The electrochemical performance of alloy anodes has been reviewed in a previous paper [1]. In this work, the fundamental understanding of lithium-insertion/extraction mechanism in alloy anodes is discussed. The article summarizes the different types of lithium-reaction processes observed in Si, Sn, Sb, Al, Mg and their alloys, with particular emphasis on the characteristics unique to alloy anodes, including the sloping voltage profiles, lithiation amorphization, cycling hysteresis and reaction-potential depression. These unique characteristics are discussed with respect to the effect of interface and surface energies on the phase transformation and thermodynamic stability of fine alloy particles.