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While still at work on So Big Colleen’s next film was slated to be the June Mathis story Bobbed Hair. In the proposed story Colleen’s character, pursued by two suitors, becomes entangled with bootleggers. It had all the wild parties and drinking and fights one could ask for. The title alone lent itself to the newly emerging Colleen Moore "flapper" persona; her bobbed style had become the very embodiment of the new young woman, and was quickly duplicated. Her bobbed haircut had been refined from the short cut of Flaming Youth to her trademarked "Dutchboy Bob." Soon, Colleen's hairstyles and costumes in her films would be closely followed and commented upon (and in changing her look would separate her new characters from the old ones. As a general rule, she wore bobbed hair in her "flapper" films and comedies, the roles that were more modern and snappier, while she changed her hair style or even her hair color for her more serious and weightier roles. Whenever she changed her hairstyle, the newspapers commented upon it. In the past she endorsed products, the emphasis on her Irish-ness making her a particularly visible spokesman to appeal to new immigrants. As time passed and her fame increased, her name became nothing short of solid  gold.
    Of all the girls that are so smart,
    There's none like pretty Sally; she is the darling of my heart,
    And she lives in our alley. There is no lady in the land,
    As half so sweet as Sally: She is the darling of my heart,
    And she lives in our alley.”
         --"Sally in Our Alley," by Henry Carey

The original play was based on the popular song "ally in Our Alley." The play, a musical comedy, was produced in New York at the Broadway Theatre, opening August 29th, 1902, the story of a good-hearted Jewish girl named Sarah but called “Sally.” The story was about her relationships with family and friends and the people in her neighborhood alley who she tries to help whenever trouble strikes. It was the basis for a 1916 film of the same title and helped inspire the Ziegfeld show Sally. The musical was originally intended as a vehicle for Marilyn Miller, the dancer who was a fast-rising Broadway star.

Sally ran 570 shows. All it needed was for someone to figure out a way to turn the musical spectacle into a silent film, and someone who could play the part of Sally as well as Marilyn Miller. The story and staging was the direct opposite of So Big.

As written for the screen, Sally (Colleen) is adopted out of the orphanage by Mrs. Du Fay (Louise Beaudet), who teaches dance. Hard times hit and Du Fay looses her students. Sally finds work as a dishwasher at the Ally Inn cafe, run by Pops Shendorf (Dan Mason) where she meets the Duke of Checkergovinia (Leon Errol), a fallen nobleman working as a waiter. She also meets Blair Farquar (Lloyd Hughes, Colleen's frequent co-star), a wealthy man who frequents the cafe and catches Sally’s eye. Sally dreams of a better life. When given a chance to dance at the cafe, she is a hit. She acquires an agent who has her pose as a famous Russian dancer. While performing at a reception held by Mrs. Ten Broeck (Myrtle Stedman) she runs into Farquar, who falls in love with her. She rejects his affections, knowing that when she was a lowly drudge she was not good enough for him.

Her performance at the ball is magnificent and she enjoys the adulation of the audience until the moment is ruined and the ruse revealed by Pops, who has followed her to the soirée. He exposes her as his dishwasher and she is banished from the Farquar home. One of the guests at the reception, however, was Florenz Ziegfeld, who signs Sally to dance in the Follies. She becomes a star, and Blair eventually convinces her to reconsider her rejection of him... in the end she decides to marry him.

For the production a gown designed by Mme. Francis of New York. Once it had been established after Flaming Youth that picture-goers paid attention to what Colleen’s film fashions, marketing of fashions and cosmetics became tied into nearly all of her films. Wardrobe became very important, unlike the days when she was making Slippy McGee, where she was looking for hand-me-downs.

It was during this film that she met a young man on the crew with the unusual and invented title of "comedy constructor." Mervyn LeRoy, who would go on to become an important director and eventually direct Colleen, though after a rough patch between Colleen and her studio.