1.8   |      |   |      | 0.7   |     |  |  | 0.5   |      
|Net (loss) income attributable to common
    stockholders                                         |                   |                        | (15.3 | )%   |   |      | 7.1   | %   |  |  | (20.7 | )%   

28



---



##### Table of Contents





| |                              
| | -----------------------------
| | Segment Results of Operations

The tables below present our revenues and
operating income (loss) by segment for each of fiscal 2001,
fiscal 2002, and fiscal 2003.

|                      |  |                             |         |                |  |      |         |              |  |              |         |  |  |  |      |   |  |  |      |   
|--------------------- |  | --------------------------- | ------- | -------------- |  | ---- | ------- | ------------ |  | ------------ | ------- |  |  |  | ---- | - |  |  | ---- | --
|                      |  |                             |         |               
|                      |  | For Years Ended January 31, |         | Percent Change
|                      |  |                             |         |               
|                      |  | 2002                        |         | 2003           |  | 2004 |         | 2002 vs 2003 |  | 2003 vs 2004
|                      |  |                             |         |                |  |      |         |              |  |             
|                      |  |                             |         |               
|                      |  | Revenue                     |         | Revenue       
|                      |  |                             |         |               
|Net direct marketing  |  | $                           | 124,052 |                |  | $    | 167,572 |              |  | $            | 156,821 |  |  |  | 35.1 | % |  |  | (6.4 | )%
|Retail stores         |  |                             |        |                |  |      |        |              |  |              | 30,103  |  |  |  |     |   |  |  | NM   |   
|Sponsorship and other |  |                             | 41,570  |                |  |      | 131,758 |              |  |              | 185,024 |  |  |  | 217  | % |  |  | 40.4 | % 
|                      |  |                             |         |                |  |      |         |              |  |              |         |  |  |  |      |   |  |  |      |   
|Total Revenues        |  | $                           | 165,622 |                |  | $    | 299,330 |              |  | $            | 371,948 |  |  |  | 80.7 | % |  |  | 24.3 | % 

|                              |  |                             |         |                         |  |      |         |              |  |              |         |   |  |  |       |   |  |  |        |   
|----------------------------- |  | --------------------------- | ------- | ----------------------- |  | ---- | ------- | ------------ |  | ------------ | ------- | - |  |  | ----- | - |  |  | ------ | --
|                              |  |                             |         |                        
|                              |  | For Years Ended January 31, |         | Percent Change         
|                              |  |                             |         |                        
|                              |  | 2002                        |         | 2003                    |  | 2004 |         | 2002 vs 2003 |  | 2003 vs 2004
|                              |  |                             |         |                         |  |      |         |              |  |             
|                              |  |                             |         |                        
|                              |  | Operating (Loss) Income     |         | Operating (Loss) Income
|                              |  |                             |         |                        
|Direct marketing              |  | $                           | (9,967  | )                       |  | $    | 3,108   |              |  | $            | (63,296 | ) |  |  | NM    |   |  |  | NM     |   
|Retail stores                 |  |                             |        |                         |  |      |        |              |  |              | (2,574  | ) |  |  |      |   |  |  | NM     |   
|Sponsorship and other         |  |                             | 4,922   |                         |  |      | 29,210  |              |  |              | 25,258  |   |  |  | 493.5 | % |  |  | (13.5  | )%
|Corporate                     |  |                             | (11,852 | )                       |  |      | (12,292 | )            |  |              | (27,074 | ) |  |  | (3.7  | ) |  |  | 120.3  |   
|                              |  |                             |         |                         |  |      |         |              |  |              |         |   |  |  |       |   |  |  |        |   
|Total operating (loss) income |  | $                           | (16,897 | )                       |  | $    | 20,026  |              |  | $            | (67,686 | ) |  |  | NM    |   |  |  | (438.0 | )%



---

NM-Not meaningful

Fiscal 2003 Compared with Fiscal
2002



| |         
| | --------
| | Revenues

Total Revenues.Total revenues increased 24.3% to $371.9 million for fiscal
2003 from $299.3 million for fiscal 2002.

Direct Marketing
Revenues.Direct marketing revenues
decreased 6.4% to $156.8 million from $167.6 million
in fiscal 2002. Revenue from our Alloy, Girlfriends LA,
CCS, and Dans Comp brands decreased as a result of both a
planned decline in catalog circulation following our acquisition
of dELiA*s and lower customer response rates to the catalogs we
did mail during the second half of the fiscal year due to less
desirable merchandise assortments. We acquired dELiA*s in
September 2003 primarily to improve catalog circulation
productivity by overlaying similar name databases; add a strong,
teen-focused brand; and capitalize on cost-saving opportunities
in combining the businesses. dELiA*s direct marketing revenue
from September 2003 through the end of fiscal 2003 totaled
$29.4 million, which partially offset the decreased sales
in our other brands.

Retail Stores
Revenues.Retail stores revenues
totaled $30.1 million for fiscal 2003 compared with none
for fiscal 2002. The retail stores revenue was generated solely
from dELiA*s 61 retail stores. We owned no retail stores prior
to our acquisition of dELiA*s in September 2003.

Sponsorship and Other Activities
Revenues.Sponsorship and other
activities revenues increased 40.4% to $185.0 million in
fiscal 2003 from $131.8 million in fiscal 2002. The
increase was the result of three main factors:



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the addition of On Campus Marketings
    (OCM) revenue from the date of its acquisition in
    May 2003;                                                                       
|
| |  | the twelve months of revenue from Market Place
    Media (MPM) during fiscal 2003 compared with the
    five and one half months of revenue from MPM during fiscal
    2002; and
|
| |  | our expanding client base and our strengthened
    client relationships within our promotional marketing business
    units.                                                      

29



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##### Table of Contents





| |                 
| | ----------------
| | Cost of Revenues

Cost of revenues consists of the cost of the
merchandise sold plus the freight cost to deliver the
merchandise to the warehouse and retail stores, together with
the direct costs attributable to the sponsorship and advertising
programs we provide and the marketing publications we produce.
Our cost of revenues increased 30.5% in fiscal 2003 to
$189.4 million from $145.1 million in fiscal 2002. The
increase in cost of revenues was due primarily to the additional
costs of goods sold by OCM (acquired in May 2003), a full
years cost of revenues for our MPM ad placement business,
and the cost of merchandise sold by dELiA*s (acquired in
September 2003), offset partially by decreases in cost of goods
sold related to the revenue declines of the Alloy,
Girlfriends LA, CCS and Dans Comp direct marketing
brands.

Our gross profit as a percentage of total
revenues decreased to 49.1% in fiscal 2003 from 51.5% in fiscal
2002. This decrease was due primarily to the lower gross margin
profile of our sponsorship and other revenues as an increased
proportion of these revenues were generated from our lower gross
margin advertising placement and event and field marketing
activities. In addition, gross margins within our sponsorship
business units declined due to more competitive market
conditions in fiscal 2003, which required us to reduce our
margins to win sponsorship business contracts. Gross profit
percentages may fluctuate significantly in future periods due
primarily to the changing revenue contributions of our different
sponsorship activities.



| |                         
| | ------------------------
| | Total Operating Expenses

Selling and
Marketing.Selling and marketing
expenses consist primarily of our catalog production and mailing
costs, our call centers and fulfillment operations expenses,
dELiA*s retail store costs, freight costs to deliver goods to
our merchandise customers, compensation of our sales and
marketing personnel, marketing costs, and information technology
expenses related to the maintenance and marketing of our
websites and support for our advertising sales activities. These
selling and marketing expenses increased 33.9% to
$145.7 million for fiscal 2003 from $108.8 million for
fiscal 2002 primarily due to:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | the inclusion of dELiA*s selling and marketing
    expenses since September 2003;             
|
| |  | the inclusion of OCMs selling and marketing
    expenses since its acquisition in May 2003;  
|
| |  | increased information technology spending to
    support our expanded advertising sales force;
|
| |  | increased occupancy expenses of our expanded
    advertising sales and execution staff; and   
|
| |  | the hiring of additional sales and marketing
    personnel.                                   

As a percentage of total revenues, our selling
and marketing expenses increased to 39.2% for fiscal 2003 from
36.3% for fiscal 2002 due to reduced catalog productivity
(revenues per book circulated) and the high selling and
marketing expenses as a percentage of revenues of dELiA*s
unprofitable retail store operations. Fulfillment expenses,
including credit card processing charges, decreased 10.1% to
$26.3 million for fiscal 2003 from $29.5 million for
fiscal 2002 due to decreased revenues in the direct marketing
segment and dELiA*s more efficient in-house fulfillment
operations. We expect fulfillment expenses to decrease further
in fiscal 2004 as we transition all of our fulfillment
operations for our Alloy and CCS units from New Roads to our
dELiA*s in-house fulfillment operations.

As a percentage of net direct marketing revenues,
fulfillment expenses decreased to 15.4% in fiscal 2003 from
17.6% in fiscal 2002.

General and
Administrative.General and
administrative expenses consist primarily of salaries and
related costs for our executive, administrative, finance and
management personnel, as well as support services and
professional service fees. These expenses increased 97.0% to
$34.0 million in fiscal 2003 from $17.2 million for
fiscal 2002. The increase in general and administrative expenses
primarily was driven by:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | the addition of OCMs expenses since the
    acquisition date;

30



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##### Table of Contents





| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the inclusion of dELiA*s expenses since
    September 4, 2003, the acquisition date;                                                                                                          
|
| |  | an increase in compensation expense for
    additional personnel to handle our growing business;                                                                                              
|
| |  | the costs of our Audit Committees
    investigation into the alleged accounting irregularities; and                                                                                          
|
| |  | increased expenses associated with growing a
    public company such as professional fees, insurance premiums,
    occupancy costs due to office expansions, and telecommunications
    costs.

Our general and administrative expenses increased
to 9.1% as a percentage of total revenues for fiscal 2003 from
5.8% for fiscal 2002, due primarily to the addition of high
general and administrative expenses as a percentage of revenues
in the acquired dELiA*s business. We expect general and
administrative expenses to grow as we hire additional personnel
and incur additional expenses related to the growth of our
business and our operations.

Amortization of Intangible
Assets.Amortization of intangible
assets was approximately $7.9 million for fiscal 2003 as
compared with $5.6 million for fiscal 2002. In fiscal 2002,
we adopted SFAS No. 142, which eliminates the
amortization of goodwill and indefinite-lived intangible assets
and requires an annual impairment review of such assets. The
increase in intangible asset amortization is due to our
acquisition activities during the last twelve months and the
associated allocation of purchase price to amortizable
identified intangible assets. All of our acquisitions have been
accounted for under the purchase method of accounting.

Goodwill and Other Indefinite-Lived Intangible
Asset Impairment.Due to the decline
in catalog response rates, operating profit and cash flows were
lower than expected during fiscal 2003. Based on that trend, as
well as the addition and integration of dELiA*s, the projected
cash flows could not support the goodwill within the direct
marketing reporting unit. During the fourth quarter of fiscal
2003, a goodwill impairment charge of $56.7 million was
recognized since the carrying amount of the reporting
units goodwill exceeded the implied fair value of the
goodwill. Also, during the fourth quarter of fiscal 2003, an
impairment charge for trademarks of $1.9 million and
$2.0 million was recognized in the direct marketing segment
and the sponsorship and other segment, respectively. In the
direct marketing segment, the trademark impairment charge of
$1.9 million was recognized since the carrying value of the
reporting units trademarks was greater than the fair value
of the reporting units trademarks. In the sponsorship and
other segment, an impairment charge of $1.0 million was
recorded since the carrying value of the reporting units
trademarks was greater than the fair value of the reporting
units trademarks and an additional $1.0 impairment charge was
recognized due to the discontinued use of certain trademarks.

Impairment of Other Long-Lived
Assets.As a result of triggering
events such as the planned discontinuance of the Old Glory and
Girlfriends LA catalog brands, we performed an analysis
pursuant to SFAS No. 144 of the recoverability of
long-lived assets in the direct marketing segment during the
fourth quarter of fiscal 2003. As a result of this analysis, we
recorded an asset impairment charge of $1.3 million in the
direct marketing segment. Alloy determined that the carrying
amounts of the non-competition agreement of $144,000 related to
Old Glory, the website of $31,000 related to Old Glory and the
non-competition agreement of $23,000 related to
Girlfriends LA were impaired as we plan to discontinue
marketing our Old Glory and Girlfriends LA brands. In
addition, the future cash flows related to Dans Comp could
not fully support the carrying amount of Dans Comps
long-lived assets. As a result, an impairment charge related to
the non-competition agreement of $209,000, property and
equipment of $159,000, and mailing list of $749,000 was recorded.

Restructuring
Charges.During the first quarter of
fiscal 2003, we made the strategic decision to outsource
substantially all of our fulfillment activities for our
Girlfriends LA unit to New Roads. We determined that we
would not be able to sublease our existing fulfillment
facilities due to real estate market conditions. As a result,
and in accordance with SFAS No. 146 and
SFAS No. 144, we recognized a first quarter charge of
approximately $380,000 in our direct marketing segment,
representing the future contractual lease payments, severance
and personnel costs, and the write-off of related leasehold
improvements. During the third quarter of fiscal 2003, we made
the strategic decision to transfer substantially all of our call
center and fulfillment activities for our Alloy and CCS units
from New Roads, a third party service provider, to our

31



---



##### Table of Contents



recently acquired distribution center in Hanover,
Pennsylvania and call center in Westerville, Ohio. As a result,
we were required to pay New Roads an exit fee. We recognized a
charge of approximately $351,000 in the third quarter of 2003 in
our direct marketing segment, representing the contractual exit
payment. During the fourth quarter of fiscal 2002, we wrote off
an abandoned facility lease and equipment no longer required in
our business operations when we determined that we could not
exit the lease or sublease the space. As a result, we took a
fourth quarter charge of $2.6 million. We will continue to
review our operations to determine the necessity of our
facilities, equipment and personnel.




| |                              
| | -----------------------------
| | Income (Loss) from Operations

Total Income (Loss) from
Operations.Our loss from operations
was $67.7 million for fiscal 2003 while our income from
operations was $20.0 million for fiscal 2002. The
transition from operating income to operating loss is primarily
due to the goodwill impairment, the incurrence of operating
losses in our direct marketing business, the loss from the
dELiA*s retail operations, increased corporate expenses, and
increased depreciation and amortization expenses.

Income (Loss) from Direct Marketing
Operations.Our loss from direct
marketing operations was $63.3 million for fiscal 2003
while our income from direct marketing operations was
$3.1 million for fiscal 2002. The transition from direct
marketing operating income to direct marketing operating loss is
primarily a result of goodwill impairment and lower revenues
resulting from reduced catalog circulation and reduced
productivity in the catalogs we did circulate.

Loss from Retail Stores
Operations.Our loss from retail
stores operations was $2.6 million in fiscal 2003. The loss
was generated from the dELiA*s retail stores acquired in
September 2003.

Income from Sponsorship and Other Activities
Operations.Our income from
sponsorship and other operations decreased 13.5% to
$25.3 million for fiscal 2003 from $29.2 million for
fiscal 2002 due primarily to the increased amortization of
acquired intangible assets and the impairment of trademarks.



| |                                   
| | ----------------------------------
| | Interest Income (Expense),
    Net

In fiscal 2003, we generated interest income of
$687,000 and $2.7 million of interest expense, primarily
related to the issuance in July and August 2003 of our
5.375% Convertible Senior Debentures due August 1,
2023 (the Debentures). In fiscal 2002, we generated
interest income of $1.7 million and had interest expense of
$1,000. The decrease in interest income resulted primarily from
lower cash and cash equivalents and available-for-sale
marketable securities balances during fiscal 2003.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Realized Gain (Loss) on Marketable
    Securities and Write-off of Investments, Net

Net realized gains on the sales of marketable
securities were approximately $66,000 in fiscal 2003. In
addition, we wrote off $313,000 of minority investments in
private companies that either declared bankruptcy or ceased
operations. Realized gains from sales of marketable securities
in fiscal 2002 were approximately $97,000.



| |                             
| | ----------------------------
| | Income Tax Benefit (Expense)

In fiscal 2003, we recorded an income tax expense
of $5.3 million due to our decision to establish a
valuation allowance for our net deferred tax asset of
$5.2 million. The valuation allowance was established as a
result of increased uncertainty over the realization of the
deferred tax asset, in part as a result of the acquisition of
dELiA*s. In fiscal 2002, we received an income tax benefit of
$1.5 million due to the release of our valuation reserve in
the fourth quarter due to the anticipated likelihood of future
profits.

32



---



##### Table of Contents



Fiscal 2002 Compared with Fiscal
2001



| |         
| | --------
| | Revenues

Total Revenues.Total revenues increased 80.7% to $299.3 million for fiscal
2002 from $165.6 million for fiscal 2001.

Merchandise Revenues.Net merchandise revenues increased
35.1% to $167.6 million for fiscal 2002 from
$124.1 million for fiscal 2001. This increase was due
primarily to increased catalog circulation to our enlarged
Generation Y database, which grew as a result of expanded
exposure of our various catalog brands, as well as the
acquisitions of Dans Comp in September 2001 and
Girlfriends LA in March 2002.

Sponsorship and Other Activities
Revenues.Sponsorship and other
activities revenues increased 217% to $131.8 million in
fiscal 2002 from $41.6 million in fiscal 2001 primarily due
to the selling efforts of our expanded advertising sales force
and the broadened range of advertising and marketing services we
were able to offer. Our sales force, client base and services
were significantly augmented by the acquisitions of Market Place
Media in July 2002 and 360 Youth and Target Marketing and
Promotions in November 2001.



| |                 
| | ----------------
| | Cost of Revenues

Our cost of revenues increased 110.6% to
$145.1 million in fiscal 2002 from $68.9 million in
fiscal 2001. This increase was due primarily to the increase in
volume of merchandise sales to our growing customer base, along
with the costs associated with our substantially enlarged
newspaper advertising and field marketing activities.

Our gross profit as a percentage of total
revenues decreased to 51.5% in fiscal 2002 from 58.4% in fiscal
2001. This was due primarily to the lower gross margin profile
of our sponsorship and other revenues as we experienced
significant growth in lower margin activities such as newspaper
advertising, event and field marketing, and sampling programs.



| |                         
| | ------------------------
| | Total Operating Expenses

Selling and
Marketing.Selling and marketing
expenses increased 33.0% to $108.8 million for fiscal 2002
from $81.8 million for fiscal 2001, due to the increased
costs incurred in marketing, selling and shipping merchandise to
our expanded database in greater volume; the hiring of
additional sales and marketing personnel; the addition of sales
staff associated with acquired media and marketing services
businesses; and increased spending on website technical
maintenance. As a percentage of total revenues, our selling and
marketing expenses decreased to 36.3% for fiscal 2002 from 49.4%
for fiscal 2001. This decrease was due primarily to more
targeted merchandise marketing to our enlarged database,
improved advertising sales force productivity and reduced
general advertising and marketing activity. Fulfillment expenses
including credit card processing charges rose 31.4% to
$29.5 million for fiscal 2002 from $22.4 million for
fiscal 2001 due to the increase in merchandise revenues. As a
percentage of net merchandise revenues, fulfillment expenses
decreased to 17.6% in fiscal 2002 from 18.1% in fiscal 2001 due
mainly to improved labor requirement forecasting and
productivity.

General and
Administrative.General and
administrative expenses increased 27.4% to $17.2 million
for fiscal 2002 from $13.5 million for fiscal 2001. The
increase was attributable primarily to an increase in
compensation expense for additional personnel to handle our
growing business, together with administrative costs related to
acquired companies and expenses associated with a growing public
company such as increased professional fees, insurance premiums
and public relations costs. As a percentage of total revenues,
our general and administrative expenses decreased to 5.8% for
fiscal 2002 from 8.2% for fiscal 2001 as we spread our overhead
expenses across an enlarged revenue base.

Amortization of Goodwill and Other Intangible
Assets.Amortization of intangible
assets was approximately $5.6 million for fiscal 2002 as
compared with the amortization of goodwill and other intangible
assets of $18.3 million for fiscal 2001. These costs have
resulted from our acquisition activities, which commenced in
fiscal 1999. All of our acquisitions have been accounted for
under the purchase method of accounting. In fiscal

33



---



##### Table of Contents



2002, we adopted Statement No. 142 which
eliminates the amortization of goodwill and indefinite-lived
intangible assets and requires an annual impairment review of
such assets. Accordingly, amortization expense decreased to
$5.6 million in fiscal 2002, as compared with
$18.3 million in fiscal 2001, as a result of adoption of
this standard.


Restructuring
Charges.During the fourth quarter of
fiscal 2002, we wrote off an abandoned facility lease and
equipment no longer required in our business operations when we
determined that we could not exit the lease or sublease the
space. As a result, we took a fourth quarter charge of
$2.6 million.



| |                              
| | -----------------------------
| | Income (Loss) from Operations

Total Income (Loss) from
Operations.Our income from operations
was $20.0 million for fiscal 2002 while our loss from
operations was $16.9 million for fiscal 2001. The
transition from operating loss to operating income reflects
greater efficiency in selling merchandise to our name database
and achieving economies of scale in selling larger advertising
and marketing services packages across a wider range of clients,
together with the elimination of goodwill amortization. The
fiscal 2001 loss from operations was due primarily to goodwill
amortization.

Merchandise Income (Loss) from
Operations.Our income from
merchandise operations was $3.4 million for fiscal 2002
while our loss from merchandise operations was
$10.0 million for fiscal 2001. The transition from
operating loss to operating income reflects greater productivity
of catalog circulation targeting the more responsive segments of
our enlarged name database and the elimination of goodwill
amortization.

Sponsorship and Other Income (Loss) from
Operations.Our income from
sponsorship and other operations increased 492.0% to
$29.2 million for fiscal 2002 from $4.9 million for
fiscal 2001. This increase resulted from greater economies of
scale in selling a broader range of advertising and marketing
services packages across a wider range of clients, together with
the elimination of goodwill amortization.



| |                     
| | --------------------
| | Interest Income, Net

Interest income net of expense includes income
from our cash and cash equivalents and from investments and
expenses related to our financing obligations. For fiscal 2002
and fiscal 2001, we generated net interest income of
$1.8 million and $935,000, respectively. This 92.2%
increase resulted primarily from interest earned on the cash
received in connection with private placements of our common
stock in the second half of fiscal 2001 and the follow-on public
offering of our common stock in February 2002.



| |                                                
| | -----------------------------------------------
| | Realized Gain on Marketable Securities,
    Net

In fiscal 2002, realized gains from sales of
marketable securities were approximately $97,000. In fiscal
2001, we unwound collars we had placed on 600,000 shares of
Liberty Digital (LDIG) common stock and sold
628,000 shares of LDIG, thereby realizing a gain of
$658,000, net of tax. The series of transactions resulted in a
realized gain from sales of marketable securities.



| |                             
| | ----------------------------
| | Income Tax Benefit (Expense)

In fiscal 2002, we received an income tax benefit
of $1.5 million due to the release of our valuation reserve
in the fourth quarter due to the anticipated likelihood of
future profits. In fiscal 2001, we were subject to income tax
expense of $296,000 due to taxable operating income generated at
the state level.

Liquidity and Capital Resources

We have financed our operations to date primarily
through the sale of equity and debt securities as we generated
negative cash flow from operations prior to fiscal 2002. At
January 31, 2004, we had approximately $46.3 million
of unrestricted cash, cash equivalents and short-term
investments along with $5.6 million of marketable
securities classified as non-current assets due to their stated
maturities and our intention to hold them for more than one
year. Our principal commitments at January 31, 2004
consisted of the Debentures, accounts payable, bank loans,
accrued expenses and obligations under operating and capital
leases.

34



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##### Table of Contents



Net cash provided by operating activities was
$12.0 million in fiscal 2003 compared with
$24.1 million in fiscal 2002. The decline was primarily due
to the transition to a net loss in fiscal 2003 as opposed to net
income in fiscal 2002, which resulted from the decline in direct
marketing segment financial performance, the addition of dELiA*s
unprofitable retail stores, and increased corporate expenses,
partially offset by the non-cash impact of the goodwill
impairment, a higher level of depreciation and amortization and
a smaller increase in operating assets net of operating
liabilities.

Cash used in investing activities was
$72.0 million in fiscal 2003 consisting of the net
application of $1.6 million of cash to acquire
available-for-sale marketable securities, $66.7 million to
acquire businesses, and $3.8 million for capital
expenditures. Cash used in investing activities was
$106.9 million in fiscal 2002 consisting of the net
application of $7.9 million of cash to acquire
available-for-sale marketable securities, $89.6 million to
acquire businesses, $4.3 million for capital expenditures
and $4.9 million to acquire databases and marketing rights.

Net cash provided by financing activities was
$52.1 million in fiscal 2003 due primarily to net proceeds
of $66.8 million received from the issuance of the
Debentures in the private placement market, offset primarily by
the repurchase of 600,000 shares of our common stock for
$3.0 million and the net repayment of $11.9 million on
credit facilities assumed in the OCM and dELiA*s acquisitions.
Net cash provided by financing activities was $56.4 million
in fiscal 2002 due primarily to the gross proceeds from our
public equity offering in February 2002. In fiscal 2003 and
2002, we recorded non-cash charges related to Series B
Convertible Preferred Stock accretion and dividends of
$1.9 million and $2.1 million, respectively.

Our liquidity position as of January 31,
2004 consisted of $46.3 million of unrestricted cash, cash
equivalents and short-term investments. We expect our liquidity
position to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 24 months,
excluding the impact of any potential, as yet unannounced
acquisitions. If cash generated from our operations is
insufficient to satisfy our cash needs, we may be required to
raise additional capital. If we raise additional funds through
the issuance of equity securities, our stockholders may
experience significant dilution. Furthermore, additional
financing may not be available when we need it or, if available,
financing may not be on terms favorable to us or to our
stockholders. If financing is not available when required or is
not available on acceptable terms, we may be unable to develop
or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or respond to
competitive pressures. Any of these events could have a material
and adverse effect on our business, results of operations and
financial condition.

On January 29, 2003, we adopted a stock
repurchase program, authorizing the repurchase of up to
$10 million of our common stock from time to time in the
open market at prevailing market prices or in privately
negotiated transactions. As of January 31, 2004, we had
utilized $3.0 million of the authorized amount of this
program. It is anticipated that additional share repurchases
under this program, if any, will be funded by available working
capital.

Contractual Obligations

The following table presents our significant
contractual obligations as of January 31, 2004 (in
thousands):

|                                               |  |       |         |                        |  |       |        |       |  |           |        |  |  |   |        |  |  |   |        | 
|---------------------------------------------- |  | ----- | ------- | ---------------------- |  | ----- | ------ | ----- |  | --------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                               |  |       |         |                        |  |      
|                                               |  |       |         | Payments Due By Period |  |      
|                                               |  |       |         |                        |  |      
|                                               |  |       |         | Less than              |  | 1-3   |        | 3-5   |  | More than
|Contractual Obligations                        |  | Total |         | 1 Year                 |  | Years |        | Years |  | 5 Years  
|                                               |  |       |         |                        |  |       |        |       |  |          
|Senior Convertible Debentures due 2023(a)      |  | $     | 69,300  |                        |  |       |       |       |  |           |       |  |  |   |        |  |  | $ | 69,300 | 
|Mortgage Loan Agreement                        |  |       | 2,914   |                        |  |       | 2,914  |       |  |           |       |  |  |   |       |  |  |   |       | 
|Operating Lease Obligations                    |  |       | 80,653  |                        |  |       | 13,879 |       |  |           | 24,726 |  |  |   | 19,564 |  |  |   | 22,484 | 
|Capital Lease Obligations (including interest) |  |       | 347     |                        |  |       | 257    |       |  |           | 67     |  |  |   | 23     |  |  |   |       | 
|Purchase Obligations(b)                        |  |       | 20,111  |                        |  |       | 19,015 |       |  |           | 1,077  |  |  |   | 19     |  |  |   |       | 
|Future Non-Compete Payments                    |  |       | 2,402   |                        |  |       | 240    |       |  |           | 620    |  |  |   | 1,542  |  |  |   |       | 
|                                               |  |       |         |                        |  |       |        |       |  |           |        |  |  |   |        |  |  |   |        | 
|Total                                          |  | $     | 175,727 |                        |  | $     | 36,305 |       |  | $         | 26,490 |  |  | $ | 21,148 |  |  | $ | 91,784 | 

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---



|    |  |                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------
|(a) |  | The Senior Convertible Debentures due 2023 may be
    redeemed after August 1, 2008 at the option of the holder.
|   
|(b) |  | Our purchase obligations are primarily related to
    inventory commitments and service agreements.             

We have long-term noncancelable operating lease
commitments for retail stores, office space, warehouse
facilities, and equipment. We also have long-term noncancelable
capital lease commitments for equipment.

Off-Balance Sheet Arrangements

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

Guarantees

We have no significant financial guarantees.

Effect of New Accounting Standards

We have described the impact anticipated from the
adoption of certain new accounting pronouncements effective in
fiscal 2003 in Note 2 to the consolidated financial
statements.

Inflation

In general, our costs are affected by inflation
and we may experience the effects of inflation in future
periods. We believe, however, that such effects have not been
material to us during the past.

Forward-Looking Statements

Statements in this Annual Report on
Form 10-K 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 Annual
Report on Form 10K, 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 risks
discussed in Item 1 of Part 1,
Business  Risk Factors That May Affect Future
Results.

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 7A. | Qualitative and Quantitative Disclosures
    About Market Risk

As of the end of fiscal 2003, we held a portfolio
of $24.6 million in fixed income marketable securities for
which, due to the conservative nature and relatively short
duration of our investments, interest rate risk is mitigated. We
do not own any derivative financial instruments in our
portfolio. Additionally, the $69.3 million

36



---



##### Table of Contents



of Debentures were issued at a fixed interest
rate of 5.375%. Accordingly, we do not believe there is any
material market risk exposure with respect to derivatives or
other financial instruments that require disclosure under this
item.







|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The financial statements and financial statement
schedule of Alloy, Inc. and subsidiaries are annexed to this
Annual Report on Form 10-K as pages F-2 through F-28
and page S-1. An index of such materials appears on
page F-1.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

On May 31, 2002, we dismissed Arthur
Andersen LLP (Arthur Andersen) as our independent
auditors and named KPMG LLP (KPMG) as our new
independent auditors in accordance with a recommendation of the
Audit Committee of our Board of Directors. Arthur Andersen
previously audited our consolidated financial statements for the
year ended January 31, 2002. The report of Arthur Andersen
on our consolidated financial statements for the year ended
January 31, 2002 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the
same period, there were no disagreements with Arthur Andersen on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Disclosure Controls and Procedures. Our
Management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the fiscal period covered by this Annual
Report on Form 10-K. Based upon such evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, except as noted below, the
Companys disclosure controls and procedures are effective
in recording, processing, summarizing and reporting information
required to be disclosed by us in the reports we file or submit
under the Exchange Act within the time periods specified in the
SECs rules and forms.

In performing its audit of our Consolidated
Financial Statements for fiscal 2003, our independent auditors,
KPMG, noted two matters involving our internal controls that it
considered to be reportable conditions and/or material
weaknesses under the standards established by the American
Institute of Certified Public Accountants. A reportable
condition, which may or may not be determined to be a material
weakness, involves matters relating to significant deficiencies
in the design or operation of internal controls that, in
KPMGs judgment, could adversely affect our ability to
record, process, summarize and report financial data consistent
with the assertions of management on the financial statements.
The first identified reportable condition related to the absence
of appropriate reviews and approvals of transactions, accounting
entries and systems output at our dELiA*s subsidiary. According
to KPMG, numerous adjusting entries came about as a result of
its audit procedures at dELiA*s that indicated a lack of timely
and appropriate management review during the closing process.
This reportable condition was not considered to be a material
weakness. The second identified reportable condition was
considered a material weakness and concerned the ability of
accounting personnel to properly apply all relevant accounting
pronouncements related to goodwill, intangible assets and other
long-lived assets. Specifically, KPMG indicated that when we
applied the provisions of FASB No. 142 relating to the
annual assessment of goodwill and other indefinite-lived
intangible assets carrying value, we incorrectly applied the
provisions of FASB No. 142 needed to calculate the
impairment amounts and failed to separately test the carrying
values of our other indefinite-lived intangible assets. They
also indicated that we incorrectly applied the provisions of
FASB No. 144 in calculating impairment amounts of other
long-lived assets. In addition they noted that we had not
formally documented triggering events for impairment testing
under either standard. Consequently, we did not properly
identify the adjustments that arose due to the weakness in our
internal control process, and KPMG indicated that we need to
implement modifications and upgrades to our financial reporting
process to ensure that this situation does not occur in the
future.

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These matters should be viewed in the context of
the special challenges for us in fiscal 2003 arising primarily
out of our acquisition of dELiA*s that placed much greater
demands on our accounting function than previously had been the
case. Given the reportable condition and material weakness
identified above, management has devoted additional resources,
time and effort to ensure that the financial statements for the
fiscal year ended January 31, 2004 present fairly, in all
material respects, our financial condition and results of
operations.

Additionally, the reportable condition and
material weakness have been discussed in detail by management,
our Audit Committee and KPMG. We have assigned a high priority
to the correction of the reportable condition and material
weakness and are committed to addressing and resolving them
fully. We intend to strengthen our internal reporting and review
procedures to assure that our personnel follow the appropriate
procedures in the future and plan to hire additional qualified
personnel to improve our technical financial competency. We
believe that these efforts should resolve both the reportable
condition and the material weakness. However, since any system
of controls is based in part on assumptions about future events,
we cannot assure you that the design of our controls will be
successful in achieving its stated goals under all potential
future conditions.

(b) Internal Control Over Financial
Reporting. There have not been any changes in our internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter ended January 31, 2004 that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. As noted,
however, certain weaknesses in our internal controls have been
identified by KPMG. We intend to take the necessary steps and
hire additional qualified personnel to address these weaknesses
while enhancing and improving our internal controls and
procedures.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The response to this item is incorporated by
reference from the discussion responsive thereto under the
caption Information About Directors and Executive
Officers in our definitive Proxy Statement for our 2004
Annual Meeting of Stockholders, which is expected to be filed
with the SEC within 120 days after the end of our fiscal
year ended January 31, 2004.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The response to this item is incorporated by
reference from the discussion responsive thereto under the
caption Executive Compensation in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders,
which is expected to be filed with the SEC within 120 days
after the end of our fiscal year ended January 31, 2004,
except that the sections in the definitive proxy statement
entitled Report of the Compensation Committee on Executive
Compensation, Report of the Audit Committee
and the Performance Graph shall not be deemed
incorporated herein by reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The response to this item is incorporated by
reference from the discussion responsive thereto under the
caption Information About Alloy Security Ownership
in our definitive proxy statement for our 2004 Annual Meeting of
Stockholders, which is expected to be filed with the SEC within
120 days after the end of our fiscal year ended
January 31, 2004.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The response to this item is incorporated by
reference from the discussion responsive thereto under the
caption Certain Relationships and Related Party
Transactions in our definitive proxy statement for our 2004

38



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##### Table of Contents



Annual Meeting of Stockholders, which is expected
to be filed with the SEC within 120 days after the end of
our fiscal year ended January 31, 2004.







|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The response to this item is incorporated by
reference from the discussion responsive thereto under the
caption Principal Accountant Fees and Services in
our definitive proxy statement for our 2004 Annual Meeting of
Stockholders, which is expected to be filed with the SEC within
120 days after the end of our fiscal year ended
January 31, 2004.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(A) FINANCIAL STATEMENTS, SCHEDULES AND
EXHIBITS

(1) Consolidated Financial Statements.

The financial statements required by this item
are submitted in a separate section of this Annual Report on
Form 10-K. See Index to Financial Statements and
Schedule on page F-1 of this Annual Report on
Form 10-K.

(2) Financial Statement Schedules.

The Schedule required by this item is submitted
in a separate section of this Annual Report on Form 10-K.
See Index to Financial Statements and Schedule on
page F-1 of this Annual Report on Form 10-K.

(3) Exhibits.

The list of exhibits required by this item is
submitted in a separate section of this Annual Report on
Form 10-K. See the Exhibit Index beginning
on page 41 of this Annual Report on Form 10-K.

(B) REPORTS ON FORM 8-K

During the fiscal quarter ended January 31,
2004, we filed the following Current Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) On November 18, 2003, we filed an
    Amendment to Current Report on Form 8-K/A to amend the
    Current Report on Form 8-K, dated September 4, 2003
    (filed September 18, 2003, disclosing information pursuant
    to Item 2 (Acquisition or Disposition of Assets) and
    Item 7 (Financial Statements, Pro Forma Financial
    Information and Exhibits)), to include Item 7(b) Pro Forma
    Financial Information as of and for the fiscal year ended
    January 31, 2003 and the six months ended July 31,
    2003, and related exhibits.                                                                                                                                                                          
|
| | 2) On November 19, 2003, we filed an
    Amendment No. 2 to Current Report on Form 8-K/A to
    amend the Current Report on Form 8-K, dated
    September 4, 2003 (filed September 18, 2003,
    disclosing information pursuant to Item 2 (Acquisition or
    Disposition of Assets) and Item 7 (Financial Statements,
    Pro Forma Financial Information and Exhibits)), to amend the
    Item 7(b) Pro Forma Financial Information as of and for the
    fiscal year ended January 31, 2003 and the six months ended
    July 31, 2003, and related exhibits, filed with the
    Amendment to Current Report on Form 8-K/A filed
    November 18, 2003, in order to correct certain
    typographical errors contained therein.
|
| | 3) On December 15, 2003, we filed a
    Current Report on Form 8-K to report under Item 9
    (Regulation FD Disclosure) and Item 12 (Results of
    Operations and Financial Condition), a press release (attached
    as Exhibit 99.1) regarding our financial results for the
    fiscal quarter ended October 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                        

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |            
| | -----------
| | ALLOY, INC.



| |     |                       
| | --- | ----------------------
| | BY: | /s/ MATTHEW C. DIAMOND

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

Date: May 27, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacity and on the dates indicated.

|                                               |  |                                                                                           |  |              |  | 
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------ |  | 
|                                               |  |                                                                                           |  |             
|Signature                                      |  | Title                                                                                     |  | Date        
|                                               |  |                                                                                           |  |             
|                                              
|/s/ MATTHEW C. DIAMONDMatthew C. Diamond       |  | Chief Executive Officer (Principal Executive
    Officer) and Chairman                    |  | May 27, 2004
|                                              
|/s/ SAMUEL A. GRADESSSamuel A. Gradess         |  | Chief Financial Officer (Principal Financial and
    Accounting
    Officer) and Director |  | May 27, 2004
|                                              
|/s/ JAMES K. JOHNSON, JR.James K. Johnson, Jr. |  | Chief Operating Officer and Director                                                      |  | May 27, 2004
|                                              
|/s/ PETER M. GRAHAMPeter M. Graham             |  | Director                                                                                  |  | May 27, 2004
|                                              
|/s/ EDWARD A. MONNIEREdward A. Monnier         |  | Director                                                                                  |  | May 27, 2004

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EXHIBIT INDEX

|        |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      | 
|Number  |      | 
|        |      | 
|        | 2.1  |  |  | Acquisition Agreement by and among Alloy, Inc.,
    Dodger Acquisition Corp. and dELiA*s Corp., dated as of
    July 30, 2003 (incorporated by Reference to Alloys
    Current Report on Form 8-K filed July 31, 2003).                                                                                                                                                                                                           
|        | 3.1  |  |  | Restated Certificate of Incorporation of Alloy
    Online, Inc. (incorporated by reference to Alloys
    Registration Statement on Form S-1 filed March 10,
    1999 (Registration Number 333-74159)).                                                                                                                                                                                                                            
|        | 3.2  |  |  | Certificate of Amendment of Certificate of
    Incorporation of Alloy Online, Inc. (incorporated by reference
    to Alloys Current Report on Form 8-K filed
    August 13, 2001).                                                                                                                                                                                                                                                
|        | 3.3  |  |  | Certificate of Amendment of Restated Certificate
    of Incorporation of Alloy Online, Inc. (incorporated by
    reference to Alloys Current Report on Form 8-K filed
    March 13, 2002).                                                                                                                                                                                                                                        
|        | 3.4  |  |  | Certificate of Designations, Preferences and
    Rights of the Series B Convertible Preferred Stock of Alloy
    Online, Inc. (incorporated by reference to Alloys Current
    Report on Form 8-K filed June 21, 2001).                                                                                                                                                                                                           
|        | 3.5  |  |  | Certificate of Designations of Series C
    Junior Participating Preferred Stock of Alloy, Inc.
    (incorporated by reference to Alloys Current Report on
    Form 8-K filed April 14, 2003).                                                                                                                                                                                                                                    
|        | 3.6  |  |  | Restated Bylaws (incorporated by reference to
    Alloys Registration Statement on Form S-1 filed
    March 10, 1999 (Registration Number 333-74159)).                                                                                                                                                                                                                                                                            
|        | 4.1  |  |  | Form of Common Stock Certificate (incorporated by
    reference to Alloys Registration Statement on
    Form S-1 filed March 10, 1999 (Registration
    Number 333-74159)).                                                                                                                                                                                                                                                       
|        | 4.2  |  |  | Warrant to Purchase Common Stock, dated as of
    November 26, 2001, issued by Alloy, Inc. to MarketSource
    Corporation (incorporated by reference to Alloys Current
    Report on Form 8-K filed December 11, 2001).                                                                                                                                                                                                          
|        | 4.3  |  |  | Warrant to Purchase Common Stock, dated as of
    January 28, 2002, issued by Alloy, Inc. to Fletcher
    International Ltd. (incorporated by reference to Alloys
    Current Report on Form 8-K/ A filed February 1, 2002).                                                                                                                                                                                                      
|        | 4.4  |  |  | Form of Warrant to Purchase Common Stock, dated
    as of June 19, 2001, issued by Alloy Online, Inc. to each
    of the purchasers of Alloys Series B Preferred Stock
    (incorporated by reference to Alloys Current Report on
    Form 8-K filed June 21, 2001).                                                                                                                                                             
|        | 4.5  |  |  | Warrant to Purchase Common Stock, dated as of
    March 18, 2002, issued by Alloy, Inc. to Craig T. Johnson
    (incorporated by reference to Alloys 2002 Annual Report on
    form 10-K filed May 1, 2003).                                                                                                                                                                                                                      
|        | 4.6  |  |  | Warrants to Purchase Common Stock, dated as of
    March 18, 2002, issued by Alloy, Inc. to (i) Debra
    Lynn Millman, (ii) Kim Suzanne Millman, and
    (iii) Ronald J. Bujarski (substantially identical to
    Warrant referenced as Exhibit 4.5 in all material respects,
    and not filed with Alloys 2002 Annual Report on
    Form 10-K, filed May 1, 2003, pursuant to
    Instruction 2 of Item 601 of Regulation S-K).
|        | 4.7  |  |  | Warrant to Purchase Common Stock, dated as of
    November 1, 2002, issued by Alloy, Inc. to Alan M. Weisman
    (incorporated by reference to Alloys 2002 Annual Report on
    form 10-K filed May 1, 2003).                                                                                                                                                                                                                     
|        | 4.8  |  |  | Form of 5.375% Global Convertible Senior
    Debenture due 2023 in the aggregate principal amount of
    $69,300,000 (incorporated by reference to Alloys
    Registration Statement on Form S-3 filed October 17,
    2003 (Registration Number 333-109786)).                                                                                                                                                                    
|        | 4.9  |  |  | Indenture between Alloy, Inc. and Deutsche Bank
    Trust Company Americas, dated as of July 23, 2003
    (incorporated by reference to Alloys Registration
    Statement on Form S-3 filed October 17, 2003
    (Registration Number 333-109786)).                                                                                                                                                                               
|        | 10.1 |  |  | Alloy, Inc. Amended and Restated 1997 Employee,
    Director and Consultant Stock Option and Stock Incentive Plan
    (incorporated by reference to Alloys 2002 Annual Report on
    form 10-K filed May 1, 2003).                                                                                                                                                                                                                

41



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##### Table of Contents



|        |         |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         | 
|Number  |         | 
|        |         | 
|        | 10.1.1  |  |  | First Amendment to Alloy, Inc. Amended and
    Restated 1997 Employee, Director and Consultant Stock Option and
    Stock Incentive Plan (incorporated by reference to Alloys
    Proxy Statement on Schedule 14A filed on June 2, 2003).                                                                                                                                                                                                                    
|        | 10.1.2  |  |  | Second Amendment to Alloy, Inc. Amended and
    Restated 1997 Employee, Director and Consultant Stock Option and
    Stock Incentive Plan (incorporated by reference to Alloys
    Registration Statement on Form S-8 filed October 17,
    2003 (Registration Number 333-109788)).                                                                                                                                                                          
|        | 10.2    |  |  | Amended and Restated Alloy, Inc. 2002 Incentive
    and Non-Qualified Stock Option Plan (incorporated by reference
    to Alloys 2002 Annual Report on form 10-K filed
    May 1, 2003).                                                                                                                                                                                                                                                                     
|        | 10.3    |  |  | Employment Agreement dated February 1, 2004
    between Matthew C. Diamond and Alloy Inc.*                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.4    |  |  | Employment Agreement dated February 1, 2004
    between James K. Johnson, Jr. and Alloy, Inc.*                                                                                                                                                                                                                                                                                                                                                                
|        | 10.5    |  |  | Employment Agreement dated April 19, 1999
    between Samuel A. Gradess and Alloy Online, Inc. (incorporated
    by reference to Alloys Registration Statement on
    Form S-1 filed March 10, 1999 (Registration
    Number 333-74159)).                                                                                                                                                                                                                    
|        | 10.6    |  |  | Non-Competition and Confidentiality Agreement
    dated November 24, 1998 between Matthew C. Diamond and
    Alloy Online, Inc. (incorporated by reference to Alloys
    Registration Statement on Form S-1 filed March 10,
    1999 (Registration Number 333-74159)).                                                                                                                                                                                       
|        | 10.7    |  |  | Non-Competition and Confidentiality Agreement
    dated November 24, 1998 between James K. Johnson, Jr.
    and Alloy Online, Inc. (incorporated by reference to
    Alloys Registration Statement on Form S-1 filed
    March 10, 1999 (Registration Number 333-74159)).                                                                                                                                                                                    
|        | 10.8    |  |  | Non-Competition and Confidentiality Agreement
    dated November 24, 1998 between Samuel A. Gradess and Alloy
    Online, Inc. (incorporated by reference to Alloys
    Registration Statement on Form S-1 filed March 10,
    1999 (Registration Number 333-74159)).                                                                                                                                                                                        
|        | 10.9    |  |  | Employment Offer Letter dated May 24, 2000
    between Robert Bell and Alloy Online, Inc. (incorporated by
    reference to Alloys 2000 Annual Report on Form 10-K
    filed May 1, 2001).                                                                                                                                                                                                                                                                   
|        | 10.10   |  |  | Non-Competition and Confidentiality Agreement
    dated March 24, 2000 between Robert Bell and Alloy Online,
    Inc. (incorporated by reference to Alloys 2000 Annual
    Report on Form 10-K filed May 1, 2001).                                                                                                                                                                                                                                           
|        | 10.11   |  |  | Incentive Stock Option Agreement dated as of
    July 19, 2000 between Alloy Online, Inc. and Robert Bell
    (incorporated by reference to Alloys 2000 Annual Report on
    Form 10-K filed May 1, 2001).                                                                                                                                                                                                                                                   
|        | 10.12   |  |  | Non-Qualified Stock Option Agreement dated as of
    July 19, 2000 between Alloy Online, Inc. and Robert Bell
    (incorporated by reference to Alloys 2000 Annual Report on
    Form 10-K filed May 1, 2001).                                                                                                                                                                                                                                               
|        | 10.13   |  |  | Flexible Standardized 401(k) Profit Sharing Plan
    Adoption Agreement (incorporated by reference to Alloys
    Registration Statement on Form S-1 filed March 10,
    1999 (Registration Number 333-74159)).                                                                                                                                                                                                                                               
|        | 10.14   |  |  | 1999 Employee Stock Purchase Plan (incorporated
    by reference to Amendment No. 2 to Alloys
    Registration Statement on Form S-1/A filed April 22,
    1999 (Registration Number 333-74159)).                                                                                                                                                                                                                                                            
|        | 10.15   |  |  | Registration Rights Agreement, dated as of
    June 19, 2001, by and among Alloy Online, Inc, BayStar
    Capital, L.P., BayStar International, Ltd., Lambros, L.P.,
    Crosslink Crossover Fund III, L.P., Offshore Crosslink
    Crossover Fund III Unit Trust, Bayview Partners, the Peter
    M. Graham Money Purchase Plan and Trust and Elyssa Kellerman
    (incorporated by reference to Alloys Current Report on
    Form 8-K filed June 20, 2001).
|        | 10.16   |  |  | Standard Office Lease between Arden Realty
    Finance Partnership, L.P. and Cass Communications, Inc., dated
    as of September 11, 1998 (incorporated by reference to
    Alloys Quarterly Report on Form 10-Q filed
    September 14, 2001).                                                                                                                                                                                                             
|        | 10.16.1 |  |  | First Amendment to Standard Office Lease, dated
    as of November 1, 2001, by and between Arden Realty Finance
    Partnership, L.P. and Alloy, Inc. (incorporated by reference to
    Alloys 2001 Annual Report on Form 10-K filed
    May 1, 2002).                                                                                                                                                                                                       

42



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##### Table of Contents



|        |         |  |  |                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         | 
|Number  |         | 
|        |         | 
|        | 10.17   |  |  | Lease Agreement by and between Bike Land, LLC and
    Dans Competition, Inc., dated September 28, 2001
    (incorporated by reference to Alloys Quarterly Report on
    Form 10-Q filed December 17, 2001).                                                                                                                                                                                                 
|        | 10.18   |  |  | Modification to Lease, dated November 2,
    1999, by and between Alloy, Inc. and Abner Properties Company,
    dated April 16, 2002 (incorporated by reference to
    Alloys Quarterly Report on Form 10-Q filed
    June 14, 2002).                                                                                                                                                                        
|        | 10.18.1 |  |  | Second Lease Modification Agreement between
    Alloy, Inc. and Abner Properties Company, c/o Williams Real
    Estate Co., Inc., dated as of January 28, 2002
    (incorporated by reference to Alloys Annual Report on
    Form 10-K filed May 1, 2002). Third lease modification
    dated August 31, 2002.                                                                                               
|        | 10.18.2 |  |  | Third Lease Modification and Extension Agreement,
    dated as of August 31, 2002 between Abner Properties
    Company c/o Williams USA Realty Services, Inc. and Alloy,
    Inc. (incorporated by reference to Alloys Quarterly Report
    on Form 10-Q filed December 16, 2002).                                                                                                                           
|        | 10.19   |  |  | Assignment and Assumption of Lease between Alloy,
    Inc. and Goldfarb & Abrandt dated as of
    February 1, 2002 (incorporated by reference to Alloys
    Annual Report on Form 10-K filed May 1, 2002).                                                                                                                                                                                                   
|        | 10.20   |  |  | Master Services Agreement, dated as of
    February 1, 2002, by and between NewRoads, Inc. and Alloy,
    Inc. (incorporated by reference to Alloys Quarterly Report
    on Form 10-Q filed June 14, 2002).                                                                                                                                                                                                  
|        | 10.21   |  |  | Amended and Restated 1996 Stock Incentive Plan of
    dELiA*s Inc. (incorporated by reference to dELiA*s Inc.
    Schedule 14A filed June 12, 1998).                                                                                                                                                                                                                                                          
|        | 10.21.1 |  |  | First Amendment to dELiA*s Inc. Amended and
    Restated 1996 Stock Incentive Plan (incorporated by reference to
    Alloys Registration Statement on Form S-8 filed
    October 17, 2003 (Registration Number 333-109788)).                                                                                                                                                                                 
|        | 10.22   |  |  | 1998 Stock Incentive Plan of dELiA*s Inc.
    (incorporated by reference to dELiA*s Inc. Annual Report on
    Form 10-K405, filed April 19, 1999).                                                                                                                                                                                                                                                            
|        | 10.22.1 |  |  | First Amendment to dELiA*s , Inc. 1998 Stock
    Incentive Plan (incorporated by reference to Alloys
    Registration Statement on Form S-8, filed October 17,
    2003 (Registration Number 333-109788)).                                                                                                                                                                                                   
|        | 10.23   |  |  | iTurf Inc. 1999 Amended and Restated Stock
    Incentive Plan (incorporated by reference to Amendment
    No. 2 to the iTurf Inc. registration statement on
    Form S-1/A filed April 6, 1999 (Registration
    No. 333-71123)).                                                                                                                                                                             
|        | 10.23.1 |  |  | First Amendment to iTurf Inc. Amended and
    Restated 1999 Stock Incentive Plan (incorporated by reference to
    Alloys Registration Statement on Form S-8 filed
    October 17, 2003 (Registration Number 333-109788)).                                                                                                                                                                                   
|        | 10.24   |  |  | Lease Agreement dated May 3, 1995 between
    dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of
    Trinity Church in the City of New York (the Lease
    Agreement); Modification and Extension of Lease Agreement,
    dated September 26, 1996 (incorporated by reference to the
    dELiA*s Inc. Registration Statement on Form S-1 filed
    January 25, 1999 (Registration No. 333-15153)).
|        | 10.24.1 |  |  | Agreement dated April 4, 1997 between
    dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of
    Trinity Church in the City of New York, amending the Lease
    Agreement (incorporated by reference to dELiA*s Inc. Annual
    Report on Form 10-K filed).                                                                                                                                         
|        | 10.24.2 |  |  | Agreement dated October 7, 1997 between
    dELiA*s Inc. and The Rector, Church Wardens and Vestrymen of
    Trinity Church in the City of New York, amending the Lease
    Agreement (incorporated by reference to dELiA*s Inc. Quarterly
    Report on Form 10-Q filed).                                                                                                                                    
|        | 10.25   |  |  | Lease Agreement dated January 30, 2000 by
    and between iTurf Inc. and the State-Whitehall Company
    (incorporated by reference to iTurf Inc. Annual Report on
    Form 10-K filed).                                                                                                                                                                                                                      
|        | 10.26   |  |  | Loan and Security Agreement dated as of
    September 24, 2001 by and among Wells Fargo Retail Finance
    LLC, dELiA*s Corp., dELiA*s Operating Company, dELiA*s
    Distribution Company and dELiA*s Retail Company (incorporated by
    reference to dELiA*s Inc. Current Report on Form 8-K filed
    October 10, 2001).                                                                                  

43



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##### Table of Contents



|        |         |  |  |                                                                                                                                                                                                                                                                                                                                                            
|------- | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         | 
|Number  |         | 
|        |         | 
|        | 10.26.1 |  |  | First Amendment to Loan and Security Agreement by
    and among Wells Fargo Retail Finance LLC, dELiA*s Corp., dELiA*s
    Operating Company, dELiA*s Distribution Company and dELiA*s
    Retail Company, dated October 29, 2001 (incorporated by
    reference to dELiA*s Corp. Quarterly Report on Form 10-Q
    filed December 17, 2003).              
|        | 10.26.2 |  |  | Second Amendment to Loan and Security Agreement
    by and among Wells Fargo Retail Finance LLC, dELiA*s Corp.,
    dELiA*s Operating Company, dELiA*s Distribution Company and
    dELiA*s Retail Company, dated October 21, 2002
    (incorporated by reference to dELiA*s Corp. Current Report on
    Form 8-K filed December 13, 2002).                
|        | 10.26.3 |  |  | Third Amendment to Loan and Security Agreement by
    and among Wells Fargo Retail Finance LLC, as lender, and dELiA*s
    Corp., as lead borrower and agent for the other borrowers named
    within, dated December 18, 2002 (incorporated by reference
    to dELiA*s Corp. Current Report on Form 8-K filed
    February 26, 2003).                    
|        | 10.26.4 |  |  | Fourth Amendment to Loan and Security Agreement
    by and among Wells Fargo Retail Finance LLC, as lender, and
    dELiA*s Corp., as lead borrower and agent for the other
    borrowers named within, dated February 10, 2003
    (incorporated by reference to dELiA*s Current Report on
    Form 8-K, filed February 26, 2003).                        
|        | 10.26.5 |  |  | Fifth Amendment to Loan and Security Agreement by
    and among Wells Fargo Retail Finance LLC, as lender, and dELiA*s
    Corp., as lead borrower and agent for the other borrowers named
    within, dated February 10, 2003 (incorporated by reference
    to dELiA*s Current Report on Form 8-K filed
    February 26, 2003).                          
|        | 10.26.6 |  |  | Sixth Amendment to Loan and Security Agreement by
    and among Wells Fargo Retail Finance LLC, as lender, and dELiA*s
    Corp., as lead borrower and agent for the other borrowers named
    within, dated April 29, 2003 ( incorporated by reference to
    dELiA*s 2002 Annual Report on Form 10-K filed May 16,
    2003).                            
|        | 10.27   |  |  | Master License Agreement, dated February 24,
    2003, by and between dELiA*s Brand LLC and JLP Daisy LLC
    (incorporated by reference to dELiA*s Current Report on
    Form 8-K filed February 26, 2003).                                                                                                                                               
|        | 10.28   |  |  | License Agreement, dated February 24, 2003,
    by and between dELiA*s Corp. and dELiA*s Brand LLC (incorporated
    by reference to dELiA*s Current Report on Form 8-K filed
    February 26, 2003).                                                                                                                                                      
|        | 10.29   |  |  | Employment Letter, dated October 27, 2003,
    between Alloy, Inc. and Robert Bernard (incorporated by
    reference to Alloys Quarterly Report on Form 10-Q
    filed December 22, 2003).                                                                                                                                                                
|        | 10.30   |  |  | Alloy, Inc. Convertible Senior Debentures
    Purchase Agreement, dated as of July 17, 2003, by and among
    Alloy and the Initial Purchasers named therein.*                                                                                                                                                                                             
|        | 10.31   |  |  | Resale Registration Rights Agreement dated as of
    July 31, 2003 between Alloy, Inc., Lehman Brothers, Inc.,
    CIBC World Markets Corp., JP Morgan Securities, Inc. and SG
    Cowen Securities Corporation (incorporated by reference to
    Alloys Registration Statement on Form S-3, filed
    October 17, 2003 (Registration Number 333-109786)).
|        | 10.32   |  |  | Sublease Agreement, dated as of December 3,
    2003, by and between MarketSource, L.L.C. and 360 Youth,
    LLC.*                                                                                                                                                                                                                                         
|        | 21.1    |  |  | Subsidiaries of Alloy, Inc. as of
    January 31, 2004.*                                                                                                                                                                                                                                                                                                   
|        | 23.1    |  |  | Consent of KPMG LLP.*                                                                                                                                                                                                                                                                                                                                      
|        | 31.1    |  |  | Certification of Matthew C. Diamond, Chief
    Executive Officer, dated May 27, 2004 as adopted pursuant
    to Section 302 of The Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                            
|        | 31.2    |  |  | Certification of Samuel A. Gradess, Chief
    Financial Officer, dated May 27, 2004 as adopted pursuant
    to Section 302 of The Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                             
|        | 32.1    |  |  | Certification of Matthew C. Diamond, Chief
    Executive Officer, dated May 27, 2004, as adopted pursuant
    to Section 906 of The Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                           
|        | 32.2    |  |  | Certification of Samuel A. Gradess, Chief
    Financial Officer, dated May 27, 2004, as adopted pursuant
    to Section 906 of The Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                            



---



|  |                
|- | ---------------
|* | Filed herewith.

44



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##### Table of Contents



ALLOY, INC. AND SUBSIDIARIES



INDEX TO FINANCIAL STATEMENTS AND
SCHEDULE


|                             |                                                                                                                                   |      |  |      | 
|---------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ---- | 
|                             |                                                                                                                                   | Page
|                             |                                                                                                                                   |     
|Financial Statements         |                                                                                                                                   |      |  |     
|                             | Independent Registered Public Accounting
    Firms Report of KPMG LLP (dated May 14, 2004)                                       |      |  | F-2  | 
|                             | Report of Independent Public Accountants (Arthur
    Andersen, dated March 13, 2002)                                              |      |  | F-3  | 
|                             | Consolidated Balance Sheets as of
    January 31, 2003 and 2004                                                                   |      |  | F-4  | 
|                             | Consolidated Statements of Operations and
    Comprehensive Income (Loss) for the Years Ended January 31,
    2002, 2003 and 2004 |      |  | F-5  | 
|                             | Consolidated Statements of Changes in
    Stockholders Equity for the Years Ended January 31,
    2002, 2003 and 2004            |      |  | F-6  | 
|                             | Consolidated Statements of Cash Flows for the
    Years Ended January 31, 2002, 2003 and 2004                                     |      |  | F-9  | 
|                             | Notes to Consolidated Financial Statements                                                                                        |      |  | F-11 | 
|Financial Statement Schedule |                                                                                                                                   |      |  |     
|                             | The following financial statement schedule is
    included herein:                                                                |      |  |      | 
|                             | Schedule II  Valuation and
    Qualifying Accounts                                                                               |      |  | S-1  | 

All other financial statement schedules are
omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
notes thereto.

F-1



---



##### Table of Contents



Report of Independent Registered Public
Accounting Firm

To the Board of Directors and

Stockholders of Alloy, Inc.:


We have audited the accompanying consolidated
balance sheets of Alloy, Inc. and subsidiaries as of
January 31, 2004 and 2003, and the related consolidated
statements of operations and comprehensive (loss) income,
changes in stockholders (deficit) equity and cash
flows for the years then ended. In connection with our audits of
the consolidated financial statements, we also have audited the
related January 31, 2004 and 2003 financial statement
schedules. These consolidated financial statements and financial
statement schedules are the responsibility of Alloy, Inc.s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audit. The consolidated financial
statements and related financial statement schedule of Alloy,
Inc. and subsidiaries as of January 31, 2002 and for the
year then ended were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on
those financial statements and related financial statement
schedules, before the restatement described in Note 19 to the
financial statements, in their report dated March 13, 2002.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 consolidated
financial statements referred to above present fairly, in all
material respects, the financial position of Alloy, Inc. and
subsidiaries as of January 31, 2004 and 2003 and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion,
the related 2003 and 2002 financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

As discussed in Note 4 to the consolidated
financial statements, Alloy, Inc. changed its method of
accounting for goodwill and other intangible assets in 2002.

Our report also indicates that the Company
changed the composition of its reportable segments in 2002 and
the amounts in the 2001 financial statements related to
reportable segments have been restated to conform to the 2002
composition of reportable segments. As described in Note 19, the
Company changed the composition of its reportable segments in
2002, and the amounts in the 2001 financial statements relating
to reportable segments have been restated to conform to the 2002
composition of reportable segments. As discussed above, the 2001
financial statements of Alloy, Inc. were audited by other
auditors who have ceased operations.



| |             
| | ------------
| | /S/ KPMG LLP

New York, New York

May 14, 2004


F-2



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors and

Shareholders of Alloy, Inc.:


We have audited the accompanying consolidated
balance sheets of Alloy, Inc. (a Delaware corporation) and
subsidiaries as of January 31, 2001 and 2002, and the
related consolidated statements of operations and comprehensive
loss, statements of changes in shareholders equity and
accumulated other comprehensive (loss) income and cash flows for
each of the three years in the period ended January 31,
2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
did not audit the financial statements of 360 Youth, Inc.
as of January 31, 2002 and for the period from
November 27, 2001 through January 31, 2002, which
statements reflect total assets and total revenues of
2 percent and 3 percent in the fiscal year ended
January 31, 2002 of the related consolidated totals. Those
statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the
amounts included for this entity, is based solely on the report
of the other auditors.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the
report of other auditors, the financial statements referred to
above present fairly, in all material respects, the financial
position of Alloy, Inc. and subsidiaries as of January 31,
2001 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended
January 31, 2002 in conformity with accounting principles
generally accepted in the United States.

Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
The schedule of valuation and qualifying accounts is presented
for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

New York, New York

March 13, 2002


THIS IS A COPY OF A REPORT ISSUED BY ARTHUR
ANDERSEN LLP, OUR FORMER INDEPENDENT AUDITORS, AS OF THE DATES
INDICATED ABOVE, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN
LLP SINCE THOSE DATES.

F-3



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##### Table of Contents



ALLOY, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |          |         | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- |  | - | -------- | ------- | 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                           
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | January 31,                               
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                           
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | 2003                                       |   | 2004   
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |        
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                           
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | (Amounts in                               
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | thousands,                                
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | except share data)                        
|ASSETS                                  
|CURRENT ASSETS:                          |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                       |                                            | $ | 35,187  |         |  | $ | 27,273   |        
|                                         | Restricted cash                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |        |         |  |   | 3,270    |        
|                                         | Marketable securities available-for-sale                                                                                                                                                                                                                                                                                                                                                        |                                            |   | 15,649  |         |  |   | 19,014   |        
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $3,410 and $3,336, respectively                                                                                                                                                                                                                                                                                              |                                            |   | 30,022  |         |  |   | 31,492   |        
|                                         | Inventories                                                                                                                                                                                                                                                                                                                                                                                     |                                            |   | 23,466  |         |  |   | 29,021   |        
|                                         | Prepaid catalog costs                                                                                                                                                                                                                                                                                                                                                                           |                                            |   | 2,100   |         |  |   | 2,028    |        
|                                         | Other current assets                                                                                                                                                                                                                                                                                                                                                                            |                                            |   | 10,130  |         |  |   | 3,813    |        
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | Total current assets                       |   |         | 116,554 |  |   |          | 115,911 | 
|                                         | Marketable securities available-for-sale                                                                                                                                                                                                                                                                                                                                                        |                                            |   | 7,520   |         |  |   | 5,585    |        
|                                         | Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                     |                                            |   | 10,081  |         |  |   | 27,234   |        
|                                         | Deferred tax assets                                                                                                                                                                                                                                                                                                                                                                             |                                            |   | 5,621   |         |  |   |         |        
|                                         | Goodwill, net                                                                                                                                                                                                                                                                                                                                                                                   |                                            |   | 270,353 |         |  |   | 274,796  |        
|                                         | Intangible and other assets, net                                                                                                                                                                                                                                                                                                                                                                |                                            |   | 24,471  |         |  |   | 25,865   |        
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | Total assets                               |   | $       | 434,600 |  |   | $        | 449,391 | 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|CURRENT LIABILITIES:                     |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         | Accounts payable                                                                                                                                                                                                                                                                                                                                                                                |                                            | $ | 28,032  |         |  | $ | 28,740   |        
|                                         | Deferred revenues                                                                                                                                                                                                                                                                                                                                                                               |                                            |   | 15,106  |         |  |   | 15,124   |        
|                                         | Mortgage note payable                                                                                                                                                                                                                                                                                                                                                                           |                                            |   |        |         |  |   | 2,914    |        
|                                         | Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                                                                                  |                                            |   | 27,679  |         |  |   | 36,841   |        
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | Total current liabilities                  |   |         | 70,817  |  |   |          | 83,619  | 
|                                         | Deferred tax liabilities                                                                                                                                                                                                                                                                                                                                                                        |                                            |   | 2,698   |         |  |   |         |        
|                                         | Long-term liabilities                                                                                                                                                                                                                                                                                                                                                                           |                                            |   | 93      |         |  |   | 743      |        
|                                         | Senior Convertible Debentures Due 2023                                                                                                                                                                                                                                                                                                                                                          |                                            |   |        |         |  |   | 69,300   |        
|                                         | Series B Redeemable Convertible Preferred
    Stock, $10,000 per share liquidation preference;
    $.01 par value; 3,000 shares designated; mandatorily
    redeemable on June 19, 2005; 1,613 and 1,340 shares
    issued and outstanding, respectively                                                                                                                                        |                                            |   | 15,550  |         |  |   | 14,434   |        
|STOCKHOLDERS EQUITY:                    |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         | Preferred stock; $.01 par value;
    10,000,000 shares authorized of which 1,850,000 shares
    designated as Series A Redeemable Convertible Preferred
    Stock and 3,000 shares designated as Series B
    Redeemable Convertible Preferred Stock authorized, 1,613 and
    1,340 shares issued and outstanding as Series B
    Redeemable Convertible Preferred Stock (above), respectively |                                            |   |        |         |  |   |         |        
|                                         | Common stock; $.01 par value;
    200,000,000 shares authorized; 40,082,024 and
    42,701,767 shares issued, respectively                                                                                                                                                                                                                                                                      |                                            |   | 401     |         |  |   | 427      |        
|                                         | Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                      |                                            |   | 396,963 |         |  |   | 412,594  |        
|                                         | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                             |                                            |   | (51,955 | )       |  |   | (127,170 | )      
|                                         | Deferred compensation                                                                                                                                                                                                                                                                                                                                                                           |                                            |   |        |         |  |   | (1,411   | )      
|                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                   |                                            |   | 164     |         |  |   | (30      | )      
|                                         | Less common stock held in treasury, at cost;
    8,275 and 608,275 shares, respectively                                                                                                                                                                                                                                                                                                         |                                            |   | (131    | )       |  |   | (3,115   | )      
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | Total stockholders equity                 |   |         | 345,442 |  |   |          | 281,295 | 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 | Total liabilities and stockholders equity |   | $       | 434,600 |  |   | $        | 449,391 | 
|                                         |                                                                                                                                                                                                                                                                                                                                                                                                 |                                            |   |         |         |  |   |         

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### Table of Contents



ALLOY, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS


AND COMPREHENSIVE (LOSS) INCOME


|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |         |       |         | 
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------ | ------- | ----- | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | ----- | ------- | 
|                                                                                                         |                                                                                     |                                                                              
|                                                                                                         |                                                                                     | For the Years Ended January 31,                                              
|                                                                                                         |                                                                                     |                                                                              
|                                                                                                         |                                                                                     | 2002                                                                          |                          | 2003    |       | 2004   
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |        
|                                                                                                         |                                                                                     |                                                                              
|                                                                                                         |                                                                                     | (Amounts in thousands, except                                                
|                                                                                                         |                                                                                     | share and per share data)                                                    
|NET REVENUES:                                                                                            |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         | Net direct marketing revenues                                                       |                                                                               | $                        | 124,052 |       |         | $          | 167,572 |      |         | $          | 156,821 |      
|                                                                                                         | Retail stores revenues                                                              |                                                                               |                          |        |       |         |            |        |      |         |            | 30,103  |      
|                                                                                                         | Sponsorship and other revenues                                                      |                                                                               |                          | 41,570  |       |         |            | 131,758 |      |         |            | 185,024 |      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         |                                                                                     |                                                                               | Total net revenues       |         |       | 165,622 |            |         |      | 299,330 |            |         |       | 371,948 | 
|COST OF REVENUES:                                                                                        |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         | Cost of goods sold                                                                  |                                                                               |                          | 59,850  |       |         |            | 79,912  |      |         |            | 99,820  |      
|                                                                                                         | Cost of sponsorship and other revenues                                              |                                                                               |                          | 9,008   |       |         |            | 65,236  |      |         |            | 89,559  |      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         |                                                                                     |                                                                               | Total cost of revenues   |         |       | 68,858  |            |         |      | 145,148 |            |         |       | 189,379 | 
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Gross profit                                                                                             |                                                                                     |                                                                               | 96,764                   |         |       |         | 154,182    |         |      |         | 182,569    |        
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|OPERATING EXPENSES:                                                                                      |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         | Selling and marketing                                                               |                                                                               |                          | 81,829  |       |         |            | 108,791 |      |         |            | 145,715 |      
|                                                                                                         | General and administrative                                                          |                                                                               |                          | 13,516  |       |         |            | 17,240  |      |         |            | 33,970  |      
|                                                                                                         | Amortization of goodwill and other intangible
    assets                            |                                                                               |                          | 18,316  |       |         |            | 5,554   |      |         |            | 7,887   |      
|                                                                                                         | Impairment of goodwill and other indefinite-lived
    intangible assets             |                                                                               |                          |        |       |         |            |        |      |         |            | 60,638  |      
|                                                                                                         | Impairment of long-lived assets                                                     |                                                                               |                          |        |       |         |            |        |      |         |            | 1,315   |      
|                                                                                                         | Restructuring charges                                                               |                                                                               |                          |        |       |         |            | 2,571   |      |         |            | 730     |      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         |                                                                                     |                                                                               | Total operating expenses |         |       | 113,661 |            |         |      | 134,156 |            |         |       | 250,255 | 
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|(Loss) income from operations                                                                            |                                                                                     |                                                                               | (16,897                  | )       |       |         | 20,026     |         |      |         | (67,686    | )      
|OTHER INCOME (EXPENSE):                                                                                  |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         | Interest income                                                                     |                                                                               |                          | 943     |       |         |            | 1,701   |      |         |            | 687     |      
|                                                                                                         | Interest expense                                                                    |                                                                               |                          | (8      | )     |         |            | (1      | )    |         |            | (2,690  | )    
|                                                                                                         | Gain (loss) on sales of marketable securities and
    write-off of investments, net |                                                                               |                          | 658     |       |         |            | 97      |      |         |            | (247    | )    
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|(Loss) income before income taxes                                                                        |                                                                                     |                                                                               | (15,304                  | )       |       |         | 21,823     |         |      |         | (69,936    | )      
|Provision (benefit) for income taxes                                                                     |                                                                                     |                                                                               | 296                      |         |       |         | (1,472     | )       |      |         | 5,279      |        
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Net (loss) income                                                                                        |                                                                                     |                                                                               | (15,600                  | )       |       |         | 23,295     |         |      |         | (75,215    | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Unrealized (loss) gain on available-for-sale
    marketable securities, net of realized gains and losses |                                                                                     |                                                                               | (892                     | )       |       |         | 217        |         |      |         | (194       | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Comprehensive (loss) income                                                                              |                                                                                     | $                                                                             | (16,492                  | )       |       | $       | 23,512     |         |      | $       | (75,409    | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Net (loss) income                                                                                        |                                                                                     | $                                                                             | (15,600                  | )       |       | $       | 23,295     |         |      | $       | (75,215    | )      
|Non-cash charge attributable to beneficial
    conversion feature of preferred stock issued              |                                                                                     |                                                                               | 6,745                    |         |       |         |           |         |      |         |           |        
|Preferred stock dividends and accretion of
    discount                                                  |                                                                                     |                                                                               | 3,013                    |         |       |         | 2,100      |         |      |         | 1,944      |        
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Net (loss) income attributable to common
    stockholders                                                |                                                                                     | $                                                                             | (25,358                  | )       |       | $       | 21,195     |         |      | $       | (77,159    | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|Basic and diluted net (loss) earnings per share
    of common stock:                                     |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         |                                                                                     | Basic net (loss) earnings attributable to common
    stockholders per share   |                          | $       | (1.02 | )       |            | $       | 0.55 |         |            | $       | (1.87 | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|                                                                                                         |                                                                                     | Diluted net (loss) earnings attributable to
    common stockholders per share |                          | $       | (1.02 | )       |            | $       | 0.53 |         |            | $       | (1.87 | )      
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING:                                                        |                                                                                     |                                                                               | 24,967,678               |         |       |         | 38,436,256 |         |      |         | 41,175,046 |        
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        
|WEIGHTED AVERAGE DILUTED COMMON SHARES
    OUTSTANDING:                                                  |                                                                                     |                                                                               | 24,967,678               |         |       |         | 40,071,412 |         |      |         | 41,175,046 |        
|                                                                                                         |                                                                                     |                                                                               |                          |         |       |         |            |         |      |         |            |        

The accompanying notes are an integral part of
these financial statements.

F-5



---



##### Table of Contents



ALLOY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


For the Year Ended January 31,
2002


(Amounts in thousands, except share
data)


|                                                                                                                   |  |              |            |            |  |             |     |          |  |               |         |             |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---------- |  | ----------- | --- | -------- |  | ------------- | ------- | ----------- |  | ----- | ------- | - |  | - | ---- | - |  | - | ---- | - |  | - | ------- | -
|                                                                                                                   |  |              |            |            |  |             |     |          |  |               |         | Accumulated |  |      
|                                                                                                                   |  |              |            |            |  |             |     |          |  | Other         |         |            
|                                                                                                                   |  | Common Stock |            | Additional |  |             |     |          |  | Comprehensive |         |            
|                                                                                                                   |  |              |            | Paid-In    |  | Accumulated |     | Deferred |  | Income        |         |            
|                                                                                                                   |  | Shares       |            | Amount     |  | Capital     |     | Deficit  |  | Compensation  |         | (Loss)      |  | Total
|                                                                                                                   |  |              |            |            |  |             |     |          |  |               |         |             |  |      
|Balance, January 31, 2001                                                                                          |  |              | 21,245,958 |            |  | $           | 212 |          |  | $             | 140,864 |             |  | $     | (52,905 | ) |  | $ | (728 | ) |  | $ | 839  |   |  | $ | 88,282  |  
|Issuance of common stock and warrants for
    acquisitions of businesses                                           |  |              | 7,534,032  |            |  |             | 75  |          |  |               | 96,573  |             |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 96,648  |  
|Cancellation of stock options issued to employees
    and consultants                                              |  |              |           |            |  |             |    |          |  |               | (488    | )           |  |       |        |   |  |   | 488  |   |  |   |     |   |  |   |        |  
|Amortization of deferred compensation                                                                              |  |              |           |            |  |             |    |          |  |               |        |             |  |       |        |   |  |   | 209  |   |  |   |     |   |  |   | 209     |  
|Issuance of common stock pursuant to the exercise
    of options and warrants and the employee stock purchase plan |  |              | 1,273,296  |            |  |             | 13  |          |  |               | 11,454  |             |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 11,467  |  
|Impact of beneficial conversion feature in
    issuance of Series A and Series B Convertible
    Preferred Stock   |  |              |           |            |  |             |    |          |  |               | 6,745   |             |  |       | (6,745  | ) |  |   |     |   |  |   |     |   |  |   |        |  
|Issuance of warrants to holders of Series A
    and B Convertible Preferred Stock                                  |  |              |           |            |  |             |    |          |  |               | 3,917   |             |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 3,917   |  
|Issuance of common stock for conversion of
    Series A and Series B Convertible Preferred Stock                   |  |              | 921,225    |            |  |             | 9   |          |  |               | 10,712  |             |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 10,721  |  
|Issuance of common stock and warrants in
    connection with private placements                                    |  |              | 3,942,366  |            |  |             | 39  |          |  |               | 57,956  |             |  |       |        |   |  |   |     |   |  |   |     |   |  |   | 57,995  |  
|Accretion of discount and dividends on
    Series A and Series B Convertible Preferred Stock                       |  |              |           |            |  |             |    |          |  |               | (3,013  | )           |  |       |        |   |  |   |     |   |  |   |     |   |  |   | (3,013  | )
|Net loss                                                                                                           |  |              |           |            |  |             |    |          |  |               |        |             |  |       | (15,600 | ) |  |   |     |   |  |   |     |   |  |   | (15,600 | )
|Unrealized loss on available-for-sale marketable
    securities, net of realized gains and losses                  |  |              |           |            |  |             |    |          |  |               |        |             |  |       |        |   |  |   |     |   |  |   | (892 | ) |  |   | (892    | )
|                                                                                                                   |  |              |            |            |  |             |     |          |  |               |         |             |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance, January 31, 2002                                                                                          |  |              | 34,916,877 |            |  | $           | 349 |          |  | $             | 324,719 |             |  | $     | (75,250 | ) |  | $ | (31  | ) |  | $ | (53  | ) |  | $ | 249,734 |  
|                                                                                                                   |  |              |            |            |  |             |     |          |  |               |         |             |  |       |         |   |  |   |      |   |  |   |      |   |  |   |         |  

The accompanying notes are an integral part of
these financial statements.

F-6



---



##### Table of Contents



ALLOY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


For the Year Ended January 31,
2003


(Amounts in thousands, except share
data)


|                                                                                                                                                     |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |         |        |  |       |     |   |  |   |     |   |  |  |        |   |  |   |      |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ----------- | --- | -------- |  | ------------- | ------- | --------------- |  | ------ | ------- | ------ |  | ----- | --- | - |  | - | --- | - |  |  | ------ | - |  | - | ---- | - |  | - | ------- | -
|                                                                                                                                                     |  |              |            |            |  |             |     |          |  |               |         | Accumulated     |  |        |         |        |  |      
|                                                                                                                                                     |  |              |            |            |  |             |     |          |  | Other         |         |                 |  |       
|                                                                                                                                                     |  | Common Stock |            | Additional |  |             |     |          |  | Comprehensive |         | Treasury Shares |  |       
|                                                                                                                                                     |  |              |            | Paid-In    |  | Accumulated |     | Deferred |  | Income        |         |                 |  |       
|                                                                                                                                                     |  | Shares       |            | Amount     |  | Capital     |     | Deficit  |  | Compensation  |         | (Loss)          |  | Shares |         | Amount |  | Total
|                                                                                                                                                     |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |         |        |  |      
|Balance, January 31, 2002                                                                                                                            |  |              | 34,916,877 |            |  | $           | 349 |          |  | $             | 324,719 |                 |  | $      | (75,250 | )      |  | $     | (31 | ) |  | $ | (53 | ) |  |  |       |   |  | $ |     |   |  | $ | 249,734 |  
|Issuance of common stock and warrants for
    acquisitions of businesses                                                                             |  |              | 803,628    |            |  |             | 8   |          |  |               | 11,421  |                 |  |        |        |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 11,429  |  
|Shares returned from escrow                                                                                                                          |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |        |        |  |       |    |   |  |   |    |   |  |  | (8,275 | ) |  |   | (131 | ) |  |   | (131    | )
|Amortization of deferred compensation                                                                                                                |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |        |        |  |       | 31  |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 31      |  
|Issuance of common stock pursuant to the exercise
    of options and warrants and the employee stock purchase plan,
    net of tax benefit of $2,481 |  |              | 225,050    |            |  |             | 2   |          |  |               | 4,403   |                 |  |        |        |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 4,405   |  
|Issuance of common stock for conversion of
    Series B Convertible Preferred Stock                                                                  |  |              | 136,469    |            |  |             | 2   |          |  |               | 1,594   |                 |  |        |        |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 1,596   |  
|Issuance of common stock and warrants in
    connection with private placements and public offering, net of
    expenses                             |  |              | 4,000,000  |            |  |             | 40  |          |  |               | 56,926  |                 |  |        |        |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 56,966  |  
|Accretion of discount and dividends on
    Series B Convertible Preferred Stock                                                                      |  |              |           |            |  |             |    |          |  |               | (2,100  | )               |  |        |        |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | (2,100  | )
|Net income                                                                                                                                           |  |              |           |            |  |             |    |          |  |               |        |                 |  |        | 23,295  |        |  |       |    |   |  |   |    |   |  |  |       |   |  |   |     |   |  |   | 23,295  |  
|Unrealized gain on available-for-sale marketable
    securities, net of realized gains and losses                                                    |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |        |        |  |       |    |   |  |   | 217 |   |  |  |       |   |  |   |     |   |  |   | 217     |  
|                                                                                                                                                     |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |         |        |  |       |     |   |  |   |     |   |  |  |        |   |  |   |      |   |  |   |         |  
|Balance, January 31, 2003                                                                                                                            |  |              | 40,082,024 |            |  | $           | 401 |          |  | $             | 396,963 |                 |  | $      | (51,955 | )      |  | $     |    |   |  | $ | 164 |   |  |  | (8,275 | ) |  | $ | (131 | ) |  | $ | 345,442 |  
|                                                                                                                                                     |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |         |        |  |       |     |   |  |   |     |   |  |  |        |   |  |   |      |   |  |   |         |  

The accompanying notes are an integral part of
these financial statements.

F-7



---



##### Table of Contents



ALLOY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY


For the Year Ended January 31,
2004


(Amounts in thousands, except share
data)


|                                                                                                                                       |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |          |        |  |       |        |   |  |   |      |   |  |  |          |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ----------- | --- | -------- |  | ------------- | ------- | --------------- |  | ------ | -------- | ------ |  | ----- | ------ | - |  | - | ---- | - |  |  | -------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                                                       |  |              |            |            |  |             |     |          |  |               |         | Accumulated     |  |        |          |        |  |      
|                                                                                                                                       |  |              |            |            |  |             |     |          |  | Other         |         |                 |  |       
|                                                                                                                                       |  | Common Stock |            | Additional |  |             |     |          |  | Comprehensive |         | Treasury Shares |  |       
|                                                                                                                                       |  |              |            | Paid-In    |  | Accumulated |     | Deferred |  | Income        |         |                 |  |       
|                                                                                                                                       |  | Shares       |            | Amount     |  | Capital     |     | Deficit  |  | Compensation  |         | (Loss)          |  | Shares |          | Amount |  | Total
|                                                                                                                                       |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |          |        |  |      
|Balance, January 31, 2003                                                                                                              |  |              | 40,082,024 |            |  | $           | 401 |          |  | $             | 396,963 |                 |  | $      | (51,955  | )      |  | $     |       |   |  | $ | 164  |   |  |  | (8,275   | ) |  | $ | (131   | ) |  | $ | 345,442 |  
|Issuance of common stock for acquisitions of
    businesses                                                                            |  |              | 2,165,048  |            |  |             | 21  |          |  |               | 11,150  |                 |  |        |         |        |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 11,171  |  
|Repurchase of common stock                                                                                                             |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |         |        |  |       |       |   |  |   |     |   |  |  | (600,000 | ) |  |   | (2,984 | ) |  |   | (2,984  | )
|Revision of accrued issuance costs in connection
    with public and private stock offerings                                           |  |              |           |            |  |             |    |          |  |               | 102     |                 |  |        |         |        |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 102     |  
|Amortization of deferred compensation                                                                                                  |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |         |        |  |       | 12     |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 12      |  
|Issuance of common stock pursuant to the exercise
    of options and common stock purchases under the employee stock
    purchase plan |  |              | 193,190    |            |  |             | 2   |          |  |               | 854     |                 |  |        |         |        |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 856     |  
|Issuance of common stock for conversion of
    Series B Convertible Preferred Stock                                                    |  |              | 261,505    |            |  |             | 3   |          |  |               | 3,057   |                 |  |        |         |        |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 3,060   |  
|Issuance of restricted stock                                                                                                           |  |              |           |            |  |             |    |          |  |               | 2,385   |                 |  |        |         |        |  |       | (2,385 | ) |  |   |     |   |  |  |         |   |  |   |       |   |  |   |        |  
|Amortization of restricted stock                                                                                                       |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |         |        |  |       | 989    |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | 989     |  
|Issuance of stock options to employees                                                                                                 |  |              |           |            |  |             |    |          |  |               | 27      |                 |  |        |         |        |  |       | (27    | ) |  |   |     |   |  |  |         |   |  |   |       |   |  |   |        |  
|Accretion of discount and dividends on
    Series B Convertible Preferred Stock                                                        |  |              |           |            |  |             |    |          |  |               | (1,944  | )               |  |        |         |        |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | (1,944  | )
|Net loss                                                                                                                               |  |              |           |            |  |             |    |          |  |               |        |                 |  |        | (75,215  | )      |  |       |       |   |  |   |     |   |  |  |         |   |  |   |       |   |  |   | (75,215 | )
|Unrealized loss on available-for-sale marketable
    securities, net of realized gains and losses                                      |  |              |           |            |  |             |    |          |  |               |        |                 |  |        |         |        |  |       |       |   |  |   | (194 | ) |  |  |         |   |  |   |       |   |  |   | (194    | )
|                                                                                                                                       |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |          |        |  |       |        |   |  |   |      |   |  |  |          |   |  |   |        |   |  |   |         |  
|Balance, January 31, 2004                                                                                                              |  |              | 42,701,767 |            |  | $           | 427 |          |  | $             | 412,594 |                 |  | $      | (127,170 | )      |  | $     | (1,411 | ) |  | $ | (30  | ) |  |  | (608,275 | ) |  | $ | (3,115 | ) |  | $ | 281,295 |  
|                                                                                                                                       |  |              |            |            |  |             |     |          |  |               |         |                 |  |        |          |        |  |       |        |   |  |   |      |   |  |  |          |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of
these financial statements.

F-8



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##### Table of Contents



ALLOY, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                      |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |         |        |         |         |  
|------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------ | -------- | ------- | ------ | ------- | ------- | -
|                                      |                                                                                              |                                                                                             
|                                      |                                                                                              | For the Years Ended January 31,                                                             
|                                      |                                                                                              |                                                                                             
|                                      |                                                                                              | 2002                                                                                         |                                               | 2003                                      |        | 2004  
|                                      |                                                                                              |                                                                                              |                                               |                                           |        |       
|                                      |                                                                                              |                                                                                             
|                                      |                                                                                              | (Amounts in thousands)                                                                      
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        
|                                      | Net (loss) income                                                                            |                                                                                              | $                                             | (15,600                                   | )      |        | $       | 23,295  |        |        | $        | (75,215 | )     
|                                      | Adjustments to reconcile net (loss) income to net
    cash provided by operating activities: |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |         |       
|                                      |                                                                                              | Depreciation and amortization                                                                |                                               |                                           | 21,053 |        |         |         | 9,819  |        |          |         | 14,620 |        
|                                      |                                                                                              | Deferred tax (benefit) expense                                                               |                                               |                                           |       |        |         |         | (4,606 | )      |          |         | 4,606  |        
|                                      |                                                                                              | Impairment of goodwill and other indefinite-lived
    intangible assets                      |                                               |                                           |       |        |         |         |       |        |          |         | 60,638 |        
|                                      |                                                                                              | Impairment of long-lived assets                                                              |                                               |                                           |       |        |         |         |       |        |          |         | 1,315  |        
|                                      |                                                                                              | Amortization of debt issuance costs                                                          |                                               |                                           |       |        |         |         |       |        |          |         | 281    |        
|                                      |                                                                                              | Realized (gain) loss on sales of marketable
    securities and write-off of investments, net |                                               |                                           | (658   | )      |         |         | 97     |        |          |         | 247    |        
|                                      |                                                                                              | Compensation charge for restricted stock                                                     |                                               |                                           |       |        |         |         |       |        |          |         | 989    |        
|                                      |                                                                                              | Compensation charge for issuance of stock options
    and common stock                       |                                               |                                           | 209    |        |         |         | 31     |        |          |         | 12     |        
|                                      |                                                                                              | Income tax benefit of exercised options on
    current year tax provision                    |                                               |                                           |       |        |         |         | 1,224  |        |          |         |       |        
|                                      |                                                                                              | Changes in operating assets and
    liabilities  net of effect of business acquisitions:    |                                               |                                           |        |        |         |         |        |        |          |         |        |        
|                                      |                                                                                              |                                                                                              | Accounts receivable, net                      |                                           |        | (2,443 | )       |         |        | (1,376 | )        |         |        | (69     | )      
|                                      |                                                                                              |                                                                                              | Inventories                                   |                                           |        | 94     |         |         |        | (5,918 | )        |         |        | 16,032  |        
|                                      |                                                                                              |                                                                                              | Prepaid catalog costs                         |                                           |        | (456   | )       |         |        | 238    |          |         |        | 831     |        
|                                      |                                                                                              |                                                                                              | Other assets                                  |                                           |        | 841    |         |         |        | 743    |          |         |        | 1,785   |        
|                                      |                                                                                              |                                                                                              | Accounts payable, accrued expenses, and other |                                           |        | (752   | )       |         |        | 601    |          |         |        | (14,070 | )      
|                                      |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        
|                                      |                                                                                              |                                                                                              |                                               | Net cash provided by operating activities |        |        | 2,288   |         |        |        | 24,148   |         |        |         | 12,002  |  
|                                      |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        
|                                      | Purchase of marketable securities                                                            |                                                                                              |                                               | (28,299                                   | )      |        |         | (77,000 | )      |        |          | (52,198 | )     
|                                      | Proceeds from the sales and maturities of
    marketable securities                          |                                                                                              |                                               | 29,080                                    |        |        |         | 69,000  |        |        |          | 50,640  |       
|                                      | Capital expenditures                                                                         |                                                                                              |                                               | (2,087                                    | )      |        |         | (4,317  | )      |        |          | (3,767  | )     
|                                      | Sale and disposal of capital assets                                                          |                                                                                              |                                               |                                          |        |        |         | 490     |        |        |          | 45      |       
|                                      | Cash paid in connection with acquisitions of
    businesses, net of cash acquired            |                                                                                              |                                               | (45,760                                   | )      |        |         | (89,580 | )      |        |          | (66,728 | )     
|                                      | Purchase of minority investment and other assets                                             |                                                                                              |                                               | (200                                      | )      |        |         | (750    | )      |        |          |        |       
|                                      | Purchase of mailing lists, domain names and
    marketing rights                             |                                                                                              |                                               | (883                                      | )      |        |         | (4,850  | )      |        |          | (29     | )     
|                                      |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        
|                                      |                                                                                              |                                                                                              |                                               | Net cash used in investing activities     |        |        | (48,149 | )       |        |        | (107,007 | )       |        |         | (72,037 | )
|                                      |                                                                                              |                                                                                              |                                               |                                           |        |        |         |         |        |        |          |        

F-9



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##### Table of Contents



ALLOY, INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS(Continued)


|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |        |       |        | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------- | ----------------------------------------- | ------ | --- | ------ | ------- | ------ | --- | ------ | ------ | ------ | ----- | ------ | 
|                                                                          |                                                                                                        |                                
|                                                                          |                                                                                                        | For the Years Ended January 31,
|                                                                          |                                                                                                        |                                
|                                                                          |                                                                                                        | 2002                            |                                           | 2003   |     | 2004  
|                                                                          |                                                                                                        |                                 |                                           |        |     |       
|                                                                          |                                                                                                        |                                
|                                                                          |                                                                                                        | (Amounts in thousands)         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                     |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          | Net proceeds from sale of common stock, net of
    expenses paid                                       |                                 |                                           | 60,127 |     |        |         | 54,887 |     |        |        |       |      
|                                                                          | Net proceeds from sale of Series A and
    Series B Redeemable Convertible Preferred Stock             |                                 |                                           | 26,710 |     |        |         |       |     |        |        |       |      
|                                                                          | Gross proceeds from issuance of Debentures                                                             |                                 |                                           |       |     |        |         |       |     |        |        | 69,300 |      
|                                                                          | Debt issuance costs                                                                                    |                                 |                                           |       |     |        |         |       |     |        |        | (2,506 | )    
|                                                                          | Exercise of options and warrants and common stock
    purchases under the employee stock purchase plan |                                 |                                           | 11,467 |     |        |         | 1,924  |     |        |        | 856    |      
|                                                                          | Repurchase of common stock                                                                             |                                 |                                           |       |     |        |         |       |     |        |        | (2,984 | )    
|                                                                          | Payment of credit facility                                                                             |                                 |                                           |       |     |        |         |       |     |        |        | (5,000 | )    
|                                                                          | Net payments under line of credit agreements                                                           |                                 |                                           |       |     |        |         |       |     |        |        | (6,937 | )    
|                                                                          | Payment of bank-loan                                                                                   |                                 |                                           |       |     |        |         |       |     |        |        | (38    | )    
|                                                                          | Payments of capitalized lease obligation                                                               |                                 |                                           | (163   | )   |        |         | (383   | )   |        |        | (570   | )    
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          |                                                                                                        |                                 | Net cash provided by financing activities |        |     | 98,141 |         |        |     | 56,428 |        |        |       | 52,121 | 
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|Net increase (decrease) in cash and cash
    equivalents                  |                                                                                                        |                                 | 52,280                                    |        |     |        | (26,431 | )      |     |        | (7,914 | )     
|CASH AND CASH EQUIVALENTS, beginning of year                              |                                                                                                        |                                 | 9,338                                     |        |     |        | 61,618  |        |     |        | 35,187 |       
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|CASH AND CASH EQUIVALENTS, end of year                                    |                                                                                                        | $                               | 61,618                                    |        |     | $      | 35,187  |        |     | $      | 27,273 |       
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    FINANCING ACTIVITY: |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          | Cash paid during the year for:                                                                         |                                 |                                           |        |     |        |         |        |     |        |        |        |      
|                                                                          |                                                                                                        | Interest                        |                                           | $      | 8   |        |         | $      | 1   |        |        | $      | 338   |       
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          |                                                                                                        | Income taxes                    |                                           | $      | 323 |        |         | $      | 441 |        |        | $      | 1,628 |       
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                              |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          | Issuance of common stock and warrants in
    connection with acquisitions (Note 3)                     |                                 | $                                         | 96,648 |     |        | $       | 11,429 |     |        | $      | 11,171 |      
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       
|                                                                          | Conversion of Series A and Series B
    Redeemable Convertible Preferred Stock into common stock       |                                 | $                                         | 8,903  |     |        | $       | 1,596  |     |        | $      | 3,060  |      
|                                                                          |                                                                                                        |                                 |                                           |        |     |        |         |        |     |        |        |       

The accompanying notes are an integral part of
these financial statements.

F-10



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##### Table of Contents



ALLOY, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |         
|-- | --------
|1. | Business

Alloy, Inc. (Alloy or the
Company) is a media, marketing services, retail and
direct marketing company targeting Generation Y, the more
than 60 million boys and girls in the United States between
the ages of 10 and 24. Alloys business integrates direct
mail catalogs, retail stores, print media, display media boards,
websites, on-campus marketing programs and promotional events,
and features a portfolio of brands that are well known among
Generation Y consumers and advertisers. Alloy reaches a
significant portion of Generation Y consumers through its
various media assets, marketing service programs, direct
marketing activities, and retail stores. As a result, Alloy is
able to offer advertisers targeted access to the youth market.
Additionally, Alloys assets have enabled it to build a
comprehensive database that includes information about
approximately 26 million Generation Y consumers.

Alloy generates revenue from three principal
sources  direct marketing, retail stores, and
sponsorship and other activities. From its catalogs and
websites, Alloy sells branded products in key Generation Y
spending categories, including apparel, action sports equipment,
and accessories directly to the youth market. Alloys
retail stores segment derives revenue primarily from the sale of
apparel, accessories and home furnishings to consumers. Alloy
generates sponsorship and other activities revenues largely from
traditional, blue chip advertisers that seek highly targeted,
measurable and effective marketing programs to reach
Generation Y. Advertisers can reach Generation Y
through integrated marketing programs that include its catalogs,
books, websites, and display media boards, as well as through
promotional events, product sampling, college and high school
newspaper advertising, customer acquisition programs and other
marketing services that Alloy provides.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |            
| | -----------
| | Fiscal Year

Alloys fiscal year ends on
January 31. All references herein to a particular
fiscal year refer to the year ended January 31 following
the particular year (e.g., fiscal 2003 refers to the
fiscal year ended January 31, 2004).



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Alloy and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.



| |                    
| | -------------------
| | Revenue Recognition

Direct marketing revenues are recognized at the
time products are shipped to customers, net of any promotional
price discounts and an allowance for sales returns. The
allowance for sales returns is estimated based upon Alloys
direct marketing return policy, historical experience and
evaluation of current sales and returns trends. Direct marketing
revenues also include shipping and handling billed to customers.
Shipping and handling costs are reflected in Selling and
Marketing expenses in the accompanying consolidated statements
of operations, and approximated $11.8 million,
$14.7 million and $12.9 million for fiscal 2001,
fiscal 2002, and fiscal 2003, respectively.

Retail stores revenues are recognized at the
point of sale, net of any promotional price discounts and an
allowance for sales returns. The allowance for sales returns is
estimated based upon Alloys retail return policy,
historical experience and evaluation of current sales and
returns trends.

Sponsorship revenues consist primarily of
advertising provided for third parties in Alloys media
properties or via marketing events or programs that it executes
on the advertisers behalf. Revenue under these
arrangements is recognized, net of the commissions and agency
fees, when the underlying advertisement is

F-11



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

published, broadcast or otherwise delivered
pursuant to the terms of each arrangement. Delivery of
advertising in other media forms is completed either in the form
of the display of an impression or based upon the
provision of contracted services in connection with the
marketing event or program. In-catalog print advertising
revenues are recognized as earned pro rata on a monthly basis
over the estimated economic life of the catalog. Billings in
advance of advertising delivery are deferred until earned.

Other activities revenues consist of book
development/publishing revenue and other service contracts. The
revenues earned in connection with publishing activities are
recognized upon publication of such property. Any amounts
received prior to publication are treated as advances, and
classified as a current liability. Contract revenues are
recognized upon the delivery of the contracted services and when
no significant company performance obligation remains. Billings
recorded in advance of provision of services are deferred until
the services are provided. Service revenues are recognized as
the contracted services are rendered. In the case of
Alloys advertising placement services, revenue is reported
in accordance with Emerging Issues Task Force Issue
No. 99-19, Reporting Revenue Gross as a Principal
versus Net as an Agent. Alloy conducts an analysis of its
pricing and collection risk, among other tests, to determine
whether revenue should be reported on a gross or net basis.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |                  
| | -----------------
| | Reclassifications

Certain balances in the prior year have been
reclassified to conform to the presentation adopted in the
current year.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents consist of highly liquid
investments with original maturities of three months or less.



| |                
| | ---------------
| | Restricted Cash

Restricted cash represents the cash that backs
Alloys line of credit. Restricted cash classified in
Current Assets on the consolidated balance sheets totaled
approximately $3.3 million as of January 31, 2004.
Restricted cash primarily represents collateral for standby
letters of credit issued in connection with the Companys
merchandise sourcing activities. The restriction will be removed
after the letters of credit expire or are cancelled.



| |                      
| | ---------------------
| | Marketable Securities

Alloy accounts for investments in marketable
securities in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. Alloy has evaluated its investment policies
and determined that all of its investment securities are to be
classified as available-for-sale. Available-for-sale securities
are reported at fair value, with the unrealized gains and losses
reported in stockholders equity, under the caption
accumulated other comprehensive (loss) income.
Realized gains and losses and declines in value judged to be
other-than-temporary are recognized on the specific
identification method in the period in which they occur.

F-12



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

Alloy determines its allowance for doubtful
accounts based on the evaluation of the aging of its accounts
receivable and a customer-by-customer analysis of its high-risk
customers. Its reserves contemplate its historical loss rate on
receivables, specific customer situations, and the economic
environments in which the Company operates.



| |                             
| | ----------------------------
| | Unbilled Accounts Receivable

At January 31, 2003 and January 31,
2004, accounts receivable included approximately
$4.0 million and $4.3 million, respectively, of
unbilled receivables, which are a normal part of the
Companys sponsorship business, as some receivables are
normally invoiced in the month following the completion of the
earnings process.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

With respect to its sponsorship and other
activities segment, Alloy provides media, marketing, advertising
placement and event promotion services to over 1,500 clients who
operate in a variety of industry sectors. Alloy extends credit
to qualified clients in the ordinary course of its business.
With respect to its direct marketing and retail stores segments,
Alloy collects payment for all merchandise, and performs credit
card authorizations and check verifications for all customers
prior to shipment or delivery. Due to the diversified nature of
its client base, it does not believe that it is exposed to a
concentration of credit risk, as its largest client accounted
for less than 2% of its fiscal 2003 consolidated revenue.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The Company believes that the carrying amounts
for cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and other current liabilities and
obligations under capital leases approximate their fair value
due to the short maturities of these instruments. Marketable
securities, including derivative financial instruments, are
carried at their fair values in the accompanying consolidated
balance sheets. Alloy calculates the fair value of financial
instruments and includes this additional information in the
notes to financial statements when the fair value is different
than the book value of those financial instruments. When the
fair value approximates book value, no additional disclosure is
made. Alloy uses quoted market prices whenever available to
calculate these fair values. When quoted market prices are not
available, Alloy uses standard pricing models for various types
of financial instruments which take into account the present
value of estimated future cash flows.



| |            
| | -----------
| | Inventories

Inventories, which consist of finished goods, are
stated at the lower of cost (first-in, first-out method) or
market value.



| |              
| | -------------
| | Catalog Costs

Catalog costs consist of catalog production and
mailing costs. Catalog costs are capitalized and charged to
expense over the expected future revenue stream, which is
principally three to five months from the date the catalogs are
mailed. Deferred catalog costs as of January 31, 2003 and
2004 were approximately $2.1 million and $2.0 million
respectively. Catalog costs expensed for the years ended
January 31, 2002, 2003 and 2004 were approximately
$20.6 million, $25.9 million, and $32.0 million,
respectively, and are included within Selling and Marketing
expenses in the accompanying consolidated statements of
operations.

F-13



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost and
depreciated or amortized using the straight-line method over the
following estimated useful lives:

|                                            |  |                  
|------------------------------------------- |  | -----------------
|Computer equipment under capitalized leases |  | Life of the lease
|Leasehold improvements                      |  | Life of the lease
|Computer software and equipment             |  | 3 to 5 Years     
|Machinery and equipment                     |  | 3 to 10 Years    
|Office furniture and fixtures               |  | 5 to 10 Years    
|Building                                    |  | 40 Years         
|Land                                        |  | N/A              



| |                                   
| | ----------------------------------
| | Goodwill and Other
    Intangibles

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill
acquired resulting from a business combination for which the
acquisition date was after June 30, 2001 is no longer
amortized, but is periodically tested for impairment.
Additionally, in accordance with SFAS No. 141,
Business Combinations, Alloy allocates the cost of
an acquired entity to the assets acquired and liabilities
assumed based on their estimated fair values including other
identifiable intangible assets, as applicable, such as trade
names, customer relationships and client lists. Information
about acquisitions can be found in Note 3.



| |                                                                     
| | --------------------------------------------------------------------
| | Goodwill and Other Indefinite-Lived
    Intangible Assets Impairment

Goodwill impairment is determined using a
two-step process. The first step of the goodwill impairment test
is designed to identify potential impairment by comparing the
fair value of a reporting unit (generally, the Companys
reportable segment) with its net book value (or carrying
amount), including goodwill. If the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The implied fair
value of goodwill is determined in the same manner as the amount
of goodwill recognized in a business combination. That is, the
fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting unit had been acquired in
a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The
impairment test for other indefinite-lived intangible assets
consists of a comparison of the fair value of the intangible
asset with its carrying value. If the carrying value of the
intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess.

Determining the fair value of a reporting unit
under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities
of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is
judgmental in nature and often involves the use of significant
estimates and assumptions. Similarly, estimates and assumptions
are used in determining the fair value of other intangible
assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and
also the magnitude of any such charge. To assist in the process
of determining goodwill impairment, the Company obtains
appraisals from an independent valuation firm. In addition to
the use of an independent valuation firm, the Company performs
internal valuation analyses and considers other market
information that is publicly available. Estimates of fair value
are primarily determined using discounted cash flows and market
comparisons. These approaches use significant

F-14



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimates and assumptions including projected
future cash flows (including timing), discount rates reflecting
the risk inherent in future cash flows, perpetual growth rates,
determination of appropriate market comparables and the
determination of whether a premium or discount should be applied
to comparables.

In fiscal 2003, Alloy recorded a
$56.7 million charge to reduce the carrying value of
goodwill and an approximate $1.9 million and
$2.0 million charge to reduce the carrying value of other
indefinite-lived intangible assets in the direct marketing
segment and sponsorship and other segment, respectively. The
combined $60.6 million charge is reflected as a component
of operating income in the accompanying consolidated statement
of operations. Any subsequent adjustment to purchase price
related to the dELiA*s acquisition due to the finalization of
the preacquisition contingencies related to taxes (other than
income taxes) and other matters for which the Company is
awaiting additional information for its completion of purchase
price allocation, may result in an adjustment to the impairment
charge. Additional information about SFAS No. 142 is
contained in Note 4.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which the
Company adopted in 2002, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of the
asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the assets. Assets to be
disposed of would be separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets
and liabilities of a disposed group classified as held for sale
would be presented separately in the appropriate asset and
liability sections of the balance sheet.

Pursuant to SFAS No. 144, the Company
performed an analysis of the recoverability of certain
long-lived assets during the fourth quarter of fiscal 2003 and
recorded an asset impairment charge of $1.3 million in the
direct marketing segment. Alloy determined that the carrying
amounts of the non-competition agreement of $144,000 related to
Old Glory, the website of $31,000 related to Old Glory and the
non-competition agreement of $23,000 related to
Girlfriends LA were impaired as the Company plans to
discontinue marketing its Old Glory and Girlfriends LA
brands. In addition, the future cash flows related to Dans
Comp could not fully support the carrying amount of Dans
Comps long-lived assets. As a result, an impairment charge
related to the non-competition agreement of $209,000, property
and equipment of $159,000, and mailing list of $749,000 was
recorded.



| |                                                   
| | --------------------------------------------------
| | Stock Option and Employee Stock Purchase
    Plans

The Company accounts for its stock option plans
in accordance with the provisions of Accounting Principles Board
Opinion No. 25 (APB No. 25),
Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the then current market
price of the underlying stock exceeded the exercise price. The
Company discloses the pro forma effect on net income (loss) and
earnings per share as required by SFAS No. 123,
Accounting for Stock-Based Compensation, recognizing
as expense over the vesting period the fair value of all
stock-based awards on the date of grant.

Shares issued under the employee stock purchase
plan are considered noncompensatory for the determination of
compensation expense under APB No. 25, but the fair value
of the benefit related to acquiring such shares at a discount is
included as compensation expense in the pro forma disclosures
required by SFAS No. 123.

F-15



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reflects the effect on net
(loss) income and (loss) earnings per share attributable to
common stockholders if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based
employee compensation. These pro forma effects may not be
representative of future amounts since the estimated fair value
of stock options on the date of grant is amortized to expense
over the vesting period and additional options may be granted in
future years.

|                                                                                                                                  |             |                        |         |       |   |      |         |      |  |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---------------------- | ------- | ----- | - | ---- | ------- | ---- |  | - | ------- | ----- | -
|                                                                                                                                  |             |                       
|                                                                                                                                  |             | Year Ended January 31,
|                                                                                                                                  |             |                       
|                                                                                                                                  |             | 2002                   |         | 2003  |   | 2004
|                                                                                                                                  |             |                        |         |       |   |     
|                                                                                                                                  |             |                       
|                                                                                                                                  |             | (Amounts in thousands,
|                                                                                                                                  |             | except per share data)
|Net (loss) income                                                                                                                 |             | $                      | (15,600 | )     |   | $    | 23,295  |      |  | $ | (75,215 | )    
|Add: Total stock-based employee compensation
    costs included in reported net (loss) income, net of taxes                       |             |                        | 209     |       |   |      | 31      |      |  |   | 1,001   |      
|Less: Total stock-based employee compensation
    costs determined under fair value based method for all awards,
    net of taxes |             |                        | (10,356 | )     |   |      | (14,290 | )    |  |   | (12,965 | )    
|                                                                                                                                  |             |                        |         |       |   |      |         |      |  |   |         |      
|Pro forma net (loss) income                                                                                                       |             | $                      | (25,747 | )     |   | $    | 9,036   |      |  | $ | (87,179 | )    
|                                                                                                                                  |             |                        |         |       |   |      |         |      |  |   |         |      
|Basic (loss) earnings attributable to common
    stockholders per share:                                                          |             |                        |         |       |   |      |         |      |  |   |         |      
|                                                                                                                                  | As reported |                        | $       | (1.02 | ) |      | $       | 0.55 |  |   | $       | (1.87 | )
|                                                                                                                                  | Pro forma   |                        | $       | (1.42 | ) |      | $       | 0.18 |  |   | $       | (2.16 | )
|Diluted (loss) earnings attributable to common
    stockholders per share:                                                        |             |                        |         |       |   |      |         |      |  |   |         |      
|                                                                                                                                  | As reported |                        | $       | (1.02 | ) |      | $       | 0.53 |  |   | $       | (1.87 | )
|                                                                                                                                  | Pro forma   |                        | $       | (1.42 | ) |      | $       | 0.17 |  |   | $       | (2.16 | )

SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure
an amendment of FASB Statement No. 123, which was
issued in December 2002, provides alternative methods of
transition for an entity that changes to the fair value based
method of accounting for stock-based compensation and requires
more prominent disclosure of the pro forma impact on earnings
per share. The disclosure portion of the statement was adopted
in 2002. On April 22, 2003, the FASB determined that fair
value of stock-based compensation should be recognized as a cost
in the financial statements. On March 31, 2004, the FASB
issued an exposure draft that provides for a comment period,
which ends June 30, 2004. The proposed statement would be
effective for awards that are granted, modified, or settled in
fiscal years beginning after December 15, 2004. The Company
has not yet determined the impact of this statement on its
consolidated financial position, results of operations or cash
flows.

See Note 14 for additional information
concerning the Companys stock option and employee stock
purchase plans.



| |             
| | ------------
| | Income Taxes

The Company accounts for deferred income taxes
using the asset and liability method of accounting. Under the
asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Deferred tax assets and liabilities are measured using rates
expected to be in effect when those assets and liabilities are
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
that period that includes the enactment date.

F-16



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Net (Loss) Earnings Per Share

Basic and diluted net (loss) earnings per share
are computed and presented in accordance with
SFAS No. 128, Earnings per Share. Basic
net (loss) earnings per share was determined by dividing net
loss by the weighted-average number of common shares outstanding
during each period. Contingently issuable shares are excluded
from the calculation of basic net loss per share until the
contingency related to the shares is resolved. Diluted net
income per share of the Company includes the impact of certain
potentially dilutive securities. However, diluted net loss per
share excludes the effects of potentially dilutive securities
because inclusion of these instruments would be anti-dilutive. A
reconciliation of the net income available for common
stockholders and the number of shares used in computing basic
and diluted net (loss) income per share is provided in
Note 16.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

In July 2000, Alloy purchased put options and
sold call options (referred to as collars) on a total of
600,000 shares of Liberty Digital, Inc. (LDIG)
common stock, representing a portion of LDIG common stock
already owned by Alloy as available-for-sale marketable
securities. The options allowed Alloy to sell LDIG common stock
at various prices and were designated as a hedge against
potential declines in the fair value of LDIG common stock. The
options were to expire on various dates beginning January 2003
through July 2003. The net fair values of the options were
$9.3 million on January 31, 2001 and they were
classified as available-for-sale marketable securities with a
corresponding unrealized gain included in accumulated other
comprehensive income in the accompanying consolidated balance
sheet.

Alloy adopted the provisions of
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and its related
amendments in SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging
Activities, and SFAS No. 149 Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities. These pronouncements require companies to
reflect the fair value of all derivative instruments, including
those embedded in other contracts, as assets or liabilities in
an entitys balance sheet. Changes in fair value of
derivative instruments are generally reflected in earnings, with
the exception of certain hedging transactions, for which the
change in fair value may be accounted for as a component of
other comprehensive income, provided that certain criteria are
met as specified in these pronouncements.

In connection with the adoption of
SFAS No. 133 on February 1, 2001, Alloy
transferred 628,305 shares of Liberty Digital, Inc. common
stock together with the equity collars on 600,000 shares of
Liberty Digital common stock that were previously designated as
fair value hedges and classified as available-for-sale, to the
classification of trading securities, pursuant to
SFAS No. 133. The impact of the transfer was to
recognize earnings of $854,000 as of February 1, 2001,
representing the net unrealized holding gain for the securities
as of February 1, 2001. In March 2001, Alloy sold its
Liberty Digital shares and unwound the collars, which generated
a net loss on the sales of the securities of $196,000 resulting
in a total net gain on the sales of securities for fiscal 2001
of $658,000. As of January 31, 2004, Alloy does not have
any freestanding derivative instruments, or instruments with
embedded derivative features.



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

The following pronouncements impact Alloys
financial statements as discussed below:

SFAS No. 146
Accounting for Costs Associated With Exit or Disposal
Activities requires costs associated with exit or disposal
activities to be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002. Alloy adopted
SFAS No. 146 effective January 1, 2003. The
impact of SFAS No. 146 on Alloys consolidated
financial position is further described in Note 18 to the
financial statements.

F-17



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosure  An Amendment of FASB
No. 123 was issued as an amendment to FASB
No. 123, Accounting for Stock-Based
Compensation and provides alternative methods of
transition for an entity that voluntarily changes to the fair
value based method of accounting for stock-based employee
compensation (in accordance with SFAS No. 123). Alloy
has applied the accounting provisions of APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and Alloy has made the annual pro forma
disclosures of the effect of adopting the fair value method of
accounting for employee stock options and similar instruments as
required by SFAS No. 123 and permitted under
SFAS No. 148. SFAS No. 148 also requires pro
forma disclosure to be provided on a quarterly basis. Alloy
began the quarterly disclosures for the first quarter of fiscal
2003 and will continue to closely monitor developments in the
area of accounting for stock-based compensation. On
April 22, 2003, the FASB determined that fair value of
stock-based compensation should be recognized as a cost in the
financial statements. On March 31, 2004, the FASB issued an
exposure draft that provides for a comment period, which ends
June 30, 2004. The proposed statement would be effective
for awards that are granted, modified, or settled in fiscal
years beginning after December 15, 2004. The Company has
not yet determined the impact of this statement on its
consolidated financial position, results of operations or cash
flows.

SFAS
No. 149
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and clarifies
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133. This Statement
is effective for contracts entered into or modified after
June 30, 2003, except in certain circumstances, and for
hedging relationships designated after June 30, 2003. This
statement did not have a material impact on the Companys
financial position or operating results.

SFAS No. 150
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances),
whereby many of those instruments were previously classified as
equity. SFAS No. 150 is effective for all freestanding
financial instruments entered into or modified after
May 31, 2003 otherwise it became effective at the beginning
of the first interim period beginning after June 15, 2003.
SFAS No. 150 is to be implemented by reporting the
cumulative effect of a change in accounting principle for
financial instruments created before the issuance of
SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Alloy adopted the provisions of
SFAS No. 150 effective August 1, 2003. The
adoption of SFAS No. 150 did not have an impact on the
financial statements as Alloys Series B Convertible
Preferred Stock, which is the only applicable financial
instrument of Alloy, is outside the scope of
SFAS No. 150.

FASB Interpretation
No. 45
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including the Indirect Guarantees of
Indebtedness to Others (FIN No. 45). FIN
No. 45 sets forth the disclosures to be made by a guarantor
in its interim and annual financial statements about its
obligations under guarantees issued. FIN No. 45 also
clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement
provisions of FIN No. 45 are applicable to guarantees
issued or modified after December 31, 2002. The application
of FIN No. 45 did not result in additional disclosure in
Alloys fiscal 2003 financial statements and did not have a
material impact on its fiscal 2003 consolidated results of
operations or financial position.

FASB Interpretation
No. 46
Consolidation of Variable Interest Entities.
(FIN 46). FIN 46 requires the
consolidation of entities that cannot finance their activities
without the support of other parties and that lack certain
characteristics of a controlling interest, such as the ability
to make decisions about the entitys activities via voting
or similar rights. An entity that consolidates a variable
interest entity is the primary beneficiary of the entitys
activities. FIN 46 applied immediately to variable interest
entities created

F-18



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

after January 31, 2003, and required
application in the first period ending after December 15,
2003 for entities in which an enterprise holds a variable
interest entity that it acquired before February 1, 2003.
The adoption of FIN 46 did not have a material impact on
the Companys consolidated results of operations or
financial position. In December of 2003, the FASB revised
FIN 46 (FIN 46R), which delayed the
required implementation date for variable interest entities
until the end of the first reporting period that ends after
March 15, 2004. FIN 46R applies to our financial
statements for the period ending April 30, 2004. We do not
believe the adoption of FIN 46R will have a material impact
on our consolidated results of operations or financial position.

Emerging Issues Task Force
02-16 Accounting by
a Customer (including a Reseller) for Certain Consideration
Received from a Vendor (EITF 02-16).
EITF 02-16 addresses the accounting by a reseller for
consideration received from a vendor. A consensus was reached
that cash consideration is presumed to be a reduction in the
price of a vendors product that should be recognized as a
reduction of cost of sales. However, this presumption can be
overcome when the consideration received is for the
reimbursement of specific, identifiable and incremental costs of
the reseller. In that event, the consideration, subject to a
threshold, is recognized as a reduction in selling, general and
administrative expenses. The provisions of EITF 02-16 are
effective for all new arrangements, or modifications to existing
arrangements, entered into after December 31, 2002. The
release did not have a significant effect on the Companys
results of operations or financial position.

Emerging Issues Task Force
02-17 Recognition of
Customer Relationship Intangible Assets Acquired in a Business
Combination (EITF 02-17). EITF 02-17
may impact Alloys acquisitions as it establishes that
customer lists, customer contracts and the related customer
relationships are intangible assets to be recognized as assets
apart from goodwill. Effective October 25, 2002, the
Company adopted the provisions of this EITF for the business
combinations consummated and goodwill impairment test performed.
As a result of adopting these provisions, Alloy identified
customer relationships as part of its application of purchase
accounting. This identification of customer relationships
reduced the amount of recorded goodwill relating to the
acquisitions. As a result, the amount of goodwill subject to the
annual impairment test was reduced.

Emerging Issues Task Force
03-01 The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments (EITF 03-01). EITF 03-01
establishes additional disclosure requirements for each category
of FAS 115 investments in a loss position. EITF 03-01
requires disclosure of the aggregate amount of unrealized
losses, and the aggregate related fair value of their
investments with unrealized losses. Those investments are
required to be segregated by those in a loss position for less
than twelve months and those in a loss position for greater than
twelve months. Additionally, certain qualitative disclosures
should be made to clarify a circumstance whereby an
investments fair value that is below cost is not
considered other-than-temporary. The disclosure requirements
were effective for the fiscal year ended January 31, 2004.
The accounting guidance of EITF 03-01 will be effective for
reporting periods beginning after June 15th and is not
expected to have a material effect on the Companys results
of operations or financial position.

In January 2003, the SEC issued a new disclosure
regulation, Conditions for Use of Non-GAAP Financial
Measures (Regulation G), which is
effective for all public disclosures and filings made after
March 28, 2003. Regulation G requires public companies
that disclose or release information containing financial
measures that are not in accordance with GAAP to include in the
disclosure or release a presentation of the most directly
comparable GAAP financial measure and a reconciliation of the
disclosed non-GAAP financial measure to the most directly
comparable GAAP financial measure. Alloy became subject to
Regulation G in fiscal 2003 and believes that it is in
compliance in all material respects with the new disclosure
requirements.

F-19



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|3. | Acquisitions

Alloy completed four acquisitions during fiscal
2000, seven acquisitions during fiscal 2001, six acquisitions
during fiscal 2002 and three significant acquisitions during
fiscal 2003. Alloys acquisition strategy is to purchase
companies that can reach Generation Y consumers through
media, marketing services and/or direct marketing. In executing
its acquisition strategy, one of the primary drivers in
identifying and executing a specific transaction is the
existence of, or the ability to, expand the Companys wide
range of media and marketing assets so that advertisers and
marketers will have the ability to target the approximate
60 million Generation Y consumers in many different
ways.

All of the acquisitions have been accounted for
under the purchase method of accounting. The assets acquired and
liabilities assumed were recorded at estimated fair values as
determined by Alloys management based on available
information and on assumptions as to future operations. The
results of operations of the acquired businesses are included in
the consolidated financial statements from the dates of
acquisition. The allocations of the purchase prices for the
fiscal 2003 acquisitions are subject to revision based on the
final determination of the fair value of the assets acquired and
liabilities assumed as of the dates of acquisition. For all
acquisitions that involve escrowed shares, the value of these
shares has been included in the initial purchase price
allocation. Any subsequent changes are reflected as an
adjustment to goodwill. The amounts allocated to goodwill for
certain acquisitions may also change in the future pending the
outcome of other contingent arrangements, such as earn-outs, as
described below. A description of Alloys significant
acquisitions completed during fiscal 2001, fiscal 2002 and
fiscal 2003 is as follows:



| |                                         
| | ----------------------------------------
| | Significant Fiscal 2001
    acquisitions



| |                    
| | -------------------
| | CASS Communications

In August 2001, Alloy acquired of all the capital
stock of CASS Communications, Inc. (CASS), an
Illinois corporation, founded in 1968, with a principal place of
business in Evanston, Illinois. CASSs contracted media and
promotional channels, including college and high school
newspapers, reach students on college and high school campuses
via outdoor and display media assets, and provide marketers with
full service event production and promotion capability. To
complete the acquisition of CASS, Alloy exchanged
1,720,392 shares of unregistered common stock, having a
value of $23.1 million, of which 258,059 shares were
placed in escrow in accordance with the terms of the related
agreements; $9.7 million in cash; additional shares of
Alloy common stock if CASS exceeded certain earnings targets
over the 12-month period following the acquisition; and a
contingent note, which note expired in April 2002 without
payments being made thereunder. In addition, no additional
shares of Alloy common stock were issued since the earnings
targets were not reached over the 12-month period following the
acquisition. In August 2002, the 258,059 shares of common
stock held in escrow were released. Cash paid during fiscal 2002
for costs related to the acquisition was approximately
$1.8 million. The total cost of this acquisition, including
acquisition costs was $35.4 million. In connection with the
acquisition, Alloy has recorded approximately $36.2 million
of goodwill representing the net excess of purchase price over
the fair value of the net assets acquired. In addition, Alloy
identified specific intangible assets consisting of the
following (amounts in thousands):

|                           |  |            |     |             |  |  |            | 
|-------------------------- |  | ---------- | --- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |     | Useful Life
|                           |  |            |     |            
|Non-competition agreements |  |            | 200 |             |  |  | 3 years    | 
|Trademarks                 |  |            | 400 |             |  |  | indefinite | 
|                           |  |            |     |             |  |  |            | 
|                           |  | $          | 600 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
recorded a $400,000 impairment of

F-20



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CASSs trademarks. The results of
CASSs operations have been included in Alloys
financial statements since August 2001.



| |                  
| | -----------------
| | Dans Competition

In September 2001, Alloy acquired of all of the
outstanding capital stock of Dans Competition, Inc.
(Dans Comp), an Indiana corporation,
incorporated in 1996, with a principal place of business in
Mt. Vernon, Indiana. Dans Comp is a direct marketer
to teenage boys and a distribution brand in the action sports
market. To complete the acquisition of Dans Comp, Alloy
exchanged 2,081,037 shares of unregistered common stock,
having a value of $25.2 million (or $12.34 per share
on the transaction date) of which 370,370 shares were
placed in escrow in accordance with the terms of the related
agreements; $11.0 million in cash; and two contingent
promissory notes, which notes expired in November 2002 without
any payments being made thereunder. The escrowed shares were
released in October 2002. An additional 37,037 shares were
issued in connection with a final working capital determination.
The resulting additional purchase price of $721,000
($19.47 per share) has been allocated to goodwill. The
escrowed shares were released in October 2002. The total cost of
this acquisition, including acquisition costs, was
$37.0 million. In connection with the acquisition, Alloy
has recorded approximately $27.8 million of goodwill
representing the net excess of purchase price over the fair
value of the net assets acquired. In addition, Alloy identified
specific intangible assets consisting of the following (amounts
in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 50    |             |  |  | 3 years    | 
|Mailing lists              |  |            | 3,500 |             |  |  | 4 years    | 
|Non-competition agreements |  |            | 800   |             |  |  | 5 years    | 
|Trademark                  |  |            | 1,600 |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 5,950 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
recorded an approximate $1.1 million impairment charge
related to Dans Comps trademark. In addition, Alloy
determined that the non-competition agreement, property and
equipment, and mailing list were impaired and recorded charges
for $209,000, $159,000 and $749,000, respectively. The results
of Dans Comps operations have been included in
Alloys financial statements since September 2001.



| |          
| | ---------
| | 360 Youth

In November 2001, Alloy acquired substantially
all of the assets of the 360 Youth business of MarketSource
Corporation, a Delaware corporation. The 360 Youth business
focuses on providing marketing and promotional services targeted
at teenagers and young adults, including acquiring and placing
advertising and other promotional materials or otherwise
targeting the Generation Y market in all forms of media,
and developing, staging and promoting events targeted at the
Generation Y market. Alloy acquired 360 Youth to
expand its range of media assets. To complete the acquisition of
360 Youth, Alloy exchanged 1,839,520 shares of
unregistered common stock, having a value of $30.1 million
of which 283,286 shares were placed in escrow in accordance
with the terms of the related agreements; $13.4 million in
cash; and warrants to purchase up to 110,000 shares of
Alloy common stock. In accordance with its terms, one warrant
may be exercised at a price of $13.78 per share with
respect to 50,000 shares of common stock on or after
November 26, 2002 and prior to November 26, 2007, and
with respect to the remaining 50,000 shares of common
stock, on or after November 26, 2003 and prior to
November 26, 2008. The second warrant for
10,000 shares is currently exercisable at a price of
$13.78 per share and expires on November 25, 2007. The
fair value of the warrants was established as $950,000 using the
Black-Scholes option-pricing model with the following
assumptions:

F-21



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

dividend yield of 0%, volatility of 50%,
risk-free interest rate of 4.61% and expected life of
6.5 years. In fiscal 2002, Alloy paid $645,000 in cash as
additional consideration under the earnout provisions of the
acquisition agreement. Additionally in March 2003, Alloy issued
as additional consideration 1,545,947 shares of Alloy
common stock, having a value of $7.7 million because
360 Youth exceeded certain earnings targets over the
12-month period following the acquisition. The escrowed shares
were released in November 2002 after the resolution of all
acquisition-related contingencies. The total cost of this
acquisition, including acquisition costs, was
$53.5 million. In connection with the acquisition, Alloy
has recorded approximately $50.1 million of goodwill
representing the net excess of purchase price over the fair
value of the net assets acquired. In addition, Alloy identified
specific intangible assets consisting of the following (amounts
in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 10    |             |  |  | 3 years    | 
|Non-competition agreements |  |            | 1,300 |             |  |  | 3 years    | 
|Trademarks                 |  |            | 1,400 |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 2,710 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. The results of 360 Youths operations have
been included in Alloys financial statements since
November 2001.



| |                                         
| | ----------------------------------------
| | Significant Fiscal 2002
    Acquisitions



| |               
| | --------------
| | Girlfriends LA

In March 2002, Alloy acquired GFLA, Inc.
(Girlfriends LA), a California corporation that
is a direct marketer of apparel to young girls. Alloy acquired
all of the issued and outstanding shares of capital stock of
Girlfriends LA for $7.2 million in cash, of which
$875,000 initially was placed in escrow ($100,000 was released
to Alloy to cover certain acquisition liabilities in May, 2002
and in June 2003 $530,000 was released to the sellers and
$245,000 was returned to Alloy), 20,000 shares of Alloy
common stock valued at $283,000, and warrants to purchase up to
100,000 shares of Alloy common stock valued at $691,000.
Total cash paid including acquisition costs, net of cash
acquired approximated $7.8 million. The total cost of this
acquisition, including acquisition costs, was $8.8 million.
Alloy recorded approximately $7.5 million of goodwill
representing the net excess of purchase price over the fair
value of the net assets acquired. In addition, Alloy identified
specific intangible assets consisting of the following (amounts
in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 146   |             |  |  | 2 years    | 
|Mailing lists              |  |            | 550   |             |  |  | 4 years    | 
|Non-competition agreements |  |            | 60    |             |  |  | 3 years    | 
|Trademarks                 |  |            | 490   |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 1,246 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
determined that the trademarks of $490,000 were impaired. In
addition, Alloy determined that the remaining carrying amount of
the non-competition agreement of $23,000 was impaired. As a
result, Alloy recognized the impairment expense in its fourth
quarter of fiscal 2003. The website was previously fully
amortized and the mailing lists will be used by the Alloy and
dELiA*s direct marketing brands. The results of
Girlfriends LAs operations have been included in
Alloys financial statements since March 2002. Alloy plans
to discontinue the production of the Girlfriends LA catalog
during fiscal 2004.

F-22



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Student Advantage Marketing Group

In May 2002, Alloy acquired substantially all of
the assets of the events and promotions business of Student
Advantage, Inc. in exchange for $6.5 million in cash, and
up to $1.5 million of future performance-based cash
consideration. The $1.5 million cash performance-based
consideration has been paid in full. In addition, the parties
agreed to extend an escrow created in connection with another
acquisition between them and allow Alloy to make claims against
such escrow for breaches by Student Advantage of the Student
Advantage Marketing Group Asset Purchase Agreement, which escrow
has been released. Total cash paid including acquisition costs,
net of cash acquired, approximated $8.2 million. The total
cost of this acquisition, including acquisition costs, was
$8.2 million. Alloy has recorded approximately
$7.0 million of goodwill representing the net excess of
purchase price over the fair value of the net assets acquired.
In addition, Alloy identified specific intangible assets
consisting of the following (amounts in thousands):

|                           |  |            |       |             |  |  |           | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | --------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Client relationships       |  |            | 1,600 |             |  |  | 2.5 years | 
|Non-competition agreements |  |            | 100   |             |  |  | 3 years   | 
|                           |  |            |       |             |  |  |           | 
|                           |  | $          | 1,700 |             |  |  |           | 

The results of Student Advantage Marketing
Groups operations have been included in Alloys
financial statements since May 2002.



| |                   
| | ------------------
| | Market Place Media

In July 2002, Alloy acquired all of the issued
and outstanding stock of MPM Holding, Inc.
(MPM Holding), whose sole operating asset was
Armed Forces Communications, Inc., d/b/a/ Market Place Media, a
major media placement and promotions company serving the
college, multi-cultural and military markets through print,
broadcast, out-of-home and event media. As part of the
Companys acquisition strategy, Market Place Media expands
the Companys media assets and provides advertisers with a
greater access to the Generation Y consumer. Alloy paid
$48.0 million in cash to complete the acquisition, subject
to adjustment based upon the outcome of a final working capital
audit, $4.3 million of which was placed into escrow as
security for the satisfaction of the indemnification obligations
of MPM Holdings, and $1.0 million of which was placed into
a supplemental escrow as security for the collection of certain
accounts receivable of Armed Forces Communications, Inc. The
$5.3 million placed into escrow was released during 2003.
Alloy paid $1.5 million as part of the working capital
adjustment during the second half of fiscal 2002 and paid an
additional $1.6 million as a working capital adjustment in
May 2004. As of January 31, 2004, total cash paid including
acquisition costs, net of cash acquired approximated
$50.1 million. The total cost of this acquisition,
including acquisition costs and net of cash acquired, was
$52.2 million. Alloy has recorded approximately
$43.7 million of goodwill representing the net excess of
purchase price over the fair value of the net assets acquired.
In addition, Alloy identified specific intangible assets
consisting of the following (amounts in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 50    |             |  |  | 3 years    | 
|Client relationships       |  |            | 2,400 |             |  |  | 3 years    | 
|Non-competition agreements |  |            | 700   |             |  |  | 3 years    | 
|Trademarks                 |  |            | 4,700 |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 7,850 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
recorded an approximate $1.0 million

F-23



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

impairment charge of Market Place Medias
trademarks. The results of Market Place Medias operations
have been included in Alloys financial statements since
July 2002.



| |                           
| | --------------------------
| | YouthStream Media Networks

In August 2002, Alloy acquired substantially all
of YouthStream Media Networks, Inc.s high school and
college targeted marketing and media assets, which included over
20,000 out-of-home display media boards in high schools and on
college campuses, media placement capabilities in college and
high school newspapers, and event marketing services and
contracts. Alloy paid $7.0 million in cash to complete the
acquisition, subject to adjustment based upon the outcome of a
final working capital audit. Alloy paid $231,000 for the working
capital adjustment during fiscal 2002. Total cash paid including
acquisition costs, net of cash acquired approximated
$7.5 million. The total cost of this acquisition, including
acquisition costs, was $7.5 million. Alloy has recorded
approximately $4.5 million of goodwill representing the net
excess of purchase price over the fair value of the net assets
acquired. In addition, Alloy identified specific intangible
assets consisting of the following (amounts in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 25    |             |  |  | 2.5 years  | 
|Client relationships       |  |            | 800   |             |  |  | 2.5 years  | 
|Non-competition agreements |  |            | 100   |             |  |  | 1.5 years  | 
|Trademarks                 |  |            | 135   |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 1,060 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
recorded a $135,000 impairment charge of YouthStream Media
Networks trademark. The results of YouthStream Media
Networks operations have been included in Alloys
financial statements since August 2002.



| |                         
| | ------------------------
| | Career Recruitment Media

In November 2002, Alloy acquired substantially
all of the assets of Career Recruitment Media, Inc., an Illinois
corporation (CRM). Alloy paid approximately
$2.3 million in cash and issued a warrant valued at $43,000
to purchase up to 10,000 shares of Alloy common stock to
complete the acquisition. In connection with this acquisition,
Alloy was given the option to purchase the remaining assets of
Career Recruitment Media, which option it exercised in September
2003. Total cash paid including acquisition costs, net of cash
acquired approximated $2.4 million. The total cost of this
acquisition, including acquisition costs, was $2.5 million.
Alloy has recorded approximately $2.2 million of goodwill
representing the net excess of purchase price over the fair
value of the net assets acquired. In addition, Alloy identified
specific intangible assets consisting of the following (amounts
in thousands):

|                           |  |            |     |             |  |  |            | 
|-------------------------- |  | ---------- | --- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |     | Useful Life
|                           |  |            |     |            
|Websites                   |  | $          | 50  |             |  |  | 33 months  | 
|Client relationships       |  |            | 100 |             |  |  | 33 months  | 
|Non-competition agreements |  |            | 50  |             |  |  | 30 months  | 
|Trademarks                 |  |            | 75  |             |  |  | indefinite | 
|                           |  |            |     |             |  |  |            | 
|                           |  | $          | 275 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. The results of CRMs operations have been
included in Alloys financial statements since November
2002.

F-24



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |          
| | ---------
| | Old Glory

In December 2002, Alloy acquired Old Glory
Boutique Distributing, Inc. (Old Glory), a
Connecticut corporation, a direct marketer of music and
entertainment lifestyle products including apparel, accessories
and collectibles through direct mail catalogs and the internet.
Alloy paid approximately $9.6 million to complete the
acquisition, of which $1.2 million was held in escrow. In
April 2004, $300,000 of such escrowed cash was released to Alloy
and the remaining escrowed funds were released to the sellers.
Total cash paid including acquisition costs, net of cash
acquired, approximated $10.1 million. The total cost of
this acquisition, including acquisition costs, net of cash
acquired, approximated $10.1 million. Alloy has recorded
approximately $9.5 million of goodwill representing the net
excess of purchase price over the fair value of the net assets
acquired. In addition, Alloy identified specific intangible
assets consisting of the following (amounts in thousands):

|                           |  |            |        |             |  |  |            | 
|-------------------------- |  | ---------- | ------ | ----------- |  |  | ---------- | 
|                           |  | Fair Value |        | Useful Life
|                           |  |            |        |            
|Websites                   |  | $          | 50     |             |  |  | 3 years    | 
|Mailing lists              |  |            | 450    |             |  |  | 7 years    | 
|Non-competition agreements |  |            | 200    |             |  |  | 4 years    | 
|Trademarks                 |  |            | 300    |             |  |  | indefinite | 
|                           |  |            |        |             |  |  |            | 
|                           |  | $          | 1, 000 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. During the fourth quarter of fiscal 2003, Alloy
recorded an approximate $300,000 impairment charge related to
Old Glorys trademarks. In addition, Alloy determined that
the carrying amounts of the non-competition agreement of
$144,000 and the website of $31,000 were impaired. As a result,
Alloy recognized the associated expense of $175,000 in its
fourth quarter of fiscal 2003. The mailing lists will be used by
the other Alloy direct marketing brands. The results of Old
Glorys operations have been included in Alloys
financial statements since December 2002. Alloy plans to
discontinue the production of the Old Glory catalog during
fiscal 2004.



| |                                         
| | ----------------------------------------
| | Significant Fiscal 2003
    Acquisitions



| |                                                                      
| | ---------------------------------------------------------------------
| | OCM Direct, Inc., Collegiate Carpets, Inc. and
    Carepackages, Inc.

In May 2003, Alloy acquired substantially all of
the assets and liabilities of OCM Direct, Inc., Collegiate
Carpets, Inc. and Carepackages, Inc., wholly owned subsidiaries
of Student Advantage, Inc., which companies were in the business
of direct marketing to college students and their parents a
variety of college or university endorsed products. These
businesses have been transferred to Alloys wholly owned
subsidiaries, On Campus Marketing, LLC, Collegiate Carpets, LLC
and Carepackages, LLC. Alloy paid approximately
$15.6 million in cash $1.0 million of which was placed
into escrow, and assumed a $5.0 million credit facility to
complete the acquisition. As of January 31, 2004, the total
cash paid including acquisition costs, net of cash acquired,
approximated $15.4 million. The total cost of this
acquisition, net of cash acquired and including acquisition
costs, is estimated to be $15.5 million. In addition, Alloy
paid off the $5.0 million credit facility during the second
quarter. Alloy has recorded approximately $16.3 million of
goodwill representing the excess of

F-25



---



##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase price over the fair value of the net
assets acquired. In addition, Alloy identified specific
intangible assets consisting of the following (amounts in
thousands):

|                           |  |            |       |             |  |  |               | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ------------- | 
|                           |  | Fair Value |       | Useful Life
|                           |  |            |       |            
|Websites                   |  | $          | 425   |             |  |  | 3 years       | 
|Customer relationships     |  |            | 2,000 |             |  |  | 8 years       | 
|Non-competition agreements |  |            | 811   |             |  |  | 48-58  months | 
|Trademarks                 |  |            | 900   |             |  |  | indefinite    | 
|                           |  |            |       |             |  |  |               | 
|                           |  | $          | 4,136 |             |  |  |               | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. The operations of this acquisition have been included
in Alloys financial statements since May 2003.



| |        
| | -------
| | dELiA*s

In September 2003, Alloy acquired all of the
outstanding stock of dELiA*s Corp. (dELiA*s), a
multi-channel retailer that markets apparel, accessories and
home furnishings to teenage girls and young women. dELiA*s
reaches its customers through the dELiA*s catalog,
www.dELiAs.com and 61 dELiA*s retail stores. Through the
acquisition of dELiA*s, Alloy seeks to generate financial
savings by consolidating operations and eliminating duplicate
functions, improve catalog circulation productivity by combining
name databases and establish a retail store presence that may be
expanded over time. These key transaction drivers supported the
acquisition price and the associated goodwill resultant from the
purchase of dELiA*s. Alloy paid approximately $50.1 million
to complete the acquisition. As of January 31, 2004, the
total cash paid including acquisition costs, net of cash
acquired, approximated $46.2 million. The total cost of
this acquisition, net of cash acquired and including acquisition
costs, was approximately $47.0 million, of which
$43.6 million was recorded as goodwill. Estimated
acquisition costs consist of professional fees of approximately
$2.8 million and other costs of approximately $600,000. The
results of dELiA*s operations have been included in
Alloys financial statements since September 2003.



| |                             
| | ----------------------------
| | Allocation of Purchase Price

The purchase price has been allocated based on an
estimate of the fair value of assets acquired and liabilities
assumed. To the extent that the Companys estimates need to
be adjusted for the preacquisition contingencies predominately
related to taxes (other than income taxes) and other matters for
which the Company is awaiting additional information for its
completion of purchase price allocation, it will make such
adjustments.

F-26



---



##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price for dELiA*s was allocated as
follows (in thousands):

|                                                                                                                        |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Book value of net liabilities acquired                                                                                  |  | $ | (3,767 | )
|Adjusted for write-off of intangible assets and
    deferred financing cost                                             |  |   | 230    |  
|                                                                                                                        |  |   |        |  
|Adjusted book value of net liabilities acquired                                                                         |  |   | (3,997 | )
|Remaining allocation:                                                                                                   |  |   |        |  
|Intangible assets(a)                                                                                                    |  |   | 4,615  |  
|Goodwill(b)                                                                                                             |  |   | 43,616 |  
|Restructuring costs(c)                                                                                                  |  |   | (6,523 | )
|Adjustment to fair value property, plant and
    equipment                                                              |  |   | (2,542 | )
|Reduction of deferred revenues related to a
    licensing agreement that has no future legal performance
    obligation |  |   | 16,500 |  
|Reduction of deferred rent liability in
    conjunction with the fair valuation of leases                               |  |   | 3,173  |  
|Fair value of leasehold liabilities                                                                                     |  |   | (1,360 | )
|                                                                                                                        |  |   |        |  
|Total purchase price allocation                                                                                         |  | $ | 53,482 |  

Since Alloys initial allocation of the
purchase price in the third quarter of fiscal 2003, its
estimates have been revised. The adjusted estimated book value
of net liabilities assumed increased $3.2 million primarily
related to sales tax liabilities. In addition, estimates have
been revised for intangible assets ($285,000 decrease),
property, plant, and equipment ($2.5 million decrease),
leasehold liabilities ($1.4 million increase), legal costs
($114,000 decrease) and goodwill ($7.3 million increase).
These revisions reflect Alloys greater understanding of
dELiA*s net liabilities since the acquisition date.

(a) Trademarks are deemed to have indefinite
lives and therefore are not amortized but are reviewed for
impairment annually. The fair values of the amortizable
intangible assets are as follows (in thousands):

|                           |  |            |       |             |  |  |            | 
|-------------------------- |  | ---------- | ----- | ----------- |  |  | ---------- | 
|                           |  |            |       | Useful Life
|                           |  | Fair Value |       | (Years)    
|                           |  |            |       |            
|Websites                   |  | $          | 1,300 |             |  |  | 3          | 
|Mailing Lists              |  |            | 25    |             |  |  | 6          | 
|Non-competition Agreements |  |            | 390   |             |  |  | 4.25       | 
|Leasehold Interests        |  |            | 300   |             |  |  | 6-7        | 
|Trademarks                 |  |            | 2,600 |             |  |  | indefinite | 
|                           |  |            |       |             |  |  |            | 
|                           |  | $          | 4,615 |             |  |  |            | 

(b) In accordance with the requirements of
SFAS No. 142, Goodwill and Other Intangible
Assets, the goodwill and the acquired indefinite-lived
intangibles associated with the acquisition will not be
amortized. Goodwill resulting from this acquisition was
allocated to the direct marketing segment during the fourth
quarter of fiscal 2003.

(c) As of the completion of the acquisition,
Alloy management began to assess and formulate a plan to exit
certain activities of dELiA*s. The plan, as initially adopted,
specifically identified significant actions to be taken to
complete the plan and activities of dELiA*s that will not be
continued, including the method of disposition and location of
those activities. At the completion of the acquisition, Alloy
was contractually obligated to pay certain termination costs to
three executives of dELiA*s. Management has estimated
liabilities related to the net present value of these
termination costs to be approximately $2.7 million, of
which approximately $1.3 million has been paid as of
January 31, 2004. The remaining costs have resulted in an
increase to short-term and long-term liabilities, which are
estimated to be approximately $100,000 and $1.3 million,
respectively. In addition, upon completion of its assessment,
management estimated $3.8 million

F-27



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of store exit and lease costs and severance
related to 17 dELiA*s retail stores. These expenses are accrued
as current liabilities as of January 31, 2004.

The following dELiA*s condensed balance sheet
discloses the amounts assigned to each major asset and liability
at September 4, 2003, the date of acquisition (amounts in
thousands):

|                                               |  |          |        | 
|---------------------------------------------- |  | -------- | ------ | 
|                                               |  | As of   
|                                               |  | 9/4/2003
|                                               |  |         
|ASSETS                                        
|Current assets                                 |  | $        | 28,652 | 
|Fixed assets                                   |  |          | 20,161 | 
|Other assets                                   |  |          | 130    | 
|Intangible assets                              |  |          | 4,615  | 
|Goodwill                                       |  |          | 43,616 | 
|                                               |  |          |        | 
|Total Assets                                   |  | $        | 97,174 | 
|LIABILITIES                                   
|Accounts payable and other current liabilities |  | $        | 32,409 | 
|Short-term debt                                |  |          | 6,911  | 
|Notes payable                                  |  |          | 2,987  | 
|Other liabilities                              |  |          | 1,385  | 
|                                               |  |          |        | 
|Total Liabilities                              |  | $        | 43,692 | 
|                                              
|NET ASSETS ACQUIRED                            |  | $        | 53,482 | 
|                                               |  |          |        | 



| |                
| | ---------------
| | CollegeClub.com

In November 2003, Alloy acquired CollegeClub.com,
a website providing e-mail, clubs, chat, personal sites, student
discounts and advice. Alloy paid approximately $800,000 to
complete the acquisition and could pay an additional $400,000 of
cash consideration based on future performance. The total
purchase price of this acquisition, including acquisition costs,
was approximately $1.3 million. Total cash paid, including
acquisition costs, approximated $853,000. Alloy has recorded
approximately $1.1 million of goodwill representing the net
excess of purchase price over the fair value of the net assets
acquired. In addition, Alloy identified specific intangible
assets consisting of the following (amounts in thousands):

|                           |  |            |     |             |  |  |            | 
|-------------------------- |  | ---------- | --- | ----------- |  |  | ---------- | 
|                           |  | Fair Value |     | Useful Life
|                           |  |            |     |            
|Websites                   |  | $          | 260 |             |  |  | 3 years    | 
|Customer relationships     |  |            | 150 |             |  |  | 3 years    | 
|Non-competition agreements |  |            | 40  |             |  |  | 2 years    | 
|Trademarks                 |  |            | 25  |             |  |  | indefinite | 
|                           |  |            |     |             |  |  |            | 
|                           |  | $          | 475 |             |  |  |            | 

Trademarks are deemed to have indefinite lives
and therefore are not amortized but are reviewed for impairment
annually. The results of CollegeClub.coms operations have
been included in Alloys financial statements since
November 2003.



| |                                              
| | ---------------------------------------------
| | Unaudited Pro Forma Financial
    Information

The following unaudited pro forma financial
information presents the consolidated operations of the Company
as if the fiscal 2003 acquisition of dELiA*s had occurred as of
the beginning of fiscal 2003 for the

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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

fiscal 2003 results and as of the beginning of
fiscal 2002 for the fiscal 2002 results. The unaudited pro forma
information excludes the impact of all other fiscal 2003
acquisitions since they are not considered to be material to the
Companys consolidated financial statements.

The following unaudited pro forma financial
information is provided for informational purposes only and
should not be construed to be indicative of the Companys
consolidated results of operations had the acquisition been
consummated on the date assumed and does not project the
Companys results of operations for any future period:

|                                                                                                                             |         |                       |         |       |   |   |          |       |  
|---------------------------------------------------------------------------------------------------------------------------- | ------- | --------------------- | ------- | ----- | - | - | -------- | ----- | -
|                                                                                                                             |         |                      
|                                                                                                                             |         | For the Years Ended  
|                                                                                                                             |         | January 31,          
|                                                                                                                             |         |                      
|                                                                                                                             |         | 2003                  |         | 2004 
|                                                                                                                             |         |                       |         |      
|                                                                                                                             |         |                      
|                                                                                                                             |         | (In thousands, except
|                                                                                                                             |         | per share data)      
|                                                                                                                             |         | (Unaudited)          
|Net revenue                                                                                                                  |         | $                     | 436,962 |       |   | $ | 439,460  |      
|Net (loss) before cumulative effect of change in
    accounting principle                                                    |         |                       | (13,540 | )     |   |   | (100,318 | )    
|Net income (loss)                                                                                                            |         |                       | 1,843   |       |   |   | (100,318 | )    
|Preferred stock dividend and accretion                                                                                       |         |                       | 2,100   |       |   |   | 1,944    |      
|Net income (loss) available to common stockholders                                                                           |         | $                     | (257    | )     |   | $ | (102,262 | )    
|Net (loss) attributable to common stockholders
    before cumulative effect of change in accounting principle per
    share: |         |                       |         |       |   |   |          |      
|                                                                                                                             | Basic   |                       | $       | (0.41 | ) |   | $        | (2.48 | )
|                                                                                                                             | Diluted |                       | $       | (0.41 | ) |   | $        | (2.48 | )
|Net income (loss)available to common stockholders
    per share:                                                             |         |                       |         |       |   |   |          |      
|                                                                                                                             | Basic   |                       | $       | (0.01 | ) |   | $        | (2.48 | )
|                                                                                                                             | Diluted |                       | $       | (0.01 | ) |   | $        | (2.48 | )

The unaudited pro forma financial information
above reflects the following pro forma adjustments:



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 1. Elimination of historical amortization
    expense recorded by legacy dELiA*s related to definite-lived
    intangible assets.
|
| | 2. Recording of:                                                                                                                 



| |   |                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | amortization expense related to the estimated
    fair value of identified intangible assets from the purchase
    price allocation, which are being amortized over their estimated
    useful lives which range from 2 to 6 years, of
    approximately $529,000 in fiscal 2002 and $309,000 in fiscal
    2003;
|
| |  | the adjustment to increase interest expense from
    borrowings to finance the dELiA*s acquisition by approximately
    $2.9 million in fiscal 2002 and $1.7 million in fiscal
    2003;                                                                                                                         
|
| |  | the adjustment to decrease deferred rent expense
    by approximately $447,000 in fiscal 2002 and $266,000 in fiscal
    2003.                                                                                                                                                                                   
|
| |  | the adjustment to decrease depreciation expense
    by approximately $500,000 in fiscal 2002 and $292,000 in fiscal
    2003.                                                                                                                                                                                    



|   |                               
|-- | ------------------------------
|4. | Goodwill and Intangible Assets

In June 2001, the FASB issued
SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives that were acquired after
June 30, 2001 are no longer amortized but instead evaluated
for impairment at least annually. With respect to goodwill and

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ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

intangibles with indefinite lives that were
acquired prior to July 1, 2001, Alloy adopted the
nonamortization provisions of SFAS No. 142 as of
February 1, 2002.

The following table reconciles previously
reported net income as if the provisions of
SFAS No. 142 had been in effect for the year ended
January 31, 2002:

|                                                                                            |                     |                        |         |       |  
|------------------------------------------------------------------------------------------- | ------------------- | ---------------------- | ------- | ----- | -
|                                                                                            |                     | Year Ended            
|                                                                                            |                     | January 31, 2002      
|                                                                                            |                     |                       
|                                                                                            |                     | (Amounts in thousands 
|                                                                                            |                     | except per share data)
|Reported net (loss)                                                                         |                     | $                      | (15,600 | )    
|Add back: goodwill amortization                                                             |                     |                        | 17,741  |      
|                                                                                            |                     |                        |         |      
|                                                                                            | Adjusted net income |                        | $       | 2,141 |  
|                                                                                            |                     |                        |         |      
|Non-cash charge attributable to beneficial
    conversion feature of preferred stock issued |                     |                        | 6,745   |      
|Preferred stock dividends and accretion of
    discount                                     |                     |                        | 3,013   |      
|                                                                                            |                     |                        |         |      
|Net (loss) attributable to common stockholders                                              |                     | $                      | (7,617  | )    
|                                                                                            |                     |                        |         |      
|Basic (loss) attributable to common stockholders
    per share
    as reported              |                     | $                      | (1.02   | )    
|                                                                                            | as adjusted         |                        | $       | (0.31 | )
|Diluted (loss) attributable to common
    stockholders per share
    as reported            |                     | $                      | (1.02   | )    
|                                                                                            | as adjusted         |                        | $       | (0.31 | )



| |                                                                  
| | -----------------------------------------------------------------
| | Impairment of Goodwill and Indefinite-Lived
    Intangible Assets

Due to the decline in catalog response rates,
operating profit and cash flows were lower than expected during
fiscal 2003. Based on that trend, as well as the addition and
integration of dELiA*s, the cash flow projections could not
support the goodwill within the direct marketing reporting unit.
During the fourth quarter of fiscal 2003, a goodwill impairment
charge of $56.7 million was recognized since the carrying
amount of the reporting units goodwill exceeded the
implied fair value of the goodwill. Any subsequent adjustment to
purchase price related to the dELiA*s acquisition resultant from
the finalization of the preacquisition contingencies related to
taxes (other than income taxes) and certain other matters for
which the Company is awaiting additional information for its
completion of purchase price allocation, may result in an
adjustment to the impairment charge. Also, during the fourth
quarter of fiscal 2003, an impairment charge for trademarks of
$1.9 million and $2.0 million was recognized in the
direct marketing segment and the sponsorship and other segment,
respectively. In the direct marketing segment, a trademark
impairment charge of $1.1 million was recognized since the
carrying value of the reporting units trademarks was
greater than the fair value of the reporting units
trademarks primarily as a result of lower future estimated
operating profit and cash flows related to the impaired
trademarks. An additional $800,000 impairment charge was
recognized due to the discontinued use of certain trademarks. In
the sponsorship and other segment, an impairment charge of
$1.0 million was recorded since the carrying value of the
reporting units trademarks was greater than the fair value
of the reporting units trademarks primarily as a result of
lower future estimated operating profit and cash flows related
to the impaired trademarks. An additional $1.0 impairment charge
was recognized due to the discontinued use of certain
trademarks. Estimates of trademark fair value were determined
using the Income Approach. Refer to Note 2, Summary
of Accounting Policies, Goodwill and Other Indefinite-Lived
Intangible Assets Impairment, for further details
regarding the procedure for evaluating goodwill for impairment.

F-30



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ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
for the years ended January 31, 2003 and January 31,
2004 are as follows (in thousands):

|                                                                         |  |      |         |      |  |   |         |  
|------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                                                         |  | 2003 |         | 2004
|                                                                         |  |      |         |     
|Gross balance, beginning of year                                         |  | $    | 205,120 |      |  | $ | 296,999 |  
|Goodwill acquired during the year                                        |  |      | 91,879  |      |  |   | 61,191  |  
|Impairment of goodwill                                                   |  |      |        |      |  |   | (56,748 | )
|                                                                         |  |      |         |      |  |   |         |  
|Gross balance, end of the year                                           |  |      | 296,999 |      |  |   | 301,442 |  
|Accumulated goodwill amortization, prior to the
    adoption of SFAS 142 |  |      | (26,646 | )    |  |   | (26,646 | )
|                                                                         |  |      |         |      |  |   |         |  
|Net balance, end of year                                                 |  | $    | 270,353 |      |  | $ | 274,796 |  
|                                                                         |  |      |         |      |  |   |         |  



| |                                                     
| | ----------------------------------------------------
| | Intangible Assets Related to Businesses
    Acquired

The acquired intangible assets as of
January 31, 2003 and January 31, 2004 were as follows:

|                                  |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 
|--------------------------------- |  | ---------------------- | ------ | ---------------- |  | -------- | ----- | ------------ |  | ---------------- | ------ |  |  | - | ------ |  |  |  | --- | 
|                                  |  |                        |        |                 
|                                  |  | January 31, 2003       |        | January 31, 2004
|                                  |  |                        |        |                 
|                                  |  | Gross                  |        |                  |  | Gross    |       |              |  | Weighted Average
|                                  |  | Carrying               |        | Accumulated      |  | Carrying |       | Accumulated  |  | Amortization    
|                                  |  | Amount                 |        | Amortization     |  | Amount   |       | Amortization |  | Period (Years)  
|                                  |  |                        |        |                  |  |          |       |              |  |                 
|                                  |  |                        |        |                 
|                                  |  | (Amounts in thousands) |        |                 
|Amortizable intangible assets:    |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 
|Mailing Lists                     |  | $                      | 4,553  |                  |  | $        | 1,314 |              |  | $                | 3,858  |  |  | $ | 2,416  |  |  |  | 4.3 | 
|Noncompetition Agreements         |  |                        | 3,695  |                  |  |          | 1,074 |              |  |                  | 5,060  |  |  |   | 2,527  |  |  |  | 3.5 | 
|Marketing Rights                  |  |                        | 5,650  |                  |  |          | 3,052 |              |  |                  | 5,650  |  |  |   | 5,650  |  |  |  | 2.3 | 
|Websites                          |  |                        | 841    |                  |  |          | 331   |              |  |                  | 2,890  |  |  |   | 961    |  |  |  | 2.9 | 
|Client Relationships              |  |                        | 4,000  |                  |  |          | 378   |              |  |                  | 7,405  |  |  |   | 2,441  |  |  |  | 3.9 | 
|Leasehold Interests               |  |                        |       |                  |  |          |      |              |  |                  | 300    |  |  |   | 41     |  |  |  | 6.5 | 
|                                  |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 
|                                  |  | $                      | 18,739 |                  |  | $        | 6,149 |              |  | $                | 25,163 |  |  | $ | 14,036 |  |  |  |     | 
|                                  |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 
|Nonamortizable intangible assets: |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 
|Trademarks                        |  | $                      | 9,625  |                  |  |          |      |              |  | $                | 9,535  |  |  |   |       |  |  |  | N/A | 
|                                  |  |                        |        |                  |  |          |       |              |  |                  |        |  |  |   |        |  |  |  |     | 

In April 2002, Alloy purchased a two-year right
to serve as the agent for selling, licensing and marketing the
media assets of a youth-oriented website for $4.9 million.
This contract was amended in May 2003 and then again in
September 2003. The Company continually monitors the operating
performance of this contract. In the fourth quarter of fiscal
2002, it was determined that based on future cash flow
estimates, the carrying amount of the marketing rights would not
be recoverable over the remaining term of the contract.
Accordingly, an impairment charge of $1.0 million was
recognized as additional amortization expense in the sponsorship
segment, representing the excess of the net carrying amount of
the intangible asset over its estimated fair value, determined
as the discounted estimated future cash flows under the
contract. This two-year right was fully amortized by the end of
the fourth quarter of fiscal 2003.

The weighted average amortization period for
acquired intangible assets subject to amortization is
approximately 3.4 years. The amortization expense related
to fiscal 2001, 2002 and 2003 was $574,000, $5.6 million
and $7.9 million, respectively. The estimated remaining
amortization expense for each of the next five fiscal years
through the fiscal year ending January 31, 2009 is
$5.4 million, $2.7 million, $1.1 million,
$543,000 and $398,000, respectively.

F-31



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ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                     
|-- | --------------------
|5. | Exchange Transaction

On April 14, 2000, Alloy entered into a
financial and strategic arrangement with Liberty Digital, Inc.
(LDIG), a subsidiary of Liberty Media Group, Inc.
(LMG), which has since been merged into LMG
pursuant, to which Alloy issued 2,922,694 shares of its
common stock having a fair value of $35.1 million, or
$12 per share, to a subsidiary of LDIG in exchange for
$10 million in cash and 837,740 shares of LDIG common
stock having a fair value of $19.5 million. Alloy
subsequently collared 600,000 LDIG shares (see Note 2
Derivative Instruments and Hedging Activities). As
of January 31, 2004, Alloy holds no LDIG or LMG shares. The
Alloy common shares issued to LDIG represented 19.9% of the then
issued and outstanding common stock of Alloy immediately prior
to the transaction. Subsequent to the transaction, LDIG had a
16.6% ownership interest in Alloys issued and outstanding
common stock. As a result of subsequent issuances of Alloy
common stock, as of January 31, 2004, LMG had an ownership
interest in Alloy of approximately 6.94%.



|   |                      
|-- | ---------------------
|6. | Marketable Securities

Fair values of taxable auction securities,
tax-advantaged auction securities, corporate debt securities and
equity securities are based upon quoted market prices. The
following is a summary of available-for-sale marketable
securities at January 31, 2003 and 2004, respectively:

|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |        | 
|--------------------------------- | ----------------------------------- | ---------------------- | ------ | ---------- |  | ------- | --- | --------- |  | - | --- | --- | - | - | ------ | ------ | 
|                                  |                                     | Gross                  |        | Gross      |  |         |     |          
|                                  |                                     | Unrealized             |        | Unrealized |  |         |     | Estimated
|                                  |                                     | Amortized              |        | Holding    |  | Holding |     | Fair     
|January 31, 2003                  |                                     | Cost                   |        | Gains      |  | Losses  |     | Value    
|                                  |                                     |                        |        |            |  |         |     |          
|                                  |                                     |                       
|                                  |                                     | (Amounts in thousands)
|Taxable auction securities        |                                     | $                      | 2,000  |            |  | $       |    |           |  | $ |    |     |   | $ | 2,000  |       
|Corporate debt securities         |                                     |                        | 21,002 |            |  |         | 166 |           |  |   |    |     |   |   | 21,168 |       
|Equity securities                 |                                     |                        | 3      |            |  |         |    |           |  |   | (2  | )   |   |   | 1      |       
|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       
|                                  | Total available-for-sale securities |                        | $      | 23,005     |  |         | $   | 166       |  |   | $   | (2  | ) |   | $      | 23,169 | 
|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       
|January 31, 2004                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       
|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       
|Taxable auction securities        |                                     | $                      | 4,700  |            |  | $       |    |           |  | $ |    |     |   | $ | 4,700  |       
|Tax-advantaged auction securities |                                     |                        | 6,000  |            |  |         |    |           |  |   |    |     |   |   | 6,000  |       
|Corporate debt securities         |                                     |                        | 13,926 |            |  |         | 3   |           |  |   | (31 | )   |   |   | 13,898 |       
|Equity securities                 |                                     |                        | 3      |            |  |         |    |           |  |   | (2  | )   |   |   | 1      |       
|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       
|                                  | Total available-for-sale securities |                        | $      | 24,629     |  |         | $   | 3         |  |   | $   | (33 | ) |   | $      | 24,599 | 
|                                  |                                     |                        |        |            |  |         |     |           |  |   |     |     |   |   |        |       

F-32



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ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amortized cost and estimated fair value of
debt securities available-for-sale at January 31, 2004 by
contractual maturity are as follows:

|                        |  |                        |        |           |  |   |        | 
|----------------------- |  | ---------------------- | ------ | --------- |  | - | ------ | 
|                        |  | Gross                  |        |          
|                        |  | Unrealized             |        | Estimated
|                        |  | Amortized              |        | Fair     
|January 31, 2004        |  | Cost                   |        | Value    
|                        |  |                        |        |          
|                        |  |                       
|                        |  | (Amounts in thousands)
|Due in one year or less |  | $                      | 19,024 |           |  | $ | 19,013 | 
|Due after one year      |  |                        | 5,602  |           |  |   | 5,585  | 
|                        |  |                        |        |           |  |   |        | 
|                        |  | $                      | 24,626 |           |  | $ | 24,598 | 
|                        |  |                        |        |           |  |   |        | 

On an ongoing basis, Alloy evaluates its
investment in debt and equity securities to determine if a
decline in fair value is other-than-temporary. When a decline in
fair value is determined to be other-than-temporary, an
impairment charge is recorded and a new cost basis in the
investment is established. As of the end of fiscal 2003, the
Company held a portfolio of $24.6 million in fixed income
marketable securities for which, due to the conservative nature
of its investments and relatively short duration did not result
in any impairment charge.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Realized Gain on Marketable Securities and
    Write-off of Investments, Net

In fiscal 2002, realized gains from sales of
marketable securities were approximately $97,000. Net realized
gains on the sales of marketable securities were approximately
$66,000 in fiscal 2003. In addition, the Company wrote off
$313,000 of minority investments in private companies during the
fourth quarter of fiscal 2003, since these private companies
either declared bankruptcy or ceased operations.



|   |                       
|-- | ----------------------
|7. | Property and Equipment

At January 31, 2003 and 2004, property and
equipment, net, consists of the following:

|                                                |  |                        |         |      |  |   |         |  
|----------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                                |  | 2003                   |         | 2004
|                                                |  |                        |         |     
|                                                |  |                       
|                                                |  | (Amounts in thousands)
|Computer equipment under capitalized leases     |  | $                      | 676     |      |  | $ | 318     |  
|Computer equipment                              |  |                        | 10,975  |      |  |   | 14,891  |  
|Machinery and equipment                         |  |                        | 6,397   |      |  |   | 8,665   |  
|Office furniture and fixtures                   |  |                        | 1,286   |      |  |   | 3,964   |  
|Leasehold improvements                          |  |                        | 1,754   |      |  |   | 10,123  |  
|Building                                        |  |                        |        |      |  |   | 6,159   |  
|Land                                            |  |                        |        |      |  |   | 500     |  
|                                                |  |                        |         |      |  |   |         |  
|                                                |  |                        | 21,088  |      |  |   | 44,620  |  
|Less: accumulated depreciation and amortization |  |                        | (11,007 | )    |  |   | (17,386 | )
|                                                |  |                        |         |      |  |   |         |  
|                                                |  | $                      | 10,081  |      |  | $ | 27,234  |  
|                                                |  |                        |         |      |  |   |         |  

Due to declines in catalog response rates, the
Company performed recoverability analysis of long-lived assets
in the direct marketing segment during the fourth quarter of
fiscal 2003. The recoverability of long-lived assets were
measured by comparing the carrying amount of a group of assets
to estimated undiscounted future cash flows expected to be
generated by that group of assets. Since the carrying amounts of
certain groups of assets exceeded their estimated future cash
flows, an impairment charge of $1.3 million was recognized
in the direct marketing segment. Alloy determined that the
carrying amounts of the non-competition agreement of $144,000
related to Old Glory, the website of $31,000 related to Old
Glory and the non-competition

F-33



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

agreement of $23,000 related to
Girlfriends LA were impaired as the Company plans to
discontinue marketing its Old Glory and Girlfriends LA
brands. Other assets of these businesses, namely mailing lists,
were not deemed impaired as they are and can be used by other
parts of the direct marketing segment. In addition, the future
cash flows related to Dans Comp could not fully support
the carrying amount of Dans Comps long-lived assets.
As a result, an impairment charge related to the non-competition
agreement of $209,000, property and equipment of $159,000 and
mailing list of $749,000 was recorded.

Depreciation and amortization expense related to
property and equipment (including capitalized leases) was
approximately $2.6 million, $4.2 million, and
$6.7 million for fiscal 2001, 2002, and 2003 respectively.



|   |                    
|-- | -------------------
|8. | Current Liabilities



| |                      
| | ---------------------
| | Mortgage Note Payable

dELiA*s was subject to certain covenants under a
mortgage loan agreement relating to dELiA*s fiscal 1999
purchase of a distribution facility in Hanover, Pennsylvania,
including a covenant to maintain a fixed charge coverage ratio.
As a result of its financial performance, the Company was in
default of the fixed charge coverage ratio. The default has been
waived for the duration of the loan. On April 19, 2004,
dELiA*s entered into a Mortgage Note Modification Agreement
extending the term for five years with a fifteen-year
amortization schedule. The modified loan bears interest at LIBOR
plus 225 basis points. The modified loan is guaranteed by
Alloy and Alloy is subject to a quarterly financial covenant to
maintain a funds flow coverage ratio with which Alloy is not
currently in compliance. As a result of this default, the
$2.9 million January 31, 2004 outstanding principal
balance related to dELiA*s mortgage loan agreement is classified
as a current liability on the accompanying consolidated balance
sheets. The mortgage loan is secured by the building and related
property.



| |                                                   
| | --------------------------------------------------
| | Accrued Expenses and Other Current
    Liabilities

As of January 31, 2003 and 2004, accrued
expenses and other current liabilities consist of the following:

|                               |  |             |        |      |  |   |        | 
|------------------------------ |  | ----------- | ------ | ---- |  | - | ------ | 
|                               |  | 2003        |        | 2004
|                               |  |             |        |     
|                               |  |            
|                               |  | (Amounts in
|                               |  | thousands) 
|Accrued acquisition costs      |  | $           | 12,998 |      |  | $ | 3,417  | 
|Accrued sales tax              |  |             | 43     |      |  |   | 4,306  | 
|Credits due to customers       |  |             |       |      |  |   | 5,754  | 
|Current deferred tax liability |  |             | 5,318  |      |  |   |       | 
|Other                          |  |             | 9,320  |      |  |   | 23,364 | 
|                               |  |             |        |      |  |   |        | 
|                               |  | $           | 27,679 |      |  | $ | 36,841 | 
|                               |  |             |        |      |  |   |        | 



|   |                  
|-- | -----------------
|9. | Credit Agreements

In October 2000, Alloy entered into a credit
agreement (the RBC Credit Agreement) with Royal Bank
of Canada, Grand Cayman (North America No. 1), (the
Lender). The RBC Credit Agreement was for a duration
of three years from inception, expired October 19, 2003,
and called for the Lender to make available to Alloy revolving
credit loans and letters of credit in the aggregate principal
amount not to exceed $15.1 million the proceeds of which
would be used to finance the working capital requirements of
Alloy and its subsidiaries in the ordinary course of business
and for other general corporate purposes. This facility was
originally collateralized by marketable securities and related
derivative put options. As further discussed in Note 2, as
a result of the settlement of the put options and sale of the
underlying securities, the facility limit was reduced from
$15.1 million to $500,000. There were no amounts
outstanding at January 31, 2002 or 2003 under the RBC
Credit Agreement.

F-34



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

dELiA*s has a credit agreement with Wells Fargo
Retail Finance LLC (the Wells Fargo Credit
Agreement). The Wells Fargo Credit Agreement consists of a
revolving line of credit that permits dELiA*s to borrow up to
$20 million. Until October 29, 2004, dELiA*s retains
the right to increase the limit to $25 million at its
option. The credit line is secured by dELiA*s assets and
borrowing availability fluctuates depending on dELiA*s
levels of inventory and certain receivables. The Wells Fargo
Credit Agreement contains certain covenants and default
provisions, including a limitation on dELiA*s capital
expenditures. At dELiA*s option, borrowings under this
facility bear interest at Wells Fargo Banks prime rate
plus 25 basis points or at LIBOR plus 250 basis
points, but at no time will the rate be less than 4.25%. A fee
of 0.375% per year is assessed monthly on the unused
portion of the line of credit as defined in the agreement. The
facility matures in April 2006. The credit facility is
considered a current liability because the lender has access to
dELiA*s lockbox facility and the agreement contains a subjective
acceleration clause. In addition, the Wells Fargo Credit
Agreement contains a change of control event, which was
triggered when Alloy purchased dELiA*s and allows the lender to
call the loan at any time. The lender has agreed to waive any
default caused in connection with Alloys acquisition of
dELiA*s. As of January 31, 2004, there was a zero balance
on the loan, the outstanding documentary letters of credit were
$29,000, the standby letters were $2.9 million, and unused
available credit was $5.4 million.



| |                  
| | -----------------
| | Letters of Credit

As of January 31, 2004, Alloy had $543,000
in a standby letter of credit with a bank for the purpose of
securing a lease transaction relating to computer equipment. The
letter of credit is fully secured by cash on deposit at the bank
as of January 31, 2004 and matures in fiscal 2007. In
addition, Alloy had a $682,000 guidance line for standby and
commercial letters of credit, of which $118,000 was outstanding
as of January 31, 2004 for the purpose of securing an
operating lease that Alloy maintains.



|    |               
|--- | --------------
|10. | Long-Term Debt



| |                             
| | ----------------------------
| | Issuance of Convertible Debt

On July 23, 2003, Alloy issued and sold
$65.0 million aggregate principal amount of 20-Year
Convertible Senior Debentures due August 1, 2023 (the
Debentures) in the 144A private placement market.
Lehman Brothers, Inc., CIBC World Market Corp., J.P. Morgan
Securities Inc., and S.G. Cowen Securities Corporation were the
initial purchasers (the Initial Purchasers) of the
Debentures. The Debentures have an annual coupon rate of 5.375%,
payable in cash semi-annually. The Debentures are convertible at
any time prior to maturity, unless previously redeemed, at the
option of the holders into shares of Alloys common stock
at a conversion price of approximately $8.375 per share,
subject to certain adjustments. The calculation of diluted loss
per share for fiscal 2003 excluded the conversion of these
securities as to include them in the calculation would be
anti-dilutive. The Debentures are Alloys general unsecured
obligations and will be equal in right of payment to its
existing and future senior unsecured indebtedness; and are
senior in right of payment to all of its future subordinated
debt. Alloy may not redeem the Debentures until August 1,
2008. On August 20, 2003, Alloy issued and sold an
additional $4.3 million aggregate principal amount of the
Debentures to the Initial Purchasers pursuant to the exercise of
an over-allotment option granted to the Initial Purchasers in
the original purchase agreement. Alloy used a significant
portion of the net proceeds from this offering for the
acquisition of dELiA*s and intends to use the remaining portion
for future acquisitions, working capital, capital expenditures
and general corporate purposes.

On February 17, 2004, Alloy approved the
repurchase of up to $5.0 million aggregate principal amount
of the Debentures. As of May 26, 2004, none of the
Debentures have been repurchased.

F-35



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of Alloys Debentures is
estimated based on quoted market prices. As of January 31,
2004, the fair value of the Debentures was $66.5 million.
Long-term debt consists of the following:

|                                                                                                                         |  |             |    |      |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------ |  | ----------- | -- | ---- |  | - | ------ | 
|                                                                                                                         |  |            
|                                                                                                                         |  | January 31,
|                                                                                                                         |  |            
|                                                                                                                         |  | 2003        |    | 2004
|                                                                                                                         |  |             |    |     
|                                                                                                                         |  |            
|                                                                                                                         |  | Amounts in 
|                                                                                                                         |  | thousands  
|5.375% Convertible Debentures due
    August 1, 2023, with interest payable semi-annually on
    February 1 and August 1 |  | $           |   |      |  | $ | 69,300 | 
|Capital leases and notes payable                                                                                         |  |             | 93 |      |  |   | 307    | 
|Other long-term liabilities                                                                                              |  |             |   |      |  |   | 436    | 
|                                                                                                                         |  |             |    |      |  |   |        | 
|                                                                                                                         |  | $           | 93 |      |  | $ | 70,043 | 



|    |                                                                 
|--- | ----------------------------------------------------------------
|11. | Series A and Series B Redeemable Convertible
    Preferred Stock

On February 16, 2001, the Board of Directors
of Alloy authorized the designation of a series of Alloys
$0.01 par value preferred stock consisting of
1,850,000 shares of the authorized unissued preferred stock
as a Series A Convertible Preferred Stock (the
Series A Preferred Stock). The Series A
Preferred Stock had a par value of $0.01 per share with a
liquidation preference of $9.50 per share. The
Series A Preferred Stock paid an annual dividend of 3%,
payable in additional shares of Series A Preferred Stock.
In addition, the Series A Preferred Stock was mandatorily
redeemable on February 16, 2006 at a price of
$9.50 per share, plus accrued and unpaid cash dividends
thereon. The Series A Preferred Stock was convertible at
the holders option into common stock of Alloy as is
determined by dividing $9.50 by the initial conversion price of
$11.40 and multiplying by each share of Series A Preferred
Stock to be converted. The initial conversion price is subject
to adjustment for stock splits, stock dividends and combinations
of common stock and other events as specified in the related
Certificate of Designation, Preferences and Rights of
Series A Convertible Preferred Stock of Alloy. At any time
after February 15, 2003, if the reported closing sales
price of Alloys common stock exceeds $25.00 per share
for a period of ten consecutive trading days, Alloy has the
option to require the holders of all, but not less than all,
shares of the Series A Preferred Stock to convert their
shares into shares of Alloy common stock.

Also, on February 16, 2001, Alloy received
an investment of $10 million from St. Paul Venture Capital
VI, LLC (SPVC VI) in exchange for
1,052,632 shares of Alloys Series A Preferred
Stock. In addition, SPVC VI received a warrant to
purchase 307,018 shares of Alloy common stock at an
exercise price of $12.83 per share. The fair value of the
warrant issued in connection with the Series A Preferred
Stock was estimated as $1.5 million using the Black-Scholes
option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 75%, risk-free interest rate of 5.50%
and expected life of two years. Based upon the terms of this
transaction, there was a beneficial conversion feature
recognized as of the date of the transaction in the amount of
approximately $2.8 million, which reduced earnings
attributable to common stockholders in the year ended
January 31, 2002. The beneficial conversion feature was
recorded as a direct charge against accumulated deficit, with a
corresponding increase in additional paid-in capital. As a
result of warrants issued and the related expenses of the
transaction, there was a discount of $1.5 million upon
issuance of the Series A Preferred Stock, which was being
accreted over the five-year period prior to mandatory redemption
and reflected as a charge against additional paid-in capital and
a corresponding increase to the carrying value of the
Series A Preferred Stock. In addition, the accrued
dividends on the Series A Preferred Stock were also charged
to additional paid-in capital, with a corresponding increase in
the carrying value of the Series A Preferred Stock. On
October 25, 2001, SPVC VI converted all
1,052,632 shares of Series A Preferred Stock into
877,193 shares of Alloy common stock. At that time, the
remaining unamortized discount of $1.3 million was charged
to additional paid-in capital, with a corresponding increase to
Series A Preferred Stock and the then carrying value of
$8.5 million was converted into common stock and additional

F-36



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ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

paid-in capital. The additional accretion
recorded upon conversion has been reflected as a reduction of
earnings attributable to common stockholders.

On June 20, 2001, the Board of Directors of
Alloy authorized the designation of a series of Alloys
$.01 par value preferred stock consisting of
3,000 shares of the authorized unissued preferred stock as
a Series B Convertible Preferred Stock (the
Series B Preferred Stock). The Series B
Preferred Stock has a par value of $.01 per share with a
liquidation preference of $10,000 per share. The
Series B Preferred Stock pays an annual dividend of 5.5%,
payable in either additional shares of Series B Preferred
Stock or cash, at Alloys option. In addition, the
Series B Preferred Stock is mandatorily redeemable on
June 19, 2005 at a price of $10,000 per share, plus
accrued and unpaid cash dividends thereon. The Series B
Preferred Stock is convertible at the holders option into
common stock of Alloy as is determined by dividing $10,000 by
the initial conversion price of $11.70 and multiplying by each
share of Series B Preferred Stock to be converted. The
initial conversion price is subject to adjustment for stock
splits, stock dividends and combinations of common stock and
other events as specified in the related Certificate of
Designation, Preferences and Rights of Series B Convertible
Preferred Stock of Alloy. At any time after June 20, 2002,
if the reported closing sales price of Alloys common stock
exceeds $20.48 per share for a period of twenty consecutive
trading days, Alloy has the option to require the holders of
all, but not less than all, shares of the Series B
Preferred Stock to convert their shares into shares of Alloy
common stock.

Also, on June 20, 2001, Alloy received an
investment of $18.1 million from various investors in
exchange for 1,815 shares of Alloys Series B
Preferred Stock, which were immediately convertible into
1,551,282 shares of Alloy common stock. In addition, the
Series B investors received warrants to purchase a total of
502,492 shares of Alloy common stock at an exercise price
of $12.46 per share. The fair value of the warrants issued
in connection with the Series B Preferred Stock was
estimated as $2.4 million using the Black-Scholes
option-pricing model with the following assumptions: dividend
yield of 0%, volatility of 75%, risk-free interest rate of 5.50%
and expected life of two years. Based upon the terms of this
transaction, there was a beneficial conversion feature reflected
as of the date of the transaction in the amount of approximately
$4.0 million, which reduced earnings attributable to common
stockholders in the year ended January 31, 2002. Similar to
the accounting treatment for the Series A Preferred Stock,
the beneficial conversion feature was recorded as a direct
charge against accumulated deficit, with a corresponding
increase in additional paid-in capital. As a result of the
warrants issued and the related expenses of the transaction,
there was a discount of $3.9 million upon issuance of the
Series B Preferred Stock, which is being accreted over the
four-year period prior to mandatory redemption and reflected as
a charge against additional paid-in capital and a corresponding
increase to the carrying value of the Series B Preferred
Stock.

In fiscal 2001, an investor converted
50 shares of Series B Preferred Stock into
44,032 shares of Alloy common stock. The impact upon
conversion was the recognition of additional accretion of $92,
which has been reflected as a reduction of earnings attributable
to common stockholders. In fiscal 2002, investors converted
152 shares of Series B Preferred Stock into
136,469 shares of Alloy common stock. The impact upon
conversion was the recognition of additional accretion of
$235,000, which has been reflected as a reduction of earnings
attributable to common stockholders. In fiscal 2003, investors
converted 273 shares of Series B Preferred Stock into
261,505 shares of Alloy common stock. The impact upon
conversion was the recognition of additional accretion of
$255,000, which has been reflected as a reduction of earnings
attributable to common stockholders.



|    |                          
|--- | -------------------------
|12. | Common Stock Transactions

On November 1, 2001, Alloy entered into
definitive purchase agreements to sell 2,575,000 shares of
newly issued common stock, $.01 par value, in a private
placement to both new institutional investors and existing
stockholders for an aggregate purchase price of
$32.2 million. Net proceeds from this private placement of
$30.0 million were used for acquisitions or general
corporate purposes.

F-37



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On January 25, 2002, Alloy entered into a
definitive purchase agreement to sell 1,367,366 shares of
newly issued common stock, $.01 par value, and warrants to
purchase a total of 888,788 shares of Alloys common
stock at an exercise price of $21.94 per share in a private
placement to an investor for an aggregate purchase price of
$30.0 million. In February 2002, pursuant to the warrant
agreement and as a result of the Companys follow-on
offering, the warrants increased to 915,555 shares and the
exercise price decreased to $21.30 per share. In July and
August 2003, pursuant to the warrant agreement and as a result
of the Companys Debenture offering, the number of shares
for which warrants are exercisable increased to
1,019,291 shares and the exercise price decreased to
$19.13 per share. Net proceeds from this private placement
of approximately $28.0 million were used for acquisitions
and general corporate purposes. The fair value of the warrants
issued in connection with this financing was estimated as
$8.2 million using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0%, volatility
of 50%, risk-free interest rate of 5.29% and expected life of
five years. In connection with this transaction, Alloy and a
company in which the investor had a minority investment entered
into a one-year marketing services agreement in which Alloy has
provided an agreed-upon set of advertising and promotional
services in exchange for a $3.0 million fee.

On February 21, 2002, Alloy sold
4,000,000 shares of its newly issued common stock,
$.01 par value, in an underwritten public offering at a
price of $15.21 per share, for an aggregate purchase price
of $60.8 million. Net proceeds from this public offering of
$56.6 million were used for acquisitions and general
corporate purposes.

On January 29, 2003, the Companys
Board authorized a stock repurchase program for the repurchase
by Alloy of up to $10.0 million of its common stock from
time to time in the open market at prevailing market prices or
in privately negotiated transactions. Alloy has repurchased
600,000 shares for approximately $3.0 million under
this plan through January 31, 2004. All 600,000 shares
were repurchased during the first quarter of fiscal 2003.



|    |                        
|--- | -----------------------
|13. | Stockholder Rights Plan

In April 2003, Alloys Board of Directors
adopted a Stockholder Rights Plan (the Plan) in
which the Company declared a dividend of one preferred stock
purchase right (a Right) for each outstanding share
of common stock, par value $0.01 per share, of the Company.
Each Right entitles the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share (a
Unit) of Series C Junior Participating
Preferred Stock, $0.01 par value per share (the
Series C Preferred Stock), at a purchase price
of $40.00 per Unit, subject to adjustment. Until the
occurrence of certain events, the Rights are represented by and
traded in tandem with Alloy common stock. Rights will be
exercisable only if a person or group acquires beneficial
ownership of 20 percent (20%) or more of the Companys
common stock or announces a tender offer upon consummation of
which such person or group would own 20% or more of the common
stock. Alloy is entitled to redeem the Rights at $.001 per
right under certain circumstances set forth in the Plan. The
Rights themselves have no voting power and will expire at the
close of business on April 14, 2013, unless earlier
exercised, redeemed or exchanged. Each one one-hundredth of a
share of Series C Preferred Stock has the same voting
rights as one share of Alloy common stock, and each share of
Series C Preferred Stock has 100 times the voting power of
one share of Alloy common stock.



|    |                               
|--- | ------------------------------
|14. | Stock-based Compensation Plans



| |               
| | --------------
| | Stock options:

During fiscal 1997, Alloys Board of
Directors adopted a Stock Option Plan (the 1997
Plan). The 1997 Plan, as restated, authorizes the granting
of options, the exercise of which would allow up to an aggregate
of 4,000,000 shares of Alloys common stock to be
acquired by the holders of the options. The number of shares
under the 1997 Plan authorized for the granting of options was
raised to 8,000,000 pursuant to a shareholder vote on
July 21, 2000 and further increased to 10,000,000 pursuant
to a shareholder vote on July 24, 2003. The

F-38



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

options can take the form of Incentive Stock
Options (ISOs) or Non-qualified Stock Options
(NQSOs). Options may be granted to employees,
directors and consultants. ISOs and NQSOs are granted in terms
not to exceed ten years and become exercisable as set forth when
the option is granted. Options may be exercised in whole or in
part. Vesting terms of the options range from immediately
vesting to a ratable vesting period of nine years. The exercise
price of the Options must be at least equal to 100% of the fair
market price of Alloy common stock on the date of grant. In the
case of a plan participant who owns directly or by reason of the
applicable attribution rules in Section 424(d) of the
United States Internal Revenue Code of 1986, as amended, more
than 10% of the total combined voting power of all classes of
stock of Alloy, the exercise price shall not be less than 110%
of the fair market value on the date of grant. ISOs must be
exercised within five to ten years from the date of grant
depending on the participants ownership in Alloy. The
exercise price of all NQSOs granted under the 1997 Plan shall be
determined by Alloys Board of Directors at the time of
grant. During fiscal 2002, Alloys Board of Directors
adopted amendments to the 1997 Plan to permit the grant of
shares of the Companys common stock on a tax-deferred
basis to eligible individuals, subject to the otherwise
applicable terms, conditions, requirements and other limitations
the Board of Directors shall deem appropriate within the limits
of its powers under the 1997 Plan. The 1997 Plan will terminate
on June 30, 2007.

During fiscal 2002, Alloys Board of
Directors adopted a new Stock Option Plan (the 2002
Plan), which permits the granting of options, the exercise
of which would allow up to an aggregate of 500,000 shares
of Alloys common stock to be acquired by the holders of
the options. During fiscal 2003, Alloys Board of Directors
authorized an Amendment to the 2002 Plan increasing from 500,000
to 2,000,000 the aggregate number of shares which may be issued
under such plan. The options can take the form of NQSOs. Options
may be granted to employees, directors and consultants. Options
may be granted in terms not to exceed ten years and become
exercisable as set forth when the option is granted. Options may
be exercised in whole or in part. Vesting terms of the options
range from immediate vesting to a ratable vesting period of nine
years. The exercise price of all options granted under the 2002
Plan shall be determined by Alloys Board of Directors at
the time of grant. Subsequently during fiscal 2002, Alloys
Board of Directors adopted amendments to the 2002 Plan to permit
the grant of shares of the Companys common stock on a
tax-deferred basis to eligible individuals, subject to the
otherwise applicable terms, conditions, requirements and other
limitations the Board of Directors shall deem appropriate within
the limits of its powers under the 2002 Plan. The 2002 Plan will
terminate on July 11, 2012.

Additionally, during fiscal 2003, Alloy, through
its acquisition of dELiA*s Corp., assumed the dELiA*s Inc.
Amended and Restated 1996 Stock Incentive Plan, dELiA*s Inc.
1998 Stock Incentive Plan and the iTurf Inc. Amended and
Restated 1999 Stock Incentive Plan. Upon consummation of the
acquisition, Alloy amended these plans to provide, among other
things, that the common stock of Alloy, not dELiA*s Corp., would
be issuable upon exercise of options granted under the plans.
Pursuant to NASDAQ Marketplace Rule 4350-5, Alloy may not
issue grants under these plans to any person who was employed by
Alloy at the time the acquisition of dELiA*s Corp. was
consummated. Alloy may, however, issue grants under these plans
to persons who were employed by dELiA*s Corp. before, or have or
will become employed by Alloy or any of its subsidiaries after,
the time Alloys acquisition of dELiA*s Corp. was
consummated.

Alloy applies APB No. 25 in accounting for
options issued under the 1997 Plan, the 2002 Plan and the
assumed dELiA*s plans and, accordingly, recognizes compensation
expense for the difference between the fair value of the
underlying common stock and the grant price of the option at the
date of grant. Alloy applies SFAS No. 123 to issuances
of stock-based compensation to non-employees and, accordingly,
recognizes the fair value of the stock options and warrants
issued as compensation expense over the service period or
vesting period, whichever is shorter. Compensation expense
recognized for the issuance of stock options to non-employees
approximated $114,000, $0, and $0 for fiscal 2001, 2002, and
2003, respectively. The fair value assumptions used for awards
to non-employees are consistent with the assumptions listed for
the pro forma impact of awards to employees.

F-39



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of Alloys stock
option activity:

|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |       |  |   |       |  |  |   |            |   |  |   |       | 
|------------------------------------------------------------------ |  | ------------------------------- | ---------- | ----- |  | -------- | ----- | ----- |  | -------- | --------- | ----- |  | - | ----- |  |  | - | ---------- | - |  | - | ----- | 
|                                                                   |  |                                
|                                                                   |  | For the Years Ended January 31,
|                                                                   |  |                                
|                                                                   |  |                                 |            |       |  |         
|                                                                   |  | 2002                            |            | 2003  |  | 2004    
|                                                                   |  |                                 |            |       |  |         
|                                                                   |  | Weighted                        |            |       |  | Weighted |       |       |  | Weighted |           |      
|                                                                   |  | Average                         |            |       |  | Average  |       |       |  | Average  |           |      
|                                                                   |  | Exercise                        |            |       |  | Exercise |       |       |  | Exercise |           |      
|                                                                   |  | Shares                          |            | Price |  | Shares   |       | Price |  | Shares   |           | Price
|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |      
|Outstanding, beginning of year                                     |  |                                 | 4,009,129  |       |  | $        | 13.69 |       |  |          | 6,016,148 |       |  | $ | 12.56 |  |  |   | 6,791,817  |   |  | $ | 11.64 | 
|Options granted                                                    |  |                                 | 4,253,100  |       |  |          | 11.90 |       |  |          | 1,697,150 |       |  |   | 9.19  |  |  |   | 2,012,089  |   |  |   | 5.26  | 
|Options exercised                                                  |  |                                 | (939,634   | )     |  |          | 11.74 |       |  |          | (190,846  | )     |  |   | 8.16  |  |  |   | (26,256    | ) |  |   | 4.42  | 
|Options canceled or expired                                        |  |                                 | (1,306,447 | )     |  |          | 14.47 |       |  |          | (730,635  | )     |  |   | 14.44 |  |  |   | (1,093,715 | ) |  |   | 11.97 | 
|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |       |  |   |       |  |  |   |            |   |  |   |       | 
|Outstanding, end of year                                           |  |                                 | 6,016,148  |       |  | $        | 12.56 |       |  |          | 6,791,817 |       |  | $ | 11.64 |  |  |   | 7,683,935  |   |  | $ | 9.96  | 
|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |       |  |   |       |  |  |   |            |   |  |   |       | 
|Exercisable, end of year                                           |  |                                 | 520,574    |       |  | $        | 13.91 |       |  |          | 2,013,637 |       |  | $ | 13.33 |  |  |   | 3,333,285  |   |  | $ | 12.32 | 
|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |       |  |   |       |  |  |   |            |   |  |   |       | 
|Weighted-average fair value of options granted
    during the year |  | $                               | 7.62       |       |  |          | N/A   |       |  | $        | 6.20      |       |  |   | N/A   |  |  | $ | 3.41       |   |  |   | N/A   | 
|                                                                   |  |                                 |            |       |  |          |       |       |  |          |           |       |  |   |       |  |  |   |            |   |  |   |       | 

The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:

|                         |  |                                 |         |      |  |      |         |   |  |  |         |  
|------------------------ |  | ------------------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                         |  |                                
|                         |  | For the Years Ended January 31,
|                         |  |                                
|                         |  | 2002                            |         | 2003 |  | 2004
|                         |  |                                 |         |      |  |     
|Risk-free interest rates |  |                                 | 4.43    | %    |  |      | 3.62    | % |  |  | 2.97    | %
|Expected lives           |  |                                 | 5 years |      |  |      | 5 years |   |  |  | 5 years |  
|Expected volatility      |  |                                 | 75      | %    |  |      | 82      | % |  |  | 74      | %
|Expected dividend yields |  |                                 |        |      |  |      |        |   |  |  |        |  

Summarized information about Alloys stock
options outstanding and exercisable at January 31, 2004 is
as follows:

|               |  |             |               |              |  |       |           |          |  |       |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ----------- | ------------- | ------------ |  | ----- | --------- | -------- |  | ----- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |             |               |             
|               |  | Outstanding |               | Exercisable 
|               |  |             |               |             
|               |  |             |               | Average      |  |       |           | Average 
|Exercise       |  |             |               | Exercise     |  |       |           | Exercise
|Price Range    |  | Options     |               | Average Life |  | Price |           | Options  |  | Price
|               |  |             |               |              |  |       |           |          |  |      
|$ 0.60         |  |             | 5,348         |              |  |       | 5.0 Years |          |  | $     | 0.60  |  |  |  | 5,348     |  |  | $ | 0.60  | 
|$ 2.64 - $ 2   |  |             | .79 2,656     |              |  |       | 9.2 Years |          |  | $     | 2.72  |  |  |  | 0         |  |  | $ | 0     | 
|$ 4.07 - $ 6   |  |             | .09 1,842,679 |              |  |       | 9.3 Years |          |  | $     | 4.75  |  |  |  | 120,285   |  |  | $ | 4.60  | 
|$ 6.19 - $ 9   |  |             | .23 2,178,399 |              |  |       | 7.7 Years |          |  | $     | 7.70  |  |  |  | 948,541   |  |  | $ | 8.02  | 
|$ 9.29 - $13.  |  |             | 80 2,230,675  |              |  |       | 7.6 Years |          |  | $     | 12.39 |  |  |  | 1,119,133 |  |  | $ | 12.48 | 
|$13.95 - $20.9 |  |             | 0 1,391,178   |              |  |       | 6.7 Years |          |  | $     | 16.32 |  |  |  | 1,115,103 |  |  | $ | 16.50 | 
|$21.06 - $23.2 |  |             | 0 33,000      |              |  |       | 6.9 Years |          |  | $     | 21.24 |  |  |  | 24,875    |  |  | $ | 21.19 | 
|               |  |             |               |              |  |       |           |          |  |       |       |  |  |  |           |  |  |   |       | 
|$ 0.60 - $23.  |  |             | 20 7,683,935  |              |  |       | 7.9 Years |          |  | $     | 9.96  |  |  |  | 3,333,285 |  |  | $ | 12.32 | 
|               |  |             |               |              |  |       |           |          |  |       |       |  |  |  |           |  |  |   |       | 

F-40



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |          
| | ---------
| | Warrants:

The following table summarizes all common stock
and preferred stock activity:

|                               |                    |                                 |           |           |   |      |           |         |   |  |           |         | 
|------------------------------ | ------------------ | ------------------------------- | --------- | --------- | - | ---- | --------- | ------- | - |  | --------- | ------- | 
|                               |                    |                                
|                               |                    | For the Years Ended January 31,
|                               |                    |                                
|                               |                    | 2002                            |           | 2003      |   | 2004
|                               |                    |                                 |           |           |   |     
|Outstanding, beginning of year |                    |                                 | 473,180   |           |   |      | 1,690,635 |         |   |  | 1,813,559 |        
|                               | Warrants issued    |                                 |           | 1,808,298 |   |      |           | 136,767 |   |  |           | 103,736 | 
|                               | Warrants exercised |                                 |           | (590,843  | ) |      |           | (13,843 | ) |  |           |        | 
|                               |                    |                                 |           |           |   |      |           |         |   |  |           |        
|Outstanding, end of year       |                    |                                 | 1,690,635 |           |   |      | 1,813,559 |         |   |  | 1,917,295 |        
|                               |                    |                                 |           |           |   |      |           |         |   |  |           |        

At January 31, 2004, the unexercised
warrants have a weighted average exercise price of
$16.19 per share and a weighted average remaining
contractual term of 5.19 years. As of January 31,
2004, all outstanding warrants are exercisable. The calculation
of diluted (loss) earnings per share for fiscal 2001, 2002 and
2003 excludes the warrants listed above because to include them
in the calculation would be antidilutive. Therefore the warrants
did not have an impact on the calculation of earnings
attributable to common stockholders per share.



| |                 
| | ----------------
| | Restricted Stock

In May 2003 Alloys Board of Directors
authorized the issuance of 300,000 shares of Common Stock
as restricted stock under the 1997 Plan, which shares were
issued in March 2004. The shares issued pursuant to the 1997
Plan are subject to restrictions on transfer and certain other
conditions. During the restriction period, plan participants are
entitled to vote and receive dividends on such shares. Upon
issuance of the 300,000 shares pursuant to the 1997 Plan, a
deferred compensation expense equivalent to the market value of
the shares on the date of grant was charged to
stockholders equity and is being amortized over the
approximate twenty-month vesting period. The compensation
expense amortized with respect to the restricted shares during
fiscal 2003 was approximately $989,000. On January 31,
2004, a total of 150,000 of the 300,000 shares vested.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In April 1999, Alloy adopted the 1999 Employee
Stock Purchase Plan (the Employee Stock Plan). The
Employee Stock Plan allows eligible employees, as defined in the
Employee Stock Plan, to purchase Alloys common stock
pursuant to section 423 of the Internal Revenue Code of
1986, as amended. A total of 500,000 shares of Alloys
common stock have been made available for sale under the
Employee Stock Plan, subject to certain capitalization
adjustments specified in the plan document. The Employee Stock
Plan will terminate on April 16, 2009 unless terminated
sooner by the Board of Directors. The Employee Stock Plan allows
for purchases of common stock under a series of six-month
offering periods commencing February 1 and August 1 of
each year, the frequency of dates and duration of which may be
changed by the Board of Directors. Eligible employees can elect
to participate through payroll deductions between 1% and 10% of
compensation that will be credited to the participants
account. The terms of the Employee Stock Plan provide for the
granting of an option on the first day of each six-month
offering period (Offering Date) to each eligible
employee to purchase Alloys common stock on the last day
of each six-month offering period (Exercise Date) at
a price equal to the lower of 85% of the fair market value of a
share of Alloys common stock at the Offering Date or 85%
of the fair market value of a share of Alloys common stock
on the Exercise Date. These shares are considered
noncompensatory for the determination of compensation expense
under APB No. 25, but the difference between the fair value
of the amount of the benefit paid related to acquiring such
shares at a discount is included as compensation expense in the
pro forma disclosures required by SFAS No. 123 above.

F-41



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The number of shares under the Employee Stock
Plan will be determined by dividing an eligible employees
accumulated contributions prior to the Exercise Date and
retained in the participants account as of the Exercise
Date by the lower of 85% of the fair market value of a share of
Alloys common stock on the Offering Date, or 85% of the
fair market value of a share of Alloys common stock on the
Exercise Date. Unless a participant withdraws from the Employee
Stock Plan, his or her option for the purchase of shares will be
exercised automatically on the Exercise Date of the relative
six-month offering period.



| |                                         
| | ----------------------------------------
| | Shares Reserved for Future
    Issuance:

Shares reserved for future issuance at
January 31, 2003 and 2004 are as follows:

|                                     |  |                     |            |      |  |  |            | 
|------------------------------------ |  | ------------------- | ---------- | ---- |  |  | ---------- | 
|                                     |  |                    
|                                     |  | For the Years Ended
|                                     |  | January 31,        
|                                     |  |                    
|                                     |  | 2003                |            | 2004
|                                     |  |                     |            |     
|Preferred Stock                      |  |                     | 2,259,544  |      |  |  | 1,981,866  | 
|Stock Option Plans                   |  |                     | 6,969,812  |      |  |  | 17,675,031 | 
|Warrants                             |  |                     | 1,813,559  |      |  |  | 1,917,295  | 
|Employee Stock Plan                  |  |                     | 451,123    |      |  |  | 289,245    | 
|5.375% Senior Convertible Debentures |  |                     |           |      |  |  | 8,274,628  | 
|                                     |  |                     |            |      |  |  |            | 
|                                     |  |                     | 11,494,038 |      |  |  | 30,138,065 | 
|                                     |  |                     |            |      |  |  |            | 



|    |             
|--- | ------------
|15. | Income Taxes

The components of the benefit
(provision) for income taxes consist of the following
(amounts in thousands) for the years ended January 31:

|                                 |         |      |     |      |  |      |        |        |   |   |       |       |  
|-------------------------------- | ------- | ---- | --- | ---- |  | ---- | ------ | ------ | - | - | ----- | ----- | -
|                                 |         | 2002 |     | 2003 |  | 2004
|                                 |         |      |     |      |  |     
|Current:                         |         |      |     |      |  |      |        |        |   |   |       |      
|                                 | State   |      | $   | 296  |  |      | $      | 1,114  |   |   | $     | 307   |  
|                                 | Federal |      |     |     |  |      |        |       |   |   |       | 366   |  
|                                 |         |      |     |      |  |      |        |        |   |   |       |      
|                                 |         |      | 296 |      |  |      | 1,114  |        |   |   | 673   |      
|Deferred:                        |         |      |     |      |  |      |        |        |   |   |       |      
|                                 | State   |      |     |     |  |      |        | 191    |   |   |       | (286  | )
|                                 | Federal |      |     |     |  |      |        | (2,777 | ) |   |       | 4,892 |  
|                                 |         |      |     |      |  |      |        |        |   |   |       |      
|                                 |         |      |    |      |  |      | (2,586 | )      |   |   | 4,606 |      
|                                 |         |      |     |      |  |      |        |        |   |   |       |      
|Net Income Tax Expense/(Benefit) |         | $    | 296 |      |  | $    | (1,472 | )      |   | $ | 5,279 |      
|                                 |         |      |     |      |  |      |        |        |   |   |       |      

The difference between the total expected tax
expense (benefit) (using the statutory rates of 34%, 35% and
35%, respectively) and tax expense for fiscal 2001, 2002 and
2003 is accounted for as follows:

|                                        |  |      |     |      |  |      |     |    |  |  |     |   
|--------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                        |  | 2001 |     | 2002 |  | 2003
|                                        |  |      |     |      |  |     
|Computed expected tax (benefit) expense |  |      | (34 | )%   |  |      | 35  | %  |  |  | (35 | )%
|State taxes, net of federal benefit     |  |      |    |      |  |      | 7   | %  |  |  |    |   
|Non-deductible expenses                 |  |      | 34  | %    |  |      | 1   | %  |  |  | 1   | % 
|Goodwill Impairment                     |  |      |    |      |  |      |    |    |  |  | 29  | % 
|Change in valuation allowance           |  |      | 2   | %    |  |      | (50 | )% |  |  | 13  | % 
|                                        |  |      |     |      |  |      |     |    |  |  |     |   
|Total expense (benefit)                 |  |      | 2   | %    |  |      | (7  | )% |  |  | 8   | % 
|                                        |  |      |     |      |  |      |     |    |  |  |     |   

F-42



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The types of temporary differences that give rise
to significant portions of the Companys deferred tax
assets and liabilities are set out as follows at
January 31,:

|                          |                                                   |                                |        |        |        |   |         |        |        |  
|------------------------- | ------------------------------------------------- | ------------------------------ | ------ | ------ | ------ | - | ------- | ------ | ------ | -
|                          |                                                   | 2003                           |        | 2004  
|                          |                                                   |                                |        |       
|                          |                                                   |                               
|                          |                                                   | (Amounts in thousands)        
|Deferred tax assets:      |                                                   |                                |        |        |        |   |         |       
|                          | Accruals and reserves                             |                                | $      | 4,131  |        |   | $       | 10,001 |       
|                          | Deferred compensation                             |                                |        |       |        |   |         | 435    |       
|                          | Property and equipment                            |                                |        | 583    |        |   |         | 3,096  |       
|                          | Other                                             |                                |        | 576    |        |   |         | 739    |       
|                          | Net operating loss and capital loss carryforwards |                                |        | 10,087 |        |   |         | 28,437 |       
|                          |                                                   |                                |        |        |        |   |         |       
|Gross deferred tax assets |                                                   |                                | 15,377 |        |        |   | 42,708  |       
|Valuation allowance       |                                                   |                                | (2,755 | )      |        |   | (36,309 | )     
|                          |                                                   |                                |        |        |        |   |         |       
|                          |                                                   | Total deferred tax assets      |        |        | 12,622 |   |         |        | 6,399  |  
|                          |                                                   |                                |        |        |        |   |         |       
|Deferred tax liabilities: |                                                   |                                |        |        |        |   |         |       
|                          | Goodwill                                          |                                |        | (875   | )      |   |         | (749   | )     
|                          | Identified intangible assets                      |                                |        | (6,576 | )      |   |         | (4,308 | )     
|                          | Other                                             |                                |        | (565   | )      |   |         | (1,342 | )     
|                          |                                                   |                                |        |        |        |   |         |       
|                          |                                                   | Total deferred tax liabilities |        |        | (8,016 | ) |         |        | (6,399 | )
|                          |                                                   |                                |        |        |        |   |         |       
|                          | Net deferred tax assets                           |                                | $      | 4,606  |        |   | $       |       |       
|                          |                                                   |                                |        |        |        |   |         |       

For federal income tax purposes, Alloy has unused
net operating loss (NOL) carryforwards of
$59.1 million at January 31, 2004 expiring through
2023 and capital loss carryforwards of $3.5 million at
January 31, 2004 expiring from January 31, 2006
through January 31, 2008. The U.S. Tax Reform Act of
1986 contains provisions that limit the NOL carryforwards
available to be used in any given year upon the occurrence of
certain events, including a significant change of ownership.
Alloy experienced at least three such ownership changes since
inception. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion of all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
in making these assessments. Based on the level of taxable
income for the year ended January 31, 2003 and projections
of future taxable income, results of the acquisitions and
building of economies of scale, management believed it was more
likely than not that Alloy would realize the benefits of the
deferred tax assets that were deductible during these periods,
net of the valuation allowance. Therefore, the Company recorded
a deferred tax benefit for a portion of the assets that had been
fully reserved. For the year ended January 31, 2004, due to
a number of factors, including the fiscal 2003 taxable loss and
the acquisition of dELiA*s, management lowered its projections
of future taxable income, particularly for the next
15 months. As a result of these lower projections of future
taxable income, management believes the future utilization of
the Companys deferred tax assets is no longer
more-likely-than-not. The Company has made the decision to fully
reserve the remaining net deferred tax asset by increasing the
valuation allowance via a $4.6 million income tax provision
during the year ended January 31, 2004.

The valuation allowance decreased by
$16.7 million and increased by $33.6 million during
fiscal years 2002 and 2003, respectively. If the entire deferred
tax assets were realized, $2.6 million would be allocated
to equity related to the tax effect of the employees stock
option deductions. In addition, $22.4 million would be

F-43



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

allocated to goodwill related to acquired
deferred tax assets. The remaining deferred tax asset would
reduce the income tax expense.

On the Companys consolidated balance sheet,
at January 31, 2003 and 2004, the current portion of the
deferred tax assets amounting to $7.0 million, and none,
respectively is included in other current assets. The current
portion of the deferred tax liability amounting to approximately
$5.3 million and none, respectively, is included in accrued
expenses and other current liabilities.



|    |                              
|--- | -----------------------------
|16. | Net (Loss) Earnings Per Share

The following table sets forth the computation of
net (loss) earnings per share. Alloy has applied the provisions
of Statement of Financial Accounting Standards No. 128,
Earnings per Share in the calculation below. Amounts
are in thousands, except share and per share data.

|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|---------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                     |  |                       
|                                                                                                     |  | Year Ended January 31,
|                                                                                                     |  |                       
|                                                                                                     |  | 2002                   |            | 2003 |  | 2004
|                                                                                                     |  |                        |            |      |  |     
|NUMERATOR:                                                                                           |  |                        |            |      |  |      |            |   |  |   |            |  
|Net (loss) income                                                                                    |  | $                      | (15,600    | )    |  | $    | 23,295     |   |  | $ | (75,215    | )
|Charge for beneficial conversion of Series A
    and Series B Redeemable Convertible Preferred Stock |  |                        | (6,745     | )    |  |      |           |   |  |   |           |  
|Dividends and accretion on preferred stock                                                           |  |                        | (3,013     | )    |  |      | (2,100     | ) |  |   | 1,944      |  
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|Net (loss) income attributable to common
    stockholders                                            |  | $                      | (25,358    | )    |  | $    | 21,195     |   |  | $ | (77,159    | )
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|DENOMINATOR:                                                                                         |  |                        |            |      |  |      |            |   |  |   |            |  
|Denominator for basic and diluted (loss) earnings
    attributable to common stockholders per share: |  |                        |            |      |  |      |            |   |  |   |            |  
|Weighted average basic common shares outstanding                                                     |  |                        | 24,967,678 |      |  |      | 38,436,256 |   |  |   | 41,175,046 |  
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|Contingently issuable common stock pursuant to
    acquisitions                                      |  |                        |           |      |  |      | 959,045    |   |  |   |           |  
|Options to purchase common stock                                                                     |  |                        |           |      |  |      | 676,111    |   |  |   |           |  
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|Weighted average diluted common shares outstanding                                                   |  |                        | 24,967,678 |      |  |      | 40,071,412 |   |  |   | 41,175,046 |  
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|Basic (loss) earnings attributable to common
    stockholders per share                              |  | $                      | (1.02      | )    |  | $    | 0.55       |   |  | $ | (1.87      | )
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  
|Diluted (loss) earnings attributable to common
    stockholders per share                            |  | $                      | (1.02      | )    |  | $    | 0.53       |   |  | $ | (1.87      | )
|                                                                                                     |  |                        |            |      |  |      |            |   |  |   |            |  

For fiscal 2002, diluted earnings per common
share is based upon the weighted average number of common shares
outstanding during the period assuming the issuance of common
shares for all dilutive potential common shares outstanding.

F-44



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The calculation of diluted (loss) earnings per
share for fiscal 2001, 2002 and 2003 excludes the securities
listed below because to include them in the calculation would be
antidilutive. For purpose of this presentation, all securities
are assumed to be common stock equivalents and antidilutive:

|                                                                               |       |             |           |            |  |      |           |           |  |  |           |            | 
|------------------------------------------------------------------------------ | ----- | ----------- | --------- | ---------- |  | ---- | --------- | --------- |  |  | --------- | ---------- | 
|                                                                               |       |            
|                                                                               |       | January 31,
|                                                                               |       |            
|                                                                               |       | 2002        |           | 2003       |  | 2004
|                                                                               |       |             |           |            |  |     
|Options to purchase common stock                                               |       |             | 6,016,148 |            |  |      | 6,115,706 |           |  |  | 7,326,014 |           
|Warrants to purchase common stock                                              |       |             | 1,690,635 |            |  |      | 1,813,559 |           |  |  | 1,873,452 |           
|Conversion of Series A and Series B
    Redeemable Convertible preferred stock |       |             | 1,576,822 |            |  |      | 1,506,363 |           |  |  | 1,377,254 |           
|Contingently issuable common shares pursuant to
    acquisitions               |       |             | 1,234,032 |            |  |      |          |           |  |  |          |           
|Conversion of 5.375% Convertible Debentures                                    |       |             |          |            |  |      |          |           |  |  | 8,103,484 |           
|Restricted stock                                                               |       |             |          |            |  |      |          |           |  |  | 300,000   |           
|                                                                               |       |             |           |            |  |      |           |           |  |  |           |           
|                                                                               | Total |             |           | 10,517,637 |  |      |           | 9,435,628 |  |  |           | 18,980,204 | 
|                                                                               |       |             |           |            |  |      |           |           |  |  |           |           



|    |                              
|--- | -----------------------------
|17. | Commitments and Contingencies



| |       
| | ------
| | Leases

Alloy leases dELiA*s retail stores, office space,
warehouse space and certain computer equipment under
noncancellable leases with various expiration dates through
2013. As of January 31, 2004, future net minimum lease
payments were as follows:

|                             |  |                        |     |           |  |          |        |  |  |   |        |  
|---------------------------- |  | ---------------------- | --- | --------- |  | -------- | ------ |  |  | - | ------ | -
|                             |  | Capital                |     | Operating |  | Sublease
|Year Ending January 31,      |  | Leases                 |     | Leases    |  | Rent    
|                             |  |                        |     |           |  |         
|                             |  |                       
|                             |  | (Amounts in thousands)
|2005                         |  | $                      | 257 |           |  | $        | 13,879 |  |  | $ | (365   | )
|2006                         |  |                        | 39  |           |  |          | 12,874 |  |  |   | (313   | )
|2007                         |  |                        | 28  |           |  |          | 11,852 |  |  |   | (319   | )
|2008                         |  |                        | 20  |           |  |          | 10,061 |  |  |   | (203   | )
|2009                         |  |                        | 3   |           |  |          | 9,503  |  |  |   | (151   | )
|Thereafter                   |  |                        |    |           |  |          | 22,484 |  |  |   | (191   | )
|                             |  |                        |     |           |  |          |        |  |  |   |        |  
|Total minimum lease payments |  | $                      | 347 |           |  | $        | 80,653 |  |  | $ | (1,542 | )
|                             |  |                        |     |           |  |          |        |  |  |   |        |  
|Imputed interest             |  |                        | 19  |           |  |          |        |  |  |   |        |  
|                             |  |                        |     |           |  |          |        |  |  |   |        |  
|Capital lease obligations    |  | $                      | 328 |           |  |          |        |  |  |   |        |  
|                             |  |                        |     |           |  |          |        |  |  |   |        |  

Some of dELiA*s retail store leases include
contingent rent clauses that will result in higher payments if
the store sales exceed expected levels. Some of Alloys
operating leases also include renewal options and escalation
clauses with terms that are typical for the industry. In
addition, its obligated to pay a proportionate share of
increases in real estate taxes and other occupancy costs for
space covered by its operating leases.

Rent expense was approximately $2.6 million,
$3.3 million, and $8.1 million for fiscal 2001, 2002,
and 2003, respectively, under noncancellable operating leases.



| |                                               
| | ----------------------------------------------
| | Ordering, Fulfillment and Customer
    Service

Alloy entered into a master services agreement
with NewRoads, Inc., (New Roads), a third party
service organization, whereby New Roads provides Alloy with
comprehensive call center and order fulfillment

F-45



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

services in support of the Alloy, CCS, GFLA and
Old Glory direct marketing operations. All aspects relating to
fulfillment of customer orders are handled by New Roads,
including receipt and processing of customer orders, shipment of
merchandise to customers and customer service. In consideration
for performance of the services provided by New Roads during the
contract term, Alloy paid New Roads an initial start-up fee and
is charged a fixed fee per order processed plus a pass-through
of the variable costs, primarily labor, involved in order
processing.

During the third quarter of fiscal 2003, Alloy
terminated its agreement with New Roads following its strategic
decision to transfer substantially all of its fulfillment
activities for its Alloy and CCS direct marketing units from New
Roads, to its recently acquired distribution center in Hanover,
Pennsylvania and to discontinue its Old Glory and
Girlfriends LA brands during fiscal 2004.



| |          
| | ---------
| | Sales Tax

Alloy does not collect sales or other similar
taxes on shipments of goods into most states. However, various
states or foreign countries may seek to impose sales tax
obligations on such shipments. A number of proposals have been
made at the state and local levels that would impose additional
taxes on the sale of goods and services through the Internet. A
successful assertion by one or more states that Alloy should
have collected or be collecting sales taxes on the sale of
products could have a material effect on Alloys operations.



| |           
| | ----------
| | 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, 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 Alloys common stock between May 14, 1999
and December 6, 2000 and alleges violations of
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933
(the Securities Act) and Section 10(b) of the
Securities Exchange Act of 1934 (the
34 Act) and Rule 10b-5 promulgated
thereunder. On or about April 19, 2002, plaintiff filed an
amended complaint against Alloy, the individual defendants and
the underwriters of its initial public offering. The amended
complaint asserts violations of Section 10(b) of the
34 Act and mirrors allegations asserted against
scores of other issuers sued by plaintiffs counsel.
Pursuant to an omnibus agreement negotiated with representatives
of the plaintiffs counsel, Messrs. Diamond and
Johnson have been dismissed from the litigation without
prejudice. In accordance with the Courts case management
instructions, Alloy joined in a global motion to dismiss the
amended complaints, which were filed by the issuers
liaison counsel. By opinion and order dated February 19,
2003, the District Court denied in part and granted in part the
global motion to dismiss. With respect to Alloy, the Court
dismissed the Section 10(b) claim and let the plaintiffs
proceed on the Section 11 claim. Accordingly, the remaining
claim against Alloy will focus solely on whether the
registration statement filed in connection with its initial
public offering contained an untrue statement of a material fact
or omitted to state a material fact required to be stated
therein or necessary to make the statement therein not
misleading. Although Alloy has not retained a damages expert at
this time, the dismissal of the Section 10(b) claim likely
will reduce the potential damages that plaintiffs can claim.
Management believes that the remaining allegations against us
are without merit. The Company has retained Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, PC in connection with this matter.
Alloy participated in the Court-ordered mediation with the other
issuer defendants, the issuers insurers and plaintiffs to
explore whether a global resolution of the claims against the
issuers could be reached. To this end, a memorandum of
understanding setting forth the proposed terms of a settlement
was signed by counsel to several issuers, including Alloys
counsel, which is not binding upon Alloy. In a press release
dated June 26, 2003, plaintiffs counsel announced
that the memorandum of understanding had been signed, and that
the process of obtaining the approval of all parties to the
settlement was underway. Alloy is participating in that process.
Any definitive settlement, however, will require final approval
by the Court after notice to all class members and a fairness
hearing.

F-46



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On or about March 8, 2003, several putative
class action complaints were filed in the United States District
Court for the Southern District of New York naming as defendants
Alloy, James K. Johnson, Jr., Matthew C. Diamond and Samuel
A. Gradess. The complaints purportedly were filed on behalf of
persons who purchased Alloys common stock between
August 1, 2002 and January 23, 2003, and, among other
things, allege violations of Section 10(b) and
Section 20(a) of the 34 Act and Rule 10b-5
promulgated thereunder stemming from a series of allegedly false
and misleading statements made by Alloy to the market between
August 1, 2002 and January 23, 2003. At a conference
held on May 30, 2003, the Court consolidated the actions
described above. On August 5, 2003, Plaintiffs filed a
consolidated class action complaint (the Consolidated
Complaint) naming the same defendants, which supersedes
the initial complaint. Relying in part on information allegedly
obtained from former employees, the Consolidated Complaint
alleges, among other things, misrepresentations of Alloys
business and financial condition and the results of operations
during the period from March 16, 2001 through
January 23, 2003 (the class period), which
artificially inflated the price of its stock, including without
limitation, improper acceleration of revenue, misrepresentation
of expense treatment, failure to properly account for and
disclose consignment transactions, and improper deferral of
expense recognition. The Consolidated Complaint further alleges
that during the class period the individual defendants and the
Company sold stock and completed acquisitions using Alloys
stock. Alloy and the individual defendants filed a joint answer
to the Consolidated Complaint on September 26, 2003. The
individual defendants have retained the law firm of Cahill,
Gordon & Reindel in connection with this matter. Alloy
has retained the law firm of Katten Muchin Zavis Rosenman in
connection with this matter. Management believes that the
allegations against the Company and Messrs. Diamond,
Gradess and Johnson are without merit and intends to vigorously
defend the action.

dELiA*s currently is party to a purported class
action litigation, which originally was filed in two separate
complaints in Federal District Court for the Southern District
of New York in 1999 against dELiA*s Inc. and certain of its
officers and directors. These complaints were consolidated. The
consolidated complaint alleges, among other things, that the
defendants violated Rule 10b-5 under the Securities
Exchange Act of 1934 by making material misstatements and by
failing to disclose certain allegedly material information
regarding trends in the business during part of 1998. The
parties have reached an agreement on a full settlement of the
action, which was approved by the court on April 21, 2004.
The entire settlement amount will be covered by dELiA*s
insurance carrier.

On or about February 1, 2002, a complaint
was filed in the Circuit Court of Cook County, Illinois naming
dELiA*s as a defendant. The complaint purportedly was filed on
behalf of the State of Illinois under the False Claims Act and
the Illinois Whistleblower Reward and Protection Act and seeks
unspecified damages and penalties for dELiA*s alleged failure to
collect and remit use tax on items sold by dELiA*s through its
catalogs and website to Illinois residents. On April 8,
2004, the complaint was served on dELiA*s by the Illinois
Attorney Generals Office, which assumed prosecution of the
complaint from the original filer. dELiA*s has retained the law
firm of Katten Muchin Zavis Rosenman in connection with this
matter. Management believes the proceedings against dELiA*s are
without merit and intends to defend the action vigorously.

Alloy is also involved in additional legal
proceedings that have arisen in the ordinary course of business.
Alloy believes that other than those discussed above there is no
claim or litigation pending, the outcome of which could have a
material adverse effect on its financial condition or operating
results.



| |           
| | ----------
| | Guarantees

The Company has no significant guarantees.

F-47



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                      
|--- | ---------------------
|18. | Restructuring Charges

During fiscal 2002, the Company made the
strategic decision to outsource substantially all of its
fulfillment activities for its CCS unit to New Roads, Inc.
During the fourth quarter of fiscal 2002, the Company determined
that it would not be able to exit or sublease its existing
fulfillment facilities. In accordance with Emerging Issues Task
Force Issue No. 94-3 and SAB No. 100, the Company
recognized a restructuring charge of approximately
$2.6 million in the fourth quarter of fiscal 2002 in its
direct marketing segment, representing the future contractual
lease payments and the write-off of related leasehold
improvements. The Company did not incur any significant
personnel termination obligations as a result of the facility
closure.

During the first quarter of fiscal 2003, the
Company made the strategic decision to outsource substantially
all of its fulfillment activities for its GFLA unit to New
Roads. The Company determined that it would not be able to
sublease its existing fulfillment facilities due to real estate
market conditions. In accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities(Statement No. 146) and
SFAS No. 144, the Company recognized a charge of
approximately $380,000 in the first quarter of 2003 in its
direct marketing segment, representing the future contractual
lease payments, severance and personnel costs, and the write-off
of related leasehold improvements. Included in the charge, the
Company incurred severance and personnel costs of $44,000 as a
result of this facility closure.

During the third quarter of fiscal 2003, the
Company made the strategic decision to transfer substantially
all of its fulfillment activities for its Alloy and CCS direct
marketing units to its recently acquired distribution center in
Hanover, Pennsylvania. The Company notified New Roads that it
would be exiting the New Roads facilities during the first
half of fiscal 2004 and as a result the Company was required to
pay New Roads an exit fee. In accordance with Statement
No. 146, the Company recognized a charge of approximately
$350,000 in the third quarter of fiscal 2003 in its direct
marketing segment, representing future contractual exit
payments, which were paid in the fourth quarter of fiscal 2003.
The Company does not expect to incur any significant personnel
termination obligations as a result of exiting the New Roads
contract.

The following tables summarize the Companys
restructuring activities (in thousands):

|                                    |  |             |      |             |  |                 |        |       |  |   |     |   |  |   |        |  
|----------------------------------- |  | ----------- | ---- | ----------- |  | --------------- | ------ | ----- |  | - | --- | - |  | - | ------ | -
|                                    |  | Asset       |      | Contractual |  | Severance &     |        |      
|Type of Cost                        |  | Impairments |      | Obligations |  | Personnel Costs |        | Total
|                                    |  |             |      |             |  |                 |        |      
|Restructuring Costs Fiscal 2002     |  | $           | 820  |             |  | $               | 1,751  |       |  | $ |    |   |  | $ | 2,571  |  
|Payments and Write-offs Fiscal 2002 |  |             | (820 | )           |  |                 | (155   | )     |  |   |    |   |  |   | (975   | )
|                                    |  |             |      |             |  |                 |        |       |  |   |     |   |  |   |        |  
|Balance at January 31, 2003         |  |             |     |             |  |                 | 1,596  |       |  |   |    |   |  |   | 1,596  |  
|                                    |  |             |      |             |  |                 |        |       |  |   |     |   |  |   |        |  
|Restructuring Costs Fiscal 2003     |  |             | 31   |             |  |                 | 655    |       |  |   | 44  |   |  |   | 730    |  
|Payments and Write-offs Fiscal 2003 |  |             | (31  | )           |  |                 | (1,185 | )     |  |   | (44 | ) |  |   | (1,260 | )
|                                    |  |             |      |             |  |                 |        |       |  |   |     |   |  |   |        |  
|Balance at January 31, 2004         |  | $           |     |             |  | $               | 1,066  |       |  | $ |    |   |  | $ | 1,066  |  
|                                    |  |             |      |             |  |                 |        |       |  |   |     |   |  |   |        |  

A summary of the Companys restructuring
liability under contractual obligations related to a real estate
lease as of January 31, 2003 and January 31, 2004 is
as follows (in thousands):

|                                          |  |             |       |             |  |   |       | 
|----------------------------------------- |  | ----------- | ----- | ----------- |  | - | ----- | 
|                                          |  | January 31, |       | January 31,
|                                          |  | 2003        |       | 2004       
|                                          |  |             |       |            
|CCS facility, San Luis Obispo, California |  | $           | 1,596 |             |  | $ | 1,066 | 

The Company anticipates that the remaining
restructuring accruals will be settled by January 31, 2006.
As of January 31, 2004, the restructuring accruals are
classified on the Companys consolidated balance sheets as
a current liability and a long-term liability of approximately
$630,000 and $436,000 respectively.

F-48



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|19. | Segment Reporting

Alloy currently has three reportable segments:
direct marketing, retail stores, and sponsorship and other. The
merchandise segment and the sponsorship and other segment were
identified during 2002. As a result of the change in composition
of its reportable segments, Alloy reclassified information prior
to 2002 to conform to the new presentation. During September
2003, Alloy changed the name of its catalog and online commerce
business from the merchandise segment to the direct marketing
segment and identified a third reportable segment 
retail stores. Alloy began operation of its retail stores upon
the acquisition of dELiA*s in September 2003.

Alloys management reviews financial
information related to these reportable segments and uses the
measure of income from operations to evaluate performance and
allocated resources. The accounting policies of the segments are
the same as those described in Note 2. Reportable data for
Alloys reportable segments were as follows as of and for
the years ended January 31, 2002, 2003, and 2004. (amounts
in thousands):

|                      |  |              |         |                      |  |      |         |      |  |      |         |      |  |   |       |  |  |   |       |  |  |   |       | 
|--------------------- |  | ------------ | ------- | -------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                      |  | 2002         |         | 2003                 |  | 2004 |         | 2002 |  | 2003 |         | 2004
|                      |  |              |         |                      |  |      |         |      |  |      |         |     
|                      |  |              |         |                     
|                      |  | Total Assets |         | Capital Expenditures
|                      |  |              |         |                     
|Direct marketing      |  | $            | 91,366  |                      |  | $    | 116,275 |      |  | $    | 100,516 |      |  | $ | 373   |  |  | $ | 237   |  |  | $ | 1,347 | 
|Retail stores         |  |              |        |                      |  |      |        |      |  |      | 20,963  |      |  |   |      |  |  |   |      |  |  |   |      | 
|Sponsorship and other |  |              | 138,331 |                      |  |      | 248,313 |      |  |      | 261,024 |      |  |   | 112   |  |  |   | 1,952 |  |  |   | 832   | 
|Corporate             |  |              | 80,510  |                      |  |      | 70,012  |      |  |      | 66,888  |      |  |   | 1,602 |  |  |   | 2,128 |  |  |   | 1,588 | 
|                      |  |              |         |                      |  |      |         |      |  |      |         |      |  |   |       |  |  |   |       |  |  |   |       | 
|Total                 |  | $            | 310,207 |                      |  | $    | 434,600 |      |  | $    | 449,391 |      |  | $ | 2,087 |  |  | $ | 4,317 |  |  | $ | 3,767 | 

|                      |  |         |         |                  |  |   |         |  |  |   |         |  |  |   |        |  |  |   |       |  |  |   |        | 
|--------------------- |  | ------- | ------- | ---------------- |  | - | ------- |  |  | - | ------- |  |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                      |  |         |         |                  |  |   |         | 
|                      |  |         |         | Depreciation and
|                      |  | Revenue |         | Amortization    
|                      |  |         |         |                 
|                      |  |         |         |                  |  |   |         | 
|Direct marketing      |  | $       | 124,052 |                  |  | $ | 167,572 |  |  | $ | 156,821 |  |  | $ | 11,849 |  |  | $ | 2,969 |  |  | $ | 3,450  | 
|Retail stores         |  |         |        |                  |  |   |        |  |  |   | 30,103  |  |  |   |       |  |  |   |      |  |  |   | 1,355  | 
|Sponsorship and other |  |         | 41,570  |                  |  |   | 131,758 |  |  |   | 185,024 |  |  |   | 8,839  |  |  |   | 6,311 |  |  |   | 8,494  | 
|Corporate             |  |         |        |                  |  |   |        |  |  |   |        |  |  |   | 365    |  |  |   | 539   |  |  |   | 1,321  | 
|                      |  |         |         |                  |  |   |         |  |  |   |         |  |  |   |        |  |  |   |       |  |  |   |        | 
|Total                 |  | $       | 165,622 |                  |  | $ | 299,330 |  |  | $ | 371,948 |  |  | $ | 21,053 |  |  | $ | 9,819 |  |  | $ | 14,620 | 

|                                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                    |  | 2002                    |         | 2003 |  | 2004
|                                                                                    |  |                         |         |      |  |     
|                                                                                    |  |                        
|                                                                                    |  | Operating (Loss) Income
|                                                                                    |  |                        
|Direct marketing                                                                    |  | $                       | (9,967  | )    |  | $    | 3,108   |   |  | $ | (63,296 | )
|Retail stores                                                                       |  |                         |        |      |  |      |        |   |  |   | (2,574  | )
|Sponsorship and other activities                                                    |  |                         | 4,922   |      |  |      | 29,210  |   |  |   | 25,258  |  
|Corporate                                                                           |  |                         | (11,852 | )    |  |      | (12,292 | ) |  |   | (27,074 | )
|                                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|Total                                                                               |  | $                       | (16,897 | )    |  | $    | 20,026  |   |  | $ | (67,686 | )
|Interest income (expense), net                                                      |  |                         | 935     |      |  |      | 1,797   |   |  |   | (2,003  | )
|Gain (loss) on sales of marketable securities and
    write-off of investments, net |  |                         | 658     |      |  |      |        |   |  |   | (247    | )
|                                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  
|(Loss) income before income taxes                                                   |  | $                       | (15,304 | )    |  | $    | 21,823  |   |  | $ | (69,936 | )
|                                                                                    |  |                         |         |      |  |      |         |   |  |   |         |  

Included in Operating (Loss) Income are expenses
in fiscal 2002 of $2.6 million related to the direct
marketing segment for a restructuring charge to write-off
abandoned facility lease and equipment and a $1.0 million
amortization expense to the sponsorship segment representing the
reduction in net carrying amount of a marketing right that had
exceeded its discounted estimated future cash flows.

F-49



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Included in Operating (Loss) Income in fiscal
2003 are expenses in the direct marketing segment of
$58.6 million representing the impairment of goodwill and
other indefinite-lived intangible assets, an asset impairment
charge of $1.3 million, and a $730,000 expense due to
restructuring charges representing future contractual lease
payments, exit costs, severance and personnel costs, and the
write-off of related leasehold improvements relating to the
closing of the Companys GFLA facility and exiting from the
New Roads fulfillment facilities. Additionally, the sponsorship
and other segment includes a trademark impairment charge of
$2.0 million.

Cost of goods sold for the fiscal year 2003
included costs related to sponsorship and other revenues of
$2.4 million. Costs of goods sold for fiscal year 2002, had
no costs related to sponsorship and other revenues.

The carrying amount of goodwill by reportable
segment as of January 31, 2003 and January 31, 2004
was as follows (in thousands):

|                                 |       |             |         |             |  |   |         |         | 
|-------------------------------- | ----- | ----------- | ------- | ----------- |  | - | ------- | ------- | 
|                                 |       |            
|                                 |       | Goodwill   
|                                 |       |            
|                                 |       | January 31, |         | January 31,
|                                 |       | 2003        |         | 2004       
|                                 |       |             |         |            
|Sponsorship and other activities |       | $           | 191,602 |             |  | $ | 209,839 |        
|Retail stores                    |       |             |        |             |  |   |        |        
|Direct marketing                 |       |             | 78,751  |             |  |   | 64,957  |        
|                                 |       |             |         |             |  |   |         |        
|                                 | Total |             | $       | 270,353     |  |   | $       | 274,796 | 
|                                 |       |             |         |             |  |   |         |        



|    |                  
|--- | -----------------
|20. | Subsequent Events

On March 26, 2004, Alloy acquired all of the
issued and outstanding stock of Advertising, Inc. InSite is a
national indoor media company targeting consumers between the
ages of 18-34. OnSite Promotions, a division of InSite, is an
event-marketing and promotions company that creates customized
programs for its clients. The InSite network and the OnSite
division further extend Alloys reach to the 18-34
demographic through its promotional marketing arm, AMP (Alloy
Marketing and Promotions) and its media and marketing division,
360 Youth. To complete the acquisition, Alloy paid
approximately $5.1 million in cash and issued shares of
common stock valued at approximately $2.9 million plus
additional consideration if certain financial performance
targets are met.

Alloy did not file its Annual Report on
Form 10-K for the fiscal year ended January 31, 2004
by the extended due date of April 30, 2004. As a result, on
May 4, 2004, Alloy received a letter from the Nasdaq staff
indicating that Alloy is not in compliance with the filing
requirements for continued listing on Nasdaq as set forth in
Nasdaq Marketplace Rule 4310(c)(14). This letter is
automatically sent out by the Nasdaq staff when a late filing
occurs. As stated in the Nasdaq letter, Alloys common
stock is subject to delisting from the Nasdaq Stock Market
because of such late filing. Additionally, because of the late
filing, the fifth character E was appended to
Alloys trading symbol. At the opening of business on
May 6, 2004, the trading symbol for Alloys securities
was changed from ALOY to ALOYE.

Alloy has requested a hearing before the Nasdaq
Listing Qualifications Panel (the Panel) to review
the Staff determination, and the delisting proceedings have been
stayed automatically pending the results of that hearing. The
hearing has been scheduled for May 27, 2004. Alloy expects
to be in compliance with the Nasdaq listing requirements on or
before the hearing date and therefore anticipates that its
request for continued listing will be granted, although no
assurance can be given that the Panel will grant Alloys
request. Upon the filing of its Annual Report on Form 10-K,
of which these financial statements are a part, Alloy believes
it will regain compliance with the requirements for continued
listing on Nasdaq.

F-50



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##### Table of Contents



ALLOY, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|21. | Quarterly Results (Unaudited)

The following table sets forth unaudited
financial data for each of Alloys last eight fiscal
quarters. Amounts are in thousands, except share and per share
data:

|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |         |  
|--------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------- | ------ | --------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------- | ------- | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------ | - | - | ------- | ------- | -
|                                                                            |                                                                         |                             |        |                            
|                                                                            |                                                                         | Year Ended January 31, 2003 |        | Year Ended January 31, 2004
|                                                                            |                                                                         |                             |        |                            
|                                                                            |                                                                         | First                       |        | Second                      |  | Third   |        | Fourth  |  | First   |        | Second  |  | Third   |         | Fourth 
|                                                                            |                                                                         | Quarter                     |        | Quarter                     |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Quarter |         | Quarter
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |        
|Net direct marketing revenues                                               |                                                                         | $                           | 31,067 |                             |  | $       | 31,530 |         |  | $       | 41,270 |         |  | $       | 63,706  |         |   | $ | 29,971 |        |   | $ | 30,028 |        |   | $ | 38,585  |        |   | $ | 58,237  |        
|Retail store revenues                                                       |                                                                         |                             |       |                             |  |         |       |         |  |         |       |         |  |         |        |         |   |   |       |        |   |   |       |        |   |   | 9,973   |        |   |   | 20,130  |        
|Sponsorship and other activities revenues                                   |                                                                         |                             | 19,366 |                             |  |         | 20,443 |         |  |         | 51,956 |         |  |         | 39,993  |         |   |   | 39,473 |        |   |   | 50,473 |        |   |   | 57,193  |        |   |   | 37,885  |        
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Total revenues                                                              |                                                                         |                             | 50,433 |                             |  |         | 51,973 |         |  |         | 93,226 |         |  |         | 103,699 |         |   |   | 69,444 |        |   |   | 80,501 |        |   |   | 105,751 |        |   |   | 116,252 |        
|Cost of revenues                                                            |                                                                         |                             | 21,560 |                             |  |         | 24,163 |         |  |         | 47,687 |         |  |         | 51,739  |         |   |   | 37,975 |        |   |   | 41,125 |        |   |   | 52,473  |        |   |   | 57,806  |        
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Gross profit                                                                |                                                                         |                             | 28,873 |                             |  |         | 27,810 |         |  |         | 45,539 |         |  |         | 51,960  |         |   |   | 31,469 |        |   |   | 39,376 |        |   |   | 53,278  |        |   |   | 58,446  |        
|Operating expenses:                                                         |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|                                                                            | Selling and marketing                                                   |                             |        | 21,425                      |  |         |        | 22,498  |  |         |        | 28,055  |  |         |         | 36,812  |   |   |        | 25,379 |   |   |        | 31,490 |   |   |         | 41,290 |   |   |         | 47,556  |  
|                                                                            | General and administrative                                              |                             |        | 4,131                       |  |         |        | 3,985   |  |         |        | 4,701   |  |         |         | 4,422   |   |   |        | 4,958  |   |   |        | 6,556  |   |   |         | 9,859  |   |   |         | 12,597  |  
|                                                                            | Amortization of goodwill and other intangible
    assets                |                             |        | 535                         |  |         |        | 1,189   |  |         |        | 1,180   |  |         |         | 2,651   |   |   |        | 1,785  |   |   |        | 1,896  |   |   |         | 2,083  |   |   |         | 2,123   |  
|                                                                            | Impairment of goodwill and other indefinite-lived
    intangible assets |                             |        |                            |  |         |        |        |  |         |        |        |  |         |         |        |   |   |        |       |   |   |        |       |   |   |         |       |   |   |         | 60,638  |  
|                                                                            | Impairment of long-lived assets                                         |                             |        |                            |  |         |        |        |  |         |        |        |  |         |         |        |   |   |        |       |   |   |        |       |   |   |         |       |   |   |         | 1,315   |  
|Restructuring charges                                                       |                                                                         |                             |       |                             |  |         |       |         |  |         |       |         |  |         | 2,571   |         |   |   | 380    |        |   |   |       |        |   |   | 350     |        |   |   |        |        
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Total operating expenses                                                    |                                                                         |                             | 26,091 |                             |  |         | 27,672 |         |  |         | 33,936 |         |  |         | 46,456  |         |   |   | 32,502 |        |   |   | 39,942 |        |   |   | 53,582  |        |   |   | 124,229 |        
|Income (loss) from operations                                               |                                                                         |                             | 2,782  |                             |  |         | 138    |         |  |         | 11,603 |         |  |         | 5,504   |         |   |   | (1,033 | )      |   |   | (566   | )      |   |   | (304    | )      |   |   | (65,783 | )      
|Interest income (expense), net                                              |                                                                         |                             | 535    |                             |  |         | 586    |         |  |         | 330    |         |  |         | 248     |         |   |   | 287    |        |   |   | (3     | )      |   |   | (970    | )      |   |   | (1,317  | )      
|Realized (loss) on marketable securities and
    write-off of investments   |                                                                         |                             |       |                             |  |         | 11     |         |  |         |       |         |  |         | 86      |         |   |   |       |        |   |   |       |        |   |   |        |        |   |   | (247    | )      
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Income (loss) before income taxes                                           |                                                                         |                             | 3,317  |                             |  |         | 735    |         |  |         | 11,933 |         |  |         | 5,838   |         |   |   | (746   | )      |   |   | (569   | )      |   |   | (1,274  | )      |   |   | (67,347 | )      
|                                                                            | Provision for income taxes                                              |                             |        | 247                         |  |         |        | 197     |  |         |        | 336     |  |         |         | (2,251  | ) |   |        | (358   | ) |   |        | (248   | ) |   |         | 5,543  |   |   |         | 342     |  
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|                                                                            | Net income (loss)                                                       |                             |        | 3,070                       |  |         |        | 538     |  |         |        | 11,597  |  |         |         | 8,089   |   |   |        | (388   | ) |   |        | (321   | ) |   |         | (6,817 | ) |   |         | (67,689 | )
|Preferred stock dividends and accretion of
    discount                     |                                                                         |                             | 558    |                             |  |         | 479    |         |  |         | 605    |         |  |         | 458     |         |   |   | 453    |        |   |   | 702    |        |   |   | 393     |        |   |   | 396     |        
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Net income (loss) attributable to common
    stockholders                   |                                                                         | $                           | 2,512  |                             |  | $       | 59     |         |  | $       | 10,992 |         |  | $       | 7,631   |         |   | $ | (841   | )      |   | $ | (1,023 | )      |   | $ | (7,210  | )      |   | $ | (68,085 | )      
|                                                                            |                                                                         |                             |        |                             |  |         |        |         |  |         |        |         |  |         |         |         |   |   |        |        |   |   |        |        |   |   |         |        |   |   |         |        
|Basic net income (loss) attributable to common
    stockholders per share   |                                                                         | $                           | 0.07   |                             |  | $       | 0.00   |         |  | $       | 0.28   |         |  | $       | 0.19    |         |   | $ | (0.02  | )      |   | $ | (0.02  | )      |   | $ | (0.17   | )      |   | $ | (1.65   | )      
|Diluted net income (loss) attributable to common
    stockholders per share |                                                                         | $                           | 0.06   |                             |  | $       | 0.00   |         |  | $       | 0.28   |         |  | $       | 0.18    |         |   | $ | (0.02  | )      |   | $ | (0.02  | )      |   | $ | (0.17   | )      |   | $ | (1.65   | )      

F-51



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##### Table of Contents



SCHEDULE II

ALLOY, INC.

VALUATION AND QUALIFYING ACCOUNTS

|                                                                               |                  |                        |  |           |  |            |  |               |  |  |  |        |  |  |  |        | 
|------------------------------------------------------------------------------ | ---------------- | ---------------------- |  | --------- |  | ---------- |  | ------------- |  |  |  | ------ |  |  |  | ------ | 
|                                                                               |                  | Balance at             |  |           |  |            |  |              
|                                                                               |                  | Beginning of           |  |           |  | Usage/     |  | Balance at   
|Description                                                                    |                  | Period                 |  | Additions |  | Deductions |  | End of Period
|                                                                               |                  |                        |  |           |  |            |  |              
|                                                                               |                  |                       
|                                                                               |                  | (Amounts in thousands)
|Allowance for doubtful accounts:                                               |                  |                        |  |           |  |            |  |               |  |  |  |        |  |  |  |       
|                                                                               | January 31, 2002 |                        |  | 1,456     |  |            |  | 1,464         |  |  |  | 777    |  |  |  | 2,143  | 
|                                                                               | January 31, 2003 |                        |  | 2,143     |  |            |  | 1,724         |  |  |  | 457    |  |  |  | 3,410  | 
|                                                                               | January 31, 2004 |                        |  | 3,410     |  |            |  | 1,024         |  |  |  | 1,098  |  |  |  | 3,336  | 
|Reserve for sales returns and allowances:                                      |                  |                        |  |           |  |            |  |               |  |  |  |        |  |  |  |       
|                                                                               | January 31, 2002 |                        |  | 766       |  |            |  | 13,553        |  |  |  | 13,366 |  |  |  | 953    | 
|                                                                               | January 31, 2003 |                        |  | 953       |  |            |  | 22,034        |  |  |  | 21,716 |  |  |  | 1,271  | 
|                                                                               | January 31, 2004 |                        |  | 1,271     |  |            |  | 23,189        |  |  |  | 22,981 |  |  |  | 1,479  | 
|Valuation allowance for deferred tax assets:                                   |                  |                        |  |           |  |            |  |               |  |  |  |        |  |  |  |       
|                                                                               | January 31, 2002 |                        |  | 19,937    |  |            |  |              |  |  |  | 467    |  |  |  | 19,470 | 
|                                                                               | January 31, 2003 |                        |  | 19,470    |  |            |  |              |  |  |  | 16,715 |  |  |  | 2,755  | 
|                                                                               | January 31, 2004 |                        |  | 2,755     |  |            |  | 33,554        |  |  |  |       |  |  |  | 36,309 | 
|Unamortized discount on Series A and
    Series B Convertible Preferred Stock: |                  |                        |  |           |  |            |  |               |  |  |  |        |  |  |  |       
|                                                                               | January 31, 2002 |                        |  |          |  |            |  | 5,395         |  |  |  | 2,190  |  |  |  | 3,205  | 
|                                                                               | January 31, 2003 |                        |  | 3,205     |  |            |  |              |  |  |  | 1,131  |  |  |  | 2,074  | 
|                                                                               | January 31, 2004 |                        |  | 2,074     |  |            |  |              |  |  |  | 1,050  |  |  |  | 1,024  | 

S-1