##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-KSB



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ANNUAL REPORT UNDER

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended March 31, 2006



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Dreams, Inc.

(Name of small business issuer in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Utah                                                           |  | 87-0368170                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                              |  |           
|--------------------------------------------- |  | ----------
|2 South University Drive, Plantation, Florida |  | 33324     
|(Address of principal executive offices)      |  | (Zip Code)

Issuers telephone number (954) 377 - 0002



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Securities registered pursuant
to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | N/A                                      

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

(Title
of class)



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Check whether the issuer is not required to file reports pursuant to Section 13 or 159d) of the Exchange Act ̈

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Act during
the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

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

State issuers revenues for its most recent fiscal year: $42,729,708

The aggregate
market value of the common equity held by non-affiliates as July 11, 2006 was $18,807,646

The number of shares
outstanding of the issuers common stock as of July 11, 2006 is 178,102,720.

Transitional Small Business Disclosure Format (check
one): ̈Y    x  N



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##### Table of Contents

TABLE OF CONTENTS

FORM 10-KSB



|           |  |                                                                                                                 |  |     
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                 |  | Page
|           |  | Part I                                                                                                          |  |     
|           |  |                                                                                                                
|Item 1.    |  | DESCRIPTION OF BUSINESS                                                                                         |  | 1   
|           |  |                                                                                                                
|Item 2.    |  | DESCRIPTION OF PROPERTY                                                                                         |  | 8   
|           |  |                                                                                                                
|Item 3.    |  | LEGAL PROCEEDINGS                                                                                               |  | 9   
|           |  |                                                                                                                
|Item 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             |  | 9   
|           |  |                                                                                                                
|           |  | Part II                                                                                                         |  |     
|           |  |                                                                                                                
|Item 5.    |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                        |  | 9   
|           |  |                                                                                                                
|Item 6.    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |  | 10  
|           |  |                                                                                                                
|Item 7.    |  | FINANCIAL STATEMENTS                                                                                            |  | 19  
|           |  |                                                                                                                
|Item 8.    |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            |  | 49  
|           |  |                                                                                                                
|Item 8A.   |  | CONTROLS AND PROCEDURES                                                                                         |  | 49  
|8B.        |  | OTHER INFORMATION                                                                                               |  |     
|           |  |                                                                                                                
|           |  | Part III                                                                                                        |  |     
|           |  |                                                                                                                
|Item 9.    |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT |  | 50  
|           |  |                                                                                                                
|Item 10.   |  | EXECUTIVE COMPENSATION                                                                                          |  | 52  
|           |  |                                                                                                                
|Item 11.   |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                  |  | 54  
|           |  |                                                                                                                
|Item 12.   |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                  |  | 55  
|           |  |                                                                                                                
|Item 13.   |  | EXHIBITS                                                                                                        |  | 58  
|           |  |                                                                                                                
|Item 14.   |  | PRINCIPAL ACCOUNT FEES AND SERVICES                                                                             |  | 59  
|           | 
|SIGNATURES |  | 60                                                                                                             



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##### Table of Contents

Part I

Item 1. Description of Business.

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.



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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.



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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.



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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.



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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.



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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



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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.



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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.

Item 2. Description of Property.

The Company leases its corporate office and primary
manufacturing/warehouse facility in Plantation, Florida and Sunrise, Florida, respectively. The corporate office lease is for approximately 4,500 square feet of office space and expires in June 2008. The Companys principal executive offices
are located at the Plantation, Florida facility.



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Our primary manufacturing/warehouse facility in Sunrise, Florida has approximately 50,000 square feet of
office, manufacturing and warehousing space. The lease is for a 10 year term expiring in 2012 with total occupancy costs of approximately $34,000 per month with 3% annual increases.

Our 10 company-owned stores currently lease their facilities, with lease terms (including renewal options) expiring in various years through September
2012 with initial terms of 7 to 10 years. We also lease a warehouse facility in Denver, Colorado which has approximately 1,400 square feet as well as a lease in Chicago expiring in 2008 for a 40,000 square foot facility to house our Internet
divisions operations

Item 3. Legal Proceedings.

We are involved from time to time with legal proceedings arising in the
ordinary course of business. The Company is not presently involved in any other litigation, the result of which would have a material adverse effect on the Company.

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

None.

Part II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Companys common stock is
listed on the OTC Bulletin Board, an electronic screen based market available to brokers on desk-top terminals, under the symbol DRMS.OB The high and low bids of the Companys common stock for each quarter during fiscal years ended
March 31, 2006 and 2005 are as follows:

Fiscal Year Ended March 31, 2006:



|               |  |                |     |               |   |    
|-------------- |  | -------------- | --- | ------------- | - | ---
|               |  | High Bid Price |     | Low Bid Price
|First Quarter  |  | $              | .09 |               | $ | .03
|Second Quarter |  |                | .12 |               |   | .05
|Third Quarter  |  |                | .09 |               |   | .06
|Fourth Quarter |  |                | .20 |               |   | .06

Fiscal Year Ended March 31, 2005:



|               |  |                |     |               |   |    
|-------------- |  | -------------- | --- | ------------- | - | ---
|               |  | High Bid Price |     | Low Bid Price
|First Quarter  |  | $              | .45 |               | $ | .25
|Second Quarter |  |                | .36 |               |   | .20
|Third Quarter  |  |                | .23 |               |   | .20
|Fourth Quarter |  |                | .18 |               |   | .05



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On July 11, 2006 the high bid price was $.17 and the low bid price was $.15 for the Companys
common stock.

Such over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not
necessarily represent actual transactions.

The records of Fidelity Transfer, the Companys transfer agent, indicate that there are
410 record owners of the Companys common stock as of March 31, 2006.

The Company has never paid dividends and we intend to
retain future earnings to finance the expansion of our operations and for general corporate purposes. In addition, our current loan and security agreement with La Salle Bank prohibits the Company from paying cash dividends.

EQUITY COMPENSATION PLANNING INFORMATION



|                                                           |  |                                                                                              |  |                                                                                |      |                                                                                                                                            |  
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ---- | ------------------------------------------------------------------------------------------------------------------------------------------ | -
|                                                           |  | Number of securities tobe issued upon
exerciseof outstanding options,warrants and rights (a) |  | Weighted  averageexercise price
ofoutstanding options,warrants and rights (b) |      | Number of securitiesremaining available forfuture issuances underequity compensationplans (excludingsecurities reflected incolumn (a)) (c)
|Equity Compensation Plans Approved by Security Holders     |  | 0                                                                                            |  |                                                                                | 0    |                                                                                                                                            | 0
|Equity Compensation Plans Not Approved by Security Holders |  | 4,836,559                                                                                    |  | $                                                                              | 0.14 |                                                                                                                                            | 0
|Total                                                      |  | 4,836,559                                                                                    |  | $                                                                              | 0.14 |                                                                                                                                            | 0

Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations.

SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-KSB 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,



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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.

Managements Overview

We are
engaged in multiple aspects of the sports entertainment and memorabilia industry through a variety of distribution channels.

We generate
revenues from:



| |  |  | our retail segment which includes our 10 Company owned stores and our e-commerce component;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | our manufacturing distribution segment, through manufacturing and wholesaling of sports memorabilia products, custom artwork and other items;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our franchise program through our 19 Field of Dreams® franchise stores presently owned and operated; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our representation and corporate marketing of individual athletes, including personal appearances, endorsement and marketing opportunities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

We also began a strategic acquisition program for the expansion of our e-commerce component. These acquisitions included FansEdge.com in October of 2003
and ProSports Memorabilia.com in April of 2004. These acquisitions present both significant challenges and opportunities for us. Our success depends, in part, on our ability to integrate operations with these companies, manage the growth associated
with these entities, and continue to improve the platforms presented by these opportunities.



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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 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.

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.

Use of Estimates and Critical Accounting Policies

The preparation of our 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 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:

Collectibility of Accounts Receivable

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.



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Reserves on Inventories

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. In fiscal 2006, the Company recorded direct inventory write
downs of $650,000 to specific products.

Income Taxes

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 a $187 and $0 valuation allowance as of March 31, 2006 and 2005 respectively, is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized.

Goodwill

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 2006 or 2005.

Revenue Recognition

The Company
recognizes retail (including e-commerce sales) and wholesale/distribution revenues and related cost of sales 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 revenues and related cost of sales are recognized at the time of sale.



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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.



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RESULTS OF OPERATIONS

Fiscal 2006 Compared to Fiscal 2005

Revenues. Total revenues increased 29% to $42.7 million in fiscal 2006 from $33.0 million last year due primarily to an increase in retail revenues, particularly retail revenues generated through e-commerce
component (approximately $6.5 million increase). During October 2003 the Company acquired FansEdge, which generated retail revenues for the Company through FansEdge.com and the Company acquired ProSports Memorabilia in April 2004, which generated
retail revenues through ProSportsmemorabilia.com. Prior to our holiday season, the internet division was properly positioned with healthy inventory levels; thus enabling them to fill and ship incremental sales orders received. The Companys
credit facility secured in June 2005 provided the ability to make these additional investments in inventory levels.

Manufacturing and
distribution revenues increased from $15.9 million in fiscal 2005 to $18.8 million, an 18% increase in fiscal 2006. Net revenues (after eliminating intercompany sales) increased 27% to $16.2 million in fiscal 2006 from $12.8 million last year. The
increase primarily is the result of incremental activity associated with MMIs on-line customers; MLB.com, NFL.com and NASCAR.com and the additional sales generated by the Pittsburgh Steelers Championship products produced and sold by the
Company.

Retail operations revenues increased significantly from $18.8 million in fiscal 2005 to $25.1 million, a 34% increase this year.
Our internet retail division, which is primarily comprised of two websites (FansEdge.com and ProSportsmemorabilia.com), began operations in October 2003 concurrent with the Companys acquisition of FansEdge. The Company then purchased
ProSportsmemorabilia.com in April 2004. The internet division had retail sales of $13.0 million in fiscal 2005 versus $19.5 million, a 50% increase this year. In October 2005, we moved the internet operations into a larger and more efficient
facility to accommodate this growth. We continue to see a growing acceptance in the marketplace for the purchasing of items via the Internet. Additionally, retail sales through our company-owned Field of Dreams stores decreased 5% from $5.9 million
in fiscal 2005 to $5.6 million this year. This was primarily due to the sale of one store in August 2005 and the early closing of two under-performing stores in December 2005. However, for analysis purposes, the same 10 store sales were up $500,000
or 11.2% for the year. As of March 31, 2006 and March 31, 2005 we owned and operated 10 and 13 company-owned Field of Dreams stores respectively.

Franchise operations revenues were $1.2 million in fiscal 2005 and $836,000 in fiscal 2006; a 30% decrease. The reduction in revenue is partly due to the fact that the Company no longer includes a 1.5% marketing fund
royalty in gross revenues and two fewer stores operating in the period. However, for analysis purposes, the same store sales were up $1.4 million or 8.6% yielding an additional $71,732 in royalty income for our Franchise business.

The Company realized $324,000 in net management fee revenues in fiscal 2005 versus $224,000 this year. The 30% decrease relates to a reduction in the
frequency of significant athlete marketing events in the current year. We will continue to market opportunities for these significant events, however, we have seen a slowdown in corporate spending for these large events.



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Costs and expenses.Total cost of sales for fiscal 2006 was $24.4 million versus $18.2 million in
fiscal 2005, a 34.0% increase. The increase relates to an increase in Company sales. As a percentage of total sales, cost of sales was comparable in both periods and was 55.2% for fiscal 2005 versus 57.2% for fiscal 2006.

Costs of sales of manufacturing/distribution products were $10.1 million for fiscal 2006 versus $7.3 million for fiscal 2005 or a 38% increase. This
increase relates to an increase in manufacturing/distribution product sales. As a percentage of total manufacturing/distribution sales, cost of sales were 62.9% for fiscal 2006 versus 56.6% for fiscal 2005. This increase in percentage of cost of
sales for this segment does not represent an erosion of margin and is attributable to a one-time net impairment charge to inventory of approximately $510,000 and a reduction in inter-company sales of $500,000 as a result of fewer stores in the
chain. Therefore, for analysis purposes, if you back-out these amounts from our cost of sales, the percentages were comparable for periods, 56% for fiscal 2006 and as stated earlier, 56.6% for fiscal 2005.

Cost of sales of retail products were $14.3 million for fiscal 2006 versus $10.9 million for fiscal 2005 or a 31% increase. This increase relates to an
increase in retail sales. As a percentage of total retail sales, costs were comparable for both periods; 57% for fiscal 2006 versus 58% for fiscal 2005.

Operating expenses increased 15% from $14.4 million in fiscal 2005 to $16.6 million this year. The increase relates to an increase in overall Company sales. As a percentage of total sales, expenses declined from 44%
in fiscal 2005 to 38% this year. The Company had previously built infrastructure to support future growth. Hence, upon achieving incremental sales, our operating costs should continue to decrease as a percentage of sales as a significant portion of
our expenses are fixed in nature.

Interest expense, net. Net interest expense decreased from $585,000 in fiscal 2005 to $454,000
this year due to lower levels of borrowing on the Companys line of credit, partially offset by increased interest rates.

Provision for income taxes. The Company recognized an income tax benefit of $174,000 in fiscal 2005 and an income tax expense of $1.8 million in fiscal 2006. 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. After consideration of all of the evidence, both positive and negative, management has determined that a $187 and $0 valuation allowance as of
March 31, 2006 and 2005 respectively, is necessary to reduce the deferred tax asset to the amount that will more likely than not be realized. The Company expects its continuing effective tax rate to approximate 40%.

LIQUIDITY AND CAPITAL RESOURCES

The balance sheet as of
March 31, 2006 reflects working capital of $13.6 million versus working capital of $7.1 million one year earlier. The increase is primarily due to our equity rights offering in May 2005; the refinancing of our Merrill Lynch credit facility by
La Salle Bank in June 2005; and the Company booking an insurance proceeds receivable of $3.6 million as of



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March 31, 2006. 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.

At March 31, 2005, the Companys cash and
cash equivalents were $211,000, compared to $433,000 at March 31, 2006. Net accounts receivable at March 31, 2005 were $1.8 million compared to $6.9 million at March 31, 2006. The structure of the Companys loan agreement with La
Salle Business Credit LLC provides for daily sweeps of the Companys bank accounts. The Company has, as of March 31, 2006 $2.0 million excess availability under its loan with La Salle and is not adversely affected by the $433,000 cash
amount on the balance sheet. Of the $10 million dollar line, $7.7 million was available to the Company for borrowing. The actual loan balance outstanding was $5.7 million resulting in the $2.0 million excess availability. The large increase in the
net accounts receivables is as a result of the Company booking an insurance proceeds receivable of $3.6 million as of March 31, 2006.

Cash used in operations amounted to $549,000 for fiscal 2005, compared to $554,000 used in operations in fiscal 2006. Cash used in investing activities were $461,000 in fiscal 2005 versus $917,000 this year. The increase was primarily
attributed to the pay-out of additional purchase consideration.

On May 11, 2005, the Company completed its rights offering. Pursuant
to the terms and conditions of the rights offerings, the Company issued 121,739,525 shares of its common stock. The Company received approximately $3.7 million in new capital from the rights offering, which consisted of approximately $1.7 million of
cash proceeds and approximately $2.0 million of then current debt obligations and accrued liabilities being converted into shares of the Companys common stock on the same terms and conditions as set forth in the rights offering.

$1,000,000 of the proceeds of the rights offering was used in partial payment of indebtedness under the Companys previous line of credit with
MLBFS. Additionally, the following obligations were satisfied by the issuance of shares of the Companys common stock in lieu of payment of the subscription price (at the equivalent issue price of $0.03 per share): (i) $1.0 million of
indebtedness to the brother of the Companys president and chief executive office; (ii) approximately $150,000 of accrued salary to the Companys president and chief executive officer; (iii) $73,000 of accrued consulting fees
owed to the Companys chairman of the board pursuant to a consulting agreement; and (iv) the obligation to pay approximately $200,000 from principal amount of indebtedness to a third party was transferred to the Companys chairman.
The chairman was the guarantor of such note.

On June 3, 2005, the Company and its subsidiaries entered into a loan and security
agreement and related loan documents with LaSalle Business Credit LLC as an agent for Standard Federal Bank National Association acting through its division of LaSalle Retail Finance providing for a three year revolving credit line up to $10.0
million. The LaSalle line of credit replaces the Companys previous line of credit with Merrill Lynch Business Financial Services. The line of credit is collateralized by all of the Companys assets and a pledge of stock of the
Companys subsidiaries. Under the line of credit, a portion of the proceeds of the borrowings of the line of credit had been used to pay off the balances of its prior lender. The initial loan on the LaSalle line of credit bears interest at
prime or LIBOR plus 200 basis points. As of March 31, 2006, the interest rate on the loan was 7.5% (prime). The $10.0 million line of credit facility includes borrowing capacity limits based on the eligibility criteria of inventories and
account receivables. As of March 31, 2006, inventory eligibility was 52.2%, while accounts receivable



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was 85%. This resulted in total line availability of $7.7 million at March 31, 2006 with an excess availability of
$2.0 million. The Loan Security Agreement also requires that certain financial performance covenants be met. These covenants included minimum cumulative EBITDA, minimum tangible net worth and maximum capital expenditures, all of which were met by
the Company.

The Company had previously disclosed that its primary warehouse facility in Sunrise, Florida sustained damage as a result of
Hurricane Wilma in the fall of 2005. The Company was unable to predict the financial impact of such damage; however, the Company believed that is had sufficient insurance coverage to protect itself. On June 28, 2006, the Company received a
settlement payment of $3.6 million which is reflected as other income in the fiscal 2006 statement of operations.

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
March 31, 2006, we owned and operated 10 stores. Effective December 31, 2005 we entered into early lease termination agreements which allowed us to cease operations for two under-performing stores, (the Beverly Center in Los Angeles, CA
and the Glendale Galleria in Glendale, CA) in return for an early exit fee of $50 and $35 respectively. The leases for two previously under-performing stores expired in late December 2004 and we elected not to renew those leases. On
August 1, 2005, the Company sold the assets, inventory and leasehold improvements of its Wellington Green store to an existing franchisee, of which one of the partners is the President of Dreams Products, Inc. We have and will continue to
analyze the performance of each of the store operations and determine whether they are providing The Company with its desired results. This may include additional future closings and/or conversion to franchise stores.

We are continuing to review our operational expenses and examining ways to reduce costs on a going-forward basis. Additionally, 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.

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. However, we may not generate sufficient cash flow from operations, our anticipated revenue growth and operating
improvements may not be realized and future borrowings may not be available in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. 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.

NEW ACCOUNTING PRONOUNCEMENTS

In the fourth quarter of 2004, the FASB issued Statement No. 123 (revised 2004), or SFAS No. 123R, Share-Based Payment, which replaces Statement No. 123 Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R eliminates the alternative to use APB Opinion 25s intrinsic value method of accounting that was provided in Statement No. 123 as
originally issued. After a phase-in period for Statement No. 123R, pro forma disclosure will no longer be allowed.



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In the first quarter of 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107
which provided further clarification on the implementation of SFAS No. 123R.

The SEC announced in the second quarter of 2005 that it
would extend this phase-in period and, therefore, the Companys effective date for implementation of SFAS 123R is April 1, 2006. The Company does not believe that any of the alternative phase-in methods would have a material effect on the
Companys consolidated statement of operations or balance sheet.

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 the Companys consolidated financial statements.

Item 7. Financial Statements.

DREAMS, INC.

Table of Contents



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | 20  
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |  |     
|                                                        | 
|Consolidated Balance Sheets                             |  | 21  
|                                                        | 
|Consolidated Statements of Operations                   |  | 22  
|                                                        | 
|Consolidated Statement of Stockholders Equity          |  | 23  
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 24  
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 25  



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

Board of Directors

Dreams, Inc.

We have audited the accompanying consolidated balance sheets of Dreams, Inc. and Subsidiaries (the Company) as of March 31, 2006 and 2005 and the related consolidated statements of operations, changes
in stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dreams, Inc. and Subsidiaries
as of March 31, 2006 and 2005, and the consolidated results of operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Fort Lauderdale, Florida

June 7, 2006

(except for Note 19,

as to which the date is June 28, 2006)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in Thousands, except share amounts)



|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                                                                |  | March 31,2006 |         |   | March 31,2005 |  
|ASSETS                                                                                                                                                                                                          |  |               |         |   |               |   |         |  
|                                                                                                                                                                                                                |  |              
|Current assets:                                                                                                                                                                                                 |  |               |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                                       |  | $             | 433     |   |               | $ | 211     |  
|Accounts receivable, net                                                                                                                                                                                        |  |               | 6,903   |   |               |   | 1,738   |  
|Inventories                                                                                                                                                                                                     |  |               | 12,207  |   |               |   | 10,135  |  
|Prepaid expenses and deposits                                                                                                                                                                                   |  |               | 841     |   |               |   | 1,225   |  
|Deferred tax asset                                                                                                                                                                                              |  |               |        |   |               |   | 345     |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|Total current assets                                                                                                                                                                                            |  |               | 20,384  |   |               |   | 13,654  |  
|                                                                                                                                                                                                                |  |              
|Property and equipment, net                                                                                                                                                                                     |  |               | 1,619   |   |               |   | 1,534   |  
|Deferred loan costs                                                                                                                                                                                             |  |               | 68      |   |               |   | 39      |  
|Goodwill, net                                                                                                                                                                                                   |  |               | 1,932   |   |               |   | 1,932   |  
|Other intangible assets, net                                                                                                                                                                                    |  |               | 4,005   |   |               |   | 4,062   |  
|Deferred tax asset                                                                                                                                                                                              |  |               | 543     |   |               |   | 877     |  
|Other long-term assets                                                                                                                                                                                          |  |               |        |   |               |   | 194     |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|                                                                                                                                                                                                                |  | $             | 28,551  |   |               | $ | 22,292  |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                            |  |               |         |   |               |   |         |  
|                                                                                                                                                                                                                |  |              
|Current liabilities:                                                                                                                                                                                            |  |               |         |   |               |   |         |  
|Accounts payable                                                                                                                                                                                                |  | $             | 3,250   |   |               | $ | 2,466   |  
|Accrued liabilities                                                                                                                                                                                             |  |               | 1,929   |   |               |   | 2,154   |  
|Short-term notes payable                                                                                                                                                                                        |  |               |        |   |               |   | 1,446   |  
|Current portion of long-term debt                                                                                                                                                                               |  |               | 251     |   |               |   | 320     |  
|Deferred credits                                                                                                                                                                                                |  |               | 245     |   |               |   | 158     |  
|Deferred tax liability                                                                                                                                                                                          |  |               | 1,071   |   |               |   |        |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|Total current liabilities                                                                                                                                                                                       |  | $             | 6,746   |   |               | $ | 6,544   |  
|                                                                                                                                                                                                                |  |              
|Long-term debt, less current portion                                                                                                                                                                            |  |               |        |   |               |   | 1,178   |  
|Borrowings against line of credit                                                                                                                                                                               |  |               | 5,744   |   |               |   | 4,499   |  
|                                                                                                                                                                                                                |  |              
|Commitments and contingencies                                                                                                                                                                                   |  |               |        |   |               |   |        |  
|                                                                                                                                                                                                                |  |              
|Stockholders equity:                                                                                                                                                                                           |  |               |         |   |               |   |         |  
|Preferred stock authorized 10,000,000 and 0 shares; issued and outstanding 0 shares as of March 31, 2006 & 2005.                                                                                                |  |               |        |   |               |   |        |  
|Common stock and additional paid-in capital, no par value; authorized 500,000,000 and 100,000,000 shares; issued and outstanding 178,102,720
and 56,363,195 shares as of March 31, 2006 and 2005, respectively. |  |               | 26,286  |   |               |   | 22,845  |  
|Accumulated deficit                                                                                                                                                                                             |  |               | (10,225 | ) |               |   | (12,774 | )
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|Total stockholders equity                                                                                                                                                                                      |  |               | 16,061  |   |               |   | 10,071  |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  
|                                                                                                                                                                                                                |  | $             | 28,551  |   |               | $ | 22,292  |  
|                                                                                                                                                                                                                |  |               |         |   |               |   |         |  

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



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Years Ended March 31, 2006 and 2005

(Dollars in
Thousands, except share and earnings per share amounts)



|                                                                             |  |                |             |   |               |   |            |  
|---------------------------------------------------------------------------- |  | -------------- | ----------- | - | ------------- | - | ---------- | -
|                                                                             |  | March 31, 2006 |             |   | March 31,2005 |  
|Revenues:                                                                    |  |                |             |   |               |   |            |  
|Manufacturing/Distribution                                                   |  | $              | 16,185      |   |               | $ | 12,922     |  
|Retail                                                                       |  |                | 25,095      |   |               |   | 18,833     |  
|Management fees, net                                                         |  |                | 224         |   |               |   | 324        |  
|Franchise fees and royalties                                                 |  |                | 1,226       |   |               |   | 899        |  
|                                                                             |  |                |             |   |               |   |            |  
|Total revenues                                                               |  |                | 42,730      |   |               |   | 32,978     |  
|                                                                             |  |               
|Expenses:                                                                    |  |                |             |   |               |   |            |  
|Cost of sales  manufacturing/distribution                                   |  |                | 10,181      |   |               |   | 7,303      |  
|Cost of sales  retail                                                       |  |                | 14,279      |   |               |   | 10,934     |  
|Operating expenses                                                           |  |                | 16,523      |   |               |   | 14,418     |  
|Depreciation and amortization                                                |  |                | 639         |   |               |   | 375        |  
|                                                                             |  |                |             |   |               |   |            |  
|Total expenses                                                               |  |                | 41,622      |   |               |   | 33,030     |  
|                                                                             |  |               
|Income (Loss) from operations before interest, Other income and income taxes |  |                | 1,108       |   |               |   | (52        | )
|                                                                             |  |               
|Interest expense, net                                                        |  |                | (454        | ) |               |   | (585       | )
|Other income                                                                 |  |                | 3,657       |   |               |   |           |  
|                                                                             |  |                |             |   |               |   |            |  
|Income (Loss) from operations before income taxes                            |  |                | 4,311       |   |               |   | (637       | )
|                                                                             |  |               
|Income tax expense (benefit)                                                 |  |                | 1,762       |   |               |   | (174       | )
|                                                                             |  |                |             |   |               |   |            |  
|Net income (loss)                                                            |  |                | 2,549       |   |               |   | (463       | )
|                                                                             |  |                |             |   |               |   |            |  
|Basic and diluted income (loss) per share                                    |  | $              | 0.02        |   |               | $ | (0.01      | )
|                                                                             |  |                |             |   |               |   |            |  
|Weighted average shares outstanding                                          |  |                | 164,427,869 |   |               |   | 56,363,195 |  
|                                                                             |  |                |             |   |               |   |            |  

The accompanying notes are an integral part of this consolidated financial statement.



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Dreams, Inc. and Subsidiaries

Consolidated Statement of Stockholders Equity

For the Years Ended March 31, 2006 and 2005

(Dollars in
Thousands, except share and earnings per share amounts)



|                                       |  |                   |  |                                         |        |   |                    |   |         |                          |  |   |        |  
|-------------------------------------- |  | ----------------- |  | --------------------------------------- | ------ | - | ------------------ | - | ------- | ------------------------ |  | - | ------ | -
|                                       |  | SharesOutstanding |  | Common Stock& AdditionalPaid-in Capital |        |   | AccumulatedDeficit |   |         | TotalStockholdersEquity | 
|Balance as of March 31, 2004           |  | 56,363,195        |  | $                                       | 22,682 |   |                    | $ | (12,311 | )                        |  | $ | 10,371 |  
|                                       |  |                   |  |                                         |        |   |                    |   |         |                          |  |   |        |  
|Stock options related party loan       |  |                   |  |                                         | 140    |   |                    |   |         |                          |  |   | 140    |  
|Modification of stock option agreement |  |                   |  |                                         | 23     |   |                    |   |         |                          |  |   | 23     |  
|Net loss                               |  |                  |  |                                         |       |   |                    |   | (463    | )                        |  |   | (463   | )
|                                       |  |                   |  |                                        
|Balance as of March 31, 2005           |  | 56,363,195        |  | $                                       | 22,845 |   |                    | $ | (12,774 | )                        |  | $ | 10,071 |  
|                                       |  |                   |  |                                         |        |   |                    |   |         |                          |  |   |        |  
|Shares Issued-Rights Offering          |  | 58,172,332        |  |                                         | 1,745  |   |                    |   |         |                          |  |   | 1,745  |  
|Settlement of Debt and accruals        |  |                  |  |                                         |        |   |                    |   |         |                          |  |   |        |  
|Via stock issuance                     |  | 63,567,193        |  |                                         | 1,907  |   |                    |   |         |                          |  |   | 1,907  |  
|Rights Offering Costs                  |  |                  |  |                                         | (241   | ) |                    |   |         |                          |  |   | (241   | )
|Stock options issued                   |  |                  |  |                                         | 30     |   |                    |   |         |                          |  |   | 30     |  
|Net income                             |  |                  |  |                                         |       |   |                    |   | 2,549   |                          |  |   | 2,549  |  
|                                       |  |                   |  |                                         |        |   |                    |   |         |                          |  |   |        |  
|Balance as of March 31,2006            |  | 178,102,720       |  | $                                       | 26,286 |   |                    | $ | (10,225 | )                        |  | $ | 16,061 |  

The accompanying notes are an integral part of this consolidated financial statement.



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Dreams, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended March 31, 2006 and 2005

(Dollars in
Thousands)



|                                                                                     |  |             |        |   |             |   |        |  
|------------------------------------------------------------------------------------ |  | ----------- | ------ | - | ----------- | - | ------ | -
|                                                                                     |  | Fiscal 2006 |        |   | Fiscal 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                |  |             |        |   |             |   |        |  
|Net income (loss)                                                                    |  | $           | 2,549  |   |             | $ | (463   | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |             |        |   |             |   |        |  
|Depreciation and amortization:                                                       |  |             |        |   |             |   |        |  
|Property and equipment                                                               |  |             | 562    |   |             |   | 300    |  
|Intangible assets                                                                    |  |             | 71     |   |             |   | 75     |  
|Amortization of deferred loan costs                                                  |  |             | 59     |   |             |   |       |  
|Deferred / current tax expense (benefit)                                             |  |             | 1,750  |   |             |   | (169   | )
|Change in assets and liabilities, net of acquisition:                                |  |             |        |   |             |   |        |  
|Accounts receivable                                                                  |  |             | (5,165 | ) |             |   | (350   | )
|Inventories                                                                          |  |             | (2,070 | ) |             |   | (997   | )
|Prepaid expenses and deposits                                                        |  |             | 397    |   |             |   | (490   | )
|Accounts payable                                                                     |  |             | 784    |   |             |   | 981    |  
|Accrued liabilities                                                                  |  |             | 32     |   |             |   | 453    |  
|Deferred credits                                                                     |  |             | 87     |   |             |   | 111    |  
|                                                                                     |  |             |        |   |             |   |        |  
|Net cash used in operating activities                                                |  |             | (554   | ) |             |   | (549   | )
|                                                                                     |  |             |        |   |             |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                |  |             |        |   |             |   |        |  
|Contingent consideration payment                                                     |  |             | (270   | ) |             |   |        |  
|Gain on sale of property, plant, equipment                                           |  |             | 25     |   |             |   |       |  
|Purchase of property and equipment                                                   |  |             | (672   | ) |             |   | (461   | )
|                                                                                     |  |             |        |   |             |   |        |  
|Net cash used in investing activities                                                |  |             | (917   | ) |             |   | (461   | )
|                                                                                     |  |             |        |   |             |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                |  |             |        |   |             |   |        |  
|Proceeds from LaSalle line of credit                                                 |  |             | 5,744  |   |             |   |       |  
|Proceeds from Merrill line of credit                                                 |  |             |       |   |             |   | 4,869  |  
|Payoff of Merrill line of credit                                                     |  |             | (4,499 | ) |             |   | (4,657 | )
|Repayments on notes payable                                                          |  |             | (1,163 | ) |             |   | (310   | )
|Rights offering costs                                                                |  |             | (46    | ) |             |   |       |  
|Deferred loan costs                                                                  |  |             | (88    | ) |             |   |       |  
|Cash received from rights offering                                                   |  |             | 1,745  |   |             |   |       |  
|Proceeds from notes payable                                                          |  |             |       |   |             |   | 1,000  |  
|                                                                                     |  |             |        |   |             |   |        |  
|Net cash provided by financing activities                                            |  |             | 1,693  |   |             |   | 902    |  
|                                                                                     |  |             |        |   |             |   |        |  
|Net increase (decrease) in cash and cash equivalents                                 |  |             | 222    |   |             |   | (108   | )
|                                                                                     |  |            
|Cash and cash equivalents at beginning of period                                     |  |             | 211    |   |             |   | 319    |  
|                                                                                     |  |             |        |   |             |   |        |  
|Cash and cash equivalents at end of period                                           |  | $           | 433    |   |             | $ | 211    |  
|                                                                                     |  |             |        |   |             |   |        |  

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



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies
|-- | -----------------------------------------------------------------

Description of Business

Dreams, Inc. and its subsidiaries (collectively the Company) are
principally engaged in the manufacture, distribution and sale of sports memorabilia products and acrylic display cases. The Company is also in the business of selling Field of Dreams® retail store franchises and operates retail stores and
websites selling memorabilia and related products, as well as athlete representation and corporate marketing of individual athletes. The Companys customers are located throughout the United States of America.

Basis of Presentation

The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The fiscal years ended March 31, 2006 and
March 31, 2005 are herein referred to as fiscal 2006 and fiscal 2005, respectively.

Cash and Cash
Equivalents

Cash and cash equivalents are defined as highly liquid investments with original maturities of three months or less and
consist of amounts held as bank deposits.

Accounts Receivable

The Companys accounts receivable principally result from uncollected royalties from Field of Dreams® franchisees and from credit sales to
third-party customers from its wholesale operations and credit card transactions from the internet division. Additionally, hurricane insurance claim proceeds of $3.6 million have been recorded at fiscal year end 2006.

Revenue Recognition

The Company
recognizes retail (including e-commerce sales) and wholesale/distribution revenues and related cost of sales 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 revenues and related cost of sales are recognized at the time of sale.

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.

(Continued)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies (Continued)
|-- | -----------------------------------------------------------------------------

Shipping and Handling Costs

Costs incurred for shipping and handling associated with a sale are
included in cost of sales in the period when the sale occurred. Amounts billed to a customer for shipping and handling is reported as revenue.

Advertising and Promotional Costs

All advertising and promotional costs associated with advertising and promoting the
Companys lines of business are expensed in the period incurred and included in operating expenses. These expenses were $1.9 million and $1.6 million in fiscal 2006 and 2005, respectively.

Inventories

Inventories, consisting
primarily of sports memorabilia products, prepaid autographs and acrylic cases, are valued at the lower of cost or market. Cost is determined using the first-in, first-out, specific identification and average cost methods. Prepaid autographs
represent amounts paid for the rights to certain autographs to be received in the next twenty-four months.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided for using the straight-line method over the estimated useful lives of
the assets ranging from three to ten years. Leasehold improvements are amortized over the remaining lease period or the estimated useful life of the improvements, whichever is less. Maintenance and repairs are charged to expense as incurred and
major renewals and betterments are capitalized.

Goodwill and Intangible Assets

In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS 142, Goodwill and Other Intangible Assets, which
establishes new accounting and reporting requirements for goodwill and other intangible assets. The new standard requires that all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately
sold, transferred, licensed, rented or exchanged must be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives are no longer amortized, but are subject to an annual assessment for impairment by applying a fair
value based test.

The Company applied the provisions of SFAS 142 beginning on April 1, 2001 and as of March 31, 2006 and 2005
performed fair value based impairment tests on its goodwill and other indefinite lived intangible assets and no impairment was noted.

(Continued)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies (Continued)
|-- | -----------------------------------------------------------------------------

Long-Lived Assets

Long-lived assets and certain amortizable intangible assets to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from
the use of such asset and eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and
certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximated their fair values because of the short maturity of these instruments. The fair value of the Companys notes payable and long-term debt is estimated based on quoted market prices for the same or similar
issues or on current rates offered to the Company for debt of the same remaining maturities. At March 31, 2006 and 2005, the aggregate fair value of the Companys notes payable and long-term debt approximated its carrying value.

Income Taxes

The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method with SFAS No. 109, deferred income taxes are required for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to the difference between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the enactment date. The Company provides a valuation allowance against its deferred tax assets when it believes that is more likely than not that the asset will not be
realized.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) is computed by dividing net income available to common stockholders by the weighted average of common shares outstanding during the year. Diluted EPS is computed by
dividing net income by the sum of the weighted average of common shares outstanding including the dilutive effect of common stock equivalents. There was no dilutive effect of common stock equivalents in fiscal 2006 as all of the outstanding stock
options had exercise prices greater than the average fiscal 2006 stock price. Common stock equivalents have been excluded from the diluted per share calculation in fiscal 2005, as the Company incurred a net loss in that year and its inclusion would
have been anti-dilutive.

(Continued)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies (Continued)
|-- | -----------------------------------------------------------------------------

Potential common stock equivalents at March 31, 2006 were stock options to purchase 4,836,559 shares of common stock with exercise prices ranging from $0.08 to $0.25 per share. As of March 31, 2005 potential
common stock equivalents were stock options to purchase 3,936,559 shares with exercise prices ranging from $0.15 to $0.25 per share.

Stock Compensation

The Company accounts for stock options issued to non-employees under Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation. The Companys issuance of employee stock options is accounted for using the intrinsic value method under APB 25, Accounting for Stock Issued to Employees.
The Company provides disclosure of certain pro forma information as if the fair value-based method had been applied in measuring compensation expense. Effective October 1, 2005 the Company issued 400,000 stock options with an $.08 exercise
price to an Investor Relations consultant in return for a 12 month service agreement. These options were valued at $30,000 and were recorded initially via additional paid in capital. Monthly, the options are being expensed at a rate of $2,500.

In accordance with the requirements of SFAS 123, the fair value of each employee option grant was estimated on the date of grant using an
option-pricing model with the following weighted-average assumptions used for grants in fiscal 2006, no dividend yield; expected volatility of 60% in fiscal 2006, risk-free interest rates of 4% and expected holding periods of three-years. On
February 1, 2006 the Company issued twelve employees and one IT Consultant from the Internet division 1,945,000 stock options with a $.10 exercise price. Also, on February 9, 2006 the Company issued an Internet division employee 55,000
stock options with a $.15 exercise price. One-million (1,000,000) of the stock options are subject to a five-year (5) vesting period, while the balance vest immediately.

(Continued)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies (Continued)
|-- | -----------------------------------------------------------------------------

The Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, compensation cost for stock options issued to employees is measured as the excess, if any, of the fair
value of the Companys common stock at the date of grant over the exercise price of the options. The Companys net income (loss) and income (loss) per share would have been changed to the pro forma amounts indicated below had compensation
cost for the stock option plans and non-qualified options issued to employees been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123:



|                                           |  |            |       |            |   |       |  
|------------------------------------------ |  | ---------- | ----- | ---------- | - | ----- | -
|                                           |  | Fiscal2006 |       | Fiscal2005 |  
|Net income (loss):                         |  |            |       |            |   |       |  
|As reported                                |  | $          | 2,549 |            | $ | (463  | )
|Pro forma                                  |  | $          | 2,513 |            | $ | (544  | )
|                                           |  |           
|Basic and diluted income (loss) per share: |  |            |       |            |   |       |  
|As reported                                |  | $          | 0.02  |            | $ | (0.01 | )
|Pro forma                                  |  | $          | 0.02  |            | $ | (0.01 | )

There was no stock-based employee compensation expense included in net income (loss) in fiscal
2005 or fiscal 2006. The above pro forma disclosures may not be representative of the effects on reported net earnings (loss) for future years as options vest over several years and the Company may continue to grant options to employees.

Use of Estimates

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.

(Continued)



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|1. | Nature of Business and Summary of Significant Accounting Policies (Continued)
|-- | -----------------------------------------------------------------------------

New Accounting Pronouncements

In the fourth quarter of 2004, the FASB issued Statement No. 123
(revised 2004), or SFAS No. 123R, Share-Based Payment, which replaces Statement No. 123 Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123R eliminates the alternative to use APB Opinion 25s intrinsic value method of accounting that was provided in Statement No. 123 as originally issued. After a phase-in period for Statement No. 123R,
pro forma disclosure will no longer be allowed. In the first quarter of 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 which provided further clarification on the implementation of SFAS
No. 123R.

The SEC announced in the second quarter of 2005 that it would extend this phase-in period and, therefore, the Companys
effective date for implementation of SFAS 123R is April 1, 2006. The Company does not believe that any of the alternative phase-in methods would have a material effect on the Companys consolidated statement of operations or balance sheet.

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 the Companys consolidated financial
statements.



|2. | Acquisition of Business
|-- | -----------------------

On April 1, 2004, the
Company acquired certain assets of ProSports Memorabilia, Inc. (ProSports), in order to further support its e-commerce initiative, for an aggregate purchase price of $750. $100 was paid at closing and the remaining $650 shall be paid
over a three year period, ending in March 2007. The present value of the remaining payments as of March 31, 2006 is $245 based on a discount rate which the Company determined to be market rate for similar types of loans. The payments are not
pursuant to a note payable, not secured or subject to interest. The Company paid an additional $405 after closing leaving an amount due of $245 as of March 31, 2006. This remaining amount will be repaid through monthly payments of $21 that
began in April 2005 and continuing through March 2007.

The following table summarizes the fair values of the assets and liabilities
acquired at the date of acquisition:



|                    |  |   |      |  
|------------------- |  | - | ---- | -
|Purchase price      |  | $ | 683  |  
|Current assets, net |  |   | (30  | )
|Intangible assets   |  |   | (653 | )
|                    |  |   |      |  
|Liabilities         |  | $ |     |  

(Continued)



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|2. | Acquisition of Business (Continued)
|-- | -----------------------------------

Primarily all
of the $653 of acquired intangible assets represents indefinite lived intellectual property. The remaining amount represents intangible assets such as customer lists which have been assigned useful lives of three years.

The acquisition was accounted for as a purchase in accordance with SFAS 141 and accordingly, the purchase price was allocated based on the estimated fair
market value of the assets and liabilities acquired. The excess purchase price over the estimated fair market value of the assets and liabilities acquired amounted to $653 and was primarily allocated to certain identifiable intangible assets which
have indefinite useful lives. The results of operations of ProSports from April 1, 2004 through March 31, 2006 are included in the accompanying statement of operations.

During October 2003, the Company purchased 100% of the outstanding common stock of Fansedge Incorporated (Fansedge), an e-commerce retailer
selling a diversified selection of sports licensed products and memorabilia on the Web, in order to further support our e-commerce initiative. The Company did not issue any consideration for this purchase other than the assumptions of the Fansedge
liabilities. However, the prior shareholders of Fansedge are entitled to additional consideration based on 25% of the earnings before interest and taxes (EBIT) of Fansedge for four years after the date of the acquisition. The amount of
additional consideration is based on a formula defined in the purchase agreement and is not limited to a certain amount. In the fourth quarter of fiscal 2005, the Company recorded additional intangible assets and additional purchase consideration of
$683 to accrue for the excess fair value of the net assets acquired over the consideration paid in accordance with SFAS141 Business Combinations. No adjustments were required for fiscal 2006.



|3. | Concentration of Credit Risk
|-- | ----------------------------

Financial instruments
that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from its normal business activities.

Franchisee receivables subject the Company to credit risk. The Companys franchisee receivables are derived primarily from royalties on franchisee sales, sales of merchandise to franchisees and the reimbursement
of various costs incurred on behalf of franchisees.

Regarding accounts receivable, the Company believes that credit risk is limited due to
the large number of entities comprising the Companys customer base and the diversified industries in which the Company operates. The Company performs certain credit evaluation procedures and does not require collateral. The Company believes
that credit risk is limited because the Company routinely assesses the financial strength of its customers, and based upon factors surrounding the credit risk of customers, establishes an allowance for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowances is limited.

(Continued)



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|3. | Concentration of Credit Risk (Continued)
|-- | ----------------------------------------

At
March 31, 2006, the Company had one customer whose accounts receivable balance was approximately $1.1 million which represented about 16% of the Companys gross accounts receivable at March 31, 2006. Subsequent to March 31, 2006
the Company collected the entire amount of the receivable from the customer.

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 set in an amount sufficient to respond to normal business conditions.
Should such conditions deteriorate or any major credit customer default on its obligations to the Company, this allowance may need to be increased which may have an adverse impact on the Companys operations. The Company reviews its accounts
receivable aging on a regular basis to determine if any of the receivables are past due. The Company writes off all uncollectible trade receivables against its allowance for doubtful accounts. As of March 31, 2006 and 2005, the allowance for
doubtful accounts was $98 and $54, respectively.



|4. | Inventories
|-- | -----------

The components of inventories are as
follows:



|                    |  |               |        |               |   |       
|------------------- |  | ------------- | ------ | ------------- | - | ------
|                    |  | March 31,2006 |        | March 31,2005
|Raw materials       |  | $             | 369    |               | $ | 372   
|Work in process     |  |               | 95     |               |   | 105   
|Finished goods, net |  |               | 11,743 |               |   | 9,658 
|                    |  |               |        |               |   |       
|                    |  | $             | 12,207 |               | $ | 10,135
|                    |  |               |        |               |   |       

The reserve for slow moving inventory was $491 at March 31, 2005 and $215 at March 31,
2006. The decrease in this reserve amount was as a result of the Company taking direct inventory write-downs to specific products in fiscal 2006 in the amount of $650,000.



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|5. | Property and Equipment
|-- | ----------------------

The components of property
and equipment as of March 31 are as follows:



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2006 |        |   | 2005 |  
|Leasehold improvements                         |  | $    | 607    |   |      | $ | 699    |  
|Machinery and equipment                        |  |      | 212    |   |      |   | 200    |  
|Office and other equipment and fixtures        |  |      | 2,178  |   |      |   | 1,627  |  
|Transportation equipment                       |  |      | 62     |   |      |   | 47     |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | 3,059  |   |      |   | 2,573  |  
|                                               |  |     
|Less accumulated depreciation and amortization |  |      | (1,440 | ) |      |   | (1,039 | )
|                                               |  |      |        |   |      |   |        |  
|                                               |  | $    | 1,619  |   |      | $ | 1,534  |  
|                                               |  |      |        |   |      |   |        |  



|6. | Intangible Assets
|-- | -----------------

In June 2001, the Financial
Accounting Standards Board approved the issuance of SFAS 142, Goodwill and Other Intangible Assets, which establishes new accounting and reporting requirements for goodwill and other intangible assets. The new standard requires that all
intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged must be recognized as an asset apart from goodwill. Goodwill and intangibles with
indefinite lives are no longer amortized, but are subject to an annual assessment for impairment by applying a fair value based test.

The
Company applied the provisions of SFAS 142 beginning on April 1, 2001 and during fiscal 2006 and fiscal 2005 performed fair value based impairment tests on its goodwill and other intangible assets and no impairment was noted.

As of March 31, 2006 and 2005, the Company has total consolidated goodwill, net of accumulated amortization, of $1.9 million.

In connection with adopting SFAS 142, the Company also reassessed the useful lives and the classifications of its identifiable intangible assets and
determined that they continue to be appropriate. The Companys intangible assets subject to amortization represent primarily a seven year non-compete agreement entered into in fiscal 2002 with a net book value of $75 and $100 as of
March 31, 2006 and 2005, respectively.

(Continued)



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|6. | Intangible Assets (Continued)
|-- | -----------------------------

As of March 31,
2006 and 2005, intangible assets not subject to amortization consist of the following:



|          |  |                                      |       |                                         |   |                       |  |                          |       |  |   |    
|--------- |  | ------------------------------------ | ----- | --------------------------------------- | - | --------------------- |  | ------------------------ | ----- |  | - | ---
|          |  | March 31, 2006 Gross Carrying Amount |       | March 31, 2005 Accumulated Amortization |   | Gross Carrying Amount |  | Accumulated Amortization
|Goodwill  |  | $                                    | 2,015 |                                         | $ | 83                    |  | $                        | 2,015 |  | $ | 83 
|Trademark |  |                                      | 4,118 |                                         |   | 251                   |  |                          | 4,097 |  |   | 210
|          |  |                                      |       |                                         |   |                       |  |                          |       |  |   |    
|          |  | $                                    | 6,133 |                                         | $ | 334                   |  | $                        | 6,112 |  | $ | 293
|          |  |                                      |       |                                         |   |                       |  |                          |       |  |   |    



|7. | Line of Credit
|-- | --------------

At March 31, 2006, the Company
had an asset-based revolving line of credit which allowed the Company to borrow up to $10 million for working capital purposes based on eligible accounts receivable and inventories. The net availability as of March 31, 2006 was $7.7 million.
The balance outstanding on the loan as of March 31, 2006 was $5.7 million resulting in the borrowing availability of $2.0 million as of March 31, 2006.The line of credit carries an annual interest rate at prime or Libor plus
two-hundred basis points. As of March 31, 2006 the interest rate on the loan was 7.5% (prime). The line of credit is collateralized by the Companys assets. The advanced rates as of March 31, 2006 were 85% for accounts receivables and
52.2% for inventories. The Loan Security Agreement also requires that certain financial performance covenants be met. These covenants include minimum cumulative EBITDA, minimum tangible net worth and maximum capital expenditures. The Company is in
compliance with its financial loan covenants as of March 31, 2006. The line of credit matures in June 2008 and carries a pre-payment penalty of $300,000 in contract year 1; $200,000 in contract year 2; and $100,000 in contract year
3.



|8. | Accrued Liabilities
|-- | -------------------

Accrued liabilities consisted
of the following at March 31:



|                                                  |  |      |       |      |   |      
|------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                  |  | 2006 |       | 2005
|Payroll costs (including bonuses and commissions) |  | $    | 685   |      | $ | 572  
|Additional purchase consideration due FansEdge    |  |      | 683   |      |   | 953  
|Professional fees                                 |  |      | 90    |      |   | 106  
|Other                                             |  |      | 471   |      |   | 523  
|                                                  |  |      |       |      |   |      
|                                                  |  | $    | 1,929 |      | $ | 2,154
|                                                  |  |      |       |      |   |      



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|9. | Short-Term Notes Payable
|-- | ------------------------

In order to satisfy
working capital needs, during the second quarter of fiscal 2005, the Company received an unsecured loan to borrow up to $1.0 million due January 15, 2005 from the brother of the Companys president and chief executive officer. The initial
advance of $700 as of September 30, 2004, was used for working capital purposes. As of December 31, 2004, the remaining $300 had been funded and used. In consideration for such loan, the Company had agreed to pay such third party interest
at the rate of 12% per annum and granted five year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share. Effective as of January 15, 2005, the Company extended the maturity date of the note to
April 29, 2005 and modified the convertibility feature to provide for conversion of the note, only upon an event of default, at the lower of (i) the average closing sales price for a share of our common stock for the three trading days
immediately prior to conversion or (ii) in the event we sell or issue common stock or other convertible securities after December 31, 2004, at the lowest issue or conversion price per share of such securities, as applicable. Also, the five
year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share were canceled effective January 15, 2005. On May 31, 2005 the Companys president agreed to assume the Companys obligations under
the loan. In consideration for such transaction the Companys president received 33,333,333 shares of the Companys common stock.

In order to fund the substitute collateral in connection with the appeal of the Unitas Management litigation matter on February 16, 2005, the Company issued unsecured subordinated convertible promissory notes in the aggregate amount of
$446. These notes included notes issued to the Companys president and chief executive officer, his brother-in-law and his father-in-law in the amounts of $121, $125, and $100, respectively, and notes to two other shareholders, each in the
amount of $50. These notes accrue interest at the rate of 12% per annum and are due on (i) December 31, 2005, if the bond is either released or drawn upon prior to December 31, 2005, (ii) the date that is 10 business days
after the bond is released, if the bond is released on or after December 31, 2005, or (iii) the date that is 45 business days after the bond is drawn upon if the bond is drawn upon on or after December 31, 2005. These notes provide
for a 10% origination fee to be paid no later than the earlier to occur of the maturity date and December 31, 2005. These notes are convertible at any time at the lower of (i) the average closing sales price for a share of our common stock
for the three trading days immediately prior to conversion or (ii) in the event we sell or issue common tock or other convertible securities after February 16, 2005 at the lowest issue or conversion price per share of such securities, as
applicable. In June 2005 the note payable to the Companys president was repaid while the remaining $325 of notes was converted as of May 31, 2005 into an aggregate of 10,833,333 shares of common stock.



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|10. | Long-Term Debt
|--- | --------------

Long-term debt consists of the
following at March 31:



|                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |      |   |      |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ----- | -
|                                                                                                                                                                                                                                                                                                                                                                                                        |  | 2006 |      |   | 2005 |  
|Note payable to a lending institution at a floating annual interest rate based on adding a fixed interest charge of 2.4% to the thirty day
Dealer Commercial Paper Rate, plus monthly principal payments through November 2004. The note was collateralized by the Companys accounts receivables and inventories. This note was paid off with the new La Salle Bank credit
facility on June 3, 2005. |  | $    |     |   |      | $ | 820   |  
|Purchase price consideration due ProSports Memorabilia which is not pursuant to a note, is not collateralized and is not subject to interest.
Monthly principal payments of $21 thru March 2007.                                                                                                                                                                                                        |  |      | 245  |   |      |   | 462   |  
|Note payable to an individual at 12% annual interest, with monthly principal and interest payments of $8 through November 2007. The note was
unsecured and guaranteed by the Companys Chairman. On May 31, 2005 the Companys Chairman assumed the obligations in exchange for common stock.                                                                                                           |  |      | 6    |   |      |   | 216   |  
|                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |      |   |      |   |       |  
|                                                                                                                                                                                                                                                                                                                                                                                                        |  |      | 251  |   |      |   | 1,498 |  
|                                                                                                                                                                                                                                                                                                                                                                                                        |  |     
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                    |  |      | (251 | ) |      |   | (320  | )
|                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |      |   |      |   |       |  
|                                                                                                                                                                                                                                                                                                                                                                                                        |  | $    |     |   |      | $ | 1,178 |  
|                                                                                                                                                                                                                                                                                                                                                                                                        |  |      |      |   |      |   |       |  



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|11. | Stockholders Equity
|--- | --------------------

Common Stock:As
of March 31, 2006 and 2005 respectively, the Company had 500,000,000 and 100,000,000 shares authorized and 178,102,720 and 56,353,195 common shares issued and outstanding.

Preferred Stock:As of March 31, 2006, the Company had 10,000,000 shares authorized and -0- preferred shares issued and outstanding. As of
March 31, 2005 there was no preferred stock authorized, issued or outstanding.

Stock Options: The following table summarizes
information about the stock options outstanding at March 31, 2006:



|                              |  |               |   |  |                          |    
|----------------------------- |  | ------------- | - |  | ------------------------ | ---
|                              |  | Stock Options
|                              |  | Shares        |   |  | Wtd. Avg. Exercise Price
|Outstanding at March 31, 2004 |  | 4,200,250     |   |  | $                        | .21
|Granted                       |  | 1,486,559     |   |  |                          | .25
|Exercised                     |  |              |   |  |                          |   
|Expired/Canceled              |  | (1,750,250    | ) |  |                          | .25
|                              |  |               |   |  |                          |    
|Outstanding at March 31, 2005 |  | 3,936,559     |   |  | $                        | .21
|                              |  |               |   |  |                          |    
|Granted                       |  | 2,400,000     |   |  |                          | .10
|Exercised                     |  |              |   |  |                          |   
|Expired/Canceled              |  | (1,500,000    | ) |  |                          | .25
|                              |  |               |   |  |                          |    
|Outstanding at March 31, 2006 |  | 4,836,559     |   |  | $                        | .14

(Continued)



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|11. | Stockholders Equity (Continued)
|--- | --------------------------------

Options
exercisable as of March 31, 2006 and 2005 were 3,636,559 and 3,136,809 respectively. The weighted average fair value of options granted during fiscal 2006 was $.04 per share. The weighted average fair value of options granted during fiscal 2005
was $.18 per share.

The following table summarizes information about all of the stock options outstanding at March 31, 2006:



|                         |  |                     |  |                                         |  |                          |     |        |           |                          |   |    
|------------------------ |  | ------------------- |  | --------------------------------------- |  | ------------------------ | --- | ------ | --------- | ------------------------ | - | ---
|                         |  | Outstanding options |  | Exercisable options                    
|Range of Exercise prices |  | Shares              |  | Weighted Average remaining life (years) |  | Weighted avg. exc. price |     | Shares |           | Weighted avg. exc. price
|$ .08 - .25              |  | 4,836,559           |  | 3.13                                    |  | $                        | .14 |        | 3,636,559 |                          | $ | .15

In January 2004, the Company issued stock options to a consultant to purchase up to
1.2 million shares of the Companys common stock at an exercise price of $0.15 per share. The options vest over three years and expire in June 2007. As a result of this transaction, the Company recorded compensation expense of $11 and the
offsetting credit was recorded as additional paid-in-capital. In June 2004, the Company hired the consultant as an employee.

In August
2004, the Company agreed to amend the former Chief Financial Officers stock option agreement to reduce the number of options to 250,000 from 500,000. This amendment was agreed to in lieu of canceling the options upon termination of employment,
as the former Chief Financial Officer has agreed to provide future consulting services if necessary. These options have an expiration period of three years and are exercisable immediately and as a result the Company recorded compensation expense of
$23.

In August 2004, the Company received an unsecured loan of up to $1.0 million from the brother of the Companys Chief Executive
Officer. In consideration for such loan, the Company has agreed to pay such third party interest at the rate of 12% per annum and granted five year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share.
The Company performed a valuation to determine the fair value of the stock options issued. The fair value determination was $0.18 per share. The Company capitalized $140 to deferred loan costs and amortized these costs during fiscal 2005. Also, the
five year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share were canceled effective January 15, 2005. On May 31, 2005 the Companys president agreed to assume the Companys obligations
under the loan. In consideration for such transaction the Companys president received 33,333,333 shares of the Companys common stock.



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



Effective October 1, 2005 the Company issued 400,000 stock options with an $.08 exercise price
to an Investor Relations consultant in return for a 12 month service agreement. These options were valued at $30,000 and were recorded initially via additional paid-in capital. Monthly, the options are being expensed at a rate of $2,500.

On February 1, 2006 the Company issued 125,000 stock options with a $.10 exercise price to an Information Technology consultant at the Internet
division. The options are subject to a five-year vesting period. The fair value of the stock options was not material.



|12. | Income Taxes
|--- | ------------

The components of the income tax
provision (benefit) are as follows:



|                               |  |             |       |             |   |      |  
|------------------------------ |  | ----------- | ----- | ----------- | - | ---- | -
|                               |  | Fiscal 2006 |       | Fiscal 2005 |  
|Current:                       |  |             |       |             |   |      |  
|Federal tax expense/ (benefit) |  | $           | 10    |             | $ |     |  
|State tax expense/ (benefit)   |  |             | 2     |             |   | (6   | )
|Deferred:                      |  |             |       |             |   |      |  
|Federal tax expense/ (benefit) |  |             | 1,361 |             |   | (150 | )
|State tax expense/ (benefit)   |  |             | 389   |             |   | (18  | )
|                               |  |             |       |             |   |      |  
|                               |  | $           | 1,762 |             | $ | (174 | )
|                               |  |             |       |             |   |      |  

Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys net deferred income taxes are as follows:

Deferred Tax Asset (Liability):



|                                     |  |      |        |   |      |   |       |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ----- | -
|                                     |  | 2006 |        |   | 2005 |  
|Current                              |  |      |        |   |      |   |       |  
|Allowance for doubtful accounts      |  | $    | 39     |   |      | $ | 23    |  
|Inventory reserve                    |  |      | 86     |   |      |   | 187   |  
|Inventory capitalization adjustment  |  |      | 66     |   |      |   | 90    |  
|Accrued expenses                     |  |      | 138    |   |      |   | 45    |  
|Insurance reimbursement              |  |      | (1,400 | ) |      |   |      |  
|                                     |  |      |        |   |      |   |       |  
|                                     |  |      | (1,071 | ) |      |   | 345   |  
|Long-term                            |  |      |        |   |      |   |       |  
|Stock options                        |  |      | 15     |   |      |   | 9     |  
|Federal and states NOL carry-forward |  |      | 1,919  |   |      |   | 1,310 |  
|Capital loss carry-forward           |  |      | 187    |   |      |   |      |  
|Alternative Minimum Tax credit       |  |      | 51     |   |      |   | 14    |  
|Charitable contributions             |  |      | 5      |   |      |   | 38    |  
|Depreciation and amortization        |  |      | (1,447 | ) |      |   | (494  | )
|Less valuation allowance             |  |      | (187   | ) |      |   |      |  
|                                     |  |      |        |   |      |   |       |  
|                                     |  |      | 543    |   |      |   | 877   |  



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



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 $187 and $-0-
valuation allowance as of March 31, 2006 and 2005 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 $187.

The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense for the years ended March 31, 2006
and 2005 is as follows:



|                                    |  |      |   |  |      |   
|----------------------------------- |  | ---- | - |  | ---- | --
|                                    |  | 2006 |   |  | 2005 |   
|Tax at U.S. statutory rate          |  | 34   | % |  | (34  | )%
|State taxes, net of federal benefit |  | 6    |   |  | (4   | ) 
|Non-deductible items                |  |     |   |  | 5    |   
|Other                               |  |     |   |  | 6    |   
|                                    |  |      |   |  |      |   
|                                    |  | 40   | % |  | (27  | )%
|                                    |  |      |   |  |      |   

At March 31, 2006, the Company had available federal net operating loss carryforwards of
approximately $5 million. Due to an ownership change, approximately $900 of the available federal net operating loss may be subject to Section 382 annual limitation. Expiration tables are as follows:



|     |  |   |      
|---- |  | - | -----
|2012 |  | $ | 887  
|2018 |  |   | 392  
|2019 |  |   | 118  
|2020 |  |   | 798  
|2023 |  |   | 28   
|2024 |  |   | 1,682
|2025 |  |   | 1,169
|     |  |   |      
|     |  | $ | 5,074



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|13. | 401 (k) Plan
|--- | ------------

The Company participates in a
401 (k) defined contribution plan (the 401 (k) Plan) under Section 401 (k) of the Internal Revenue Code. The 401 (k) Plan is available to all employees over the age of 21 with at least one year of service. Eligible
participants may contribute up to 50% of their pretax earnings. The Company does not contribute to the Plan. For the years ended March 31, 2006 and 2005, employees were able to contribute up to $14,000 and $13,000 respectively of their annual
compensation. Participants are immediately vested.



|14. | Commitments and Contingencies
|--- | -----------------------------

Operating Leases

As of March 31, 2006, the Company leases office, warehouse and retail space under operating leases. The leases expire over the
next seven years and some contain provisions for certain annual rental escalations. Rent expense charged to operations for fiscal 2006 and 2005 was $2.2 million and $2.1 million, respectively. One of the Companys leases requires the Company to
pay percentage rent based on the revenues of the company-owned stores. Total percentage based rent payments were $58,600 in fiscal 2006 and $42,900 in fiscal 2005.

The future aggregate minimum annual lease payments under the Companys noncancellable operating leases are as follows:



|                                |  |   |      
|------------------------------- |  | - | -----
|Fiscal                          |  |  
|2007                            |  |   | 1,228
|2008                            |  |   | 1,157
|2009                            |  |   | 841  
|2010                            |  |   | 666  
|2011                            |  |   | 658  
|Thereafter                      |  |   | 350  
|                                |  |   |      
|Total minimum lease commitments |  | $ | 4,900

Future Contractual Payments to Athletes

As of March 31, 2006 the Company had several agreements with athletes to provide autographs in the future and the rights to produce and sell certain
products. The autographs are received by the Company as a part of inventory products and re-sold throughout the Companys distribution channels. The future aggregate minimum payments to athletes under contractual agreements are as follows:



|       |  |   |      
|------ |  | - | -----
|Fiscal |  |  
|2007   |  | $ | 1,675
|2008   |  |   | 540  
|       |  |   |      
|       |  | $ | 2,215



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



Litigation

The Company is subject to legal proceedings that arise in the ordinary course of its business. The amount of ultimate liability, if any, in excess of applicable insurance coverage, is not likely to have a material
effect on the financial condition, results of operations or liquidity of the Company. However, as the outcome of litigation or other legal claims is difficult to predict, significant changes in the estimated exposures could occur, which could have a
material impact on the Companys operations.



|15. | Related Party Transactions
|--- | --------------------------

Ross Tannenbaum, the
Companys Chief Executive Officer and a director, and Sam Battistone, the Companys chairman, each had ownership interests in franchised Field of Dreams® stores. Prior to November 2004, Mr. Tannenbaum was a 25% owner in M&S,
Inc.; a Florida Corporation that owns and operates three Field of Dreams® franchised stores in the state of Florida. As of November 1, 2004, Mr. Tannenbaum divested himself of all equity ownership of M&S, Inc. Mr. Battistone
was a principal in FOD Las Vegas, LLC which owns and operates three Field of Dreams® franchised stores in the state of Nevada and one in the state of Minnesota. Mr. Battistone divested himself of his interest January 1, 2005.
Mr. Tannenbaum and Mr. Battistone, through their partnerships with M&S, Inc. and FOD Las Vegas, LLC, respectively, had entered into the Companys standard franchise agreements.

During fiscal 2005, M&S and FOD Las Vegas, LLC paid the Company $68 and $308, respectively in franchise royalties. Additionally, during fiscal 2005,
M&S, Inc. and FOD Las Vegas, LLC purchased products from the Company totaling $253 and $195, respectively.

In April 2002, the Company
entered into a consulting agreement with a corporation wholly-owned by Mr. Battistone. The term of the agreement was through March 31, 2007. The Company agreed to pay the consultant $145 for the first year, $160 in each of years two, three
and four and $175 in year five. The Company is responsible for all expenses incurred by the consultant in performance of his duties. The consultant agreed to provide consulting services using his business contacts. Mr. Battistone agreed to
continue as chairman of the Companys Board of Directors. On February 1, 2005, the Company and Mr. Battistone agreed to terminate this agreement.

In August 2004, the Company obtained a convertible loan to borrow up to $1.0 million due January 15, 2005 from the brother of the Companys president and chief executive officer. The initial advance of $700
as of September 30, 2004, was used for working capital purposes. As of November 22, 2004 the remaining $300 had been funded and used for working capital purposes as well. In consideration for such loan, the Company had agreed to



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



pay such third party interest at the rate of 12% per annum and granted five year options to
purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share. In an event of a default under the loan, the loan is convertible into our common stock at $0.05 per share. On January 25, 2005, the Company extended the maturity
date of the note to April 29, 2005 and modified the convertibility feature to provide for conversion of the note, only upon an event of default, at the lower of (i) the average closing sales price for a share of our common stock for the
three trading days immediately prior to conversion or (ii) in the event we sell or issue common stock or other convertible securities after December 31, 2004 at the lowest issue or conversion price per share of such securities, as
applicable. Also, the five year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share were canceled effective January 15, 2005. On May 31, 2005 the Companys president agreed to assume the
Companys obligations under the loan. In consideration for such transaction the Companys president received 33,333,333 shares of the Companys common stock.

To provide the Company with additional working capital, nine of the Companys senior employees, including our chairman and chief executive officer,
agreed to defer all but $1 of their monthly salary effective August 1, 2004. In consideration for such deferral, each employee received options to purchase that number of shares of our common stock equal to the dollar amount deferred.The five year options are exercisable at $0.25 per share. In addition, upon payment of such accrued amounts, each employee received a 5% deferral bonus. The deferrals ceased and accrued amounts were paid on November 19, 2004 for each of the
Companys senior employees other than our president and chief executive officer and our chairman, which continued in effect until February 2005 for our chairman and June 3, 2005 for our president and chief executive officer. As of
March 31, 2005, stock options to purchase up to 486,559 shares were issued at an exercise price of $0.25 per share. These options are exercisable immediately. The Company accrued $285 of salaries and deferral bonuses for these two executives
($212 of the aggregate accrued salary to the Companys president and chief executive officer and $73 of the consulting fees to the Companys chairman of the board). In May 2005, the entire chairman of the boards accrued consulting
fees was satisfied with issuance of an aggregate of 2,433,333 shares of the Companys common stock in lieu of salary and $149 of the accrued amount to the Companys president was satisfied with the issuance of 4,939,000 shares of common
stock. The Company paid its president the remaining balance of $63 in December 2005.

In August 2004, the Company agreed to amend the
Companys former chief financial officers stock option agreement to reduce the number of options to 250,000 from 500,000. This amendment was agreed to in lieu of canceling the options upon termination of employment, as our former chief
financial officer has agreed to provide future consulting services if necessary. These options have an expiration period of three years and are exercisable immediately. This amendment, as well as the chief financial officers change in status,
resulted in our recording additional compensation expense of $23 during the three-month period ended September 30, 2004. The amount of the compensation expense was based on a fair market value of $0.09 per share as determined by an independent
third party valuation firm. Our former chief financial officer did not receive any consideration for reducing his number of options.



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



On January 12, 2005, the Company entered into a licensing agreement with Pro Stars, Inc., a
corporation in which the Companys chairman of the board is an executive officer. Under the terms of the agreement, the Company receives a 10% licensing fee on the revenues generated from our 365 live marketing concepts which we licensed to Pro
Stars, Inc. The license fees received in fiscal 2006 were $350. The license fees received in fiscal 2005 were insignificant.

In order to fund the
substitute collateral in connection with the appeal of the Unitas Management litigation matter on February 16, 2005, the Company issued unsecured subordinated convertible promissory notes in the aggregate amount of $446. These notes included
notes issued to our president and chief executive officer, his brother-in-law and his father-in-law in the amounts of $121, $125, and $100, respectively, and notes to two other shareholders, each in the amount of $50. These notes accrued interest at
the rate of 12% per annum and were due on (i) December 31, 2005, if the bond was either released or drawn upon prior to December 31, 2005, (ii) the date that is 10 business days after the bond is released, if the bond is
released on or after December 31, 2005, or (iii) the date that is 45 business days after the bond is drawn upon if the bond is drawn upon on or after December 31, 2005. These notes provide for a 10% origination fee to be paid no later
than the earlier to occur of the maturity date and December 31, 2005. These notes are convertible at any time at the lower of (i) the average closing sales price for a share of our common stock for the three trading days immediately prior
to conversion or (ii) in the event we sell or issue common tock or other convertible securities after February 16, 2005 at the lowest issue or conversion price per share of such securities, as applicable. In June 2005 the note payable to
the Companys president was repaid. The remaining $325 of notes was converted as of May 31, 2005 into an aggregate of 10,833,333 shares of common stock.

On May 31, 2005, the Companys chairman agreed to assume the Companys obligations under a note payable to an individual, which bears interests at 12% per annum and $199 of principal amount is due on December 1,
2007. The note was unsecured and previously guaranteed by the Companys chairman. In exchange for the obligation to pay the principal amount of indebtedness to the third party, the Company chairman received 6,633,333 shares of the
Companys common stock.



|16. | Franchise Information
|--- | ---------------------

The Company licenses the
right to use the proprietary name Field of Dreams®
from Universal Studios Licensing, Inc. (USL), formerly known as Universal Merchandising, Inc. Pursuant to the most recent amendment to the licensing agreement, the Company pays USL one percent of each company-owned and franchise
units gross sales, with a minimum annual royalty of $100. The Company pays royalties to USL of $5 for each new franchised unit opened and one percent of each franchised units gross sales. This $5 fee is not an advance against royalties.
At March 31, 2006, the Company had 19 units owned by franchisees and had 10 company-owned units.

The Company is required to indemnify
USL for certain losses and claims, including those based on defective products, violation of franchise law and other acts and omissions by the Company. The Company is required to maintain insurance coverage of $3.0 million per single incident. The
coverage is current as of March 31, 2006 and names USL as the insured party.



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



The license agreement expires in December 2010. The agreement may be renewed for additional five-year
terms, provided that the Company is in compliance with all aspects of the agreement. If the Company fails to comply with the license requirements of the agreement, either during the initial term or during an option term, the agreement may be
terminated by USL. Termination of the license agreement would eliminate the Companys right to use the Field of Dreams® service mark. Such determination could have an adverse effect on the Companys franchise and retail operations.

The Company franchise activity is summarized as follows for the years ended March 31:



|                                        |  |      |  |     
|--------------------------------------- |  | ---- |  | ----
|                                        |  | 2006 |  | 2005
|In operation at year end                |  | 19   |  | 18  
|Opened during the year                  |  |     |  |    
|Closed during the year                  |  |     |  | 4   
|Acquired by franchisor during the year  |  |     |  |    
|Acquired from corporate during the year |  | 1    |  |    



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|17. | Business Segment Information
|--- | ----------------------------

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

The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products, custom artwork, reproductions 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 segment represents the Company-owned
Field of Dreams® retail stores and the Fansedge.com and Prosportsmemorabilia.com web-sites. As of March 31, 2006, the Company owned and operated 10 Field of Dreams® stores. During October 2003, the Company purchased 100% of the
outstanding common stock of Fansedge Incorporated (Fansedge), an e-commerce retailer selling a diversified selection of sports licensed products and memorabilia on the Web. In April of 2004, the Company purchased certain assets
associated with ProSports Memorabilia.com.

The Franchise Operations 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 and generates revenues through the sale of those franchises and continuing royalties.

All of the Companys revenue generated in fiscal 2006 and 2005 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.



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##### Table of Contents

Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



|17. | Business Segment Information (Continued)
|--- | ----------------------------------------

Segment
information for the fiscal years ended March 31, 2006 and 2005 was as follows:



|                       |  |                             |        |   |                   |   |                      |  |   |       |   |  |   |        |  
|---------------------- |  | --------------------------- | ------ | - | ----------------- | - | -------------------- |  | - | ----- | - |  | - | ------ | -
|Twelve Months Ended:   |  | Manufacturing/ Distribution |        |   | Retail Operations |   | Franchise Operations |  |   | Total |  
|March 31, 2006         |  |                             |        |   |                   |   |                      |  |   |       |   |  |   |        |  
|Net sales              |  | $                           | 18,796 |   |                   | $ | 25,095               |  | $ | 836   |   |  | $ | 44,727 |  
|Intersegment net sales |  |                             | (2,565 | ) |                   |   | 0                    |  |   | (38   | ) |  |   | (2,603 | )
|Operating earnings     |  |                             | 2,236  |   |                   |   | 1,288                |  |   | 386   |   |  |   | 3,910  |  
|Total assets           |  |                             | 15,381 |   |                   |   | 7,172                |  |   | 101   |   |  |   | 22,654 |  
|                       |  |                             |        |  
|March 31, 2005         |  |                             |        |   |                   |   |                      |  |   |       |   |  |   |        |  
|Net sales              |  | $                           | 15,927 |   |                   | $ | 18,833               |  | $ | 1,166 |   |  | $ | 35,926 |  
|Intersegment net sales |  |                             | (3,092 | ) |                   |   |                     |  |   | (196  | ) |  |   | (3,288 | )
|Operating earnings     |  |                             | 994    |   |                   |   | 397                  |  |   | 328   |   |  |   | 1,719  |  
|Total assets           |  |                             | 9,756  |   |                   |   | 4,441                |  |   | 134   |   |  |   | 14,331 |  

Reconciliation to consolidated amounts is as follows:



|                                                        |  |        |        |   |        |   |        |  
|------------------------------------------------------- |  | ------ | ------ | - | ------ | - | ------ | -
|                                                        |  | FY2006 |        |   | FY2005 |  
|Revenues:                                               |  |        |        |   |        |   |        |  
|Total revenues for reportable segments                  |  | $      | 44,727 |   |        | $ | 35,926 |  
|Other revenues                                          |  |        | 606    |   |        |   | 340    |  
|Eliminations of intersegment revenues                   |  |        | (2,603 | ) |        |   | (3,288 | )
|                                                        |  |        |        |   |        |   |        |  
|Total consolidated revenues                             |  | $      | 42,730 |   |        | $ | 32,978 |  
|                                                        |  |       
|Pre-tax earnings / (loss):                              |  |        |        |   |        |   |        |  
|Total earnings for reportable segments                  |  | $      | 3,910  |   |        | $ | 1,719  |  
|Other income (loss) (primarily parent company expenses) |  |        | 855    |   |        |   | (1,771 | )
|Interest expense                                        |  |        | (454   | ) |        |   | (585   | )
|                                                        |  |        |        |   |        |   |        |  
|Total income (loss) before income taxes                 |  | $      | 4,311  |   |        | $ | (637   | )



|18. | Supplemental Cash Flow Information
|--- | ----------------------------------

Interest and
Taxes Paid

Cash paid for interest during fiscal 2006 and 2005 was $421 and $605, respectively. The Company paid $0 during fiscal 2006
fiscal 2005 for income taxes.

During October 2003, the Company purchased 100% of the website and outstanding common stock of Fansedge
Incorporated (Fansedge), an e-commerce retailer selling a diversified selection of sports licensed products and memorabilia on the Web, in order to further support our e-commerce initiative. The Company did not issue any consideration
for this purchase other than the assumptions of the Fansedge liabilities. Any additional consideration incurred by the Company will be reflected as additional cost basis of the



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



acquired intangible assets in the period in which the additional consideration is earned. In the
fourth quarter of fiscal 2005, the Company recorded additional intangible assets and additional purchase consideration of $683 to accrue for the excess of the fair value of the net assets acquired over the consideration paid in accordance with
SFAS141 Business Combinations.

In August 2004, the Company agreed to amend the former Chief Financial Officers stock
option agreement to reduce the number of options to 250,000 from 500,000. This amendment was agreed to in lieu of canceling the options upon termination of employment, as the former Chief Financial Officer has agreed to provide future consulting
services if necessary. These options have an expiration period of three years and are exercisable immediately and as a result the company recorded compensation expense of $23.

In August 2004, the Company received an unsecured loan of up to $1.0 million from the brother of the Companys Chief Executive Officer. In
consideration for such loan, the Company has agreed to pay such third party interest at the rate of 12% per annum and granted five year options to purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share. The Company
performed a valuation to determine the fair value of the stock options issued. The fair value determination was $0.18 per share. The Company capitalized $140 to deferred loan costs and amortized these costs during fiscal 2005. On January 15,
2005 the Company canceled the five-year options to purchase 1,000,000 shares of common stock at an exercise price of $.25 per share. Also, on May 31, 2005 the Companys president agreed to assume the Companys obligations under the
loan and in consideration for such transaction, the Companys president received 33,333,333 shares of the Companys common stock.



|19. | Insurance Proceeds
|--- | ------------------

On June 28, 2006,
the Company received a net settlement payment of $3.68 million all of which is included in Accounts receivable as of March 31, 2006. After consideration of the insurance deductible the Company recognized $3.6 million of other income in the
fiscal 2006 statement of operations.



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Dreams, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in Thousands, except share and earnings per share amounts)



Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 8A. Controls and Procedures.

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 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the fiscal year
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 fourth quarter of the fiscal year covered by this report. However, as previously reported, effective August 1, 2005 the Company
hired Dorothy Sillano, BBA, MBA, and CPA as its Company Controller. Furthermore, in August 2005 Dreams added another Senior Accountant to its department and again in December 2005 the Company hired an additional Senior Accountant, BS Accounting, and
CPA. As a result of the new hires referenced above, the Company feels that these additions to the accounting department have improved the internal controls and financial reporting requirements of the organization.

Item 8B. OTHER INFORMATION.

None



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Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

Directors and Officers. The Directors and Executive Officers of the Company and the positions held by each of them are as follows. All directors serve until the Companys next annual meeting of
shareholders.



|                  |  |     |  |                                         |  |                                           
|----------------- |  | --- |  | --------------------------------------- |  | ------------------------------------------
|Name              |  | Age |  | Serving as Directorof the Company Since |  | Position Held With the Company            
|Sam D. Battistone |  | 66  |  | 1982                                    |  | Chairman/Director                         
|Ross Tannenbaum   |  | 44  |  | 1998                                    |  | President/CEO/Director                    
|David M. Greene   |  | 44  |  | 2001                                    |  | Senior Vice President/ Corporate Secretary
|Dale Larsson      |  | 61  |  | 1982                                    |  | Director                                  
|Victor Shaffer    |  | 46  |  | 2004                                    |  | Executive Vice President                  

Biographical Information.

Sam D. Battistone. Sam D. Battistone has been Chairman of the Board since our inception. Mr. Battistone served as president until November
1998. He currently also serves as the Chairman and CEO of Pro Stars, Inc. He was the principal owner, founder and served as Chairman of the Board, President and Governor of the New Orleans Jazz and Utah Jazz of the National Basketball Association
(NBA) from 1974 to 1986. In 1983, he was appointed by the Commissioner of the NBA to the Advisory committee of the Board of Governors of the NBA. He held that position until the Company sold its interest in the team. He served as a founding director
of Sambos Restaurants, Inc. and in each of the following capacities, from time to time, from 1967 to 1979: President, Chief Executive Officer, Vice-Chairman and Chairman of the Board of Directors. During that period, Sambos grew from a
regional operation of 59 restaurants to a national chain of more than 1,100 units in 47 states. From 1971 to 1973, he served on the Board of Directors of the National Restaurant Association.

Ross Tannenbaum. Mr. Tannenbaum has served as President and a Director of the Company since November 1998. From August 1994 to November 1998,
Mr. Tannenbaum was President, director and one-third owner of MMI. From May 1992 to July 1994, Mr. Tannenbaum was a co-founder of Video Depositions of Florida. From 1986 to 1992, Mr. Tannenbaum served in various capacities in the
investment banking division of City National Bank of Florida. Mr. Tannenbaum is the brother-in-law of David M. Greene, the Companys Senior Vice President.



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David M. Greene. David M. Greene has been Senior Vice President of Strategic Planning since June
2001 and our Corporate Secretary since August 2004. From May 1992 to May 2001, he was the President of Florida Tool & Gauge, Inc., an aerospace manufacturing company located in Fort Lauderdale, Florida. From April 1987 to April 1992, he
served as President of GGH Consultants, Inc., an investment and business consulting company. From May 1984 to March 1987, he worked as an investment executive at the investment banking firm of Drexel, Burnham, Lambert, Inc. Mr. Greene is the
brother-in-law of Ross Tannenbaum, the Companys President.

Dale E. Larsson. Mr. Larsson has served as Director of our
Company since 1982. From 1982 until September 1998, Mr. Larsson was our Secretary-Treasurer. Mr. Larsson currently serves as a Director and CFO of Pro Stars, Inc. Mr. Larsson graduated from Brigham Young University in 1971 with a
degree in business. From 1972 to 1980, Mr. Larsson served as controller of Invest West Financial Corporation; a Santa Barbara, California based Real Estate Company. From 1980 to 1981, he was employed by Invest West Financial Corporation as a
real estate representative. From 1981 to 1982, he served as the corporate controller of WMS Famco, a Nevada corporation based in Salt Lake City, Utah, which engaged in the business of investing in land, restaurants and radio stations. Since 1998,
Mr. Larsson has also served as the controller of Dreamstar, Inc., an investment and Retail Sports Memorabilia Company.

Victor
Shaffer. Mr. Shaffer commenced employment and was appointed Executive Vice President of the Company effective June 2004. Prior to the hiring of Mr. Shaffer, he served as a part-time consultant since August 2003 in support of the
Companys NASCAR initiative. Mr. Shaffer has over 20 years of executive experience in advertising and marketing. From 1992 to 1998 he served as president and chief executive officer of Press Pass, a trading card and collectibles company.
From 1998 to 2000 he served as an executive vice president of Racing Champions, a racing collectible and Toy Company. From 2000 to 2001 he served as a consultant of a variety of companies in connection with product development and product launch
marketing. From 2001 to 2003 he served as an executive vice president of Great Western Reserve, a specialty printing company.

During
fiscal year 2006, the Board of Directors acted by unanimous consent on five (5) occasions and had no meetings.

Director of
Compensation.

Directors are not paid fees for serving on our board. Directors are reimbursed for their out-of-pocket expenses incurred
in connection with attendance at our board meetings.

Code of Ethics.

We have adopted a code of ethics for our officers and directors. The Code of Ethics was approved by our Board of Directors in June 2004 and is posted on
our web site. We will also disclose any amendments or waivers to our Code of Ethics on our website www.dreamscorp.com.



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##### Table of Contents

Committees of the Board of Directors. The Board of Directors does not have an Audit Committee. To
date the Board of Directors has acted as our Audit Committee. The Board of Directors has determined that Dale Larsson is an audit committee financial expert and independent as defined in 401(h) of Regulation SB. The
boards affirmative determination was based upon, among other things, his prior business and educational experience.

Compliance
With Section 16(a) of the Exchange Act. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) during
the fiscal year ended March 31, 2006 and amendments thereto furnished to the Company with respect to the fiscal year ended March 31, 2006, except as set forth below, the Company is not aware of any person that failed to file on a timely
basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the fiscal year ended March 31, 2006.

Item 10. Executive Compensation.

The following table sets forth information concerning compensation
for services in all capacities by the Company and its subsidiaries for fiscal years ended March 31, 2004, 2005 and 2006 of those persons who were, at March 31, 2006, the Chief Executive Officer of the Company and executive officers of the
Company whose compensation exceeded $100,000.

Summary Compensation Table



|                            |  |                     |  |                             |         |                                                        |        |  |   |       |  |  
|--------------------------- |  | ------------------- |  | --------------------------- | ------- | ------------------------------------------------------ | ------ |  | - | ----- |  | -
|                            |  | Annual Compensation |  | Other AnnualCompensation(1) |         | Long-Term CompensationSecuritiesUnderlyingOptions/SARs
|Name and principal Position |  | FiscalYear          |  | Salary                      |         | Bonus                                                  |        | 
|Ross Tannenbaum,            |  | 2004                |  | $                           | 288,750 |                                                        |       |  | $ | 9,600 |  | 
|CEO and Director            |  | 2005                |  |                             | 288,750 |                                                        |       |  |   | 9,600 |  | 
|                            |  | 2006                |  |                             | 288,750 |                                                        | 75,000 |  |   | 9,600 |  |  
|                            |  |                     |  |                             |         |                                                        |        |  |   |       |  |  
|David Greene, Senior        |  | 2004                |  | $                           | 100,000 |                                                        |       |  | $ | 7,200 |  | 
|Vice President              |  | 2005                |  |                             | 105,000 |                                                        |       |  |   | 7,200 |  | 
|                            |  | 2006                |  |                             | 125,000 |                                                        | 40,000 |  |   | 7,200 |  |  
|                            |  |                     |  |                             |         |                                                        |        |  |   |       |  |  
|Victor Shaffer,             |  | 2004                |  |                             |        |                                                        |       |  |   |      |  | 
|Executive Vice President    |  | 2005                |  | $                           | 217,500 |                                                        |       |  | $ | 7,200 |  | 
|                            |  | 2006                |  |                             | 225,000 |                                                        | 22,579 |  |   | 7,200 |  | 

---

|(1) | Other annual compensation represents automobile allowances.
|--- | -----------------------------------------------------------



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##### Table of Contents

Option Grants in Last Fiscal Year and Potential Realizable Values.

The following table sets forth as to each of the named executed officers information with respect to option grants during fiscal 2006, potential
realizable values of such option grants. They are not intended to predict future stock prices, which will depend on market conditions, performance and other factors.



|                |  |                                           |  |                                                                   |  |                |  |                
|--------------- |  | ----------------------------------------- |  | ----------------------------------------------------------------- |  | -------------- |  | ---------------
|Name            |  | Number of SharesUnderlyingGranted Options |  | Percentage of theTotal Options Grantedto
Employees in Fiscal Year |  | Exercise Price |  | Expiration Date
|Ross Tannenbaum |  | 0                                         |  |                                                                   |  |                |  |                
|David M. Greene |  | 0                                         |  |                                                                   |  |                |  |                
|Victor Shaffer  |  | 0                                         |  |                                                                   |  |                |  |                

Aggregated Option/Exercises in Fiscal Year and Fiscal Year End Options.

The following table sets forth, with respect to each of the named executive officers, the number of share options exercised and the dollar value realized
from those exercised during fiscal 2006, and the total number and aggregate dollar value of exercisable and non-exercisable stock options held on March 31, 2006.

Aggregated Option/SAR Exercises in Fiscal Year and FY-End

Option/SAR Values



|                |  |                                 |  |                    |  |                                                                                                 |  |                                                                                        
|--------------- |  | ------------------------------- |  | ------------------ |  | ----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------
|Name            |  | Shares Acquired On Exercise (#) |  | Value Realized ($) |  | Number of
SecuritiesUnderlying UnexercisedOptions/SARs At FY-End (#) Exercisable/ Unexercisable |  | Value of UnexercisedIn-The-Money Options/SARsAt FY-End ($)(1) Exercisable/Unexercisable
|Ross Tannenbaum |  |                                |  |                   |  | 169,696                                                                                         |  |                                                                                       
|David M. Greene |  |                                |  |                   |  | 524,766/                                                                                       |  |                                                                                       
|Victor Shaffer  |  |                                |  |                   |  | 1,152,717/104,360                                                                               |  | 21,913/2,087                                                                           

At March 31, 2006, the closing bid price of the Companys common stock was $.17, and on
July 11, 2006, was $.16.





---

|(1) | Based on the closing bid price of the Companys common stock of $.16 on July 11,
2006.
|--- | --------------------------------------------------------------------------------------

Employment Agreements.

We are not currently a party to any employment agreement with any of our named executive officers.



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Equity Compensation Plans.

We do not currently have any equity compensation plans in effect.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Principal Shareholders.

The following table sets forth as of June 15, 2006, the number
of the Companys common stock beneficially owned by persons who own five percent or more of the Companys voting stock, by each director, by each executive officer, and by all executive officers and directors as a group. The table
presented below includes shares issued and outstanding and warrants to purchase shares and options exercisable within 60 days.



|                                                                  |  |                        |        |  |                  |  
|----------------------------------------------------------------- |  | ---------------------- | ------ |  | ---------------- | -
|Name and Address of Beneficial Owner(1)                           |  | Number of Shares Owned |        |  | Percent of Class |  
|Sam D. Battistone                                                 |  | 9,619,954              | (2)(3) |  | 5.4              | %
|                                                                  |  |                       
|Ross Tannenbaum                                                   |  | 46,003,029             | (4)    |  | 25.8             | %
|                                                                  |  |                       
|Jeffrey R. Rosenberg 4025 Willowbend, Suite 312 Houston, TX 77023 |  | 11,000,000             |        |  | 6.2              | %
|                                                                  |  |                       
|Donald Friedman(9) 3131 Eastside, #120 Houston, TX 77098          |  | 11,000,000             |        |  | 6.2              | %
|                                                                  |  |                       
|Dale Larsson 3230 North University Ave. Provo, UT 84604           |  | 595,144                |        |  | .3               | %
|                                                                  |  |                       
|Victor Shaffer                                                    |  | 2,023,744              | (5)(6) |  | 1.1              | %
|                                                                  |  |                       
|David M. Greene                                                   |  | 2,549,766              | (7)    |  | 1.4              | %
|                                                                  |  |                       
|All Executive Officers and Directors as a group (5 persons)(8)    |  | 60,791,547             |        |  | 34               | %

See footnotes next page.



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|(1) | Unless otherwise indicated, the address for each person is 2 South University Drive, suite
325 Plantation, Florida 33324.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(2) | Excludes 7,811,782 shares owned by the following family members of which Mr. Battistone
disclaims beneficial ownership:
|--- | -----------------------------------------------------------------------------------------------------------------------



|                 |  |                       
|---------------- |  | ----------------------
|Name             |  | Number of Shares Owned
|Kelly Battistone |  | 1,000,000             
|Dann Battistone  |  | 1,000,000             
|Brian Battistone |  | 1,000,000             
|Mark Battistone  |  | 1,000,000             
|Cindy Battistone |  | 1,000,000             
|Signature, Inc.  |  | 2,811,782             



|(3) | Includes 70,348 shares which are the subject of stock options.
|--- | --------------------------------------------------------------

|(4) | Includes 169,696 shares which are the subject of stock options.
|--- | ---------------------------------------------------------------

|(5) | Includes 857,077 shares which are the subject of stock options.
|--- | ---------------------------------------------------------------

|(6) | Does not include 400,000 shares which are the subject of stock options which have not yet
vested.
|--- | -------------------------------------------------------------------------------------------------

|(7) | Includes 524,766 shares which are the subject of stock options.
|--- | ---------------------------------------------------------------

|(8) | The directors and officers have sole voting and investment power as to the shares beneficially owned by them.
|--- | -------------------------------------------------------------------------------------------------------------

|(9) | Includes 4,000,000 shares held in four trusts of which the beneficiaries are Mr. Friedmans children.
|--- | -----------------------------------------------------------------------------------------------------

Item 12. Certain Relationships and Related Transactions.

Ross Tannenbaum, the Companys Chief
Executive Officer and a director, and Sam Battistone, the Companys Chairman, each had ownership interests in franchised Field of Dreams® stores. Prior to November 2004, Mr. Tannenbaum was a 25% owner in M&S, Inc.; a Florida
Corporation that owns and operates three Field of Dreams® franchised stores in the state of Florida. As of November 1, 2004, Mr. Tannenbaum divested himself of all equity ownership of M&S, Inc. Mr. Battistone is a principal in
FOD Las Vegas, LLC which owns and operates three Field of Dreams® franchised stores in the state of Nevada and one in the state of Minnesota. Mr. Battistone divested himself of his interest January 1, 2005. Mr. Tannenbaum and
Mr. Battistone, through their partnerships with M&S, Inc. and FOD Las Vegas, LLC, respectively, had entered into the Companys standard franchise agreements.

During fiscal 2005, M&S and FOD Las Vegas, LLC paid the Company $68,000 and $308,000, respectively in franchise royalties. Additionally, during
fiscal 2005, M&S, Inc. and FOD Las Vegas, LLC purchased products from the Company totaling $253,000 and $195,000, respectively.



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In April 2002, the Company entered into a consulting agreement with a corporation wholly-owned by
Mr. Battistone. The term of the agreement was through March 31, 2007. The Company agreed to pay the consultant $145,000 for the first year, $160,000 in each of years two, three and four and $175,000 in year five. The Company is responsible
for all expenses incurred by the consultant in performance of his duties. The consultant agreed to provide consulting services using his business contacts. Mr. Battistone agreed to continue as Chairman of the Companys Board of Directors.
On February 1, 2005, the Company and Mr. Battistone agreed to terminate this agreement.

In August, 2004, the Company obtained a
convertible loan to borrow up to $1.0 million due January 15, 2005 from the brother of the Companys president and chief executive officer. The initial advance of $700,000 as of September 30, 2004, was used for working capital
purposes. As of November 22, 2004 the remaining $300,000 has been funded and used. In consideration for such loan, the Company has agreed to pay such third party interest at the rate of 12% per annum and granted five year options to
purchase 1,000,000 shares of common stock at an exercise price of $0.25 per share. In an event of a default under the loan, the loan is convertible into our common stock at $0.05 per share. On January 25, 2005, effective January 15, 2005,
we extended the maturity date of the note to April 29, 2005 and modified the convertibility feature to provide for conversion of the note, only upon an event of default, at the lower of (i) the average closing sales price for a share of
our common stock for the three trading days immediately prior to conversion or (ii) in the event we sell or issue common stock or other convertible securities after December 31, 2004 at the lowest issue or conversion price per share of
such securities, as applicable. On May 31, 2005 the Companys president agreed to assume the Companys obligations under the loan. In consideration for such transaction the Companys president received 33,333,333 shares of our
common stock.

To provide the Company with additional working capital, nine of our senior employees, including our chairman and chief
executive officer, agreed to defer all but $1 of their monthly salary effective August 1, 2004. In consideration for such deferral, each employee received options to purchase that number of shares of our common stock equal to the dollar amount
deferred.The five year options are exercisable at $0.25 per share. In addition, upon payment of such accrued amounts, each employee received a 5% deferral bonus. The deferrals ceased on November 19, 2004 for each of our senior employees
other than our president and chief executive officer and our chairman, which continued in effect until February 1, 2005 for our chairman and June 3, 2005 for our president and chief executive officer. On December 31, 2004, stock
options to purchase up to 410,615 shares were issued at an exercise price of $0.25 per share. These options are exercisable immediately. The Company accrued $284,588 of salaries and deferral bonuses for these two executives. $211,588 of the
aggregate accrued salary to the Companys president and chief executive officer and $73,000 of the consulting fees to the Companys chairman of the board. The entire chairman of the boards accrued salary was satisfied with issuance
of an aggregate of 2,433,333 shares of the Companys common stock in lieu of salary and $148,188 of the accrued amount to the Companys president was satisfied with the issuance of 4,939,000 shares of common stock. The Company paid its
president the remaining balance of $63,000 in December 2005.



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In August 2004, the Company agreed to amend our former chief financial officers stock option
agreement to reduce the number of options to 250,000 from 500,000. This amendment was agreed to in lieu of canceling the options upon termination of employment, as our former chief financial officer has agreed to provide future consulting services
if necessary. These options have an expiration period of three years and are exercisable immediately. This amendment, as well as the chief financial officers change in status, resulted in our recording additional compensation expense of
$22,500 during the three-month period ended September 30, 2004. The amount of the compensation expense was based on a fair market value of $0.09 per share as determined by an independent third party valuation firm. Our former chief financial
officer did not receive any consideration for reducing his number of options.

On January 12, 2005, the Company entered into a
licensing agreement with Pro Stars, Inc., a corporation in which our chairman of the board is an executive officer. Under the terms of the agreement, we receive a 10% licensing fee on the revenues generated from our 365 live marketing concepts which
we licensed to Pro Stars, Inc. The license fees received in fiscal 2006 were $350,000. The license fees received in fiscal 2005 were insignificant.

In order to fund the substitute collateral in connection with the appeal of the Unitas Management matter discussed under Business  Legal Proceedings, on February 16, 2005, the Company issued unsecured subordinated
convertible promissory notes in the aggregate amount of $446,080. These notes included notes issued to our president and chief executive officer, his brother-in-law and his father-in-law in the amounts of $121,080, $125,000, and $100,000,
respectively, and notes to two other shareholders, each in the amount of $50,000. These notes accrue interest at the rate of 12% per annum and are due on (i) December 31, 2005, if the bond is either released or drawn upon prior to
December 31, 2005, (ii) the date that is 10 business days after the bond is released, if the bond is released on or after December 31, 2005, or (iii) the date that is 45 business days after the bond is drawn upon if the bond is
drawn upon on or after December 31, 2005. These notes provide for a 10% origination fee to be paid no later than the earlier to occur of the maturity date and December 31, 2005. These notes are convertible at any time at the lower of
(i) the average closing sales price for a share of our common stock for the three trading days immediately prior to conversion or (ii) in the event we sell or issue common stock or other convertible securities after February 16, 2005
at the lowest issue or conversion price per share of such securities, as applicable. In June 2005 the note payable to the Companys president was repaid. The remaining $325,000 of notes was converted as of May 31, 2005 into an aggregate
10,833,333 shares of common stock.

On May 31, 2005, the Companys chairman agreed to assume the Companys obligations under
a note payable to an individual, which bears interests at 12% per annum and $199,000 of principal amount is due on December 1, 2007. The note was unsecured and previously guaranteed by the Companys chairman. In exchange, the
obligation to pay the principal amount of indebtedness to the third party, the Company chairman received 6,633,333 shares of the Companys common stock.



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Item 13. Exhibits.

(a)



|               |  |                                                                                                                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                                        
|3.1(c)         |  | Articles of Incorporation(1)                                                                                                                                                                                                   
|               | 
|3.2            |  | Articles of Amendment to the Revised Articles of Amendment of Incorporation(2)                                                                                                                                                 
|               | 
|3.3            |  | Bylaws(1)                                                                                                                                                                                                                      
|               | 
|10.2           |  | Merchandise License Agreement(1)                                                                                                                                                                                               
|               | 
|10.3           |  | Standard Franchise Documents(1)                                                                                                                                                                                                
|               | 
|10.4           |  | Loan and Security Agreement with LaSalle Business Credit, LLC or agent for Standard Federal Bank National Association, acting through it division, LaSalle Retail Finance(3)                                                   
|               | 
|10.6           |  | Agreement and Plan of Merger effective as of August 15, 2001 by and among Dreams, Inc., Dreams/GOI Merger Sub, Inc., The Greene Organization, Inc. and Warren H. Greene as sole shareholder of The
Greene Organization, Inc.(4)
|               | 
|10.7           |  | Employment Agreement dated August 15, 2001 by and among Dreams, Inc. and Warren H. Greene(4)                                                                                                                                   
|               | 
|21             |  | Subsidiaries of the Company(5)                                                                                                                                                                                                 
|               | 
|31.1           |  | Certification of CEO(5)                                                                                                                                                                                                        
|               | 
|31.2           |  | Certification of CFO(5)                                                                                                                                                                                                        
|               | 
|32.1           |  | Certification of CEO(5)                                                                                                                                                                                                        
|               | 
|32.2           |  | Certification of CFO(5)                                                                                                                                                                                                        

---

|(1) | Filed with the Companys Form 10-KSB dated September 7, 1999 and incorporated by this reference.
|--- | ------------------------------------------------------------------------------------------------

|(2) | Filed with Companys SB-2 File No. 333-122385 dated April 4, 2005 and incorporated by this reference.
|--- | -----------------------------------------------------------------------------------------------------

|(3) | Filed with the Companys Form 8-K dated June 7, 2005, and incorporated by this reference.
|--- | -----------------------------------------------------------------------------------------

|(4) | Filed with the Companys Form 8-K dated August 28, 2001 and incorporated by this reference.
|--- | -------------------------------------------------------------------------------------------

|(5) | Filed herewith.
|--- | ---------------



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Item 14. Principal Accountant Fees and Services.

The following table shows the fees that the Company
paid or accrued for the audit and other services provided by Grant Thornton for fiscal years 2006 and 2005.



|                   |  |             |         |             |   |        
|------------------ |  | ----------- | ------- | ----------- | - | -------
|                   |  | Fiscal 2006 |         | Fiscal 2005
|Audit Fees         |  | $           | 103,000 |             | $ | 109,000
|Audit-Related Fees |  |             | 2,000   |             |   | 3,000  
|Tax Fees           |  |             | 38,000  |             |   | 26,000 
|                   |  |             |         |             |   |        
|Total              |  | $           | 143,000 |             | $ | 138,000

Audit Fees - This category includes the audit of the Companys annual financial statements,
review of financial statements included in the Companys Form 10-QSB Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those fiscal years. This category also included
consents for the equity rights offering advice in Fiscal 2005 on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements and the preparation of an annual management
letter on internal control matters.

Audit-Related Fees - This category consists of assurance and related services by the independent
auditors that are reasonably related to the performance of the audit or review of Dreams, Inc.s financial statements and are not reported above under Audit Fees. The services for the fees disclosed under this category included the
review of SEC Comment Letters for Fiscal 2005 and the consent for the Uniform Franchise Offering Circular and other accounting consulting for both Fiscal 2006 & 2005.

Tax Fees - This category consists of professional services rendered by Grant Thornton LLP for tax compliance and tax advice. The services for the fees
disclosed under this category include tax return preparation and technical tax advice for Fiscal 2006 & 2005.

Miscellaneous - The Board of Directors, serving as the Companys Audit Committee, reviews, and in its sole discretion pre-approves, our independent auditors annual engagement letter including proposed fees and all audit
and non-audit services provided by the independent auditors. Accordingly, all services described under Audit Fees, Audit-Related Fees, and Tax Fees were pre-approved by our Board of Directors. Board of Directors,
serving as the Companys Audit Committee, may not engage the independent auditors to perform the non-audit services proscribed by law or regulation. The Board of Directors, serving as the Companys Audit Committee, may delegate
pre-approval authority to a member of the Board of Directors, and authority delegated in such manner must be reported at the next scheduled meeting of the Board of Directors.



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



DREAMS, INC., a Utah corporationBy:

/s/ Ross TannenbaumRoss Tannenbaum,President, Chief Executive OfficerDated: July 13, 2006


In accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the Company and in the capacities and on the dates indicated.



By:

/s/ Ross TannenbaumRoss Tannenbaum,Chief Executive Officer and a Director(principal executive officer and principalaccounting financial officer)Dated: July 13, 2006By:

/s/ Sam BattistoneSam Battistone, DirectorDated: July 13, 2006By:

/s/ Dale E. LarssonDale E. Larsson, DirectorDated: July 13, 2006




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Exhibit Index



|            |  |                            
|----------- |  | ---------------------------
|Exhibit No. |  | Description                
|21          |  | Subsidiaries of the Company
|            | 
|31.1        |  | Certification of CEO       
|            | 
|31.2        |  | Certification of CFO       
|            | 
|32.1        |  | Certification of CEO       
|            | 
|32.2        |  | Certification of CFO