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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-KSB





ANNUAL REPORT UNDER


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





For fiscal year ended March 31, 2002





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DREAMS, INC.


(Name of small business issuer in its charter)





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)





(954) 377 - 0002


Issuers telephone number





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





Title of each Class

Name of each exchange on which registeredNone

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 (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 disclosure of
delinquent filers in response to Item 405 of Regulation S-B is not 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





State issuers revenues for its most recent fiscal year:  $16,602,000





The
aggregate market value of the common equity held by non-affiliates as of May 31, 2002 was $10,413,000.





The number
of shares outstanding of the issuers common stock as of June 15, 2002 is 57,852,835





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





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FORWARD LOOKING STATEMENTS





The registrant cautions readers that certain important factors may affect actual results and could cause such results to differ materially from any forward-looking
statements that may have been made in this Form 10-KSB or that are otherwise made by or on behalf of the registrant. For this purpose, any statements contained in the Form 10-KSB that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing, words such as may, expect, believe, anticipate, intend, could, estimate,
plan, or continue or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements.




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TABLE OF CONTENTS





FORM 10-KSB





PagePart IItem 1.

DESCRIPTION OF BUSINESS

1Item 2.

DESCRIPTION OF PROPERTY

7Item 3.

LEGAL PROCEEDINGS

8Item 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

8Part IIItem 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

8Item 6.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

9Item 7.

FINANCIAL STATEMENTS

14Item 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

41Part IIIItem 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

41Item 10.

EXECUTIVE COMPENSATION

44Item 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

46Item 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

47Item 13.

EXHIBITS AND REPORTS ON FORM 8-K

48SIGNATURES

49




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Part I





Item 1.Description of Business





General.





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





Dreams, Inc.
(the Company) is a Utah Corporation which was formed in April 1980. The Company operates through its wholly-owned subsidiary, Dreams Franchise Corporation (DFC) and through Dreams Entertainment, Inc. (DEI) and
Dreams Products, Inc. (DPI), wholly-owned subsidiaries of DFC. DFC is in the business of selling Field of Dreams ® retail store franchises and generates revenues through the sale of those franchises and continuing royalties. DEI includes the Companys Farley art division, which is the Companys entry into original art and
reproductions of sports personalities and events. DPI is a wholesaler of sports memorabilia products and acrylic cases. DPI employs the trademark Mounted Memories. DPI pays annual fees to Major League Baseball and the National Football
League which officially licenses DPIs baseball and football memorabilia products. Through The Greene Organization the Company is engaged in the representation and marketing of professional athletes. There are currently 33 Field of
Dreams ® franchise stores open and operating and two Field of Dreams ® company-owned stores. DPI has manufacturing, distribution and warehousing facilities located in Sunrise, Florida
and a distribution center in Denver, Colorado. See Mounted Memories for information regarding the reorganization of the Company which resulted in the acquisition of the assets and business now employed by DPI. In March 2002 we entered
into the company-owned retail business with the purchase of two existing Field of Dreams ® franchises.
See Consolidated Financial Statements for financial information.





Field of
Dreams ® Franchising Background.





The Company conducts its Field of Dreams ® operations through its subsidiary DFC. DFC licenses certain rights from MCA/Universal Merchandising Inc. (MCA) 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 MCA 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 MCA 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 MCA 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 MCA is referred to herein as the MCA License. Under the terms of the MCA License, DFC is obligated to pay to MCA a 1% royalty based on gross sales of Field of Dreams ® stores. DFC must pay MCA a $2,500 advance on royalties for each




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company-owned store which is opened. DFC is obligated to pay $5,000 to MCA upon the opening of each franchised store. The $5,000 fee is not an
advance on royalties. DFC guarantees to pay MCA a minimum yearly royalty of $2,500 regardless of the amount of gross sales. The current term of the MCA License expires in 2005. DFC has successive five-year options to renew the MCA License. The MCA
License requires DFC to submit all uses of the Field of Dreams ® mark for approval prior to use.
Ownership of the Field of Dreams ® name remains with MCA and will not become that of DFC or the
Company. Should DFC breach the terms of the MCA License, MCA 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.





If DFC is in compliance with the terms of the MCA License and if MCA wishes to open and operate or license third parties to open and operate Field of Dreams ® stores outside of the United States, DFC has a right of first refusal to obtain the license for such non-United
States territory. The Company may exercise its right of first refusal by notifying MCA of its desire to undertake a proposed new territory and paying to MCA a non-refundable advance license fee of $10,000. Following such notice and payment, the
Company and MCA must negotiate in good faith to reach a definitive license agreement for the additional territory. If the Company fails to send notification, make the $10,000 payment or if a definitive license cannot be reached, MCA may offer the
new territory to another party.





DFC is required to indemnify MCA for certain losses and claims, including those
based on defective products, violation of franchise law and other acts and omissions of DFC. DFC is required to maintain insurance coverage of $3,000,000 per single incident. The coverage must name MCA as an insured party. The Company has guaranteed
the monetary obligations of DFC pursuant to the MCA License.





Franchising.





In June 1991, DFC began offering franchises for the development and operation of Field of Dreams ® stores in the United States. The laws of each state vary regarding regulation of the sale of franchises. Certain states require
compliance with the regulations of the Federal Trade Commission (the FTC Regulations) prior to commencement of sales activity (the FTC States). Other states require compliance with specific additional registration procedures
which vary in complexity. DFC is currently offering franchises in FTC States and a limited number of other states. It will offer franchises in other states as compliance with each states regulation is completed. Compliance with the FTC
Regulations and various state regulations requires preparation of an extensive offering circular and the filing of such circular in certain states. Compliance with some state regulations requires significant time in connection with satisfying
comments of franchise offering circular examiners. Compliance with FTC Regulations and certain state laws significantly limits the means by which the Company offers and sells franchises. In the future, DFC intends to acquire from MCA the rights to
open and franchise stores in Canada and other countries. As summarized below, DFC offers five types of franchises: Individual Standard Store (Standard), Individual Kiosk (Kiosk), Area Development (Area
Development), Conversion (Conversion), and Seasonal (Seasonal). The Company does not depend on any one or a few franchisees for a material portion of its




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revenues. Royalties from the largest franchisee accounted for only one percent of the Companys fiscal 2002 consolidated revenues.





Standard Franchises:





Pursuant to a Standard franchise, a franchisee obtains 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 concur 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. The course is conducted at a DFC designated site. DFC also makes the
same training available to a reasonable number of the franchisees employees. 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 loans to each
franchisee a copy of its operations manual which sets out the policies and procedures for operating a Field of Dreams ® store. 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. DFC also reserves the right to change the name used in the system from Field of Dreams ® to any other name and require all franchisees to discontinue any use of any aspect of the system or the name Field of Dreams ® . DFC has reserved this right in its franchise agreements to provide for the event that it determines that another name would be better for its
franchise system, that the royalty it pays to MCA in connection with use of the name is excessive or if DFC should breach the terms of the MCA license and lose the right to use the Field of Dreams ® name.





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. Franchisees are also required to contribute an additional 1.5% of
gross revenues to a marketing and development fund which is administered by DFC for the promotion of the Field of Dreams ® system. Each franchisee is also required to spend 1% of its gross revenues for its own local advertising and promotion. During its first 90 days of operation, each franchisee is required to spend a minimum of $2,500 for
promotion and advertising. Franchisees are required to maintain standards of quality and performance and to maintain the proprietary nature of the Field of Dreams ® name. Franchisees must commence operation of the franchised stores within 180 days after execution of the Standard franchise agreement. DFC has
prepared and amends from time-to-time an approved supplier list from which franchisees may




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purchase certain inventory and other supplies. Each franchisee is required to maintain specified amounts of liability insurance which names DFC
and MCA 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.





Kiosk:





Pursuant to a Kiosk franchise, a franchisee acquires the same rights as a Standard franchise, except that the franchisee is licensed to open a freestanding Kiosk for an initial franchise fee of $19,000
rather than $32,500. Other fees paid by Kiosk franchisees, including ongoing royalties, and marketing and development fund contributions are the same as under a Standard franchise agreement.





Area Development:





Under an Area Development agreement, DFC grants rights to develop a minimum of four Field of Dreams ® stores in a designated area. The stores are required to be open pursuant to a specified time schedule. The developer must execute separate Standard franchise agreements for each store as it is opened. Upon execution of
the Area Development agreement, the developer is required to pay DFC $5,000 for each store to be opened, with a minimum payment upon execution of $20,000. The developer must obtain DFCs approval for each store site the developer proposes to
open. The developer then pays DFC an additional $20,000 for each store upon execution by the developer of a lease for that store. Development Agreements are not transferable without the consent of DFC.





Conversion:





DFC offers Conversion franchises to certain operators of businesses which currently sell sport related merchandise, memorabilia, trading cards and similar products. Among other conditions to the granting of a Conversion
franchise, an operator must have run such a business for a minimum of three months. Such a business owner will execute a Standard franchise agreement as well as a Conversion franchise addendum. A Conversion franchisee is required to pay DFC $32,500
upon execution of the Standard franchise and the Conversion addendum. The Conversion franchisee is required to pay to DFC all amounts required in the Standard franchise. Conversion franchises are not transferable without the consent of DFC.





Seasonal:





DFC offers existing franchisees the right to open one or more temporary holiday Seasonal location stores during the period beginning October 15 and ending not later than the Monday following the second
full calendar week in January of the following year.





Seasonal franchisees must pay the Company an initial fee of
$2,500 for each seasonal location. As Seasonal franchises are open for a very limited period of time, DFC offers very limited service to such franchisees. Consequently, Seasonal franchises are available only to existing Field of Dreams ® Franchisees.




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DFC has sold only Standard franchises, Area Development rights, and Seasonal
franchises. It has sold no Kiosk or Conversion Franchises. It is not anticipated that Kiosk or Conversion Franchises will be a substantial portion of DFCs business in the future. DFC does not actively market Kiosk and Conversion Franchises and
there appears to be little interest in those types of franchises from potential purchases.





Franchise Broker.





DFC does not currently employ a franchise broker. The officers of DFC currently act as sales agents for Field
of Dreams ® franchises. The Company may engage an outside franchise broker in the future. DFC
advertises Field of Dreams ® franchises in a very limited number of business magazines. Most persons
expressing an interest in purchasing a Field of Dreams ® franchise have visited a Field of
Dreams ® store and have subsequently contacted DFC.





Company-owned Stores.





In March 2002, we entered into the company-owned retail business with the purchase of two existing Field of Dreams ® franchises including inventory on hand as of the acquisition date. The stores are located in the Park Meadows Mall in Denver, Colorado and the
Somerset Mall, in Detroit, Michigan. The aggregate purchase price was $226,000. The Company intends to identify other franchised stores which it may purchase from time to time as it believes is appropriate.





Mounted Memories.





Mounted Memories (MMI) is a wholesaler of sports and celebrity memorabilia products and acrylic cases. MMI also organizes, operates and participates in hobby and collectible shows. The Company has non-exclusive
informal agreements with numerous well-known athletes who frequently provide autographs at agreed-upon terms. The Company also enters into exclusive agreements with athletes. The Company has entered into an exclusive arrangement with Dan Marino who
is also a member of the board of directors and employee of the Company. Through its relationships with athletes, agents and other persons and entities in the sporting industry, MMI is able to arrange for the appearance of popular athletes and
celebrities at collectible shows, and at the same time, generate inventory for future sales from the warehouse. The Company negotiates directly with the athlete or with the athletes agent to determine contract specifics. These contracts are
formal in that they stipulate the logistic specifics, payment terms and number of autographs to be received. The Company generally receives a fee when it arranges an athlete for a corporate event.





MMI has been in business since 1989 and has achieved its industry leading status partly due to 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 offers a very large selection and supply of acrylic cases, with over 50 combinations of materials, colors and styles. The primary raw material used in the




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production process is plastic. 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 represent more than ten
percent of the Companys total fiscal 2002 purchases.





MMIs customer base varies greatly and includes,
for example, internet companies, traditional catalog retailers and retail stores which sell sports and celebrity memorabilia products and cases. Field of Dreams ® franchise stores purchase products from MMI and have historically provided approximately eight percent of the Companys total consolidated revenue. No other customer provided greater
than ten percent of MMIs total fiscal 2002 revenue.





The sports memorabilia industry faces several
challenges, most notably the assurance of product authenticity. Through its caution in only selling items produced internally or purchased from authorized agents, witnessed by an MMI representative, MMI avoids significant authenticity problems. MMI
feels the way it has achieved a competitive advantage over its competitors is through accurate and timely shipping. MMI uses approximately 4,000 square feet of its warehousing facilities for shipping. MMI has achieved a significant positive
reputation in its industry for timely and accurate shipments and commits to shipping orders within 72 hours of order receipt. Additionally, through the implementation of advanced and effective fulfillment techniques and processes, and utilization of
the most current shipping software, MMI has experienced very low breakage over the past several years.





The
Greene Organization





On August 15, 2001, the Company purchased The Greene Organization for 2,200,000
restricted shares of the Companys common stock and $300,000 in cash. The Greene Organization is engaged in athlete representation and corporate marketing of individual athletes. The Greene Organization provides athletes with all
off-field activities including personal appearances, endorsement and marketing opportunities. Warren H. Greene, president of The Greene Organization, is the brother-in-law of the Companys president.





In connection with the acquisition, the Company also entered into a five year employment agreement with Warren H. Greene. The agreement
provides that the Company will pay Warren H. Greene $250,000 and an annual bonus whereby Mr. Greene may earn an annual bonus in an amount equal to one-third of the earnings before interest, taxes, depreciation and amortization of The Greene
Organization in excess of $250,000. Mr. Greene earned a bonus of $175,000 in fiscal 2002.





Competition.





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




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sale of franchises are franchise sales price, services rendered, public awareness and acceptance of trademarks and franchise agreement terms.





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 ten-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. 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 two core sports that provide the greatest source of industry revenue, baseball and
football.





Within the acrylic 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 very 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.





Employees.





The Company
employs sixty-seven (67) full-time employees and thirteen (13) part-time employees.





Item 2.Description of Property.





As of
March 31, 2002, the Company leased approximately 35,500 square feet of office, manufacturing and warehouse space between four locations in Sunrise, Florida (approximately 28,000 square feet), Plantation, Florida (approximately 4,500 square feet),
and Denver, Colorado (approximately 3,000 square feet). The Companys principal executive offices are located at its Plantation, Florida facility.





The Company has two locations in Sunrise, Florida with leases that terminate in April 2003. Combined rent in Sunrise, Florida is approximately $17,700 per month plus certain expenses and escalates to
approximately $19,700 in the final year. The Company has entered a lease for new warehouse space in Sunrise, Florida. The 50,000 square foot location will replace the Companys two existing Sunrise, Florida facilities. Occupancy is anticipated
in September 2002. The lease is for a 10 year term with approximately $21,045 per month with 3% annual increases.





The Companys Plantation, Florida lease terminates in June 2005. Plantation, Florida rent is approximately $7,500 per month plus common area expenses with 5% annual increases.




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The Companys Colorado lease terminates in October 2005. Colorado rent is
approximately $3,800 per month and escalates to approximately $4,000 per month in its final year.





Item 3.Legal Proceedings.





On May 31,
2002, the Company filed an action in the Circuit Court of Broward County, Florida against an athlete in connection with a certain exclusive services agreement between the athlete and the Company whereby the athlete would provide sports memorabilia
and licensed products to the Company for a period of three years. The Company alleges among other things, that the athlete has failed to perform the necessary services under the agreement. The Company has requested that the court award compensatory
damages, including loss of profits and a constructive trust over the common stock issued to the athlete and return of amounts prepaid to the athlete for autographs to be provided in the future. As of March 31, 2002, the Company has a prepaid
autograph balance of $286 related to amounts paid to this athlete for future autographs as well as an unamortized deferred compensation balance of $167 related to a personal services contract entered into with this athlete. As the outcome of
litigation is difficult to predict, management is unable to determine at this early stage in the litigation the likelihood of a favorable outcome.





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. The high and low bids of the Companys common stock for each quarter
during fiscal years ended March 31, 2001 and 2002 are as follows:





High Bid Price

Low Bid PriceFiscal Year Ended March 31, 2001:First Quarter

$
2.25

$
.78Second Quarter


1.81


.75Third Quarter


1.75


.93Fourth Quarter


1.25


.43Fiscal Year Ended March 31, 2002:First Quarter

$
.70

$
.35Second Quarter


.64


.39Third Quarter


.45


.30Fourth Quarter


.38


.29





On June 4, 2002, the high bid price was $0.24 and the low bid price
was $0.24 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 Three Hundred Ninety (390) record owners of the Companys common stock.




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The Company has paid no dividends in the past two fiscal years. The Company has
no intention of paying dividends in the future.





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, 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.





RESULTS OF OPERATIONS





Critical Accounting Policies





Our accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements. As disclosed therein, 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 about future events that effect the amounts reported in the financial statements and accompanying Notes. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from those estimates and such differences may be material to the financial statements.




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The most significant accounting estimates inherent in the preparation of the
Companys financial statements include those related to the realizability of deferred tax assets, impairment of assets, allocation of purchase price to intangible assets, the collectibility of accounts receivable, inventory valuations and
certain benefits provided to current employees. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as
historical experience, current and expected economic conditions, and product mix. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described above.





Fiscal Years





The Companys fiscal year ends each March 31, and the fiscal years ended March 31, 2002 and March 31,
2001 are referred to as fiscal 2002 and fiscal 2001, respectively. Certain prior period amounts have been reclassified to conform with the current year financial statement presentation.





Revenue Recognition





Retail and wholesale revenues are recognized as the products are sold and/or shipped to customers. The Company had wholesale sales to Field of Dreams ® franchises of $1.5 million and $1.7 million in fiscal 2002 and 2001, respectively. 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 and the royalty revenue is recognized when earned.
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.





Fiscal 2002 Compared to Fiscal 2001





Revenues.    Total revenues increased 13.8% from $14.6 million in fiscal 2001 to $16.6 million in fiscal 2002. The increase is due to a $1.7 million increase in manufacturing/ distribution revenues and a
$362,000 increase in management fee revenue, offset by a slight decrease in franchise operations revenue.





Manufacturing/distribution revenues increased 13.1% from $13.0 million in fiscal 2001 to $14.7 million in fiscal 2002, due primarily to increased product offerings, continued development of business from existing customers and an
overall increase in the Companys distribution channels.





Management fee revenue increased 204.5% from
$177,000 in fiscal 2001 to $539,000 in fiscal 2002. Management fees are generated through athlete representation and marketing fees the Company charges its customers, and are reported net of the related cost of sales. This line of business began for
the Company in January 2001 and was formalized through the acquisition of




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The Greene Organization in August 2001. Therefore, fiscal 2002 had twelve months of management fee activity versus only three months in fiscal
2001.





Franchise operations revenue decreased $35,000, or 2.6%, from fiscal 2001 to fiscal 2002. The slight
decrease primarily relates to franchise fees earned as the result of opening of four new franchises in fiscal 2001 versus no new franchises opened in fiscal 2002. The average number of franchises in fiscal 2002 is comparable to fiscal 2001.





Cost and expenses.    Cost of sales of wholesale and retail products were $9.6 million
in fiscal 2002 versus $8.6 million in fiscal 2001. As a percentage of wholesale and retail revenues, cost of sales was comparable to prior year (65.0% in fiscal 2002 versus 65.8% in fiscal 2001).





Operating expenses increased 35.7% from $4.3 million in fiscal 2001 (29.4% of total revenue) to $5.8 million in fiscal 2002 (35.1% of total revenue). Approximately
half of the increase relates to incremental costs associated with the start up of new product lines during fiscal 2002 and the full year effect of new business activity entered into during fiscal 2001. The balance of the increase relates to the
hiring of several new executive, administrative and operational employees during fiscal 2001 and fiscal 2002 and overall increases in the Companys infrastructure in anticipation of future growth. We believe we have developed the infrastructure
necessary to support our operations without significant increases in fiscal 2003.





Impairment of
software.    During fiscal 2002, the Company hired a Chief Technology Officer who performed an evaluation of the Companys current technology. During the fourth quarter of fiscal 2002, the Company recorded an impairment
charge of $168,000 related to certain in-process software purchased for the Companys Manufacturing/Distribution segment. The Company decided to abandon its efforts to complete the software project and accordingly recorded an impairment charge
to write down the value of this in-process software to zero.





Depreciation and
amortization.    Depreciation and amortization decreased from $278,000 in fiscal 2001 to $90,000 in fiscal 2002. The decrease is due to the April 1, 2001 adoption of SFAS 142 Goodwill and Other Intangible Assets
which no longer requires the amortization of goodwill.





Interest expense, net.    Net
interest expense decreased 38.4% from $336,000 in fiscal 2001 to $207,000 in fiscal 2002, due primarily to a decrease in interest rates during fiscal 2002 as well as the elimination of a $3.0 million note payable in October 2000 which had monthly
interest of $35,000 (see Liquidity and Capital Resources). This decrease was partially offset by the Companys increased borrowings during fiscal 2002.





During fiscal 2002, the Company had an income tax benefit of $959,000 compared to income tax expense of $82,000 in fiscal 2001. During the fourth quarter of fiscal 2002, the Company determined that it
was more likely than not that its deferred tax assets would be realized and accordingly, completely relieved its valuation allowance of approximately $1 million. This determination was based primarily on the Companys continued profitability.
The benefit from the reduction in the valuation allowance was partially offset by the utilization of net operating loss carryforwards and the accrual for state income taxes.




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##### Table of Contents




Extraordinary item.    The Company recognized a
one-time, net extraordinary charge of $465,000 during fiscal 2001 relating to the early extinguishment of debt in October 2000.





LIQUIDITY AND CAPITAL RESOURCES





The Companys financial position remains sound and
strong. The balance sheet at the end of fiscal 2002 reflects current assets in excess of current liabilities by $6.3 million versus an excess of $5.1 million one year earlier, a 24.1% increase.





At March 31, 2002, the Companys cash and cash equivalents were $225,000, compared to $190,000 at March 31, 2001. Net accounts receivable at March 31, 2002 were
$2.3 million compared to $1.9 million at March 31, 2001.





Cash provided by operations amounted to $96,000 for
fiscal 2002, compared to $1.9 million used in operations in fiscal 2001. The change primarily relates to the Companys significant investment in inventories in fiscal 2001 when it secured its initial line of credit in November 2000, offset by a
substantial pay-down of accounts payable balances during fiscal 2002.





The amount outstanding on our line of
credit, which is classified in the financing section of the Statement of Cash Flows, was reduced by $576,000 during fiscal 2002. Outstanding borrowings against our line of credit were $1.4 million at March 31, 2002. The line of credit is used for
working capital purposes. As of June 15, 2002, the Companys availability under the line of credit was approximately $1.5 million. The line of credit is collateralized by the Companys accounts receivable and inventories. The line of
credit matures in November 2002 and the Company believes it will be able to renew its line of credit.





On November
1, 2001, the Company converted $1.0 million of its line of credit into a four-year term loan. The Company will make equal monthly payments of principal and interest under the term loan ($250,000 principal due each year). The line of credit and term
loan carry a floating interest rate based on adding a fixed interest charge of 2.4% to the 30-day Dealer Commercial Paper rate (4.2% at March 31, 2002).





On August 15, 2001, the Company purchased The Greene Organization for 2,200,000 restricted shares of the Companys common stock and $300,000 in cash. In connection
with the acquisition, the Company also entered into a five year employment agreement with Warren H. Greene. The agreement provides that the Company will pay Warren H. Greene $250,000 and an annual bonus whereby Mr. Greene may earn an annual bonus in
an amount equal to one-third of the earnings before interest, taxes, depreciation and amortization of The Greene Organization in excess of $250,000. Mr. Greene earned a bonus of $175,000 in fiscal 2002.





During March 2002, the Company purchased two existing Field of Dreams ® stores from an individual franchise owner. The transaction resulted in the Companys entry into the company-owned store business. The
purchase price was $226,000 and was treated as an asset purchase, whereby the Company acquired certain inventory items, store fixtures and assumed the




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##### Table of Contents

two leases. At March 31, 2002, $163,000 of the purchase price was due to the seller under two short-term notes, bearing interest at 4.75% per
annum. Both notes are due August 14, 2002, are unsecured, and are included in the current portion of debt section of the balance sheet.





We plan to closely analyze the results of these new company-owned operations and evaluate other opportunities, as the Company sees necessary. Based on the success of those operations, we may pursue opportunities to purchase
other existing franchise locations or find situations where we may open stores in new locations. Our internal staff which manages the franchise operations has extensive experience in operating retail outlets. We believe we can effectively transition
into the company-owned store business and add future revenues and profits to the consolidated entity.





We will
continue to sell franchised units to prospective and current third-party franchisees in fiscal 2003 and beyond. We did not open any franchise units in fiscal 2002; however, we have dedicated significant internal time and expense towards this effort
in the fourth quarter of fiscal 2002 and believe these efforts will continue and result in franchise opportunities in the next 12 months.





At March 31, 2002 we had commitments to certain athletes under contracts for autographs to be provided in the future. The total of those commitments as of March 31, 2002 was $2.9 million and will be paid over the next three
fiscal years. All autographs received under those commitments are brought into the Company as inventory items and resold throughout our distribution channels.





The Company believes its current available cash position taking into consideration the current availability under the line of credit, coupled with its cash forecast for the year and periods beyond, is
sufficient to meet its cash needs on both a short-term and long-term basis. The balance sheet has a strong working capital ratio and the Companys long-term debt obligations require payments totaling $24,000 per month. The Companys
management is not aware of any known trends or demands, commitments, events, or uncertainties, as they relate to liquidity which could negatively affect the Companys ability to operate and grow as planned.





New Accounting Pronouncements





In November 2001, the Emerging Issues Task Force reached a consensus on EITF Issue 01-9 Accounting for Consideration Given by a Vendor to a Customer including a Reseller of the Vendors Products. Also, in August
2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 retained substantially all of the requirements of SFAS No. 121 while resolving certain implementation issues. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. Management believes the impact of these pronouncements on its operations, if any, will not be material.




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##### Table of Contents




Item 7.Financial Statements.





DREAMS, INC.


Table of Contents





PageREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

15REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

16CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Balance Sheets

17Consolidated Statements of Income

18Consolidated Statement of Stockholders Equity

19Consolidated Statements of Cash Flows

20Notes to Consolidated Financial Statements

21




14




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##### Table of Contents




REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors


Dreams, Inc.





We have audited the accompanying consolidated balance sheet of Dreams, Inc. and subsidiaries as of March 31, 2002, and the related consolidated statements of income, stockholders equity and cash flows for the year 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 audit.





We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Dreams, Inc. and subsidiaries as of March 31, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States
of America.





/s/    GRANT THORNTON LLP





Fort Lauderdale, Florida


May 29, 2002




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##### Table of Contents




REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors
and Stockholders


Dreams, Inc.





We have audited the accompanying consolidated balance sheets of Dreams, Inc. and subsidiaries as of March 31, 2001, and the related consolidated statements of income, stockholders equity and cash
flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Dreams, Inc. and subsidiaries as of March 31, 2001 and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted
accounting principles.





/s/    MARGOLIES, FINK AND
WICHROWSKI Certified Public
Accountants





Pompano Beach, Florida


May 22, 2001




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##### Table of Contents




Dreams, Inc. and Subsidiaries





Consolidated Balance Sheets


(Dollars in Thousands, except share amounts)





March 31, 2002


March 31, 2001ASSETSCurrent assets:Cash and cash equivalents

$
225


$
190Accounts receivable, net


2,263



1,948Notes receivable






20Inventories


6,959



6,643Prepaid expenses and deposits


259



232Deferred tax asset, net


177



Total current assets


9,883



9,033Property and equipment, net


546



423Goodwill, net


1,932



705Other intangible assets, net


1,965



1,790Deferred tax asset, net


824



$
15,150


$
11,951LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
580


$
1,567Accrued liabilities


627



316Short-term notes payable


163



Current portion of long-term debt


296



44Borrowings against line of credit


1,406



1,982Deferred credits


495



35Total current liabilities


3,567



3,944Longterm debt, less current portion


970



383Commitments and contingencies






Stockholders equity:Common stock, no par value; authorized 100,000,000 shares; issued 57,852,835 and 55,252,835 shares,
respectively


23,033



22,021Accumulated deficit


(12,225
)


(13,900
)10,808



8,121Less: deferred compensation


(195
)


(497
)Total stockholders equity


10,613



7,624$
15,150


$
11,951





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 Income


For the Years Ended March 31, 2002 and 2001


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





Fiscal 2002


Fiscal 2001Revenues:Retail/Wholesale

$
14,765


$
13,081Management fees, net


539



177Franchise fees and royalties


1,298



1,333Total revenues


16,602



14,591Expenses:Cost of sales


9,593



8,606Operating expenses


5,828



4,295Impairment of software


168



Depreciation and amortization


90



278Total expenses


15,679



13,179Income from operations before interest, income taxes and extraordinary item


923



1,412Interest, net


207



336Income from operations before income taxes and extraordinary item


716



1,076Income tax (benefit) expense


(959
)


82Net income before extraordinary item


1,675



994Extraordinary item:Loss on early extinguishment of debt, net of tax






(465
)Net income

$
1,675


$
529Earnings per share:Basic:      Income before extraordinary item

$
0.03


$
0.02Extraordinary
item

$



$
(0.01
)Net income

$
0.03


$
0.01Weighted average shares
outstanding


56,751,191



47,102,723Diluted:  Income before extraordinary item

$
0.03


$
0.02Extraordinary
item

$



$
(0.01
)Net income

$
0.03


$
0.01Weighted average shares
outstanding


57,704,964



53,158,810





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




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##### Table of Contents




Dreams, Inc. and Subsidiaries





Consolidated Statement of Stockholders Equity


For the Years Ended March 31, 2001 and 2002


(Dollars in Thousands, except share amounts)





Shares Outstanding


Common Stock


Accumulated Deficit


Deferred Compensation


Total Stockholders EquityBalance at April 1, 2000

40,148,500


$
18,084


$
(14,429
)

$



$
3,655Shares sold through private transaction

14,554,335



4,356











4,356Repurchase of redeemable warrants





(950
)










(950
)Shares issued pursuant to services agreements

550,000



531







(497
)


34Net income









529







529Balance at March 31, 2001

55,252,835



22,021



(13,900
)


(497
)


7,624Shares issued for technology services

400,000



148











148Shares issued in acquisition

2,200,000



1,078











1,078Cancellation of shares

(500,000
)


(399
)






399



Shares issued pursuant to services agreement

500,000



185







(185
)


Deferred compensation expense













88



88Net income









1,675







1,675Balance at March 31, 2002

57,852,835


$
23,033


$
(12,225
)

$
(195
)

$
10,613





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




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##### Table of Contents




Dreams, Inc. and Subsidiaries





Consolidated Statements of Cash Flows


For the Years Ended March 31, 2002 and 2001


(Dollars in Thousands)


Fiscal 2002


Fiscal 2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
1,675


$
529Adjustments to reconcile net income to net cashprovided by (used in) operating activities:Depreciation and amortization:Property and equipment


90



55Goodwill






140Deferred compensation


88



34Debt issuance and debt discount costs






79Impairment of software


168



Extraordinary item, net of tax






489Provision for losses on accounts and notes receivable






(10
)Change in assets and liabilities:Increase in accounts receivable


(315
)


(371
)Increase in inventories


(236
)


(2,614
)Increase in prepaid expenses


(176
)


(7
)Decrease (increase) in notes receivable


20



(188
)Increase in deferred tax asset


(1,001
)


Increase (decrease) in accounts payable


(988
)


382Increase (decrease) in accrued liabilities


311



(374
)Increase (decrease) in deferred credits


460



(60
)Net cash provided by (used in) operating activities


96



(1,916
)CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for acquisitions


(150
)


(150
)Purchase of property and equipment


(174
)


(115
)Net cash used in investing activities


(324
)


(265
)CASH FLOWS FROM FINANCING ACTIVITIES:Net change in line of credit balance


(576
)


1,982Proceeds from sale of stock






4,419Repurchase of warrants






(1,250
)Repayments on notes payable


(161
)


(3,016
)Proceeds from term loan


1,000



Net cash provided by financing activities


263



2,135Net increase (decrease) in cash and cash equivalents


35



(46
)Cash and cash equivalents at beginning of period


190



236Cash and cash equivalents at end of period

$
225


$
190





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) is principally engaged in the manufacture, distribution and sale of sports memorabilia products and acrylic cases. The Company is also in the business of
selling Field of Dreams ® retail store franchises.





Basis of Presentation





The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and accounts have been eliminated in consolidation. Results of operations of acquired
companies accounted for as purchases are included from their respective dates of acquisition. The fiscal years ended March 31, 2002 and March 31, 2001 are herein referred to as fiscal 2002 and fiscal 2001, respectively.





Reclassifications





Certain prior period amounts have been reclassified to conform with the current year presentation.





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 and advertising royalties from Field of
Dreams ® franchisees and from credit sales to third-party customers.





Revenue Recognition





Retail and wholesale revenues are recognized as the products are sold and/or shipped to customers. The Company had wholesale sales to Field of Dreams ® franchises of $1.5 million and $1.7 million in fiscal 2002 and 2001, respectively. 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 and the royalty revenue is recognized when earned.
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.





Shipping and Handling Costs





Costs incurred for shipping
and handling are included in cost of sales when incurred. Amounts billed to a customer for shipping and handling are reported as revenue.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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










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





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 $195 and $180 in fiscal 2002 and 2001, respectively.





Inventories





Inventories, consisting primarily of sports memorabilia products and acrylic
cases, are valued at the lower of cost or market. Cost is determined using the weighted average cost method.





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
during fiscal 2002 performed a transitional fair valued based impairment test on its goodwill and other intangible assets and no impairment was noted.





Other intangible assets represent the Company-owned Mounted Memories trademark and a non-compete agreement. As of March 31, 2002 and 2001, the unamortized book value of the trademark was $1.8 million
for both periods. As of March 31, 2002 and 2001, the unamortized book value of the non-compete agreement was $175 and $0, respectively.





Commencing April 1, 2001, the Company no longer records amortization on goodwill and the trademark. In fiscal 2001, the goodwill and trademark were being amortized using the straight-line method over 20 years. The
non-compete agreement is being amortized using the straight-line method over the seven year term of the agreement.





Debt Issuance
Costs





Costs relating to the issuance of debt were capitalized and amortized over the term of the related
debt. The unamortized portion of the debt issuance costs comprise a portion of the extraordinary loss on the early debt retirement.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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










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





Impairment of Long-Lived Assets





In the event that facts and circumstances indicate that the carrying value of long-lived assets, including associated intangibles, may be
impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the assets carrying amount to determine if a write-down to market value or discounted cash flow is
required.





During fiscal 2002, the Company hired a Chief Technology Officer who performed an evaluation of
the Companys current technology. During the fourth quarter of fiscal 2002, the Company recorded an impairment charge of $168 related to certain in-process software purchased for the Companys Manufacturing/Distribution segment. The
Company decided to abandon its efforts to complete the software project and accordingly recorded an impairment charge to write down the value of this in-process software to zero.





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, 2002 and 2001, 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.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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










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





Net Income Per Share





Basic earnings 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 dilutive common stock equivalents. Included in diluted shares are common stock
equivalents relating to stock options with a dilutive effect of 953,773 and 6,056,087 for fiscal 2002 and 2001, respectively. Common stock equivalents representing stock options to purchase 975,000 shares of the Companys common stock with
exercise prices ranging from $0.44 to $0.75, outstanding as of March 31, 2002, were not included in the computation of diluted earnings per share because the options exercise prices were greater than the annual average market price of the
Companys common stock and thus their inclusion would be anti-dilutive.





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.





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.





New
Accounting Pronouncements





In November 2001, the Emerging Issues Task Force reached a consensus on EITF Issue
01-9 Accounting for Consideration Given by a Vendor to a Customer including a Reseller of the Vendors Products. Also, in August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
SFAS No. 144 retained substantially all of the requirements of SFAS No. 121 while resolving certain implementation issues. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management believes the impact of these
pronouncements on its operations, if any, will not be material.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







2.     Acquisition of Business





On August 15, 2001, the Company purchased The Greene Organization for approximately $1.4 million. The purchase price included $300 in cash
and the issuance of 2.2 million restricted shares of the Companys common stock valued at approximately $1.1 million. Of the $300 in cash, $150 had been paid on deposit prior to April 1, 2001 and the remaining $150 was paid in the first quarter
of fiscal 2002.





The Greene Organization is engaged in athlete representation and corporate marketing of
individual athletes. The Greene Organization provides athletes with all off-field activities including personal appearances, endorsements and marketing activities. Warren H. Greene, the president of The Greene Organization, is the
brother-in-law of the Companys president.





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 values of the assets and liabilities obtained. As the fair value of the net assets acquired was zero, the entire purchase price of approximately $1.4
million was allocated to the intangible assets, including goodwill and a non-compete agreement. The goodwill is attributable to the general reputation of the business in the markets it serves and the collective experience of the management and other
employees. In accordance with SFAS 142, goodwill will not be amortized in the future but will be tested for impairment in accordance with the provisions of the Statement.





The results of operations of The Greene Organization are included in the accompanying consolidated statement of income since the date of the acquisition. The unaudited pro
forma results of operations as if the business combination had occurred at the beginning of each period presented has been omitted as the results are not significant to the consolidated financial statements.





In connection with the acquisition, the Company also entered into a five year employment agreement and a seven year non-compete agreement
with Warren H. Greene. The agreement provides that the Company will pay Warren H. Greene $250 per year and an annual bonus whereby Mr. Greene may earn an annual bonus in an amount equal to one-third of the earnings before interest, taxes,
depreciation and amortization of The Greene Organization in excess of $250. Mr. Greene earned a bonus of $175 in fiscal 2002, which is included in accrued liabilities as of March 31, 2002.





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.





(Continued)




25




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







3.    Concentration of Credit Risk (Continued)





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. The Company had a
consolidated allowance for doubtful accounts at March 31, 2002 and March 31, 2001 of approximately $37 and $88, respectively.





The Companys allowance for doubtful accounts is based on managements estimates of the creditworthiness of its customers, 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.





4.    Inventories





The components of inventories are as follows:





March 31, 2002

March 31, 2001Memorabilia products

$
4,916

$
4,588Prepaid autographs


814


716Licensed products


849


829Acrylic cases and raw materials


380


510$
6,959

$
6,643





(Continued)




26




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(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:





2002


2001Leasehold improvements

$
30


$
30Machinery and equipment


95



95Office and other equipment


813



600Transportation equipment


47



47985



772Less accumulated depreciation and amortization


(439
)


(349
)$
546


$
423





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 2002 performed a transitional fair valued based impairment test on its goodwill and other intangible assets and no impairment was noted.





As of March 31, 2002 and 2001, the Company has total consolidated goodwill, net of accumulated amortization, of $1.9 million, all of which is allocated to the Manufacturing/Distribution segment.





(Continued)




27




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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










6.    Intangible Assets
(Continued)





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 include a seven year non-compete agreement.





The following table presents a reconciliation of net income and earnings per share amounts, as reported in the financial statements, to
those amounts adjusted for goodwill and intangible asset amortization determined in accordance with the provisions of SFAS No. 142.





YTD FY2002

YTD FY2001Reported net income

$
1,675

$
529Add back: goodwill amortization





40Add back: trademark amortization





100Income tax effect





(8
)Adjusted net income

$
1,675

$
661





(Continued)




28




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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










6.    Intangible Assets
(Continued)





YTD FY2002

YTD FY2001Basic and diluted earnings per share:

$
0.03

$
0.01Reported net income


0.00


0.00Goodwill amortization


0.00


0.00Trademark amortization


0.00


0.00Income tax effect


0.00


0.00Adjusted net income

$
0.03

$
0.01





As of March 31, 2002, intangible assets not subject to amortization
consists of the following:





Gross Carrying Amount

Accumulated AmortizationGoodwill

$
2,015

$
83Trademark


2,000


210$
4,015

$
293








The trademark of $2.0
million and goodwill of $788 were being amortized over 20 years. Upon the initial adoption of SFAS 142, the Company reassessed the useful lives of the intangible assets and determined the trademark is deemed to have an indefinite useful life because
it is expected to generate cash flows indefinitely and the Company intends on continuing to register the trademark. Thus, the Company has ceased amortization of the trademark, as well as the goodwill as of April 1, 2001. No amortization has been
recorded on the $1.4 million of goodwill incurred related to the August 2001 acquisition of The Greene Organization.





7.    Line of Credit





The Company entered into a formula-based
revolving line of credit during fiscal 2001. The line of credit allows the Company to borrow up to $3.5 million for working capital purposes. The balance outstanding as of March 31, 2002 was approximately $1.4 million.The line of credit
carries a floating annual interest rate based on adding a fixed interest charge of 2.4% to the thirty day Dealer Commercial Paper rate (4.2% at March 31, 2002). The line of credit is collateralized by the Companys accounts
receivable and inventories. The line of credit matures on November 30, 2002. The Company is required to comply with certain financial ratios including a minimum net worth test and a minimum net cash flow test.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







8.    Accrued Liabilities





Accrued liabilities consisted of the following at March 31:





2002

2001Payroll costs (including bonuses and commissions)

$
277

$
74Interest


8


Sales taxes


1


29Income taxes


5


Royalties


106


177Other


230


36$
627

$
316





9.    Short-Term Notes Payable





The Company had two short-term notes payable as of March 31, 2002 totaling $162. The notes relate to the March 2002 purchase of two Field
of Dreams ® franchise stores from a franchisee. The notes bear interest at 4.75% per annum and require
monthly interest and principal payments and are due in August 2002. The notes are unsecured.





10.    Long-Term
Debt





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





2002


2001Note 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 (4.2% at March 31, 2002), plus equal principal payments of $21 per month through November 2005. The note is collateralized by the Companys accounts receivables and
inventories

$
888


$
Note payable to an individual at 12% interest, with monthly principal and interest payments of $8 through
November 2007. The note is guaranteed by the Companys Chairman.


378



4271,266



427Less current portion


(296
)


(44
)$
970


$
383





(Continued)




30




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







10.    Long-Term Debt (Continued)





Future maturities of long-term debt are summarized as follows:





Fiscal year2003

$
2962004


3082005


3132006


2082007


79Thereafter


62$
1,266





11.    Stockholders Equity





Common Stock





On
January 1, 2001, the Company issued 50,000 shares of its common stock in conjunction with a personal services contract, for a term of two years. Deferred compensation in the amount of $63 (fair market value was $1.25 on that date), was recorded and
will be amortized over the term of the contract.





On January 17, 2001, the Company issued 500,000 shares of its
common stock in conjunction with a personal services contract, for a term of three years. Deferred compensation in the amount of $469 (fair market value was $0.94 on that date), was recorded. In June 2001, these shares were cancelled and the
remaining portion of deferred compensation as of that date was eliminated.





In May 2001, the Company issued
400,000 shares of its common stock as consideration for the development of software. The fair value of the common stock of $148 was capitalized to property and equipment.





On August 15, 2001, the Company issued 2,200,000 restricted shares of its common stock in connection with the acquisition of The Greene Organization.





On December 27, 2001, the Company issued 500,000 shares of its common stock in connection with a personal services contract,
for a term of two and one-half years. Deferred compensation in the amount of $185 was recorded and will be amortized over the term of the contract.





(Continued)




31




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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




11.    Stockholders Equity (Continued)





Warrants





The Company had granted the lending
institution which loaned the Company $3.0 million in fiscal 1999 warrants to purchase approximately 6,658,000 shares of the Companys common stock. During fiscal 2001, these warrants were repurchased by the Company for $1.3 million, when the
debt was retired.





Stock Options





The following table summarizes information about the stock options outstanding at March 31, 2002:








Stock OptionsShares


Wtd. Avg. PriceOutstanding at March 31, 2000

3,450,250


$
.29Granted

225,000


$
.75Exercised





Expired/Canceled

(450,000
)

$
.25Outstanding at March 31, 2001

3,225,250


$
33Granted

50,000


$
.35Exercised





Expired/Canceled





Outstanding at March 31, 2002

3,275,250


$
.33





Options exercisable as of March 31, 2002 and 2001 was 3,175,250 and
2,691,791, respectively.





Weighted-average fair value of options granted during fiscal 2002 and fiscal 2001 was
$.19 per share and $.52 per share, respectively.





The exercise prices of the stock options discussed below were
the fair market value of the common stock on the date the options were granted.





In April 2001, the Company issued
options to purchase 50,000 shares at $.35 per share to a nonemployee. The options expire in April 2004 and vest immediately.





On November 1, 2000, the Company granted options to purchase 100,000 shares at $.75 per share in conjunction with a personal services agreement that was entered into with an outside individual. The options expire on December 31,
2003.





On September 6, 2000, the Company granted options to purchase 125,000 shares at $.75 per share in
conjunction with an exclusive services agreement that was entered into with an outside individual and his agent. The options expire on September 6, 2003.





(Continued)




32




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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




11.    Stockholders Equity (Continued)





The following table summarizes information about all of the stock options outstanding at March 31, 2002:





Outstanding options

Exercisable optionsRange ofExercise prices

Shares

WeightedAverageremaining life (years)

Weightedavg. price

Shares

Weighted avg. price$ .25.35

2,300,250

1.41

$.25

2,200,250

$.25.44.44

750,000

2.33

.44

750,000

.44.75.75

225,000

.94

.75

225,000

.753,275,250





3,175,250





For purposes of the following proforma disclosures, the weighted
average fair value of each option has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal 2001: no dividend yield; volatility of 61%; risk-free
interest rate of 6%; and an expected term of five years. There were stock options issued to employees in fiscal 2002. The weighted average Black-Scholes value of options granted during fiscal 2002 and 2001 was $.19 and $.52, respectively, per
option. Had compensation cost for the Companys fixed stock-based compensation plan been determined based on the fair value at the grant dates consistent with the method of SFAS 123, the Companys pro forma net income and pro forma
earnings per share would have been as indicated below:





Fiscal 2002

Fiscal 2001Net incomeAs reported

$
1,675

$
529Pro forma

$
1,675

$
529Basic earnings per shareAs reported

$
.03

$
.01Pro forma

$
.03

$
.01Diluted earnings per shareAs reported

$
.03

$
.01Pro forma

$
.03

$
.01





(Continued)




33




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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




12.    Income Taxes





The provision (benefit) for income taxes consisted of the following:





Fiscal 2002


Fiscal 2001Current:Federal tax expense

$



$
16State tax expense


42



66Deferred:Federal tax benefit


(873
)


State tax benefit


(128
)


$
(959
)

$
82





The components of the deferred tax asset at March 31, 2002 and 2001
are as follows:





Deferred Tax AssetCurrent





2002

2001Allowance for doubtful accounts

$
15

$
34Inventory obsolescence reserve


52


Deferred revenue





14Inventory capitalization adjustment


65


62Accrued expenses


45


Total current assets


177


110Valuation allowance





(110
)Total current assets, net


177








(Continued)







34




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DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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




12.    Income Taxes (Continued)





Deferred Tax AssetLong Term





2002


2001Deferred loan costs

$



$
(82
)Depreciation and amortization


(48
)


(19
)Net operating loss carryforward


872



998Total noncurrent assets


824



897Valuation allowance






(897
)Total noncurrent assets, net


824









SFAS No. 109 requires a valuation allowance to be recorded when it
is more likely than not that some or all of the deferred tax assets will not be realized. At March 31, 2001, a valuation allowance for the full amount of the net deferred tax asset was recorded because of pre-2001 losses and uncertainties as to the
amount of taxable income that would be generated in future years. During the fourth quarter of fiscal 2002, the Company determined that it was more likely than not that the deferred tax assets would be realized and completely relieved the valuation
allowance of $1.0 million, which resulted in an increase of $.02 per share for both basic and diluted EPS. The determination was based primarily on the Companys continued profitability.





A reconciliation of the Companys effective tax rate compared to the statutory federal tax rate for the years ended March 31, 2002 and 2001 is as follows:





2002


2001Federal income taxes at statutory rate

34
%

34
%State taxes, net of federal benefit

6


6Valuation allowance

(141
)

(34
)Extraordinary item




(2
)Other

(33
)

4(134
)%

8
%





At March 31, 2002, the Company had available net operating loss
carryforwards of approximately $2.6 million which expire in various years beginning in 2009 through 2018.





(Continued)




35




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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




13.    Commitments and Contingencies





Operating Leases





As of March 31, 2002, the Company leases
office, warehouse and retail space under operating leases in Florida, Colorado and Michigan. Subsequent to March 31, 2002, the Company entered into three new lease agreements relating to existing locations. Rent expense charged to operations for
fiscal 2002 and 2001 was $430 and $300, respectively.





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





Fiscal2003

$
5332004


5362005


5532006


4712007


340Thereafter


1,625Total minimum lease commitments

$
4,058





Future Contractual Payments to Athletes for Autographs





As of March 31, 2002, the Company had several agreements with athletes to provide autographs in the future. 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:





Fiscal2003

$
2,2342004


4152005


255Total minimum autograph commitments

$
2,904





Employment Agreements





The Company has executed employment agreements with several of its key employees. The employment agreement with the Companys President, which expires in November
2003, calls for a salary of $250 per year and an annual car allowance of $10. The Companys agreement with Warren H. Greene provides for a salary of $250 per year and an annual bonus whereby Mr. Greene may earn an annual bonus in the amount
equal to one-third of the earnings before interest, taxes, depreciation and amortization of The Greene Organization in excess of $250 for each calendar year. In fiscal 2002, Mr. Greene earned a bonus of $175, which was accrued as of March 31, 2002
and paid in May 2002.





(Continued)




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







13.    Commitments and Contingencies (Continued)





Litigation





On May 31, 2002, the Company filed an action in the Circuit Court of Broward County, Florida against an athlete in connection with a certain exclusive services agreement between the athlete and the Company whereby the athlete would
provide sports memorabilia and licensed products to the Company for a period of three years. The Company alleges among other things, that the athlete has failed to perform the necessary services under the agreement. The Company has requested that
the court award compensatory damages, including loss of profits and a constructive trust over the common stock issued to the athlete and return of amounts prepaid to the athlete for autographs to be provided in the future. As of March 31, 2002, the
Company has a prepaid autograph balance of $286 related to amounts paid to this athlete for future autographs as well as an unamortized deferred compensation balance of $167 related to a personal services contract entered into with this athlete. As
the outcome of litigation is difficult to predict, management is unable to determine at this early stage in the litigation the likelihood of a favorable outcome.





14.    Related Party Transactions





Ross Tannenbaum, the
Companys Chief Executive Officer and a Director, and Sam Battistone, the Companys Chairman, each have ownership interests in franchised Field of Dreams ® stores. Mr. Tannenbaum is a 25% owner in M&S, Inc., a Florida Corporation that owns and operates two Field of Dreams ® franchised stores in the state of Florida. Mr. Battistone is a principal in FOD Las Vegas, LLC which owns and
operates four Field of Dreams ® franchised stores in the state of Nevada. Mr. Tannenbaum and Mr.
Battistone, through their partnerships with M&S, Inc. and FOD Las Vegas, LLC, respectively, have entered into the Companys standard franchise agreements, in an arms length transaction on commercially reasonable terms. In fiscal 2001,
M&S and FOD Las Vegas, LLC paid the Company $80 and $215, respectively. In fiscal 2002, M&S, Inc. and FOD Las Vegas, LLC paid the Company $67 and $237 in royalties, respectively.





On December 18, 2001, the Company advanced $120 to Sam Battistone, the Companys Chairman. This amount was repaid in January 2002. On May 13, 2002, the Company loaned
Mr. Battistone $275. This amount was repaid in June 2002. In April 2002, the Company entered into a consulting agreement with a corporation wholly-owned by Mr. Battistone. The term of the agreement shall be until March 31, 2007. The Company shall
pay the consultant $145 for the first year, $160 in each of years two, three and four and $175 in year five. The Company shall be responsible for all expenses incurred by the consultant in the performance of his duties. The consultant shall provide
consulting services utilizing his business contacts. Mr. Battistone shall continue as Chairman of the Companys Board of Directors.





During fiscal 2002, the Company purchased inventory items from one of the Companys directors totaling $20.





During fiscal 2001 and 2002, the Company paid Dan Marino, an officer and director of the Company, $731 and $582, respectively, for his autograph on inventory items. Such payments were based on arms-length negotiations
between the parties.





(Continued)




37




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







15.    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 license agreement, the
Company pays USL one percent of each company-owned units gross sales, with a minimum annual royalty of $3 per store. 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, 2002, the Company had 33 units owned by franchisees and had two company-owned units.





The license agreement expires December 2005. 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 of 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 a termination would have an adverse effect on the Companys
franchise operation.





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





2002

2001In operation at year end

33

36Opened during the year



4Closed during the year

1

2Acquired by franchisor during the year

2







16.    Business Segment Information





The Company has two reportable segments: the Manufacturing/Distribution segment and the Franchise Operations segment.





The Manufacturing/Distribution segment represents the manufacturing and wholesaling of sports memorabilia products, custom
artwork and acrylic 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 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, continuing royalties and sales of certain merchandise to franchises.





All of the Companys fiscal 2002 and 2001 revenue was derived in the United States and all of the Companys assets
are located in the United States.





(Continued)




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DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







16.    Business Segment Information (Continued)





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





Segment information for fiscal 2002 and fiscal 2001 was as follows:





Manufacturing/ Distribution

Franchise Operations

TotalTwelve Months Ended:March 31, 2002Net sales

$
14,673

$
1,338

$
16,011Intersegment net sales








Impairment of software


168





168Operating earnings


2,004


405


2,409Total assets


8,740


326


9,066March 31, 2001Net sales

$
12,941

$
1,473

$
14,414Intersegment net sales








Operating earnings


1,026


371


1,397Total assets


8,779


307


9,086





Reconciliation to consolidated amounts is as follows:





2002


2001Revenues:Total revenues for reportable segments

$
16,011


$
14,414Other revenues


591



177Eliminations of intersegment revenues






Total consolidated revenues

$
16,602


$
14,591Operating earnings:Total earnings for reportable segments

$
2,409


$
1,397Other (loss) earnings


(1,486
)


15Interest expense, net


(207
)


(336
)Total consolidated income before taxes

$
716


$
1,076





(Continued)




39




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##### Table of Contents



DREAMS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


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







In March 2002, the Company acquired two existing Field of
Dreams ® franchises and entered the company-owned retail store business. The results of those
operations are consolidated into the Companys financial statements and represent only a month of activity. Because of the immaterial results, the retail operations are included in the other sections above as the retail operations
did not qualify as a reportable business segment. In the future, if the retail operations become significant and qualify as a business segment, the Company will separately include retail operations in the segment footnote as a reportable segment.





17.    Supplemental Cash Flow Information





Interest and Taxes Paid





Cash paid for interest during
fiscal 2002 and 2001 was $208 and $309, respectively. The Company paid $6 during fiscal 2002 and $118 during fiscal 2001 for income taxes.





Non-Cash Investing and Financing Activities





On January 1, 2001, the Company issued 50,000
shares of its common stock in conjunction with a personal services contract, for a term of two years. Deferred compensation in the amount of $63 (fair market value was $1.25 on that date), was recorded and will be amortized over the term of the
contract.





On January 17, 2001, the Company issued 500,000 shares of its common stock in conjunction with a
personal services contract, for a term of three years. Deferred compensation in the amount of $469 (fair market value was $0.94 on that date), was recorded. In June 2001, these shares were cancelled and the remaining portion of deferred compensation
as of that date was eliminated.





In May 2001, the Company issued 400,000 shares of its common stock as
consideration for the development of software. The fair value of the common stock of $148 was capitalized to property and equipment.





On August 15, 2001, the Company issued 2,200,000 restricted shares of its common stock in connection with the acquisition of The Greene Organization.





On December 27, 2001, the Company issued 500,000 shares of its common stock in connection with a personal services contract, for a term of two and one-half years. Deferred
compensation in the amount of $185 was recorded and will be amortized over the term of the contract.





During March
2002, the Company purchased two existing Field of Dreams ® stores from an individual franchise owner.
The transaction resulted in the Companys entry into the company-owned store business. The purchase price was $226 and was treated as an asset purchase, whereby the Company acquired certain inventory items ($89), store fixtures ($137) and
assumed the two leases. At March 31, 2002, $163 of the purchase price was due to the seller under two short-term notes.




40




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Item 8.Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.





On July 12, 2001, the Board of Directors approved the engagement of Grant Thornton LLP as independent auditors of the Company for the fiscal year ended March 31, 2002, to
replace the firm of Margolies, Fink and Wichrowski (MFW), who were dismissed as the Companys auditors, effective July 12, 2001.





The reports of MFW on the Companys consolidated financial statements for the past two fiscal years ended March 31, 2001, did not contain an adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.





In connection with the audits of
the Companys consolidated financial statements for each of the last two fiscal years ended March 31, 2001, and in the subsequent unaudited interim period through July 12, 2001 (date of dismissal), there were no disagreements with MFW on any
matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of MFW, would have caused MFW to make reference to the subject matter in their reports.





During the fiscal years ended March 31, 2001 and 2000 and during subsequent interim periods prior to engaging
Grant Thornton, neither us nor any person on our behalf consulted with Grant Thornton regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on
the Companys financial statements.





MFW did not inform us of the existence of any reportable events as
defined in Regulation S-B. The Company has authorized MFW to respond fully to any inquiries of Grant Thornton relating to their engagement as the Companys independent accountant.





MFW furnished a letter addressed to the Securities Exchange Commission dated July 16, 2001 agreeing with the above statements. A copy of the letter was filed as an Exhibit
to our Report on Form 8-K dated July 17, 2001.





There were no disagreements with Grant Thornton related to the
audit for the year ended March 31, 2002.





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.




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Name

Age

Serving as Director of the Company Since

Position Held With the CompanySam D. Battistone

62

1983

Chairman/DirectorRoss Tannenbaum

40

1998

President/CEO/DirectorDavid M. Greene

40



Senior Vice PresidentMark Viner

35



Secretary/Treasurer/Chief Financial OfficerDan Marino

40

2000

Director of Business Development/DirectorDale Larsson

57

1999

DirectorRoger Shiffman

49

2000

Director





Biographical Information.





Sam D. Battistone.    Sam D. Battistone has been Chairman of the Board since inception of the Company. Mr.
Battistone served as president until November 1998. 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.





David M. Greene.    David M.
Greene has been Senior Vice President, Planning/Mergers and Acquisitions since June 2001. 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




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executive at the investment banking firm of Drexel, Burnham, Lambert, Inc. Mr. Greene is the brother-in-law of the Companys President.





Mark Viner.    Mr. Viner has been Secretary, Treasurer and Chief Financial Officer of
the Company since September 1998. He is a Certified Public Accountant. From June 1994 to October 1997, Mr. Viner was the Director of Financial Reporting for Planet Hollywood International, Inc. and was instrumental in every phase of that
companys 1996 initial public offering. From May 1992 to May 1994, Mr. Viner was a financial manager for the Walt Disney Company, responsible for all financial activities of Pleasure Island, a $75 million nighttime entertainment district.





Dan Marino.    Dan Marino is one of the most recognizable and popular sports figures
in the entire world and has served as the Companys Director of Business Development since January 2000. In April 2000, Mr. Marino announced his retirement from professional football after 17 consecutive seasons with the Miami Dolphins of the
National Football League. He holds twenty NFL records and is considered by many as the most prolific passer in NFL history. His ongoing work for the community is centered on the Dan Marino Foundation for childrens charities of South Florida.





Dale E. Larsson.    For more than five years until September 1998, Dale E. Larsson was
the Secretary-Treasurer. Mr. Larsson has been a Director of the Company for over five years. Mr. Larsson was re-elected a director in August 1999. 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.





Roger Shiffman.    Mr. Shiffman has served as a director since October 2000. Mr. Shiffman has served as a consultant in the retail industry
since 2001. Mr. Shiffman was the Chief Executive Officer and President of Tiger Electronics, Ltd., a wholly owned subsidiary of Hasbro, Inc. (NYSE: HAS), a worldwide leader in childrens and family leisure time entertainment products and
services for five years prior to 2001. Mr. Shiffman received a bachelor degree in marketing from the University of Illinois. Mr. Shiffman is active in several charitable foundations and currently serves on the International board of Directors of the
Starlight Childrens Foundation.





During fiscal year 2002, the Board of Directors acted by unanimous
consent on five occasions and had one meeting.





Committees of the Board of
Directors.    The Board of Directors does not have an Audit Committee.





Audit
Fees.    The independent auditors of the Company during the year ended March 31, 2002 were Grant Thornton LLP. The aggregate fees, including expenses, billed by Grant




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Thornton LLP in connection with the audit of the Companys annual financial statements for the most recent fiscal year and for the review
of the Companys financial information included in its annual report on Form 10-KSB and its quarterly reports on Form 10-QSB during fiscal year 2002 was $56,000.





Financial Information Systems Design and Implementation Fees.None.





All Other Fees.The aggregate fees, including expenses, billed for all other services rendered to the Company by Grant Thornton LLP, during
fiscal 2002 were $17,000. These non-audit fees relate to corporate compliance, tax and registration filing services performed for the Company.





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, 2002 and Forms 5 and amendments thereto furnished to the Company with respect to the fiscal year ended March 31, 2002, as well as any
written representation from a reporting person that no Form 5 is required, 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, 2002.





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, 2000, 2001 and 2002 of those persons who were, at March 31, 2002, the Chief Executive
Officer of the Company and executive officers of the Company whose compensation exceeded $100,000.





Summary
Compensation Table





Annual Compensation

Other Annual Compensation (1)

Long-Term Compensation Securities Underlying Options SARsName and principal Position

Year

Salary

BonusRoss Tannenbaum, CEO and Director

2000 2001 2002

$
250,000 250,000 250,000

$
 5,000 5,000

$
9,600 9,600 9,600

  Mark Viner, Chief Financial Officer, Secretary & Treasurer

2000 2001 2002


113,250 124,583 137,584


5,000 5,000 5,000


7,500 7,500 7,500

300,000 



---

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



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The Company and Ross Tannenbaum entered into an Employment Agreement on November
10, 1998. Under the terms of that Agreement, Mr. Tannenbaum is employed for a five-year period at a base salary rate of $250,000 per year. Mr. Tannenbaum also receives certain benefits including car allowance and insurance. The Employment Agreement
may be terminated for cause prior to expiration of its full term.





The Company and Mark Viner entered into an
Employment Agreement on September 4, 2000. Under the terms of that Agreement, Mr. Viner is employed for a three year period at a base salary rate of $130,000 per year with minimum ten percent per year increases. Mr. Viner has been issued options to
purchase 550,000 shares of the Companys common stock at exercise prices between $0.25 and $0.4375 per share, the closing prices of the common stock at the date of the grants. The options are conditioned upon continued employment by the Company
of Mr. Viner and vest throughout his employment term. Mr. Viner also receives certain benefits including car allowance and insurance. The Employment Agreement may be terminated for cause prior to expiration of its full term.





Option/SAR Grants in Last Fiscal Year





There were no Option/SAR Grants to executive officers in the fiscal year ended March 31, 2002.





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


Option/SAR Values





Name

Shares Acquired On Exercise (#)

Value Realized ($)

Number of Securities Underlying Unexercised Options/SARs At FY-End (#) Exercisable/ Unexercisable

Value of Unexercised In-The-Money Options/SARs At FY-End ($) Exercisable/UnexercisableRoss Tannenbaum



N/A




Mark Viner



N/A

450,000/100,000

$
14,000/$7,000





At March 31, 2002, the closing bid price of the Companys
common stock was $0.32, and on June 7, 2002, was $0.24.




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Item 11.Security Ownership of Certain Beneficial Owners and Management.





Principal Shareholders.





The following table sets forth as
of May 31, 2002, 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 AddressOf Beneficial Owner(1)

Number of Shares Owned


Percent Of ClassSam D. Battistone

11,129,511
(2)

19.2
%Ross Tannenbaum

12,500,000


21.6
%Owen Randall Rissman 1101 Skokie Road, Suite 255 North Brook, IL 60062

4,655,000


8.0
%Dale Larsson 3230 North University Ave. Provo, UT 84604

425,300


0.7
%Mark Viner

450,000
(5)

0.8
%David M. Greene

2,500


Roger Shiffman

1,255,000


2.2
%Dan Marino

1,500,000
(4)

2.5
%All Executive Officers and Directors as agroup (7 persons)(3)

27,262,311


45.6
%


---

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

|(2) |  | Excludes 1,407,025 shares owned by the following family members of which Mr. Battistone disclaims beneficial ownership:
|--- |  | -----------------------------------------------------------------------------------------------------------------------



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Name

Number of Shares OwnedKelly Battistone

350,000Dann Battistone

350,000Brian Battistone

350,000Mark Battistone

350,000Cynthia Battistone Hill

350,000


|(3) |  | The directors and officers have sole voting and investment power as to the shares beneficially owned by them.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 1,500,000 shares which are the subject of stock options.
|--- |  | -----------------------------------------------------------------

|(5) |  | Includes options to purchase 450,000 shares of common stock. Mr. Viner has options to purchase an additional 100,000 shares, which are not presently vested.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




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 have ownership interests in franchised Field of Dreams ® stores. Mr. Tannenbaum is a 25% owner in M&S, Inc., a Florida Corporation that owns and operates two Field of Dreams ® franchised stores in the state of Florida. Mr. Battistone is a principal in FOD Las Vegas, LLC which owns and
operates four Field of Dreams ® franchised stores in the state of Nevada. Mr. Tannenbaum and Mr.
Battistone, through their partnerships with M&S, Inc. and FOD Las Vegas, LLC, respectively, have entered into the Companys standard franchise agreements, in an arms length transaction on commercially reasonable terms. In fiscal year 2002,
M&S, Inc. and FOD Las Vegas, LLC paid the Company $67,000 and $237,000 in royalties, respectively.





On
December 18, 2001, the Company advanced $120,000 to Sam Battistone, the Companys Chairman. This amount was repaid in January 2002. On May 13, 2002, the Company loaned Mr. Battistone $275,000. This amount was repaid in June 2002. In April 2002,
the Company entered into a consulting agreement with a corporation wholly-owned by Mr. Battistone. The term of the agreement shall be until March 31, 2007. The Company shall 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 shall be responsible for all expenses incurred by the consultant in the performance of his duties. The consultant shall provide consulting services utilizing his business contacts.
Mr. Battistone shall continue as Chairman of the Companys Board of Directors.





During fiscal 2002, the
Company purchased inventory items from one of the Companys directors totaling $20,000.





During fiscal 2001
and 2002, the Company paid Dan Marino, an officer and director of the Company, $731,000 and $582,000, respectively, for his autograph on inventory items. Such payments were based on arms-length negotiations between the parties.




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Item 13.Exhibits and Reports on Form 8-K.





|
|

Exhibit Number

Exhibit2.1

Articles of Incorporation(1)2.2

Bylaws(1)10.1

Ross Tannenbaum Employment Agreement(1)10.2

Merchandise License Agreement(1)10.3

Standard Franchise Documents(1)10.4

Line of Credit Agreement with Merrill Lynch Business Financial Services, Inc.(2)10.5

Employment Agreement with Mark Viner(2)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.(3)10.7

Employment Agreement dated August 15, 2001 by and among Dreams, Inc. and Warren H. Greene(3)10.8

Consulting Agreement dated April 1, 2002 with Dreamstar, Inc.(4)21

Subsidiaries of the Company(4)


---

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

|(2) |  | Filed with the Companys Form 10-KSB for the year ended March 31, 2001 and incorporated by this reference.
|--- |  | ----------------------------------------------------------------------------------------------------------

|(3) |  | Filed with the Companys Form 8-K dated August 28, 2001 and incorporated by this reference.
|--- |  | -------------------------------------------------------------------------------------------

|(4) |  | Filed herewith
|--- |  | --------------



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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 Officer





Dated:    June 28, 2002





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/    MARK VINERMark Viner, Chief Financial
Officer, Principal Accounting Officer





Dated:    June 28, 2002





By:

/s/    SAM BATTISTONESam Battistone, Director





Dated:    June 28, 2002





By:

/s/    DALE E. LARSSONDale E. Larsson, Director





Dated:    June 28, 2002





By:

/s/    ROGER SHIFFMANRoger Shiffman, Director





Dated:    June 28, 2002





By:

/s/    DAN MARINODan Marino, Director





Dated:    June 28, 2002




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