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Excerpts from Gilford Securities analyst Casey Alexander's recent update to clients on Dreams Inc. (DRJ):

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We are becoming more confident all the time that Dreams Inc. is building an integrated specialty retailer/e-tailer with unique attributes that could over time reshape the traditional model for brick and mortar versus on-line retailing. The key for Dreams is managing growth and the associated expenses required to fund that growth against the need to produce meaningful earnings per share which will gain further Street sponsorship.

1. The Specialty Retailer/E-tailer Concept

Dreams has now opened the first FansEdge brick & mortar store. On the surface the just opened FansEdge store may appear to be a traditional sports apparel store with some sports memorabilia thrown in to give it a unique twist. In fact, the store has an in-store kiosk that connects to the entire inventory of the enterprise, both apparel and memorabilia. In this manner, the b&m store can have more targeted physical inventory in the store while making every piece of merchandise that Dreams sells available to every customer that walks into the store.

Our sense is that this integrated concept could spread rapidly. We believe that the wider range of merchandise available through FansEdge stores versus Field of Dreams stores suggests that any underperforming Field of Dreams stores that are owned by the Company could become candidates for conversion to FansEdge stores.

This would allow Dreams to maximize their sales per square foot and leverage the off site inventory and shipping model built by the Company. This also takes advantage of the name brand recognition that FansEdge is building on-line. At the end of 2006 FansEdge.com was named the 289thfastest growing retailer on the web. They actually improved that position at the end of 2007, rising to become the 216th fastest growing retailer on the web. We saw more of this in 2008 as the internet division grew 49% year to year versus the first quarter of 2007.

2. Leveraging Capabilities through Syndication

The ability of the FansEdge on-line presence to process business in the sports apparel space has led to a syndication opportunity where FansEdge now serves as the backbone for other internet retailers that want to work in the sports apparel space. FansEdge makes their inventory available to syndication partners, and they are have added 20 web site partners in the last seven months and is adding approximately 3 new site partners per month. This syndication business allows for significantly higher inventory turns and means that Dreams capacity utilization of corporate assets should eventually lead to faster absorption of overhead and greater long term profitability.

3. Managing the Cost Side and the Balance Sheet

Growth initiatives cost money. Fortunately, in the era of a supposed ‘credit crunch’, Dreams received an increase in their credit line from Comerica Bank. The credit line was increased from $18 million to $23 million, and provides Dreams with the financial flexibility necessary to fund the various growth initiatives. Dreams has been working for a year preparing for the syndication partner opportunities. This has been cost with no associated revenue. Now that syndication partners stores are beginning to open the revenues should begin flowing to support a larger balance sheet. Also there have been costs associated with the opening of the FansEdge b&m store, where revenues are also beginning to flow after months of cost absorption.

At the same point in time, Dreams has several cost saving initiatives, recognizing the necessity to work hard to bring more dollars down to the bottom line. This includes combining accounts to decreaseshipping costs (a significant cost component of on-line endeavors), working their merchant processing costs better, managing accounts payable more efficiently, and even investigating potential tax credits.

4. Reiterate Buy Rating We are adjusting our 2008 EPS to $0.07 per share versus $0.04 per share in the previous 12 month period. This represents earnings growth year-top-year of 75%. Dreams is currently trading at a P/E ratio based upon our 2008 EPS estimate of approximately 19 times. Our experience is that growth stocks should trade at a P/E ratio that represents ¾ of the EPS growth rate. This suggests that Dreams should sell at a P/E of 56X (75% growth rate times ¾ = 56X P/E) which gives us a price target of $3.93 per share. On this basis, we reiterate our Buy rating.

ANALYST CERTIFICATION: I, Casey Alexander, certify that all the views expressed in this research report accurately reflect my personal views of the subject company (ies). I also certify that I have not and will not receive compensation with respect to the issuance of this report.

Source: Dreams Inc.: Reiterating Buy on Integrated Specialty Retailer/E-tailer