Form 10-Q

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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Yes ¨ No x

As of August 1, 2007, there were 37,573,758 shares outstanding of the registrant’s Common Stock.

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

The condensed consolidated interim financial statements included herein have been prepared by Dreams, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K, for the fiscal year ended March 31, 2007, filed with the SEC on June 29, 2007.

The accompanying condensed consolidated interim financial statements have been prepared, in all material respects, in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28 and reflect, in management’s opinion, all adjustments, which are of normal recurring nature, necessary to summarize fairly the financial position and results of operations for such periods. Due to the seasonality of our business, the results of operations for such interim periods are not necessarily indicative of the results expected for future quarters or the full fiscal year.

Dreams, Inc. and its subsidiaries (collectively the “Company”) are principally engaged in the manufacture, distribution and retailing of sports memorabilia and licensed sports products and acrylic display cases through multiple distribution channels; including brick & mortar, and internet. The Company is also in the business of selling Field of Dreams^® store franchises, as well as athlete representation and corporate marketing of individual athletes. The Company’s customers are located throughout the United States of America.

The accompanying condensed consolidated interim financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation.

The Company received approval from a majority of its shareholders on January 25, 2007 to effectuate a reverse stock split of its common shares. Consequently, the Board determined that a 1 for 6 reverse stock split would be effective on January 30, 2007. All share and per share amounts have been retroactively adjusted to reflect this reverse stock split.

For the three months ended June 30, 2007, weighted average shares outstanding for basic earnings per share purposes was 36,958,391. For the three months ended June 30, 2007, weighted average shares outstanding for the diluted earnings per share purposes was 37,287,900.

For the three months ended June 30, 2006, weighted average shares outstanding for basic earnings per share purposes and diluted earnings per share purposes was 29,683,786. Stock options to purchase up to 806,093 shares of the Company’s common stock with an exercise price ranging from $.48 to $1.50 per share were not considered in the calculation of diluted earnings per share for the three month period ended June 30, 2006, due to their anti-dilutive effects.

On April 1, 2006, the Company adopted Statement of Financial Accounting Standards 123(R), Share-Based Payment. Accordingly, the Company is now recognizing share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. The Company adopted FAS No. 123(R) under the modified prospective transition method and, consequently, prior period results have not been restated. Under this transition method, in fiscal 2007, the Company’s reported share-based compensation expense will include expense related to share-based compensation awards granted subsequent to April 1, 2006, which is based on the grant date fair value estimated in accordance with the provisions of FAS No. 123(R), as well as any unrecognized compensation expense related to non-vested awards that were outstanding as of the date of adoption. Prior to April 1, 2006, the Company applied APB Opinion No. 25 “Accounting for Stock Issued to Employees” in accounting for its employee share-based compensation and applied FAS No. 123 “Accounting for Stock Issued to Employees” for disclosure purposes only. Under APB 25, the intrinsic value method was used to account for share-based employee compensation plans and compensation expense was not recorded for awards granted with no intrinsic value. The FAS No. 123 disclosures include pro forma net earnings (loss) and earnings (loss) per share as if the fair value-based method of accounting had been used. Determining the appropriate fair value model and calculating the fair value of share-based compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the

share-based compensation awards, the Company’s common stock price volatility, and the rate of employee forfeitures. The assumptions used in calculating the fair value of share-based compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, share-based compensation expense could be materially different from what has been recorded in the current period.

For the three months ended June 30, 2007, the Company recorded $68 of pre-tax share-based compensation expense under FAS No. 123(R), recorded in selling and administrative expense in the Condensed Consolidated Statement of Operations. This expense was offset by approximately $26 in a deferred tax benefit for non-qualified share–based compensation.

The following disclosure provides information regarding the Company’s share-based compensation awards, all of which are classified as equity awards in accordance with FAS No. 123(R):

Stock Options—The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to outside members of the Board of Directors of the Company as well as independent contractors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Options generally vest immediately, however, the Company has granted options that vest over three to five years. Awards generally expire three to five years after the date of grant.

Vested options totaled 333,246 with an average price of $.97. Total outstanding options that were “in the money” at June 30, 2007 were 421,083 with an average price per option of $.87. Of those options, the vested “in the money” options totaled 329,080 with an average price of $.95 and the “in the money” unvested options totaled 92,003.

The following table summarizes the stock option activity from April 1, 2007 through June 30, 2007:

The following table breaks down the number of outstanding options with their corresponding contractual life as well as the exerciseable weighted average (WA), outstanding exercise price, number of vested options with the corresponding exercise price by price range.

At June 30, 2007, exercisable options had aggregate intrinsic values of approximately $775.

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

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement No. 109, on April 1, 2007. The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The periods subject to examination for the Company’s federal return are the fiscal 2006 and 2007 tax years. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

It is the Company policy to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter.

The tax effect of temporary differences, primarily asset reserves and accrued liabilities, gave rise to the Company’s deferred tax asset in the accompanying June 30, 2007 and March 31, 2007 consolidated balance sheets. Deferred income taxes are recognized for the tax consequence of such temporary differences at the enacted tax rate expected to be in effect when the differences reverse.

The income tax provision for the respective three-months ended June 30, 2007 and 2006 differ from the federal statutory rate primarily as a result of state income taxes and, to a lesser extent, other permanent differences.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to current period’s presentation.

The Company has two reportable segments as identified by information reviewed by the Company’s chief operating decision maker: the Manufacturing/Distribution segment and the Retail Operations segment.

The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products and acrylic display cases. Sales are handled primarily through in-house salespersons that sell to specialty retailers and other distributors in the United States. The Company’s manufacturing and distributing facilities are located in the United States. The majority of the Company’s products are manufactured in these facilities.

The Retail Operations segment is comprised of traditional brick and mortar and Internet:

As of June 30, 2007, the Company owned and operated 16 Field of Dreams^® stores offering a selection of sports & entertainment memorabilia and collectibles. The Company has multiple stores in the south Florida and Las Vegas markets. The Company is also targeting the opening of its prototype FansEdge store in Chicago later this year.

The Company’s e-commerce components feature FansEdge.com and ProSportsMemorabilia.com along with a complement of athlete web sites including, but not limited to; www.peterose.com, www.danmarino.com, and www.dickbutkus.com. These e-commerce retailers sell a diversified selection of sports licensed products and autographed memorabilia on the web. These e-commerce operations have provided for the fastest growing area of our retail segment.

All of the Company’s revenue generated in the first three months ended June 30, 2007 and June 30, 2006 was derived in the United States and all of the Company’s assets are located in the United States.

Summarized financial information concerning the Company’s reportable segments is shown in the following tables. Corporate related items, results of insignificant operations and income and expenses not allocated to reportable segments are included in the reconciliations to consolidated results table.

Segment information for the three month periods ended June 30, 2007 and June 30, 2006 was as follows:

Effective June 16, 2007, the Company entered into an asset purchase agreement with M & S, Inc. The agreement calls for the Company to acquire certain assets associated with the retail operations of existing Field of Dreams^® stores at The Mall at Wellington Green, Sawgrass Mills Mall, Town Center at Boca Raton, the PGA Gardens Mall (all located in South Florida) and Menlo Park in New Jersey. An executive of the Company is also a 25% owner of the selling group. The assets acquired consist of all inventory located at these stores, all interests in the leases which have been or are to be assigned, all other tangible properties and assets used or held for use at the Field of Dreams stores, including equipment, furniture and fixtures and all intellectual property assets of the Seller. However, leases associated with the PGA Gardens Mall and Menlo Park were not assumed by the Company. The purchase price is the assumption of debts and trade payables up to an equivalent amount of actual inventory which approximates $450.

At March 31, 2007, the Company had an accrued earn-out obligation to the former shareholders of FansEdge per the stock purchase agreement of October, 2003. One of the former shareholders of FansEdge is a named executive officer. The officer’s share of the earn-out distribution for fiscal year 2007 was approximately $307. This amount was paid in July of 2007. Contractually, that was the final year of the earn-out arrangement between Dreams and the former shareholders of FansEdge.

Upon the closing of an acquisition, management estimates the fair values of assets and liabilities acquired and consolidates the acquisition as quickly as possible. However, it routinely takes time to obtain all of the pertinent information to finalize the acquired company’s balance sheet and supporting schedules and to adjust the acquired company’s accounting policies,

procedures, books and records to the Company’s standards. As a result, it may take several quarters before the Company is able to finalize those initial fair value estimates. Accordingly, it is not uncommon for initial estimates to be subsequently revised.

Effective June 16, 2007, the Company acquired via an asset purchase agreement with M & S, Inc., a Florida corporation, assets associated with the retail operations of their Field of Dreams^® stores at The Mall at Wellington Green, Sawgrass Mills Mall, Town Center at Boca Raton, the PGA Gardens Mall (all located in south Florida) and Menlo Park in New Jersey. Operating leases associated with the PGA Gardens Mall and Menlo Park was not assumed by the Company. The purchase price consisted of approximately $450 in inventory along with the assumption of debts and trade payables up to an equivalent amount. The Company did not record any goodwill as a result of the transaction.

The Company has certain contracts with several athletes which will require the Company to make minimum payments to these athletes over the next two years. The payments are in exchange for autographs and licensing rights on inventory items to be received in the future.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements.

On June 6, 2007, the Company entered into a three-year loan and security agreement with Comerica Bank. Comerica provided the Company with $18 million in credit facilities; consisting of a $15 million revolver and a $3 million “acquisition line” to fund the cash portion of future strategic acquisitions. The loan is secured by all of the assets of the Company and its divisions. The interest rate on outstanding loan balances is prime minus .750 or 30 day Comerica costs of funds plus 1.50% for the revolver and prime minus .250 or 30 day Comerica costs of funds plus 2.25% for funds drawn from the acquisition line. The Company used $6.7 million of the revolver to pay-off the loan balances owed to the Company’s prior senior lender, La Salle Bank. In addition, the Company incurred about $45 in closing fees with Comerica Bank. The credit facility requires that certain performance financial covenants be met on a quarterly basis. The advance rates for eligible accounts receivable is 80% and 60% for the Company’s eligible inventories. As of June 30, 2007, the Company had $8.4 million outstanding on the revolver. The Company had approximately $3.5 million available on the revolver and the full $3.0 million on the acquisition line.

Effective August 1, 2007, the Company entered into a stock purchase agreement with the shareholders of BKJ Consulting Corp., an Illinois corporation that owned and operated Schwartz Sports, a Chicago based sports memorabilia company. The Company acquired 100% of the outstanding shares of BKJ Consulting Corp. in exchange for 500,000 newly issued, restricted common shares of Dreams, Inc. The Company disclosed this transaction on a Form 8-K dated August 2, 2007. The effect of this transaction, if any, on the current quarter has not been determined. As a result, the financial statements have not been adjusted.

Effective July 14, 2007, the Company entered into an asset purchase agreement with The Pentagon Group of Orlando, Inc., a Florida corporation that owned and operated a franchised Field of Dreams^® store in Orlando, Florida. The Company paid $50 at closing and provided a $50 one-year promissory note, without interest in return for approximately $50 in inventory and all lease-hold improvements and other tangible assets used in the operation. The effect of this transaction, if any, on the current quarter has not been determined. As a result, the financial statements have not been adjusted.

Certain statements in this Form 10-Q under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements are indicated by words or phrases such as “anticipates,” “projects,” “management believes,” “Dreams believes,” “intends,” “expects,” and similar words or phrases. Such factors include, among others, the following: competition; seasonality; success of operating initiatives; new product development and introduction schedules; acceptance of new product offerings; franchise sales; advertising and promotional efforts; adverse publicity; expansion of the franchise chain; availability, locations and terms of sites for franchise development; changes in business strategy or development plans; availability and terms of capital; labor and employee benefit costs; changes in government regulations; and other factors particular to the Company.

Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements of Dreams may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. All subsequent written and oral forward-looking statements attributable to Dreams or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph. Dreams disclaims any obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Dreams, Inc., headquartered in Plantation, Florida has evolved into the premier vertically integrated licensed sports products firm in the industry. This has been accomplished, in part, via organic growth and strategic acquisitions. Our continuing pursuit of this dual strategy should result in our becoming a principal leader and a consolidator in this highly fragmented industry. We believe our senior management and corporate infrastructure is well suited to acquire both large and small industry competitors.

Specifically, we are engaged in multiple aspects of the licensed sports products and autographed memorabilia industry through a variety of distribution channels.

Key components of our organic growth strategy include building brand recognition; improving sales conversion rates both in our stores and web sites; exploring additional distribution channels for our products; and lastly, cross pollinating corporate assets among our various operating divisions. Management believes that there remain significant benefits to cross pollinating the various corporate assets and leveraging the vertically integrated model that has been constructed over the years.

We have had success with the marketing of our products on-line via FansEdge.com and the complement of each of our web properties. The Company’s sales associated with these e-commerce initiatives have grown from $4 million in fiscal 2004 to over $31 million last fiscal year. Internet sales for our quarters ending June 30, 2007 and June 30, 2006, were $4.6 million and $3.1 million, respectively.

Our strategic acquisition initiatives will focus on e-commerce companies, brick and mortar retailers, other manufacturers of licensed sports and entertainment products and collectibles. These are companies that can offer incremental distribution channels for our products and whose value can be enhanced by placing them under the Dreams corporate umbrella. Normally, upon successfully completing these types of acquisitions, we seek to retain key management personnel while instituting a growth culture. Hence, our ability to evaluate potential acquisition candidates and consummate these transactions will remain an integral part of our business model.

We believe we have sufficient capital available under our new credit facilities to fund these corporate initiatives.

Our overall objective is to establish a market leading totally licensed, sports and entertainment products enterprise and true multi-channel retailer. That is, to service the customer by every possible means necessary in an efficient and professional manner, driving and building our brands through on-line, brick and mortar, catalogue, and in-bound and out-bound call centers.

We review our operations based on both our financial results and various non financial measures. Management’s focus in reviewing performance begins with growth in sales, margin integrity and operating income. On the expense side, with a majority of our sales being achieved as an on-line retailer of licensed sports products, we spend a disproportionate amount of our operating expenses in internet marketing. Therefore, we continuously monitor the return on investment of these particular expenses. As the online retail market continues to grow, we believe that the market for our products sold over the Internet will also grow.

Some of the important non financial measures which management reviews are; unique visitors to our web sites, foot traffic in our stores, sales conversion rates and average sold unit prices.

Historically, the third quarter of our fiscal year (October to December) has accounted for a greater proportion of our operating income than have each of the other three quarters of our fiscal year. This is primarily due to increased activities as a result of the holiday season. We expect that we will continue to experience quarterly variations and operating results principally as a result of the seasonal nature of our industry. Other factors also make for a significant fluctuation of our quarterly results, including the timing of special events, the general popularity of a specific team that wins a championship or an individual athlete who enters their respective sports’ Hall of Fame, the amount and timing of new sales contributed by new stores, the timing of personal appearances by particular athletes and general economic conditions. Additional factors may cause fluctuations and expenses, including the costs associated with the opening of new stores, the integration of acquired businesses and stores into our operations, and corporate expenses to support our expansion and growth strategy.

We set ourselves apart from other companies with our diversified product and services line, as well as our relationships with sports leagues, agents and athletes. Management believes we can become a consolidator in this highly fragmented industry.

As used in this Form 10-Q “we”, “our”, “us”, “the Company” and “Dreams” refer to Dreams, Inc. and its subsidiaries unless the context requires otherwise.

The preparation of our financial statements in conformity with generally accounting principles accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with

absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to our financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances.

Management believes that the following may involve a higher degree of judgment or complexity:

The Company’s allowance for doubtful accounts is based on management’s estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be an amount sufficient to respond to normal business conditions. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact upon the Company’s operations. The Company’s current allowance for doubtful accounts is $33.

The Company establishes a reserve based on historical experience and specific reserves when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to operations results when the estimated net realizable value of inventory items declines below cost. Management regularly reviews the Company’s investment in inventories for declines in value. The Company’s current reserve for inventory obsolescence is $227.

Significant management judgment is required in developing the Company’s provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. The Company evaluates quarterly its ability to realize its deferred tax assets and adjusts the amount of its valuation allowance, if necessary. The Company provides a valuation allowance against its deferred tax assets when it believes that it is more likely than not that the asset will not be realized. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. After consideration of all the evidence, both positive and negative, management has determined that no valuation allowance as of June 30, 2007 and June 30, 2006 was necessary.

The Company performs goodwill impairment tests on at least an annual basis and more frequently in certain circumstances. The Company cannot predict the occurrence of certain events that might adversely affect the reported value of goodwill. For example, such events may include strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company’s customer base, or a material negative change in its relationships with significant customers. If events

occur or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount, goodwill will be tested for impairment. The Company will recognize an impairment loss if the carrying value of the asset exceeds the fair value determination. The Company performs an annual fair value assessment of its goodwill on March 31 of each year, and no impairment was noted in fiscal 2007 or 2006.

The Company recognizes retail (including e-commerce sales) and wholesale/distribution revenues at the later of (a) the time of shipment or (b) when title passes to the customers, all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Retail revenues and wholesale/distribution are recognized at the time of sale. Return allowances, which reduce gross sales, are estimated using historical experience.

Revenues from the sale of franchises are deferred until the Company fulfills its obligations under the franchise agreement and the franchised unit opens. The franchise agreements provide for continuing royalty fees based on a percentage of gross receipts.

Management fee revenue related to the representation and marketing of professional athletes is recognized when earned and is reflected net of its related costs of sales. The majority of the revenue generated from the representation and marketing of professional athletes relates to services as an agent. In these arrangements, the Company is not the primary obligor in these transactions but rather only receives a net agent fee.

Revenues from industry trade shows are recognized at the time of the show when tickets are submitted for autographs or actual product purchases take place. In instances when the Company receives pre-payments for show autographs, the Company records these amounts as deferred revenue.

The following table presents our historical operating results for the periods indicated as a percentage of net sales:

Revenue. Total revenues increased 33% to $10.5 million in the first three months of fiscal 2008 from $7.9 million in the same period last year. The increase was primarily due to an increase in retail revenues generated through our e-commerce and brick and mortar components.

Manufacturing and distribution revenues decreased 17% to $3.4 million in the first three months of fiscal 2008 from $4.1 million in the same period last year. Net revenues (after eliminating intercompany sales) decreased 24% to $2.5 million in the first three months of fiscal 2008 from $3.3 million in the same period last year. The decrease is as a result of more items being sold to the Company-owned stores and Internet sites.

Retail operation revenues increased 90% to $7.8 million in the first three months of fiscal 2008 from $4.1 million in the same period last year. Our internet retail division revenues increased 48% to $4.6 million in the first three months of fiscal 2008 from $3.1 million in the same period last year. The increase is as a result of our providing more robust platforms, improving our user interface, better merchandising of our products on-line, increased traffic and better conversion rates. Additionally, retail revenues generated through our sixteen company-owned Field of Dreams stores increased 220% to $3.2 million in the first three months of fiscal 2008 from $1.0 million in the same period last year when we operated nine stores.

Franchise revenues are no longer significant as a result of the Company acquiring 8 previously franchised Field of Dreams^® stores in the past several months along with the Company promoting growth in other areas of its business. Henceforth, franchise revenues will simply be reflected as a component of “Other” revenues in the Company’s financial statements.

Costs and expenses. Total cost of sales for the first three months of fiscal 2008 increased 22% to $5.5 million, versus $4.5 million in the same period last year. The increase directly relates to the increase in overall company sales. However, as a percentage of total sales, cost of sales was 52% for the first three months of fiscal 2008 compared to 57% for the same period last year.

Cost of sales of manufacturing/distribution products decreased 36% to $1.2 million in the first three months of fiscal 2008, versus $1.9 million in the same period last year. As a percentage of manufacturing/distribution revenues, cost of sales was approximately 48% for the first three months of fiscal 2008 compared to 58% for the same period last year. However, as a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 62% for the first three months of fiscal 2008 versus 67% for the same period last year.

Cost of sales of retail products increased 75% to $4.2 million in the first three months of fiscal 2008, from $2.4 million in the same period last year. The increase is a direct result of incremental retail sales. As a percentage of total retail sales, costs were 54% in the first three months of fiscal 2008, versus 58.5% for the same period last year.

Operating expenses increased 59% to $5.9 million in the first three months of fiscal 2008, from $3.7 million in the same period last year. As a percentage of sales, operating expenses increased from 46.5% for the first three months of last year to 56% for the first three months of fiscal 2008. The increase in overall operating expenses is attributable to some one-time expenses in the period, re-investments in additional infrastructure and the costs of operating several newly acquired Field of Dreams^® stores.

Interest Expense., net. Net interest expense was $237 for the first three months of fiscal 2008, versus $152 for the same period last year. The increase in interest expense for the period was attributable to the Company writing off its deferred loan costs associated with the early re-financing of its previous senior lender along with additional interest expense related to the Company’s notes payables accumulated in the Pro Stars, Inc. transaction.

Provision for income taxes. The Company recognized an income tax benefit of $552 for the first three months of fiscal 2008, versus an income tax benefit of $214 for the same period last year. Each quarter, the Company evaluates whether the realizability of its net deferred tax assets is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Company’s operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of June 30, 2007 and June 30, 2006. The effective tax rate for both periods was approximately 40.0%.

Our primary sources of liquidity are the cash flow generated from our operating subsidiaries; availability under our $15 million senior revolving credit facility; availability under our $3 million acquisition line and available cash and cash equivalents. We are unaware of any trends that may have a negative impact on our ability to continue our operations. In fact, with the improvement of the financial results of the Company and a further strengthening of the balance sheet, our ability to capitalize on market opportunities should be enhanced.

The balance sheet as of June 30, 2007 reflects working capital of $18.4 million, versus working capital of $12.7 million last year. At June 30, 2007, the Company’s cash and cash equivalents were $1,109, versus $541 last year. Net accounts receivable at June 30, 2007 were $1.5 million compared to $2.2 million last year.

Cash used in operations was $706 for the first quarter of fiscal 2008, compared to $2.1 million cash provided by operations during the first quarter of fiscal 2007. During the period last year, the Company received its insurance claim proceeds of $3.6 million.

Cash used in investing activities was $774 for the first quarter of fiscal 2008, compared to $306 used in investing activities for the first quarter of fiscal 2007.

Cash provided by financing activities was $1.8 million for the first quarter of fiscal 2008, compared to $1.7 million in cash used in financing activities for the first quarter of fiscal 2007.

On November 1, 2006, the Company entered into a Securities Purchase Agreement with The Frost Group, LLC, a Florida limited liability company (“Frost”). Pursuant to the Agreement, the Company sold to Frost 5,128,205 shares of the Company’s common stock. The purchase price for the common stock was $0.39 per share in cash for an aggregate price of $2 million. As a result of the purchase, Frost owns approximately 14% of the Company’s outstanding common stock. The common stock issued in the transaction was not registered under the Securities Act of 1933 (the “Act”) and was issued pursuant to an exemption from registration under Section 4(2) of the Act.

On June 6, 2007, the Company entered into a three-year loan and security agreement with Comerica Bank. Comerica provided the company with $18 million in credit facilities; consisting of a $15 million revolver and a $3 million acquisition line for the cash portion of future strategic acquisitions. The loan is collateralized by all of the assets of the Company and its divisions. The interest rate for the revolver is floating at prime minus .750 or 30 day Comerica costs of funds plus 1.50%; and prime minus .250 or 30 day Comerica costs of funds plus 2.25%, for the funds drawn from the acquisition line. The Company used $6.7 million of the revolver at closing to pay-off the remaining loan balance with its prior senior lender, La Salle Bank. As of June 30, 2007, the Company’s outstanding loan balance with Comerica was $8.4 million. The Company had approximately $3.5 million available on the revolver and the full $3.0 million on the acquisition line.

We are currently analyzing our company-owned retail store business model and looking at the profitability of each store. We expanded this new model very rapidly. Our first two company-owned stores opened in March 2002 and grew to 15 stores by June 2004. As of June 30, 2007, we owned and operated 16 stores. We have and will continue to analyze the performance of each of the store operations in order to determine whether they are providing the Company with its desired results. This may include additional future closings and/or conversion to franchise stores or conversely, the acquisition and conversion of existing franchise stores to company-owned stores.

We are continuing to review our operational expenses and examining ways to reduce costs on a going-forward basis. With our recent change in our independent auditors and bank; we believe we will experience lower fees and costs typically associated with a smaller, yet highly regarded accounting firm; and moving away from a traditional asset-based lender to a more traditional cash-flow lender, respectively. However, we will be required in fiscal 2008 to comply with the new annual internal control certification pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related SEC rules. While we expect some relaxing of the initial requirements mandated by Sarbanes-Oxley due to our relative company size, these and other compliance costs of a public company will increase. To support our ultimate compliance with Section 404, we have engaged the services of an outside consulting company who began working with our management team in March of 2007. In addition, effective April 16, 2007, the Company’s Common shares became listed on the American Stock Exchange under the symbol “DRJ”. The Company has incurred additional costs and fees associated with this listing.

Management believes that future funds generated from our operations and available borrowing capacity will be sufficient to fund our debt service requirements, working capital requirements and our budgeted capital expenditure requirements for the foreseeable future.

We have not created and are not a party to any special purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. Except as described herein, our management is not aware of any known trends or demands, commitments, events or uncertainties, as they relate to liquidity which could negatively affect our ability to operate and grow as planned, other than those previously disclosed.

Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates and market prices. We do not currently have any trading derivatives nor do we expect to have any in the future. We have established policies and internal processes related to the management of market risks, which we use in the normal course of our business operations.

Interest Rate Risk. We have interest rate risk, in that borrowings under our credit facility with Comerica Bank are based on variable market interest rates. As of June 30, 2007, we had $8.4 million of variable rate debt outstanding under our current credit facility with Comerica Bank. A hypothetically 10% increase in our credit facility’s weighted average interest rate of 7.50% per annum for the quarter ended June 30, 2007 would correspondingly decrease our pre-tax earnings and our operating cash flows by approximately $15.

Intangible Asset Risk. We have a substantial amount of intangible assets. We are required to perform goodwill impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material changes that could be adverse to our operating results and financial position. Although at June 30, 2007 we believed our intangible assets were recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets.

Evaluation of Disclosure Controls and Procedures. Our management has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our management has concluded our disclosure controls and procedures are effective for timely gathering, analyzing and disclosing the information we are required to disclose in the reports filed in the Securities Exchange Act of 1934, as amended. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

Change in Internal Controls. There have been no significant changes made in the internal controls and there were no other factors that could significantly affect our internal controls during the fiscal year covered by this report. However, as of March 2007, the Company has engaged the services of an outside consulting firm to aid its efforts with ultimate compliance and certification of section 404 of the Sarbanes-Oxley Act of 2002.

There are no material changes to the Company’s risk factors as previously reflected in the form 10-K that was filed on June 29, 2007.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2007


DREAMS, INC.

By:		/s/ Ross Tannenbaum
		Ross Tannenbaum, Chief Executive Officer,
		Principal Financial Officer


		PAGE

Part I.	Financial Information	1

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheet	1

	Condensed Consolidated Statements of Operations	2

	Condensed Consolidated Statements of Cash Flows	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	24

Part II.	Other Information	24

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits	25


	June 30, 2007			March 31, 2007
(Dollars in Thousands, except share amounts)	(un-audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,109		$	753
Accounts receivable, net		1,506			2,287
Inventories		19,082			17,867
Prepaid expenses and deposits		1,956			1,337
Deferred tax asset		844			292

Total current assets		24,497			22,536

Property and equipment, net		3,597			3,504

Deferred loan costs		70			42

Other intangible assets, net		4,064			4,076

Goodwill, net		7,569			7,497

Other assets		9			—

Total assets	$	39,806		$	37,655

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,847			3,198
Accrued liabilities		1,480			1,164
Current portion of long-term debt		468			667
Deferred credits		307			244

Total current liabilities	$	6,102			5,273
Long-term debt, less current portion		370			379
Borrowings against line of credit		8,441			6,352
Long-term deferred tax liability		1,218			1,218

Total Liabilities	$	16,131		$	13,222

Minority interest in subsidiary		87			42

Stockholders’ equity:
Preferred stock authorized 10,000,000, issued and outstanding -0- shares		—			—
Common stock and additional paid-in capital, no par value; authorized 100,000,000 shares; shares issued and outstanding 37,000,913 and 36,952,943, respectively.		33,706			33,636
Accumulated deficit		(10,118	)		(9,245	)

Total stockholders’ equity		23,588			24,391

Total liabilities and stockholders’ equity	$	39,806			37,655


	Three Months Ended June 30,
	2007			2006
Revenues:
Manufacturing/Distribution	$	2,496		$	3,584
Retail		7,811			4,135
Other		241			205

Total Revenues	$	10,548		$	7,924
Expenses:
Cost of sales-mfg/distribution		1,247			2,078
Cost of sales-retail		4,252			2,433
Operating expenses		5,924			3,685
Depreciation and amortization		268			141

Total Expenses	$	11,691		$	8,337

(Loss) before interest and taxes		(1,143	)		(413	)
Interest expense, net		237			152

Other expense		45			—

(Loss) before income taxes		(1,425	)		(565	)
Income tax benefit		552			214

Net (loss)	$	(873	)	$	(351	)
(Loss) per share:
Basic: (Loss) per share	$	(0.02	)	$	(0.01	)
Weighted average shares outstanding – Basic		36,958,391			29,683,786
Diluted: (Loss) per share	$	(0.02	)	$	(0.01	)
Weighted average shares outstanding – Diluted		37,287,900			29,683,786



Three Months Ending June 30	2007			2006
(Dollars in Thousands)
Cash Flows from Operating Activities
Net cash (used in) / provided by operating activities	$	(706	)	$	2,118

Cash Flows from Investing Activities
Payment of contingent consideration		(424	)		—
Purchase of property and equipment		(350	)		(306	)

Net cash used in investing activities		(774	)		(306	)
Cash Flows from Financing Activities
Proceeds from Line of Credit		17,814			11,366
Paydown on Line of Credit		(15,723	)		(13,007	)
Deferred loan costs		(48	)		—
Repayment of Notes payable		(207	)		(63	)

Net cash provided by (used in) financing activities		1,836			(1,704	)
Net increase in cash and cash equivalents		356			108
Cash and cash equivalents at beginning of period		753			433
Cash and cash equivalents at end of period	$	1,109		$	541

Non Cash investing and financing activities:
Purchase of M&S stores inventory and assumption of accounts payable		494			—
Adjustment to FansEdge acquisition cost		30			—
Cashless exercise of stock options		129			—


	Shares		Exercise Price	Weighted Avg. Exercise Price
April 1, 2007	493,582		$ .60 - $1.50	$.89
Granted	36,667		$2.64 - $2.75	$2.69
Expired	(3,166	)	$.90	$.90
Cancelled	(5,000	)	$.90	$.90
Exercised	(84,333	)	$1.20	$1.19
June 30, 2007	437,750		$ .60 - $2.75	$.97

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Options Breakdown by Range at 6/30/2007
Outstanding			Exerciseable
Range	Outstanding Options	Remaining Contractual Life	WA Outstanding Exercise Price	Vested Options	WA Vested Exercise Price
$0.600 to $ 1.190	319,995	3.7	.60	227,992	.60
$1.200 to $ 2.140	81,088	2.1	1.50	81,088	1.50
$2.150 to $ 2.750	36,667	4	2.69	24,166	2.66
$.600 to $ 2.750	437,750	3.4	.94	333,246	.97


	Three Months Ended June 30, 2007		Three Months Ended June 30, 2006
Expected Dividend Yield (1)	N/A		N/A
Expected Stock Price Volatility (2)	94.00	%	94.00	%
Risk-Free Interest Rate (3)	4.74	%	4.64	%
Expected Life in Years (4)	3		3


	Manufacturing/ Distribution		Retail Operations		Total
Three Months Ended:
June 30, 2007
Net sales	3,403		7,822		11,225
Intersegment net sales	907		11		918
Operating earnings / (loss)	196		(560	)	(364	)
Total assets	11,696		20,321		32,017

June 30, 2006
Net sales	4,108		4,136		8,244
Intersegment net sales	(776	)	0		(776	)
Operating earnings / (loss)	276		(382	)	(106	)
Total assets	11,336		7,507		18,843


	Q1 FY2008			Q1 FY2007
Revenues:
Total revenues for reportable segments	$	11,225		$	8,244
Other revenues		241			456
Eliminations of intersegment revenues		(918	)		(776	)

Total consolidated revenues		10,548			7,924

Pre-tax (loss):
Total operating losses for reportable segments	$	(364	)	$	(106	)
*Other (loss)		(824	)		(307	)
Interest expense		(237	)		(152	)

Total consolidated (loss) before taxes	$	(1,425	)	$	(565	)


	June 30, 2007		March 31, 2007
Raw materials	$	333	$	302
Work in process		94		108
Finished goods, net		18,655		17,457

Total	$	19,082	$	17,867


	Quarter Ended June 30,
	2007		2006
Net Sales	1.00		1.00
COGS	.52		.57
Gross Profit	.48		.43
*Operating Expenses	.56		.46
Operating Income (loss)	(.08	)	(.05	)
Income (loss) before income taxes	(.13	)	(.07	)
Net Income (loss)	(.08	)	(.04	)


No.
31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


Exhibit No.		Description
31.1		Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 202

32.2		Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002