Form 10-Q

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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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”, “large accelerated filer” and “smaller reporting company” 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 May 1, 2009 there were 37,528,214 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 calendar year ended December 31, 2008, filed with the SEC on April 15, 2009.

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 calendar 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, catalogue, kiosks, trade shows 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 Company incurred a loss from operations, has a decrease in operational cash flows, and as of December 31, 2008, the Company was not in compliance with its debt covenants. The Company has sought the appropriate waivers from its senior lender. However, no assurances can be made that the Company will receive the formal waivers, or if they will offer terms and conditions that are acceptable to the Company. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

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.

For the three months ended March 31, 2009, weighted average shares outstanding for basic and diluted earnings per share purposes was 37,528,214.

For the three months ended March 31, 2008, weighted average shares outstanding for basic earnings per share purposes was 37,703,211. For the three months ended March 31, 2008, weighted average shares outstanding for diluted earnings per share purposes was 37,876,886.

Effective April 1, 2006, the Company adopted the provisions of, and accounted for stock-based compensation in accordance with SFAS No. 123 — revised 2004 (“SFAS 123R”), “Share-Based Payment”, which replaced SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award over the requisite service period, which is the vesting period. The Company elected the modified-prospective method of adoption, under which prior periods are not revised for comparative purposes. The Company has elected the graded-vesting attribution method for recognizing stock-based compensation expense over the requisite service period for each separately vesting tranche of awards as though the awards were, in substance, multiple awards. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified.

For the three months ended March 31, 2009, the Company recorded $.7 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 a $.3 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.

While there were no options granted during the three months ended March 31, 2009, certain options awarded previously vested during the period.

Vested options totaled 454,909 with an average price of $.96. Total outstanding options that were “in the money” at March 31, 2009 were -0-. The unvested options totaled 30,505.

There were no options exercised, 1,334 options cancelled, and 23,498 options vested at an average price of $.60, during the period ended March 31, 2009.

The following table summarizes the stock option activity from January 1, 2009 through March 31, 2009:

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.

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets reported, if based on the weight of evidence, it is more likely than not that some portion or the entire deferred tax asset will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance of $187 and $187 as of December 31, 2008 and December 31, 2007, respectively, is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current fiscal year is $0.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2008. The tax years subject to examination by the taxing authorities are the years ended December 31, 2007, March 31, 2007, and March 31, 2006.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operation.

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.

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 stores and Internet sites:

As of March 31, 2009, the Company owned and operated 16 Field of Dreams^® stores offering a selection of sports & entertainment memorabilia and collectibles and 6 FansEdge stores offering an array of sports licensed products. The Company has multiple stores in the South Florida, Chicago and Las Vegas markets.

The Company’s e-commerce components feature FansEdge.com and ProSportsMemorabilia.com along with a complement of athlete and syndicated 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 three months ended March 31, 2009 and March 31, 2008, 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 March 31, 2009 and March 31, 2008 was as follows:

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.

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.

At March 31, 2009, the Company had a revolving line of credit with a financial institution which allowed the Company to borrow up to $21.5 million for working capital purposes based on eligible accounts receivable and inventories. The net availability as of March 31, 2009 was $19.0 million, which consisted of $18.1 million in inventory and $0.9 million in accounts receivables. The balance outstanding on the loan as of March 31, 2009 was $18.3 million resulting in the excess availability of $3.2 million as of March 31, 2009. The line of credit carries a floating annual interest rate at prime or fixed at 30 day Comerica costs of funds plus 2.00%. As of March 31, 2009 the interest rate on the loan was 3.25%. The line of credit is collateralized by the Company’s assets. The advanced rates as of March 31, 2009 were 80% for eligible accounts receivables and 60% for inventories. The Company also has a $1.5 million “Acquisition Line” with Comerica Bank of which $556 thousand amount was available at March 31, 2009. The Loan Security Agreement also requires that certain financial performance covenants be met. These covenants include a fixed charge coverage ratio and minimum tangible net worth. For 2008, we were out of compliance with certain financial covenants and are still working with our Bank to determine a course of action to remedy the situation. Interest expense associated with the line of credit for the year quarter ended March 31, 2009 was $175 and for the quarter ended March 31, 2008 was $148.

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 including the continuing availability of our credit facility with Comerica Bank or a similar facility with another financial institution; 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; continuing our execution of multi-channel retailing; aggressively marketing our web syndication services, exploring additional distribution channels for our products; and 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.

In particular, 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 2004 to nearly $47 million in 2008, placing it at number 363 in 2005, number 289 in 2006 and number 216 in 2007 of the largest Internet retailers in the nation.

The Company has drawn on a complete spectrum of competencies it developed to support its flagship online brand, FansEdge. This has allowed the Company to leverage the investments made during the past few years by marketing a proven range of services to third parties that include; managed hosting, custom site design and development, customer service, order fulfillment, purchasing, inventory management, marketing, merchandising, and analytics and reporting. The Company calls the compilation of e-commerce services described above as, Web Syndication, and believes there are significant growth opportunities that exist in the marketplace.

Commencing in June, 2008 we have successfully opened and are presently operating (6) six FansEdge stores in the greater Chicago, IL area. This is in support of our executing our Multi-channel Retailing strategy; whereby we our driving and marketing a single brand via multiple channels. We plan to add an e-commerce component to our FieldofDreams.com site to cross market our (16) company-owned Field of Dreams stores in 2009.

Our proprietary e-commerce platform has also enabled us to fuel a state-of-the-art in-store interactive Kiosk for ordering products. These Kiosks are in each of the new FansEdge stores and are providing a unique shopping experience for our customers by allowing them to access the entire Company portfolio of more than 100,000 sku’s (stock keeping units). In fact, so far, we are seeing an average of 16% contribution to the individual store sales from the Kiosks.

In October 2008, Fansedge.com announced it began offering its vast array of products internationally to 34 countries.

Also, our first FansEdge catalogue was shipped in November 2008, and our latest catalogue was shipped in April 2009.

We believe this expansion of our revenue producing foot-print will serve us well as we navigate our business models through the challenging economy and look to distinguish ourselves from our competitors.

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, profitable, and professional manner, driving and building our brands through on-line, brick and mortar, catalogue, kiosk, trade shows, 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.

We believe the implementation of our Multi-channel Retailing strategy will strengthen our brands in the marketplace.

We believe we are well positioned to capture increased activity of on-line retail purchases as industry experts and analysts state that currently, only 5-6% of all retail sales are being conducted on-line and that over the next few years, consumers may generate twice that figure in on-line purchases.

Also, with the continued growth of our Web Syndication business model, we are leveraging the Company’s investment in its broad inventory by offering the items to multiple sites simultaneously. This should improve our inventory turns, increase our absorption rates and reduce inventory carrying costs.

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 fourth quarter of the 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 , the over-all strength of the economy, and corporate expenses to support our expansion and growth strategy.

We set ourselves apart from other companies with our diversified product and services line, our proprietary e-commerce platform, as well as our relationships with sports leagues, agents and athletes. Management believes we can continue to capture market share and become a consolidator in the highly fragmented licensed sports products industry. During the slowing economy, we have been proactive as it relates to our corporate over-head and expenses and have instituted several savings initiatives including: lay-offs, management and employee salary reductions, re-negotiations of our client contracts, rent economics, extended terms from key suppliers, etc.

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 $51.

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 $335.

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 March 31, 2009 and December 31, 2008, was necessary.

In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (“SFAS 142”), the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.

The Company’s evaluations of the carrying amount of goodwill, were completed as of December 31, 2008 and December 31, 2007 in accordance with SFAS 142, resulted in no impairment losses. There were no material changes in the carrying amount of goodwill for the three months ended March 31, 2009.

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 Company partnered in a corporate rebate program with a national consumer goods retailer. The Company issued rebate coupons for which it was pre-paid 50% of the coupon value. Certificates redeemed through March 31, 2009, were recognized as revenue in the period. Additionally, a breakage model was projected for the program’s eight month term, based upon redemption totals redeemed through April 27, 2009, the program’s termination date. Thus, the Company recognized breakage revenue over the seven months (September 2008 – March 09), of the program. The balance of certificates redeemed during the program’s last month (April 09), remain in deferred revenue at March 31, 2009.

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

Three Months Ended March 31, 2009 versus the Three Months Ended March 31, 2008

Revenue. Total revenues decreased 20% to $14.8 million for the three months ended March 31, 2009, from $18.5 million in the same period last year. The decrease was primarily due to the overall weakness in the economy.

Manufacturing/Distribution revenues decreased 35.3% to $4.4 million for the three months ended March 31, 2009, from $6.8 million in the same period last year. Net revenues (after eliminating intercompany sales) decreased 37.5% to $3.5 for the three months ended March 31, 2009, from $5.6 million in the same period last year. The decrease in manufacturing/distribution revenues for the period was partially attributed to the Company’s participation last year in Orange Bowl Stadium asset sales as a partner with the City of Miami, a one time project that generated approximately $1.2 million during the 1st quarter of last year.

Retail operation revenues decreased 11.7% to $11.3 million for the three months ended March 28, 2009, from $12.8 million in the same period last year. Our internet retail division revenues decreased 14.9% to $8.0 million for the three months ended March 31, 2009, from $9.4 million in the same period last year. The decrease was a result of numerous retail competitors aggressively moving products for large discounts, and the overall weakness in the economy. Additionally, retail revenues generated through our sixteen company-owned Field of Dreams stores decreased 20.6% to $2.7 million for the three months ended March 31, 2009, from $3.4 in the same period last year. The decrease was attributable to the softness in the retail arena. For the first quarter of 2009, our six FansEdge stores generated $.5 in sales. These stores were opened towards the end of 2008.

Costs and expenses. Total cost of sales for the three months ended March 31, 2009, decreased 22.0% to $7.8 million, versus $10.0 million in the same period last year. The decrease is directly relates to the decrease in overall company sales. However, as a percentage of total sales, cost of sales was 52.7% for the three months ended March 31, 2009, compared to 53.8% for the same period last year.

Cost of sales of manufacturing/distribution products decreased 46.6% to $1.6 million for the three months ended March 31, 2009, versus $3.0 million in the same period last year. However, as a percentage of manufacturing/distribution revenues, cost of sales was approximately 45% for the three months ended March 31, 2009, compared to 53% for the same period last year. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 56.7% for the three months ended March 31, 2009, versus 43.6% for the same period last year.

Cost of sales of retail products decreased 11.4% to $6.2 million for the three months ended March 31, 2009, from $7.0 million in the same period last year. The decrease is a direct result of lower retail sales. As a percentage of total retail sales, costs were 55.5% for the three months ended March 31, 2009, versus 54.7% for the same period last year.

Operating expenses decreased 5.9% to $8.0 million for the three months ended March 31, 2009, from $8.5 million in the same period last year. As a percentage of sales, operating expenses were 54.0% for the three months ended March 31, 2009, versus 46% for the same period last year. The Company has instituted numerous corporate savings initiatives that will reduce operating expenses for the 2nd quarter and the remainder of the year.

Interest expense, net. Net interest expense was $175 for the three months ended March 31, 2009, versus $148 for the same period last year.

Provision for income taxes. The Company recognized an income tax benefit of $660 for the three months ended March 31, 2009, versus an income tax benefit of $119 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 March 31, 2009 and March 31, 2008. The effective tax rate for both periods was approximately 40.0%.

Our primary sources of liquidity during the three month period ended March 31, 2009, are the cash flows generated from our operating subsidiaries; availability under our $21.5 million senior revolving credit facility; 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.

The balance sheet as of March 31, 2009 reflects working capital of $7.3 million versus working capital of $8.2 million at December 31, 2008. At March 31, 2009, the Company’s cash and cash equivalents were $368 thousand compared to $498 thousand at December 31, 2008. Net accounts receivable at March 31, 2009 were $2.3 million compared to $3.3 million at December 31, 2008.

Cash used in operations was $5.9 million for the three months ended March 31, 2009, compared to $9.0 million cash used in operations during the same period of 2008.

Cash used in investing activities was $157 thousand for the three months ended March 31, 2009, compared to $343 thousand of cash used in investing activities for the same period of 2008.

Cash provided by financing activities was $6.0 million for the three months ended March 31, 2009, compared to $9.2 million cash provided by financing activities for the same period in 2008.

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. Effective May 12, 2008, Comerica Bank increased the Company’s revolver from $15 million to $21.5 million. 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 or 30 day Comerica costs of funds plus 2.00%; and prime or 30 day Comerica costs of funds plus 2.50%, for the funds drawn from the acquisition line. As of March 31, 2009, the Company’s outstanding loan balance was $18.3 million, yielding $3.2 million available on the revolver and $.9 million, yielding $.6 million available on the acquisition line. Our line of credit facility requires us to maintain specified financial ratios and satisfy certain financial covenants. As of December 31, 2008, the Company was not in compliance with its covenants and has sought the appropriate waivers from its senior lender. No assurances can be made that the Company will ultimately receive the formal waivers, and if so, under acceptable terms and conditions. Also, no assurances can be made that the Company will have the ability to repay the debt when it comes due or be able to restructure the debt if waivers are obtained.

We are continuing to review our operational expenses and examining ways to reduce costs on a going-forward basis. With the slowing economy, we are managing our capital conservatively and analyzing each of our commitments to identify areas where we can improve the profitability and or cash flow of our business. To date, we have been successful with restructuring many of our rent commitments, player contracts and vendor pricing. Also, we have reduced our workforce and implemented management and employee salary reductions to lower our operating expenses.

In addition, our stock has been, and continues to be, thinly traded despite our listing on the American Stock Exchange, and our public and investor relations initiatives, therefore providing little liquidity for many of our shareholders. Accordingly, we believe we may have been unable to realize many of the principal benefits of being a public company; all the while, continuing to incur many of the additional costs associated with being a public company, including, but not limited to, listing fees, SEC filings, enhanced legal and accounting fees and Sarbanes-Oxley. We expect that these and other compliance costs of a public company will continue to increase. As a result of the foregoing, we expect to consider from time to time, strategic alternatives to maximize shareholder value, including terminating our status as a public company, going private, and delisting our common stock from the American Stock Exchange.

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 March 31, 2009, we had $18.3 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 2.52 % per annum for the quarter ended March 31, 2009, would correspondingly decrease our pre-tax earnings and our operating cash flows by approximately $10.

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 March 31, 2009, 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.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal accounting and financial officer) as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings as of March 31, 2009.

Changes in Internal Control Over Financial Reporting. There have been no significant changes made in the registrant’s internal controls over financial reporting and there were no other factors that could significantly affect our internal controls over financial reporting during the first quarter covered by this report.

There are no material changes to the Company’s risk factors as previously reflected in the form 10-K that was filed on April 15, 2009.

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 May 14, 2009.


DREAMS, INC.

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


		PAGE
Part I.	Financial Information	1

Item 1.	Financial Statements (Unaudited)	1

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations	2

	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	8

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14

Item 4.	Controls and Procedures	15

Part II.	Other Information	16

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults upon Senior Securities	16

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits	16


	March 31, 2009			December 31, 2008
(Dollars in Thousands, except share amounts)	(un-audited)
ASSETS
Current assets:
Cash and cash equivalents	$	368		$	498
Accounts receivable, net		2,335			3,313
Inventories		29,861			31,121
Prepaid expenses and deposits		1,876			1,863
Deferred tax asset		636			636

Total current assets	$	35,076		$	37,431
Property and equipment, net		5,210			5,476
Deferred loan costs		27			44
Other intangible assets, net		5,437			5,472
Goodwill, net		8,715			8,715
Deferred tax asset		1,776			1,776
Other assets		9			9

Total assets	$	56,250		$	58,923


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,498		$	7,522
Accrued liabilities		2,599			6,060
Current portion of long-term debt		723			1,255
Borrowings against line of credit		18,333			11,445
Borrowings against bank term note		944			1,111
Deferred credits		694			1,863

Total current liabilities	$	27,791		$	29,256
Long-term debt, less current portion		1,652			1,876
Capital lease obligation		80			75
Long-term deferred tax liability		2,500			2,500

Total Liabilities	$	32,023		$	33,707
Minority interest in subsidiary		4			4
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 37,528,214 and 37,528,214 shares as of March 31, 2009 and December 31, 2008, respectively.		35,339			35,339
Treasury stock 38,400 issued as of March 31, 2009 and December 31, 2008.		(46	)		(46	)
Accumulated deficit		(11,070	)		(10,081	)

Total stockholders’ equity		24,223			25,212

Total liabilities and stockholders’ equity	$	56,250		$	58,923


	Three Months Ended March 31,
	2009			2008
Revenues:
Manufacturing/Distribution	$	3,523		$	5,611
Retail		11,233			12,767
Other		89			140

Total Revenues	$	14,845		$	18,518
Expenses:
Cost of sales-mfg/distribution	$	1,580		$	2,987
Cost of sales-retail		6,243			6,982
Operating expenses		8,037			8,514
Depreciation and amortization		459			209

Total Expenses	$	16,319		$	18,692

(Loss) before interest and taxes		(1,474	)		(174	)
Interest expense, net		175			148
Other expense		—			37

(Loss) before income taxes		(1,649	)		(359	)
Income tax benefit		660			119

Net (loss)	$	(989	)	$	(240	)

(Loss) per share:
Basic: (Loss) per share	$	(0.03	)	$	(0.01	) )
Weighted average shares outstanding – Basic		37,528,214			37,703,211
Diluted: (Loss) per share	$	(0.03	)	$	(0.01	)
Weighted average shares outstanding – Diluted		37,528,214			37,876,886


Dreams, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ending March 31, 2009 and 2008

(Dollars in Thousands)	2009			2008
Cash Flows from Operating Activities
Net (Loss)	$	(989	)	(240	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		423		196
Amortization		36		13
Loan cost amortization		18		10
Stock based compensation		1		2
Deferred tax benefit, net		—		(119	)
(Increase) decrease in:
Accounts receivable		978		1,747
Inventories		1,260		(1,954	)
Prepaid expenses and deposits		(13	)	(627	)
Increase (decrease) in:
Accounts payable		(3,026	)	(6,612	)
Accrued liabilities		(3,461	)	(540	)
Deferred revenues		(1,169	)	(880	)

Net cash (used in) operating activities		(5,942	)	(9,004	)
Cash Flows from Investing Activities
Purchase of property and equipment		(157	)	(343	)

Net cash used in investing activities		(157	)	(343	)
Cash Flows from Financing Activities
Proceeds from Line of Credit		11,781		14,607
Paydown on Line of Credit		(5,048	)	(4,978	)
Repayment of Capital lease		(6	)	(5	)
Proceeds from stock option expense		—		2
Repayment of Notes payable		(758	)	(393	)

Net cash provided by financing activities		5,969		9,233
Net (decrease) in cash and cash equivalents		(130	)	(114	)
Cash and cash equivalents at beginning of period		498		1,601

Cash and cash equivalents at end of period	$	368		1,487

Cash paid for interest		179		148
Cash paid for income taxes		—		415
Additional common stock issued in acquisition of Prostars		—		39

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company


	Options	Exercise Price		Weighted Avg. Exercise Price
January 1, 2009	486,748	$	.60-$2.75	$	.60-$2.75
Granted	—		—		—
Expired	—		—		—
Cancelled	1,334		.60		.60
Exercised	—		—		—
March 31, 2009	485,414	$	.60-$2.75	$	.60-$2.75



Range	Outstanding Options	Remaining Contractual Life	WA Outstanding Exercise Price		Vested Options	WA Vested Exercise Price
$0.60 to $1.19	367,659	1.9	$	.69	345,488	$	.70
$1.20 to $2.14	81,088	.3		1.50	81,088		1.50
$2.15 to $2.75	36,667	2.2		2.69	28,333		2.67
$.60 to $2.750	485,414	1.7	$	.97	454,909	$	.96


Three Months Ended:	Manufacturing/ Distribution		Retail Operations			Total
March 31, 2009
Net sales	$	4,475	$	11,261		$	15,736
Intersegment net sales		952					952
Operating earnings / (loss)		467		(1,217	)		(750	)
Total assets		20,100		31,042			51,142

March 31, 2008
Net sales		6,847		12,763			19,610
Intersegment net sales		1,236		—			1,236
Operating earnings / (loss)		1,229		(620	)		609
Total assets	$	16,884	$	25,966		$	42,850


	Three-Months Ended
	3/31/09			3/31/08
Revenues:
Total revenues for reportable segment	$	15,736		$	19,610
Other revenues		61			144
Eliminations of intersegment		(952	)		(1,236	)

Total consolidated revenues	$	14,845		$	18,518
Pre-tax (loss) :
Total operating (loss) /earnings for reportable segments		(750	)		609
*Other (loss)		(724	)		(820	)
Less: Interest expense		175			148

Total consolidated (loss) before taxes	$	(1,649	)	$	(359	)


	March 31, 2009		December 31, 2008
Raw materials	$	503	$	362
Work in process		78		78
Finished goods, net		29,280		30,681

Total	$	29,861	$	31,121


	March 31, 2009		December 31, 2008
Accounts receivable	$	2,386	$	3,389
Allowance for doubtful accounts		51		76

Accounts receivable, net	$	2,335	$	3,313


	Three Months March 31,
	2009		2008
Net Sales	1.00		1.00
COGS	.53		.54
Gross Profit	.47		.46
*Operating Expenses	.54		.46
Operating (loss)	(.10	)	(.01	)
(Loss) before income taxes	(.11	)	(.02	)
Net (loss)	(.07	)	(.01	)


	Total	Less than 1-yr	1-3 yrs	3-5 yrs	More than 5-yrs
Long-term debts:	2,374	723	358	1,293	—
Operating leases:	16,256	3,291	5,737	4,019	3,209
Other long-term liabilities:	2,041	1,141	870	30	—


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


Outstanding		Exerciseable