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General.

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

Dreams, Inc. is a Utah Corporation which was formed in 1980. Dreams operates in three business segments:

  •   Retail . The retail segment represents the ten Company owned and operated Field of Dreams® retail stores and its e-commerce business operations including FansEdge.com and ProSportsMemorabilia.com. The e-commerce component of the segment consists of two e-commerce retailers selling a diversified selection of sports licensed products and memorabilia on the Internet.

  •   Manufacturing/Distribution . The manufacturing/distribution segment represents the manufacturing and wholesaling of sports memorabilia products, custom artwork, reproductions and acrylic display cases. These operations are principally conducted through our wholly-owned subsidiary, doing business as Mounted Memories.

  •   Franchise . This segment represents the results of the Company’s franchise program. The Company is in the business of selling Field of Dreams® retail store franchises in the United States. There are currently 19 Field of Dreams® franchise stores open and operating.

Retail Segment.

Retail Stores.

As of June 15, 2006, we currently own and operate ten Field of Dreams® retail stores. During the past fiscal year we sold our Wellington Green store to an existing franchisee and effective December 31, 2005 we entered into two early lease termination agreements with the landlords of our Beverly Center and Glendale Galleria sites that were under-performing. The Company may identify other franchised stores which it may purchase from time to time as it believes is appropriate. In addition, we sold our Somerset store effective June 30, 2006 to an existing franchisee. The Company will also evaluate the opening of new retail operations. Stores are located in high traffic areas in regional shopping malls. The stores average approximately 1,000 square feet. The average cost of opening a new Company-owned retail store in fiscal 2006 was approximately $150,000 per store. We pay a 1% royalty fee to MCA Universal Licensing for the use of the “Field of Dreams” trademark relating to sales generated in our stores. Effective December 31, 2005 the parties extended the exclusive licensing agreement for an additional five-year term. During fiscal 2006 and 2005 we incurred royalty fees of $56,089 and $58,850, respectively.

This division prides itself on being the ultimate, corporately-owned sports and celebrity gift store in the country. This goal will be achieved by:

  •   Staying ahead of the competition by offering innovative and fresh products;

  •   Offering unrivaled service and product knowledge communicated through the best personnel in the industry;

  •   Implementing management, product and financial controls to ensure maximum profitability.

A store typically has a full time manager and full time assistant manager in addition to hourly personnel, most of who work part time. The number of hourly sales personnel in each store fluctuates depending upon our seasonal needs. Our stores are generally open seven days per week and generally ten hours per day.

Set forth below is a listing of our stores as of June 15, 2006, their location and the date opened.

City
  

Store Location
  

Date Opened

Denver, CO
  

Park Meadows Mall
  

March 2002

Detroit, MI
  

Somerset Mall
  

March 2002

Chicago, IL
  

Woodfield Mall
  

October 2002

Norfolk, VA
  

MacArthur Center
  

October 2002

San Diego, CA
  

Horton Plaza
  

November 2002

Paramus, NJ
  

Garden State Plaza
  

May 2003

San Francisco, CA
  

Pier 39
  

September 2003

Farmington, CT
  

West Farms Mall
  

November 2003

Denver, CO
  

Cherry Creek Mall
  

May 2004

Scottsdale, AZ
  

Scottsdale Fashion Square
  

June 2004

E-Commerce Operations.

The Company sells officially licensed products and authentic autographed memorabilia of the NFL, MLB, NHL, NBA, NCAA and NASCAR. In October 2003 the Company purchased 100% of the outstanding common stock of FansEdge Incorporated and in April 2004 the Company acquired certain assets, including the website of Pro Sports Memorabilia, Inc. The e-commerce division, which includes these online properties and others, is focused on providing the best customer experience in the online sports-licensed products and memorabilia vertical.

E-commerce products are marketed through a series of websites that offer customers a daily selection of items from more than 200 teams and over 1,300 different athletes. This division sells over 30,000 products across categories such as apparel, auto accessories, autographed memorabilia, collectibles, headwear, home and office items, jewelry and watches, tailgate and stadium gear, and DVD’s. These online properties represent several of the leading brand names in this market and include:

  •   www.FansEdge.com ,

  •   www.prosportsmemorabilia.com ,

  •   www.sportcases.com

  •   www.danmarino.com

  •   www.johnelway.com

  •   www.peterose.com

In addition, FansEdge maintains strategic alliances with Amazon.com in which the FansEdge brand and its products are sold in the apparel and sporting section of the Amazon.com website.

The division fulfills orders generated through website sales by shipping products from its own warehouse facilities in Sunrise, Florida, Chicago, Illinois and Denver, Colorado, and from suppliers via drop-ship agreements. Our distribution network enables us to provide immediate delivery service to our online customers. It is our goal to be the market leader by shipping orders the same day they are received.

This division’s business strategy is to be the best at what they do within the sports-licensed products and memorabilia vertical. Tactics employed to execute this strategy include:

  •   Applying critical expertise to improve logistics and provide the best possible customer experience;

  •   Strengthening brands by continually expanding catalogs and reinforcing market positioning in response to market demand;

  •   Efficiently transforming shoppers into customers and effectively turning customers into repeat customers; and

  •   Operating with optimal efficiencies realized through superior market expertise and technology, total commitment to both quality and accuracy, and timely fulfillment.

This division will continue to expand and optimize its marketing practices exclusively within its chosen vertical by seeking strategic alliances with other companies and brands, in some cases providing expertise and technology to third-party entities, including other online marketers and professional athletes.

Manufacturing/Distribution Segment .

Mounted Memories.

Mounted Memories (“MMI”) is one of the largest wholesalers of authentic sports and celebrity memorabilia products and acrylic display cases. The Company maintains many exclusive and non-exclusive agreements with numerous athletes who frequently provide autographs and or game used memorabilia at agreed upon terms. In addition to its relationships with various athletes and their representatives, MMI holds licenses with different sports leagues which allow for the manufacture and distribution of a wide array of products. Licenses are currently held with MLB, MLBPA, NFL, Golden Bear (Jack Nicklaus), NASCAR and a variety of NASCAR teams and drivers.

Specifically, MMI strives to enhance its market leadership position by executing against the following objectives:

  •   Further expand distribution channels and deepen existing customer relationships.

  •   Expand and diversify product lines by adding new licenses and bringing new products to market.

  •   Continue to pursue exclusive licensing and memorabilia opportunities.

  •   Enhance manufacturing efficiencies.

MMI has been in business since 1989 and has achieved its industry leading status fundamentally due to a combination of its licenses and its strict authenticity policies. The only sports memorabilia products sold by MMI are those produced by MMI through private or public signings organized by MMI or purchased from an authorized agent of MMI and witnessed by an MMI representative. In addition to sports and celebrity memorabilia products, MMI manufacturers a large selection and supply of custom acrylic display cases, with over 50 combinations of materials, colors and styles. The primary raw material used in the production process is acrylic. There are many vendors who sell plastic throughout south Florida and the Company seeks to obtain the best pricing through competitive vendor bidding. The Company does not produce the helmets, footballs, baseballs or other objects which are autographed. Those products are available through numerous suppliers. No individual suppliers represented more than ten percent of the Company’s total fiscal 2006 or fiscal 2005 purchases.

MMI continues to work on the development of new distribution channels. MMI’s customer base varies greatly and includes transactional television, internet companies, traditional retail stores, specialty retail which sell sports and celebrity memorabilia as well as corporate account sales. MMI has worked diligently to expand and diversify its customer base and currently no single customer accounted for more than twelve percent and ten percent of MMI’s total fiscal 2006 or 2005 revenues respectively.

MMI has one of the most advanced and effective fulfillment processes in the industry and utilizes the most current shipping software to assist in the process. MMI operates out of a 50,000 square foot facility and will continue to invest in technologies that enhance its competitive manufacturing and distribution advantages.

The Greene Organization.

The Greene Organization since 1991 has been engaged in athlete representation and corporate sports marketing of individual athletes. This boutique division provides athletes with all “off-field” activities including but not limited to; personal appearances, product endorsements, book publishing deals, public/private autograph signings, licensing and marketing opportunities. As a result, over the years, The Greene Organization has become a portal for numerous corporate clients who regularly contract this division to identify a professional athlete to enhance their company’s profile, products and or services. Warren H. Greene, president of The Greene Organization, is the brother-in-law of the Company’s president.

Franchise Segment.

The Company conducts its Field of Dreams® operations through Dreams Franchise Corporation (“DFC”). On March 1, 2006, the Company announced the hiring of a new president of the franchise division. DFC, under the direction of its new President, Mr. Jorge Salvat will focus its attention on two principal objectives;

Improving its support structure for existing franchisees by creating “value-added” services such as:

  •   Analyzing top line revenues and creating short and long-term action plans for sales increases through improved personnel training/recruitment, more regionally appropriate marketing/advertising based incentives, and direct interface with landlord’s marketing department to create better traffic opportunities.

  •   Assisting franchisees in resolving real estate issues from expansion to renewal and beyond.

  •   Bringing in new vendor relationships that enhance both the store’s top line revenues and operating expense savings.

Increasing brand awareness by opening more stores throughout the United States and Canada and revamping the FieldofDreams.com website which includes adding an e-commerce component. These objectives have begun to be addressed by:

  •   An increase in expenditures for prospective franchisees through traditional print media and online services.

  •   Improving the screening process for qualified prospects with the proper financial and operational experience.

  •   Developing and enhancing relationships with national landlords to secure “A” rated locations within their malls.

DFC licenses certain rights from Universal Studios Licensing, Inc. (“USL”) to use the name “Field of Dreams®” in connection with retail operations and catalog sales. Field of Dreams® is a copyright and trademark owned by Universal City Studios, Inc. with all rights reserved. Universal has authorized USL to license the marks. Neither company is in any way related to or an affiliate of the Company. The Company does not presently have a Field of Dreams® catalog.

Merchandising License Agreement.

DFC has acquired from USL the exclusive license to use “Field of Dreams®” as the name of retail stores in the United States and a non-exclusive right to use the name “Field of Dreams®” as a logo on products. DFC has also licensed from USL the exclusive right to sublicense the “Field of Dreams®” name to franchisees for use as a retail store name. The license agreement between DFC and USL is referred to herein as the “USL License”. Under the terms of the USL License, DFC is obligated to pay to USL a 1% royalty based on gross sales of Field of Dreams® stores. The current term of the USL License expires in December 2010. DFC has successive five-year options to renew the USL License. The USL License requires DFC to submit all uses of the Field of Dreams® mark for

approval prior to use. Ownership of the Field of Dreams® name remains with USL and will not become that of DFC or the Company. Should DFC breach the terms of the USL License, USL may, in addition to other remedies, terminate DFC’s rights to use the “Field of Dreams®” name. Such a termination would have an adverse effect on DFC’s and the Company’s business.

Franchising.

Our standard franchise provides a franchisee the right to open and operate a single Field of Dreams® store at a single specified location. Franchisees pay DFC $10,000 upon execution of a standard franchise agreement and an additional $22,500 upon execution by the franchisee of a lease for the franchised store. Standard franchise agreements vary in length. It is DFC’s general practice that the term of standard franchise agreements begins with the term of the franchisee’s lease. In addition to sublicensing the right to use the Field of Dreams® name for a single franchised store, DFC is required to provide the franchisee certain training, start-up assistance and a system for the operation of the store. Prior to opening a Field of Dreams® store, a franchisee or its designated manager is required to attend and successfully complete a 2-week training course. For a period of five days during startup of a franchised store, DFC furnishes to a franchisee a representative to assist in the store opening. DFC does not provide an accounting system to franchisees. DFC does provide operational advice to franchisees and will, upon request, assist a franchisee in locating a site for a store. DFC reserves the right to modify at any time the system used in the store. Royalties from the largest franchisee accounted for less than one percent of the Company’s fiscal 2006 and 2005 consolidated revenues.

DFC imposes certain controls and requirements on Field of Dreams® franchisees in connection with site selection, site development, pre-opening purchases, initial training, opening procedures, payment of fees, compliance with operating manual procedures including purchasing through approved vendors, protection of trademark and other proprietary rights, maintenance and store appearance, insurance, advertising, owner participation in operations, record keeping, audit procedures, autograph authenticity standards and other matters. Franchisees are required to pay DFC 6% of gross revenues as an on-going royalty. Payments must be made weekly. Franchisees are required to comply with certain accounting procedures and use computer systems acceptable to DFC. Each franchisee is also required to spend 1% of its gross revenues for its own local advertising and promotion. Franchisees are required to maintain standards of quality and performance and to maintain the proprietary nature of the Field of Dreams® name. DFC has prepared and amends from time-to-time an approved supplier list from which franchisees may purchase certain inventory and other supplies. Each franchisee is required to maintain specified amounts of liability insurance which names DFC and USL as insured parties. Franchisee’s rights under the standard franchise are not transferable without the consent of DFC and DFC has a right of first refusal to purchase any franchised store which is proposed to be sold. DFC sold no standard franchises during the fiscal year ended March 31, 2006.

Competition.

The Company’s retail stores compete with other retail establishments, including the Company’s franchise stores and other stores that sell sports related merchandise, memorabilia and similar products. The success of our stores depends, in part, on the quality, availability and the varied selection of authentic products as well as providing strong customer service.

Our e-commerce business competes with a variety of online and multi-channel competitors including mass merchants, fan shops, major sporting goods chains and online retailers.

MMI competes with several major companies and numerous individuals in the sports and celebrity memorabilia industry. MMI believes it competes well within the industry because of the reputation it has established in its 17-year existence. MMI focuses on ensuring authenticity and providing the best possible customer service. MMI has concentrated on maintaining and selling memorabilia items of athletes and celebrities that have a broad national appeal. MMI believes it maintains its competitive edge because of its long established relationships with numerous high profile athletes, each of the major sports leagues and several of the largest sports agencies. Several of its competitors tend to focus on specific regional markets due to their relationships with sports franchises in their immediate markets. The success of those competitors typically depends on the athletic performance of those specific franchises. Additionally, MMI typically focuses on the three core sports that provide the greatest source of industry revenue, baseball, football and NASCAR.

Within the acrylic display case line of business, MMI competes with other companies which mass produce cases. MMI does not compete with companies which custom design one-of-a-kind cases. MMI believes that because it is one of the country’s largest acrylic case manufacturers, it is price competitive due to its ability to purchase large quantities of material and pass the savings to customers.

The Greene Organization competes with other companies which provide “off-field” services to athletes, some of which are much larger and better capitalized, including traditional sports agencies such as International Management Group.

DFC competes with other larger, more well-known and substantially better funded franchisors for the sale of franchises. Field of Dreams® stores compete with other retail establishments of all kinds. The Company believes that the principal competitive factors in the sale of franchises are franchise sales price, services rendered, public awareness and acceptance of trademarks and franchise agreement terms.

Employees.

The Company employs 152 full-time employees and 28 part-time employees. None of our employees are represented by a labor union and we believe that our employee relations are good.

Seasonality .

Our business is highly seasonal with operating results varying from quarter to quarter. We have historically experienced higher revenues in the third quarter of our fiscal year, primarily due to holiday sales. Approximately 42% and 44% of our revenues were generated in the third quarter of fiscal 2006 and fiscal 2005. Management believes that the percentage of revenues in the third fiscal quarter will increase in future fiscal years as we grow the retail segment.