SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

Management's Overview

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

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

We generate revenues from:

• Our 17 company-owned Field of Dreams stores;

• Our 6 company-owned FansEdge stores;

• Our e-commerce component featuring www.FansEdge.com and others;

• Our athlete and web syndication sites;

• Our catalogues;

• Our outbound VIP call center;

• Our manufacturing/distribution of sports memorabilia products, custom acrylic display cases and framing;

• Our running of sports memorabilia /collectible trade shows;

• Our franchise program through the 9 Field of Dreams franchise stores presently operating; and

• Our representation and corporate marketing of individual athletes.

Organic Growth

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

In particular, we have had success with the marketing of our products on-line via FansEdge.com and the complement of each of our web properties. The Company's sales associated with these e-commerce initiatives have grown from $4 million in 2004 to nearly $40 million in 2007, placing it at number 363 in 2005, number 289 in 2006 and number 216 in 2007 of the largest Internet retailers in the nation. Internet sales for the nine months ended September 30, 2008 and September 30, 2007, were $23.0 million and $16.5 million, respectively.

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

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

Our proprietary e-commerce platform has also enabled us to fuel a state-of-the-art in-store interactive Kiosk for ordering products. These Kiosks are in each of the new FansEdge stores and is providing a unique shopping experience for our customers by allowing them to access the entire Company portfolio of more than 100,000 sku's (stock keeping units).

Also, our first FansEdge catalogue shipped in November 2008.

Strategic Acquisitions

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

In August 2008, we acquired the assets of StarStruck/Proteam, a catalogue-focused retailer in the sports licensed products industry. StarStruck/Proteam is one of the largest catalogue and internet retailers of licensed Major League and Minor League merchandise in the country. The company also produces the official catalogue for the New York Mets.

Through the addition of a catalogue business, Dreams will further strengthen its Multi-channel Retailing strategy.

Objective

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

Analysis

We review our operations based on both our financial results and various non financial measures. Management's focus in reviewing performance begins with growth in sales, margin integrity and operating income. On the expense side, with a majority of our sales being achieved as an on-line retailer of licensed sports products, we spend a disproportionate amount of our operating expenses in internet marketing. Therefore, we continuously monitor the return on investment of these particular expenses.

We believe the implementation of our Multi Channel retailing strategy will strengthen our brands in the marketplace.

We believe we are well positioned to capture increased activity of on-line retail purchases as industry experts and analysts state that currently, only 3-4% of all retail sales are being conducted on-line and that over the next few years, consumers may generate twice that figure in on-line purchases.

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

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

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

Conclusion

We set ourselves apart from other companies with our diversified product and services line, our proprietary e-commerce platform, as well as our relationships with sports leagues, agents and athletes. Management believes we can continue to capture market share and become a consolidator in the highly fragmented licensed sports products industry.

GENERAL

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

Use of Estimates and Critical Accounting Policies

The preparation of our financial statements in conformity with generally accounting principles accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to our financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances.

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

Collectibility of Accounts Receivable

The Company's allowance for doubtful accounts is based on management's estimates of the creditworthiness of its customers, current economic conditions and historical information, and, in the opinion of management, is believed to be an amount sufficient to respond to normal business conditions. Should business conditions deteriorate or any major customer default on its obligations to the Company, this allowance may need to be significantly increased, which would have a negative impact upon the Company's operations. The Company's current allowance for doubtful accounts is $54.

                                               Sept. 30,    December 31,
                                                 2008           2007
            Accounts receivable               $     1,668   $       4,416
            Allowance for doubtful accounts            54              67

            Accounts receivable, net          $     1,614   $       4,395

Reserves on Inventories

The Company establishes a reserve based on historical experience and specific reserves when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to operations results when the estimated net realizable value of inventory items declines below cost. Management regularly reviews the Company's investment in inventories for declines in value. The Company's current reserve for inventory obsolescence is $270.

Income Taxes

Significant management judgment is required in developing the Company's provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. The Company evaluates quarterly its ability to realize its deferred tax assets and adjusts the amount of its valuation allowance, if necessary. The Company provides a valuation allowance against its deferred tax assets when it believes that it is more likely than not that the asset will not be realized. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. After consideration of all the evidence, both positive and negative, management has determined that no valuation allowance as of September 30, 2008 and December 31, 2007, was necessary.

Goodwill and Unamortized Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets ("SFAS 142"), the Company evaluates the carrying value of goodwill as of December 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured.

The impairment loss would be calculated by comparing the implied fair value of the reporting unit's goodwill to its carrying amount. In calculating the implied fair value of goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair value. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds it implied fair value.

The Company's evaluations of the carrying amount of goodwill were completed as of December 31, 2007 and March 31, 2007 in accordance with SFAS 142, resulted in no impairment losses. There were no material changes in the carrying amount of goodwill for the nine and three months ended September 30, 2008.

Revenue Recognition

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

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

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

Revenues from industry trade shows are recognized at the time of the show when tickets are submitted for autographs or actual product purchases take place. In instances when the Company receives pre-payments for show autographs, the Company records these amounts as deferred revenue until the products are signed and shipped/delivered to the customer; at which time the revenue is recognized.

RESULTS OF OPERATIONS

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



                                        Nine months ended         Three months ended
                                            Sept. 30,                  Sept. 30,
                                       2008          2007         2008           2007
  Net Sales                               1.0           1.0          1.0            1.0
  COGS                                    .54           .55          .54            .55
  Gross Profit                            .46           .45          .46            .45
  *Operating Expenses                     .51           .50          .57            .51
  Operating Income (loss)                (.08 )        (.08 )       (.14 )         (.08 )
  Income (loss) before income taxes      (.10 )        (.10 )       (.10 )         (.10 )
  Net Income (loss)                      (.05 )        (.06 )       (.09 )         (.06 )

* Does not include depreciation.

** Above table may not foot due to rounding

Nine Months Ended September 30, 2008 versus the Nine Months Ended September 30, 2007

Revenue. Total revenues increased 23.4% to $46.6 million for the nine months ended September 30, 2008, from $37.8 million in the same period last year. The increase was primarily due to an increase in retail revenues generated through our e-commerce component.

Manufacturing/Distribution revenues increased 28% to $12.8 million for the nine months ended September 30, 2008, from $10.0 million in the same period last year. The increase is primarily attributable to our Orange Bowl Stadium Project with the City of Miami earlier in the year.

Retail operation revenues increased 23.4% to $33.3 million for the nine months ended September 30, 2008, from $27.00 million in the same period last year. Our internet division revenues increased 39.3% to $23.0 million for the nine months ended September 30, 2008, from $16.5 million in the same period last year. Additionally, retail revenues generated through our 16 Field of Dreams stores (our 17th FOD store opened on September 15, 2008) remained constant with $10.3 million for the nine months ended September 30, 2008, from $10.5 million in the same period last year.

Costs and expenses. Total cost of sales for the nine months ended September 30, 2008 increased 20.8% to $25.5 million, from $21.1 million in the same period last year. The increase directly relates to an increase in overall company sales. However, as a percentage of total sales, costs of sales were 54.7% for the nine months ended September 30, 2008, compared to 55.8% for the same period last year.

Costs of sales of manufacturing/distribution products increased 23.3% to $7.4 million for the nine months ended September 30, 2008, from $6.0 million in the same period last year. However, as a percentage of manufacturing/distribution revenues, costs of sales were approximately 57.8% for the nine months ended September 30, 2008, compared to 60.0% for the same period last year. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were 66.2% for the nine months ended September 30, 2008, versus 69.9% for the same period last year.

Costs of sales of retail products increased 19.8% to $18.1 million for the nine months ended September 30, 2008, from $15.1 million in the same period last year. The increase is a direct result of incremental retail sales. As a percentage of total retail sales, costs were 54.4% for the nine months ended September 30, 2008, versus 56.0% for the same period last year.

Operating expenses increased 27.6% to $24.0 million for the nine months ended September 30, 2008, from $18.8 million in the same period last year. As a percentage of sales, operating expenses were 51.5% for the nine months ended September 30, 2008, and 50.0% for the same period last year.

Interest expense, net. Net interest expense was $645 for the nine months ended September 30, 2008, versus $569 for the same period last year.

Provision for income taxes. The Company recognized an income tax benefit of $1.9 million for the nine months ended September 30, 2008, versus an income tax benefit of $1.5 million for the same period last year. Each quarter, the Company evaluates whether the realizability of its net deferred tax asset is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Company's operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of September 30, 2008 and September 30, 2007. The effective tax rate for both periods was approximately 40%.

Three Months Ended September 30, 2008 versus the Three Months Ended September 30, 2007

Revenue. Total revenues increased 14.4% to $14.4 million for the three months ended September 30, 2008, from $12.6 million in the same period last year. The increase was primarily due to an increase in retail revenues generated through our e-commerce component.

Manufacturing/Distribution revenues were consistant with $3.2 million for the three months ended September 30, 2008, and $3.1 million in the same period last year.

Retail operation revenues increased 19.3% to $11.1 million for the three months ended September 30, 2008, from $9.3 million in the same period last year. Our internet retail division revenues increased 37.5% to $7.7 million for the three months ended September 30, 2008, from $5.6 million in the same period last year. The increase is as a result of our providing more robust platforms, improving our user interface, better merchandising of our products on-line, increased traffic and better conversion rates. Additionally, retail revenues generated through our sixteen company-owned Field of Dreams stores (our 17th FOD store opened on September 15, 2008) were down 8.0% with $3.4 million for the three months ended September 30, 2008, from $3.7 million in the same period last year.

Costs and expenses. Total cost of sales for the three months ended September 30, 2008, increased 12.8% to $7.9 million, versus $7.0 million in the same period last year. The increase directly relates to the increase in overall company sales. However, as a percentage of total sales, cost of sales was 54.5% for the three months ended September 30, 2008, compared to 55.2% for the same period last year.

Cost of sales of manufacturing/distribution products were consistant with $1.9 million for both three months ended September 30, 2008 and September 30, 2007. As a percentage of manufacturing/distribution revenues, cost of sales was approximately 61.0% for both three months ended September 30, 2008, and September 30, 2007. As a percentage of manufacturing/distribution revenues before elimination of inter-company sales, costs were approximately 70.0% for both three months ended September 30, 2008, and September 30, 2007.

Cost of sales of retail products increased 15.6% to $5.9 million for the three months ended September 30, 2008, from $5.1 million in the same period last year. The increase is a direct result of incremental retail sales. As a percentage of total retail sales, costs were 53.6% for the three months ended September 30, 2008, versus 54.7% for the same period last year.

Operating expenses increased 28.0% to $8.2 million for the three months ended September 30, 2008, from $6.4 million in the same period last year. As a percentage of sales, operating expenses were 57.1% for the three months ended September 30, 2008, versus 50.9% for the same period last year.

Interest expense., net. Net interest expense was $273 for the three months ended September 30, 2008, versus $194 for the same period last year.

Provision for income taxes. The Company recognized an income tax benefit of $1.0 million for the three months ended September 30, 2008, versus an income tax benefit of $.5 million for the same period last year. Each quarter, the Company evaluates whether the realizability of its net deferred tax assets is more likely than not. Should the Company determine that a valuation reserve is necessary, it would have a material impact on the Company's operations. The Company has prepared an analysis based upon historical data and forecasted earnings projections to determine its ability to realize its net deferred tax asset. The Company believes that it is more likely than not that the net deferred tax asset will be realized. Therefore, the Company has determined that a valuation allowance was not necessary as of September 30, 2008 and September 30, 2007. The effective tax rate for both periods was approximately 40.0%.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the nine months ended September 30, 2008 are the cash flows generated from our operating subsidiaries; availability under our senior revolving credit facility; and available cash and cash equivalents. We are unaware of any trends that may have a negative impact on our ability to continue our operations. In fact, with the improvement of the financial results of the Company and a further strengthening of the balance sheet, our ability to capitalize on market opportunities should be enhanced.

The balance sheet as of September 30, 2008 reflects working capital of $29.9 million, versus working capital of $17.5 million at year end. At September 30, 2008, the Company's cash and cash equivalents were $602, versus $1.6 million at year end. The cash position in addition to capital available under its revolving . . .