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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission File No. 0-15586

EOS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

888 Seventh Avenue, 13th Floor, New York, New York 10106

(Address of Principal Executive Office, including Zip Code)

(212) 887-6869

(Registrant’s telephone number including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, $0.01 par value

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this  Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  x    No  ¨

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrant’s most recently completed second quarter, is $14,076,149.

As of March 17, 2003, 88,020,099 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2003 annual meeting of stockholders are incorporated by reference into Part III of this report.

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PART I

ITEM 1.    BUSINESS

Certain statements in this Annual Report on Form 10-K, including certain statements contained in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words or phrases “can be”, “expects”, “may affect”, “may depend”, “believes”, “estimate”, “project”, and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and Eos International, Inc. (“Eos”) cautions you that any forward-looking information provided by or on behalf of Eos is not a guarantee of future performance. Eos’ actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond Eos’ control, including (i) the volatile and competitive nature of the consumer products and direct selling industries, (ii) changes in domestic and foreign economic and market conditions, (iii) the effect of federal, state and foreign regulation on Eos’ business, (iv) the ability of Eos to attract and maintain relationships with its independent sales forces, (v) intellectual property and other claims, (v) Eos’ ability to successfully implement and execute its acquisition strategies, (vi) Eos’ ability to maintain its relationships with its customers and (vii) Eos’ ability to raise additional sources of financing or capital to satisfy its operating expenses and working capital needs in addition to the risks described below in Item 1—Business and in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as those discussed in Eos’ other public filings. All such forward-looking statements are current only as of the date on which such statements were made.

General

Eos International, Inc. (“Eos”) is a holding company owning capital stock of product marketing companies focusing on direct sales of consumer products through independent contractors. Eos was originally formed in 1984 under the name “GHS Acquisition Corp.,” subsequently changed its name in 1984, 1988, 1999 and, and on December 31, 2001 changed its name from dreamlife, inc. to Eos International, Inc. following Eos’ July 18, 2001 acquisition of Discovery Toys, Inc. (“Discovery Toys”), a California corporation. As a result of Eos’ acquisition of Discovery Toys, Discovery Toys became a wholly owned subsidiary of Eos and the former shareholders of Discovery Toys became the majority stockholders of Eos in a transaction accounted for as a reverse merger. Discovery Toys offers educational toys, games, books and software designed to offer high educational quality, play value, durability and safety with a focus to grow a child’s natural interest, developmental level, and evolving learning style. Discovery Toys products are sold by approximately 30,000 independent educational consultants in the United States and Canada. On December 14, 2001, Eos acquired an 85% interest in Regal Greeting and Gifts, Inc. (“Regal”), a Canadian Corporation. Regal offers unique value-priced gifts, stationery, household, kitchen, garden and seasonal items that can be differentiated from competitive products either by design, price or personalization. Regal products are purchased by over 400,000 independent sales representatives in Canada. Eos and its subsidiaries are collectively referred to as the “Company.”

Our Recent Company History and Liquidity Position

On July 18, 2001, Eos consummated a reverse merger with Discovery Toys by which Eos acquired all of the outstanding capital stock of Discovery Toys. The consideration paid by Eos for the acquisition of Discovery Toys was determined through arms-length negotiation by the management of Eos and the majority stockholders of Discovery Toys. The transaction has been accounted for as a reverse merger with Discovery Toys as the accounting acquirer. The historical financial results for periods prior to July 18, 2001 reflect the financial position and operations of Discovery Toys only as restated. Outstanding common shares of Discovery Toys have been retroactively adjusted for all periods to give effect to the recapitalization. See the Notes to the Consolidated Financial Statements included herein.

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On December 14, 2001, Eos purchased 85% of the assets of the Regal Greetings & Gifts division of MDC Corporation, Inc. (“MDC”) an Ontario Corporation, and Prime DeLuxe, Inc. (a subsidiary of MDC). The purchase price and nature of the consideration paid in the acquisition were determined through arms-length negotiation. The acquisition was accounted for as a purchase.

On January 14, 2003, Eos acquired all of the outstanding stock of I.F.S. of New Jersey, Inc. (“IFS”). IFS sells product based fundraising packages and services to schools and non-profit organizations across the United States and the Caribbean. The consideration paid by Eos for the acquisition of IFS was determined through arms length negotiation by only the independent board members of Eos and the majority stockholders of IFS. Eos and IFS share certain common officers, directors and stockholders. The purchase price consisted of 15,998,001 shares of Eos common stock and 1,000 shares of Eos Series E Junior Convertible Preferred Stock. The acquisition was accounted for as a purchase.

Concurrent with the acquisition of IFS, Eos raised gross proceeds of $7.5 million through a private equity offering of 15,000,000 shares of Eos common stock and issued 900,000 shares of Eos common stock as a placement fee. Eos exchanged its short-term bridge notes payable totaling $6.5 million and accrued interest payable of $896,000 for an aggregate of $4,000,000 in cash and 1,000 shares of redeemable Eos Series D Preferred Stock, which require the Company to pay a 13% annual dividend upon redemption. Eos exchanged old warrants to purchase an aggregate of 2,600,000 shares of Eos common stock at an original exercise price of $2.95 per share issued to its short-term bridge lenders for amended and restated five-year immediately exercisable warrants to purchase an aggregate of 3,000,000 shares of Eos common stock at an exercise price of $0.25 per share. In connection with this exchange, the bridge lenders’ put rights on the old warrants totaling $2.3 million were eliminated. As a result of the above transactions, Eos’ outstanding common increased from 56,132,098 shares at December 31, 2002 to 88,020,099 shares on January 14, 2003. See the Notes to Consolidated Financial Statements included herein.

As a result of the IFS acquisition and financing transactions that occurred on January 14, 2003, Eos on a stand alone basis improved its working capital by $13.1 million, resulting in total positive working capital of $1.7 million. Of the $3.5 million of cash retained from Eos’ $7.5 million private equity offering after repayment of Eos’ short-term bridge notes, all must be used for general corporate purposes, of which $1.2 million may only be spent on specific items as defined in the agreement with Eos’ former short-term bridge lenders. Improvements to the working capital and cash position of Eos on a stand alone basis is significant because the operating subsidiaries’ lenders limit the amount of parent company expenditures that may be funded by Discovery Toys, Regal and IFS. Consolidated working capital as of January 14, 2003 increased by approximately $17.3 million, from $4.1 million to over $21 million.

Direct Sales Industry Overview

Direct selling is the sale of a consumer product or service in a face-to-face manner that is not performed in a fixed retail location. Most direct sellers act as independent contractors; sales agents work on their own schedules, and their earnings are in direct proportion to their efforts. The strength of direct selling lies in its tradition of independence, service to consumers and the spirit of entrepreneurs. Direct selling provides accessible business opportunities to persons looking for alternative sources of income, and whose entry is generally restricted by gender, age, education or previous experience. Around the world a substantial majority of direct sellers are women, and most work in their direct selling businesses on a part-time basis. A very small percentage of direct sellers are employees of the companies whose products they sell. In many cases, direct selling opportunities develop into a fulfilling career for those who achieve success and choose to pursue their independent direct selling business on a full-time basis.

The Direct Selling Association reports that direct selling has doubled in the United States in the last decade to nearly $25 billion in sales and $82 billion worldwide. Approximately 55% of Americans have purchased goods or services through direct sales and 45% of Americans show a willingness to purchase through direct sales.

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Myriad social and economic trends point towards growth for the direct selling industry. The number of households is growing. Greater numbers of people are working from home, searching for financial stability, planning for early retirement and examining ways to increase their leisure time. Direct selling allows people to set flexible hours, work from home and earn compensation in proportion to their efforts.

Consumer trends point to an increasing preference for the convenience of buying via direct sellers. Direct sellers assist consumers by bringing welcomed product variety directly to their doorstep in an efficient manner. This service is also beneficial for the growing elderly population, who often experience decreased mobility which restricts them from shopping extensively and frequently.

EOS’ Product Lines

Eos operates three distinct direct selling companies: Discovery Toys, Regal and IFS.

Discovery Toys is a multi-level direct selling company offering approximately 200 products including toys, games, books, and software through a network of approximately 30,000 independent educational consultants (“ECs”) in the United States and Canada. Discovery Toys was founded in 1978. Discovery Toys’ principal offices are located in Livermore, California, and its geographic market primarily encompasses the United States and Canada. Sales of educational toys accounted for over 80% of Discovery Toys revenue during each of the last three fiscal years.

Regal is one of Canada’s largest direct selling and mail order distributors of greeting cards, gift-wrap, and innovative household and giftware items, offering up to 3,300 unique products per year. Founded in 1928 as the Regal Stationery Company, Regal initially operated as a commercial printer of greeting cards, gift-wrap and stationery. Regal introduced its consumer mail-order operations in the 1940’s. Regal sells its products through a network of over 400,000 independent sales representatives who in turn sell the merchandise to friends, family neighbors and co-workers. Regal also provides fundraising services to schools and non-profit organizations. Regal also distributes merchandise via its website and its 43 representative service centers (“RSCs”) located throughout Canada.

IFS is one on the largest direct marketing firms that sells product based fundraising packages and services to schools across the United States and Caribbean. In the school fundraising market, which represents 106,000 kindergarten through 12^th grade (K-12) American schools, IFS works with approximately 12,000 of these schools annually. IFS sells its products and service through two channels of distribution: (i) direct sales through a national sales force of over 150 employed professionals, and (ii) through the Internet via its America’s Lemonade Stand e-commerce business. IFS, primarily through teachers and administrators, provides interested school children with IFS supplied products which they sell to friends, families and neighbors. IFS and the schools share the proceeds, with each school receiving 30% to 50% of the retail price of products sold.

Discovery Toys

Products.    Discovery Toys’ products consist of high quality educational toys, books and software which are developed and designed in-house or sourced from independent designers or vendors. Sales of toys represent over 80% of Discovery Toys’ revenues. Products are tested to ensure educational quality, play value, durability and safety. Products are categorized by age level with a focus to grow a child’s natural interests, developmental level, and evolving learning style. Discovery Toys introduces approximately 80 new products each year. Discovery Toys also sells catalogues and business forms to its sales representatives.

Sales Force.    Discovery Toys uses a force of independent sales representatives to sell and distribute its products to consumers. Representatives use printed catalogues and live product demonstrations given at hostess parties to promote product sales. Representatives purchase new Educational Consultant (“EC”) kits for their product demonstrations. Discovery Toys uses a multi-level marketing plan to provide career opportunities to

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parents and others who are recruited as educational consultants while providing them the flexibility of being an independent sales representative.

Catalogues.    Discovery Toys creates two major catalogues and distributes over three million copies annually, along with additional seasonal sales supplements. These catalogues are created by our in-house creative staff, which includes designers, writers and production personnel.

Product Sourcing.    Products are sourced domestically as well as from Asia and Europe. Discovery Toys uses approximately 80 vendors for product sourcing. Most foreign purchases are denominated in U.S. dollars. ABS plastics is the most used raw material in our product line and although pricing of this commodity fluctuates, we do not feel there are any significant current resource limitations regarding this material.

Order Fulfillment and Distribution.    Products are distributed from Discovery Toys’ automated warehouse facility in Livermore, California. Orders from educational consultants are received via phone, fax, mail and internet, fulfilled from inventory by its automated line and shipped to the educational consultants or party hostess for final distribution to the consumer. Inventory is maintained at Discovery Toys’ central warehouse and inventories are adjusted seasonally to meet sales demands. As of December 31, 2002, the backlog of sales consisted of $236,000 of product orders received but not shipped compared to $206,000 at December 31, 2001. All orders were shipped during the first quarter of fiscal 2003.

Internet Strategy.    In August 2002, Discovery Toys (www.discoverytoysinc.com) introduced its ecommerce web template which allows its representatives to each have a standardized but customizable web presence for accepting customer orders that are all linked to the Discovery Toys Home office. This system also supports customer toll-free direct phone ordering that allows each customer to be assigned an independent representative for commission purposes.

Regal Greetings & Gifts

Products.    Regal offers a unique mix of affordable products in seven primary product categories: Home Decorative, Stationery, Kitchen Items, Home Functional, Special Use Accessories, Children’s Products and Bathroom Items. Products range in price from $1.25 to $53.12 per item (approximately $2 to $85 CDN), with an average price point of $6.09 (approximately $9.75 CDN). Approximately 45% of merchandise offered each catalogue season is new, including new greeting card and gift wrap designs. Approximately 5% of the product line may be selected for customer personalization. Regal also sells a portion of its catalogues to its sale representatives.

Sales Force.    The majority of Regal’s sales are made through Regal’s network of independent sales representatives. Regal’s active registered representatives, that is, the number who have purchased in the prior twelve months, were in excess of 400,000 as of December 31, 2002. The majority of representatives are self-purchasers (meaning that they only buy for themselves). The remaining representatives sell Regal products to supplement family income or to support fund-raising activities for non-profit organizations, and they account for the majority of sales. Representatives are not required to satisfy any minimum sales targets, nor are they encouraged to actively recruit new representatives. Typically, 25% to 30% of active representatives have sold Regal’s products for less than one year. The Company believes that it has attracted a loyal representative following at Regal due to the low-pressure sales system, which is flexible, supportive, and family-oriented.

Representatives initiate the sales process by purchasing catalogues from Regal for distribution. Catalogues are sold to representatives on a sliding scale based on volume ordered and year-to-date earning level. Representatives use a variety of methods to distribute catalogues, including door-to-door catalogue drops and distribution at craft sales, flea market booths, recreational gatherings and in the workplace. Representatives collect orders from friends, family, neighbors and co-workers and then purchase the products directly from Regal at a discount. The rate of discount depends upon a representative’s individual sales volume, with the highest

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performing representatives receiving a 50% discount on merchandise. Representatives keep the difference between Regal’s published sale price and the discounted price. Representatives collect money at the time of order or upon delivery.

Catalogues.    Regal produces 6 major catalogues per year via its in-house creative department and distributes over 10 million copies annually. A typical catalogue features up to 700 unique products. Regal also produces special promotional flyers, usually in connection with the sale of excess inventory or leftover merchandise from the representative service centers. Catalogues are mailed only to Regal’s proprietary active registered representative list or in response to requests generated by Regal’s customer recruitment initiatives.

Product Sourcing.    Regal purchases approximately 70% of its merchandise from independent trading agents selling products on behalf of Asian-based manufacturers. Approximately 20% of the items (mainly greeting cards and gift wrap products) are manufactured in-house and approximately 10% of all items are sourced in Canada. All foreign purchases are made in U.S. dollars. Regal sources product from more than 40 vendors. Raw materials vary by product with paper being a significant resource for the business.

Order Fulfillment and Distribution.    Products are distributed from Regal’s warehouse in Mississauga, Ontario or from one of its 43 representative service centers. Sales representatives send their orders to Regal via phone, fax, mail, the Internet, or alternately visit one of Regal’s 43 representative service centers to purchase the merchandise. Regal maintains inventory at all of its 43 representative service centers and its main warehouse in Mississauga, Ontario. Inventories are adjusted to meet seasonal sales demand. Regal’s inventory includes more than 7,400 stock keeping units (“SKUs”). Backlog consisting of orders received but not shipped were approximately $12,000 at December 31, 2002 and $11,000 at December 31, 2001.

Internet Strategy.    Regal launched its Regal and Prime Deluxe websites (WWW.REGALGREETINGS.COM and WWW.PRIMESDELUXE.COM respectively) in May 1999. The websites include the history of Regal, a comprehensive online catalogue, shopping capabilities for registered representatives, RSC locations, a list of representatives, information on becoming a representative and one-step registration for new representatives, as well as information on using Regal as a source of fundraising. Representatives can place online orders from any current catalogue and pay via Visa or Mastercard.

IFS

Products.    IFS’ products consist of costume jewelry, calendars, posters, specialty gift items, seasonal items and confectionery.

Sales Force.    IFS employs and contracts with over 150 direct sales staff throughout the United States and the Caribbean. These direct sales staff secure contracts with schools to utilize IFS products for fundraising programs. IFS products are sold by school children to their friends, families and neighbors. IFS provides incentive prize programs that provide student sellers with toys, cash, electronics and other age appropriate prizes.

Catalogues.    Products are displayed in attractive color brochures and inserts that are designed in-house. The students utilize the catalogues to secure orders.

Product Sourcing.    The products are bought from domestic suppliers and directly from around the world. The jewelry line is manufactured in the Far East.

Order Fulfillment and Distribution.    Products are distributed from IFS’ warehouse facility in Benicia, California. Orders from students are received via phone, fax, mail and internet, fulfilled from inventory shipped to the final consumer. Inventory is maintained at IFS’ central warehouse and inventories are adjusted seasonally to meet sales demands.

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Competition

The markets for consumer products and the direct selling industry are both highly competitive. Direct selling companies compete for products, customers, and sales representatives.

Discovery Toys competes in the $20+ billion North American toy market. Discovery Toys competes on price and quality. Discovery Toys differentiates itself by offering a unique line of high quality educational toys. Regal competes in the Canadian value-priced consumer gift market and fundraising program market. Regal competes based on merchandising mix, price and convenience.

The Company competes for consumer product revenues with traditional forms of retail, direct selling companies, catalogue and mail order companies, internet retailers and fundraising companies Many of the Company’s competitors have longer operating histories, more experience in consumer products, significantly greater financial, product development and marketing resources, more liquid stock which can be used as a currency to acquire other companies, greater access to debt or equity capital, greater name recognition, and larger existing customer and independent sales force bases.

Traditional retail accounts for most sales in the toy and consumer product industries. Discount and specialty stores such as Wal-Mart, Toys “R” Us, and Zellers Inc sell similar product lines and compete with Regal and Discovery Toys on a price and value basis.

Specialty card stores such as Hallmark and Carlton Cards operate retail outlets across Canada which provide a wide selection of cards, ribbons and gift wrap compete with Regal.

Educational toy groups such as Leap Frog, Zany Brainy, and Imaginarium are also competitors of Discovery Toys.

The Company competes with other direct selling companies for representatives on various levels, including but not limited to, earnings opportunity, product selection, program flexibility and convenience. Avon Products, Inc., Tupperware Corp and Amway Corporation are amongst the largest direct selling companies with which the Company competes.

Non profit groups, such as schools and churches, often use fund raising programs to generate incremental funds for school initiatives. Regal products are sold for these purposes in Canada. Many fundraising competitors offer similar product lines, although their product selection is typically limited. Such companies are QSP, Inc., a subsidiary of the Reader’s Digest Association, Inc., Cherrydale, Sally Foster and Third Wave Fundraising. Regal competes on the basis of product selection, price and service.

Seasonality

The Company’s business is highly seasonal. Historically, revenues during the fourth quarter constitute approximately 40% to 50% of its annual revenues and substantially all of its net income has been realized during its fourth quarter, from October through December. The Company believes this is the general pattern associated with other toy and gift distributors. Discovery Toys and Regal and IFS have revolving lines of credit established with lenders to provide seasonal financing for their operations. Eos recognizes approximately 40-50% of its annual sales revenues in the fourth calendar quarter. Under existing line of credit agreements and given borrowing base restrictions in effect on December 31, 2002, Discovery Toys had funds available for borrowing of $1.5 million, Regal had funds available for borrowing of $3.2 million, and Eos had no funds available for borrowing.

Further discussion of the effect of seasonality upon revenues and income is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Foreign operations

The Company markets its products primarily to customers in the United States of America and Canada. Revenues derived from customers located in the United States of America accounted for 39%, 88% and 94% for the years ended December 31, 2002, 2001 and 2000, respectively. Revenues derived from customers located in Canada accounted for 61%, 12% and 6% for the years ended December 31, 2002, 2001 and 2000 respectively. The acquisition of Regal Greetings & Gifts Corporation, a Canadian corporation, in December 2001 accounts for the large shift in revenues from the United States of America to Canada between 2001 and 2002. Discovery Toys, had sales in Canada of approximately $3.1 million, $2.7 million, and $2.4 million in 2002, 2001 and 2000, respectively.

Significant customers

The Company enjoys a broad customer base and has no customers that represent more than 10% of its revenues.

Intellectual property, proprietary rights and domain names

The Company has obtained registration in the United States for certain of our tradenames and service marks, including “Discovery Toys,” and the Discovery Toys logo. “Regal Greetings and Gifts” is a registered tradename in Canada. In the opinion of management of the Company, the tradenames “Discovery Toys” and “Regal Greetings and Gifts” are of significant value because of their market recognition.

Research and development

The Company’s expenditures for research and development were immaterial during the past three years.

Environmental compliance

The Company has no future commitments for expenditures relating to environmental compliance and has not made any significant expenditures relating to such issues in the past two years.

Employees

At December 31, 2002 we had approximately 370 full-time employees consisting of 2 full-time employees of Eos, 78 full-time employees of Discovery Toys, and 290 full-time employees of Regal Greetings & Gifts Corporation There are no employees covered by collective bargaining agreements. At January 14, 2003, IFS had 337 full-time employees.

ITEM 2.    PROPERTIES

The Company is headquartered in New York, New York, where it leases approximately 2,400 square feet of space at 888 Seventh Avenue, 13th Floor. The original lease term was for one year ended November 2002 and is currently renewed on a month-to-month basis.

Discovery Toys operates a 180,000 square foot leased facility at 6400 Brisa Street, Livermore, California. The facility contains both warehouse space of approximately 150,000 square feet for storage and distribution and 30,000 square feet of office facilities. The lease expires in February 2004.

Regal occupies 45 locations across Canada in 8 provinces. Regal’s headquarters is located at 7035 Ordan Drive, Mississuaga, Ontario in a 237,065 square foot leased facility. The lease expires in 2009. The company also maintains a secondary headquarters in Quebec City, Quebec, consisting of a 2,987 square foot leased facility

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that includes a French speaking call center. There are 43 representative service centers in light industrial areas that average 6,600 square feet to supply representatives locally. The facilities total approximately 286,205 square feet and are all leased facilities. Management believes that these facilities are adequate for Regal’s needs.

IFS occupies a 141,000 square foot leased facility located at 5100 Park Road, Benicia, California. The facility contains both warehouse space of approximately 112,000 square feet for storage and distribution and 29,000 square feet of office facilities. The lease expires in October 2006.

ITEM 3.    LEGAL PROCEEDINGS

On November 6, 2002, the Company received correspondence from counsel to the Post Effective Date Committee in the Chapter 11 proceedings of eToys, Inc. in relation to fees paid by eToys to Discovery Toys, Inc. under a Merchandising and Promotion Agreement dated October 1, 1999. The letter requests repayment of approximately $1.2 million of fees paid under the contract as unearned. The Company has notified the counsel that eToys defaulted under the contract and forfeited such fees. The Company plans to vigorously defend its position, including the possibility of counterclaims.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

Price of Common Stock

Our common stock is quoted on the OTC Bulletin Board under the symbol “EOSI.” The following table sets forth, for the periods indicated, the high and low bid prices per share of the common stock as reported on the OTC Bulletin Board. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Historically, Eos common stock has not traded on a daily basis.

Holders

On March 17, 2003, the closing sale price of Eos common stock on the OTC Bulletin Board was $0.50 per share. There were 169 holders of record as of March 17, 2003. The total number of beneficial owners is estimated to be 1,000 as of March 17, 2003. As of March 17, 2003, Eos had 1,000 outstanding shares of Series D Preferred Stock held by two holders of record and 1,000 outstanding shares of Series E Junior Convertible Preferred Stock held by three holders of record.

Dividends

Eos has not declared or paid any cash dividends on its common stock. Eos intends to retain its future earnings, if any, to fund the development and growth of its business. Eos is required to pay cash dividends upon redemption of its Series D Preferred Stock at 13% annually. These shares of Series D Preferred Stock were issued in January 2003 in connection with the repayment of Eos’ short-term bridge notes.

Prior to the July 2001 recapitalization, Discovery Toys did not pay cash dividends in the year ended December 31, 2001.

Eos’ operating subsidiaries Discovery Toys and Regal have restrictions against making loans, advances, dividends and corporate overhead payments to Eos without lender approval. On March 18, 2002, the primary lender of Discovery Toys, PNC Bank, approved $50,000 in corporate overhead fees to be charged to Discovery Toys and paid to Eos. On April 26, 2002, Discovery Toys entered into an amendment of its loan agreement with PNC that permitted Discovery Toys to pay funds to Eos for corporate overhead charges incurred by Eos in the amount of $250,000 until June 30, 2002 and an additional $150,000 during the remainder of 2002, for $400,000 in total during the year. Actual payments made during the 2002 from Discovery Toys to Eos were $250,000. The amendment allows payments of $300,000 during 2003 should certain conditions be met. Discussions are in process with the primary lenders of Regal, The Bank of Nova Scotia and RoyNat, to attempt to negotiate

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additional corporate overhead charges to be billed to Regal and paid to Eos similar to those being negotiated for Discovery Toys.

Recent Sales of Unregistered Securities

During the fourth quarter of the year ended December 31, 2001, Eos issued short-term bridge notes and warrants to purchase its common stock to two investors, in each case in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act relating to sales by an issuer not involving a public offering, as set forth below. Based on discussions with and representations made by such investors, Eos reasonably believes that each such investor was an accredited and/or sophisticated investor. Eos granted to each investor access to information on the Company necessary to make an informed investment decision.

The short-term bridge notes were issued by Eos to DL Holdings I, LLC and Weichert Enterprise LLC in the principal amounts of $3,500,000 and $3,000,000 respectively. These notes bore interest at the rate of 13% per annum and originally matured on April 13, 2002, at which time all principal and interest was to be due. CYL Development Holdings, LLC, a principal stockholder of Eos, is also a non-voting member of DL Holdings I, LLC. Eos agreed to use its best efforts to grant, or cause to be granted, to DL Holdings I, LLC and Weichert Enterprise LLC, a perfected security interest in all of its assets and other property and any of its subsidiaries that have been or are available to be granted as collateral. Eos has not granted such security interests to DL Holdings I, LLC or Weichert Enterprise LLC because it is currently prohibited from granting security interests by the loan arrangements between its subsidiaries and their respective lenders.

DL Holdings I, LLC and Weichert Enterprise LLC were originally granted warrants to purchase 1,400,000 and 1,200,000 shares of common stock of Eos, respectively, in connection with the issuance of the short-term bridge notes. The warrants were originally exercisable at the price of $2.95 per share for a five year period commencing on April 14, 2002. Both DL Holdings I, LLC and Weichert Enterprise LLC were granted demand and “piggyback” registration rights on the shares of common stock of Eos underlying the warrants.

The holders of the warrants had a put right with respect to the shares of common stock of Eos underlying the warrants, commencing on the date upon which all of the amounts owing under the short-term notes have been paid in full. This right allowed the holders of the warrants to sell to Eos all or a portion of the warrants at $0.15 per share, if the put right was exercised before April 14, 2002, $0.45 per share, if the put right was exercised after April 14, 2002 but before August 14, 2002, and $0.90 per share if the put right was exercised after August 14, 2002. Eos had a call right with respect to the shares of common stock underlying the warrants at any time during the 90 day period commencing on the date upon which all amounts owing under the short-term notes had been paid in full. The call right allowed Eos to purchase from the holders of the warrants, at a price of $0.15 per share, if the call right was exercised before April 14, 2002, $0.45 per share, if the call right was exercised after April 14, 2002 but before August 14, 2002, and $0.90 per share if the call right was exercised after August 14, 2002, a number of shares of common stock of Eos equal to 75% of the total number of shares of common stock into which such warrant holder’s warrants were exercisable on the date of their issuance, less the number of shares of common stock underlying the warrants of such holder that have been repurchased pursuant to the put right discussed above. The put rights on the warrants were not exercised by August 14, 2002 and the Company recognized an additional $1,950,000 of expense associated with the increase in the value of the puts through August 30, 2002. Furthermore, the Company had originally committed to issue an aggregate of 16,667 warrants to purchase common stock per day at $0.01 per share if the bridge loans were not repaid in full at December 9, 2002. The Company negotiated for successive extensions for the commencement of the penalty warrants from December 9, 2002 to December 31, 2002 and January 31, 2003.

If all amounts owing under the short-term notes were not paid in full on or prior to December 9, 2002, Eos had agreed to issue to DL Holdings I, LLC and Weichert Enterprise LLC on such date and on each 30th day following such date that such payment has not occurred, warrants to purchase an aggregate of 16,667 shares of common stock of Eos (53.8461% to DL Holdings I, LLC and the balance to Weichert Enterprise LLC) for each

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day after December 9, 2002 that all amounts owing under the short-term notes remained unpaid. The exercise price for these warrants would have been $0.50 per share. On November 27, 2002, Eos entered into amended agreements with the short-term bridge lenders to further extend the maturity dates of the bridge notes to December 31, 2002 and to extend the date to issue the additional warrants until January 1, 2003. On December 30, 2002, Eos entered into amended agreements with the short-term bridge lenders to extend the maturity date of the notes to January 31, 2003 and the date to issue additional warrants to the short-term bridge lenders until January 31, 2003.

On January 14, 2003, Eos exchanged its short-term bridge notes payable totaling $6,500,000 plus accrued interest payable of $896,000 for an aggregate of $4,000,000 in cash and 1,000 shares of redeemable Eos Series D Preferred Stock which require the Company to pay a 13% annual dividend upon redemption. Eos exchanged the old warrants to purchase 2,600,000 shares of common stock at an original exercise price of $2.95 per share issued to its short-term bridge lenders for amended and restated immediately exercisable warrants to purchase an aggregate of 3,000,000 shares of Eos common stock. The exercise price is $0.25 per share for a five year period ending January 2008. As a result of this exchange, all put rights on the old warrants totaling $2.3 million were eliminated.

The Series D Preferred Stock, $0.01 par value, issued by Eos to its former short-term bridge lenders in connection with Eos’ refinancing of its short-term bridge notes, has no voting rights, and the consent of the holders of Series D Preferred Stock is not required for taking any corporate action, except as required by law or as specifically provided in the Certificate of Designations of the Series D Preferred Stock. Shares of Series D Preferred Stock are redeemable by Eos at its option and, under certain circumstances, are mandatorily redeemable. The terms of the Series D Preferred Stock restrict certain dividend distributions to holders of Eos common stock or preferred stock ranking junior to the Series D Preferred Stock.

On January 14, 2003, Eos completed a $7.5 million private equity offering of 15,000,000 shares of Eos common stock at a purchase price of $0.50 per share. The agreement with Eos’ former short-term bridge lenders relating to the issuance of the Series D Preferred Stock specifies that $3,500,000 must be retained for general corporate purposes, of which $1,200,000 may only be used for the compensation of Eos’ chief executive officer, chief financial officer, or accounting staff or consultants; specified recruiting fees; costs related to acquisitions of businesses; costs related to the refinancing of debt; costs related to investment banking services; payments to avoid default on any debt; and any other expenditures agreed upon by Eos and its former short-term bridge lenders. Should these funds not be expended for such purposes by July 4, 2004, such funds would be restricted for redemption of the Eos Series D Preferred Stock. Eos issued 900,000 shares of Eos common stock to Allen & Company for serving as placement agent in connection with the private equity offering.

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ITEM 6.     SELECTED FINANCIAL DATA

The selected consolidated financial data presentation of consolidated financial statements should be read in conjunction with “Management’s Discussion of Financial Condition and Results of Operations” and our financial statements and notes to those statements and other financial information included elsewhere in this report.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

                   RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and notes to those statements and the other financial information appearing elsewhere in this annual report. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.

Overview

The following discussion and analysis refers to Eos International, Inc. (“Eos”), formerly “dreamlife, Inc.,” a Delaware corporation, and all of its operating subsidiaries on a consolidated basis, including Discovery Toys, Inc. (“Discovery Toys”) and Regal Greetings & Gifts Corporation (“Regal”). All references to “we,” “us,” and “our” refer to Eos and its subsidiaries on a consolidated basis.

Our accompanying consolidated financial statements include the accounts of (i) Discovery Toys for all periods; (ii) Regal for the year ended December 31, 2002 and for the period from the date of acquisition, December 14, 2001, to December 31, 2001; and (iii) Eos for the year ended December 31, 2002 and for the period from the date of reverse merger with Discovery Toys, July 18, 2001, through December 31, 2001.

Eos, the parent company, is a holding company generating no revenues independent of amounts received from its subsidiaries, Discovery Toys and Regal.

Discovery Toys is a multi-level marketer of approximately 200 products, including toys, games, books, and software through a network of approximately 30,000 independent educational consultants (“ECs”) in the United States and Canada. Discovery Toys was founded in 1978. Discovery Toys’ principal offices are located in Livermore, California and its geographic markets primarily encompass the United States and Canada.

Regal is one of Canada’s largest direct selling and mail order distributors of general merchandise to consumers, including stationery, and household and giftware items. Regal sells its products through a network of over 400,000 independent sales representatives who in turn sell the merchandise to friends, family, coworkers and neighbors. Regal also distributes merchandise via its website and its 43 representative service centers located throughout Canada.

On January 14, 2003, Eos acquired I.F.S. of New Jersey, Inc. IFS is a consumer products-fundraising company. The results of IFS are not included in the consolidated financial statements for the year ended December 31, 2002. The consolidated financial statements for quarters ending after December 31, 2002 will include the accounts of IFS from the date of acquisition, January 14, 2003.

Eos Strategy

The Company’s mission is to increase revenues and return to stockholders through internal growth, acquisition and synergistic opportunities. Key elements of our strategy include:

Recruiting retaining, supporting and motivating independent sales representatives.    We expect to continue to expand our independent sales force network. We utilize a variety of incentive and motivational programs to drive increased revenue and to recruit and motivate independent sales representatives.

Expanding our cross-marketing efforts.    We intend to explore opportunities created by sharing access to products and product knowledge between subsidiaries.

Aligning our products, prices, promotions and places with our independent sales representatives.    We expect to offer additional products and catalogues, expand promotional opportunities and improve distribution access as business growth strategies dictate.

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Acquiring additional brand-name direct sales organizations.    Discovery Toys is a well-known brand for high quality educational toys in both the U.S. and Canada. Regal is a household name in most of Canada for value-priced novelty gifts. We expect to continue to deliver the quality and price-point expected by the final purchaser to reinforce our brand name recognition. We intend to continue to pursue acquisitions of additional brand-name direct sales organizations.

Staying focused on first-rate customer service.    We expect to continue to improve and expand our back office systems and call center for order processing and shipping.

Leveraging larger volume discounts on product purchases and printed catalogues.    By combining volume from its operating companies, we expect to source larger product volumes from our suppliers and catalogue publishers. With increased purchases, we expect to negotiate better pricing.

Expanding fundraising programs in Canada.    We expect to continue to focus on Regal’s expansion into providing its products for school and charity fundraising purposes.

Expanding the diversity of our sales representatives to capture growth markets.    We intend to focus on expansion into the growing Hispanic, African American and Asian populations in the United States for our educational toys.

Consolidated incentive and training conferences.    We intend to explore opportunities to coordinate incentive and conference destinations to negotiate cost savings.

Critical Accounting Policies

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Our critical accounting policies are as follows:

Revenue recognition and sales returns

Revenue is recognized when the product is delivered to the Company’s independent sales consultants. With respect to Regal, approximately 70% of its sales are made at representative service centers where delivery to the Company’s independent sales representatives occurs at the point of purchase. With respect to Discovery Toys’ sales and Regal’s non-service center sales, delivery generally occurs at the time of shipment, which is when legal title and risk of loss are transferred to the Company’s independent sales consultants. The Company records shipping and handling fees invoiced to the independent sales representatives as revenue. The Company records revenue for catalogues and business forms that are sold to independent sales consultants.

Independent sales consultants have limited rights to return product orders, and we record provisions for estimated returns and warranty costs at the time revenue is recognized based on historical experience.

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We use cash incentive and promotional coupon awards to incent our independent sales representatives. Discovery Toys maintains an incentive bonus plan in which all independent consultants participate. Under the plan, consultants earn awards based on individual and team sales performance and other benchmarks. Awards are determined and accrued for on a monthly basis. Regal awards promotional coupons for product purchases on a periodic basis. These awards are reflected as a reduction of revenues in the period the awards are earned. Awards under the incentive bonus plan were $31,222,000, $8,964,000, and $7,545,000 for 2002, 2001, and 2000, respectively.

We provide coupons to buyers of our products and hostess volunteers that can be used towards future purchases of products. When coupons are provided in conjunction with the sale of products, we allocate the sales proceeds between the fair values of the products and the value of the coupon based on estimated redemption rates. Amounts attributable to the value of the coupon are deferred until the earlier of redemption of the coupon or expiration occurs. When coupons are provided as incentives to hostess volunteers, we accrue the value of the coupon based on estimated redemption rates as a reduction in revenue.

Inventory valuation

Inventories are stated at the lower of cost or market value. We record adjustments to the value of inventory based upon our forecasted plans to sell our inventories. The physical condition (e.g., age and quality) of the inventories is also considered in establishing its valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.

Goodwill and other acquired intangible assets

We have made acquisitions in the past that included a significant amount of goodwill and other intangible assets. Under generally accepted accounting principles in effect through December 31, 2001, these assets, as well as negative goodwill, were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives.

Effective in 2002, indefinite-lived intangible assets, including goodwill and tradename, are no longer amortized but are subject to an annual (or under certain circumstances more frequent) impairment test based on their estimated fair values. Other intangible assets that meet certain criteria continue to be amortized over their useful lives and are also be subject to an impairment test based on estimated fair value. Estimated fair value is typically less than values based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. We did not record any impairment charges upon completion of our transitional impairment review in the second quarter of 2002 and our annual test in the fourth quarter of 2002. However, there can be no assurance that a review in 2003 may not result in a material impairment charge. Further, in 2002, negative goodwill was written-off as the cumulative effect of a change in accounting principle. As a result, the Company recorded a benefit of approximately $3.7 million on January 1, 2002 resulting from the write-off of unamortized negative goodwill.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material and affect the results of operations reported in future periods.

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In connection with our acquisition of Regal, we granted redeemable warrants to certain lenders from whom we obtained financing to acquire an 85% interest in the assets of Regal. The redeemable warrants issued to Eos’ short-term bridge lenders gave them the right to purchase shares of Eos common stock from us at a fixed price or to sell the warrants back to us at prices defined in the agreement. The redeemable warrants issued to the mezzanine lender gave them the right to sell either the warrants to purchase shares of Regal common stock or the shares of Regal common stock received after exercise of the warrants to Regal at prices defined in the agreement based on a multiple of historical earnings or other factors. The minority stockholder of Regal has the right to sell (put) its interest to Regal at a price based on a multiple of the historical earnings of Regal. The redeemable warrants granted to our lenders and the put rights granted to the minority stockholder have been recorded at fair value. The underlying valuations, which were determined through use of the Black Scholes Model, represent significant accounting estimates. The price at which the warrant holders and minority stockholder can sell their instruments back to us is a key variable in determining fair value with the Black Scholes Model. As the price in some instances is based, in part, on a multiple of the historical earnings of Regal, this variable, and therefore, our calculation of the fair value of these instruments is subject to change. Changes in the value of the warrants held by the short-term bridge lenders and the mezzanine lender are reflected as interest expense. Changes in the value of the minority stockholder’s put rights are reflected as changes in the carrying value of the minority interest.

Results of Operations

The following table sets forth for the periods indicated the percentage of revenues represented by certain line items in our consolidated statements of operations:

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Segment Results

As of December 31, 2002, Eos operates two strategic business units that provide differing products using different direct sales forces: Discovery Toys and Regal. Discovery Toys and Regal are managed separately because each business unit requires different employee skills, product development and marketing strategies. We evaluate the performance based on profit or loss from operations. Overhead costs associated with the Eos as the holding company are characterized as “Corporate.” Prior to 2001, we only operated through our Discovery Toys segment.

The following table sets forth the revenues, gross profit, and operating profit (loss) for our three segments for the years ended December 31, 2002, 2001 and 2000 (in thousands):

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Year Ended December 31, 2002 Compared to Year Ended 2001

Revenues

We record revenues from product sales made to our independent sales representatives net of the cash incentives earned by these representatives under our incentive bonus plans and net of returns. Revenues include shipping and handling charges. Revenues also include catalogue sales and business form sales to our educational consultants at Discovery Toys. Revenues also include catalogue sales to approximately 6% of the sales representatives at Regal who order more than one catalogue per season. Revenues increased by $50,721,000, or 115%, from $44,280,000 in 2001 to $95,001,000 in 2002. This increase is primarily attributable to the $52,786,000 increase in revenues of Regal which we acquired on December 14, 2001, from $2,455,000 in 2001 to $55,241,000 in 2002. Regal Greetings & Gifts accounted for 6% of revenues in 2001 compared to 58% of revenues in 2002. Revenues of Discovery Toys decreased by $2,065,000, or 5%, from $41,825,000 in 2001 to $39,760,000 in 2002.

The 5% decrease in Discovery Toys’ revenues is attributable primarily to a $3.5 million decrease in product sales and shipping revenues attributable to a 3% decline in the number of active educational consultants and a 7% decline in the average number of orders received from active educational consultants from 2001 to 2002. Average order size increased slightly from 2001 to 2002. This decrease in product revenues was partially offset by reduced compensation incentives due to lower revenue volumes. New Educational Consultants are required to purchase Kits in order to demonstrate products at hostess parties. Sales of Kits are a primary measure of sales representative recruiting for our Company. Kit sales increased by almost $1 million in 2002 compared to 2001 in a continued effort to recruit new educational consultants by discounting the price of the new kits for the second year in a row. The number of new educational consultants recruited in 2002 increased by 20% compared to 2001. We believe that higher discounting led to increased purchases of the Kit in 2002 as a result of the excellent product value included as part of the Kit without generating new educational consultants that became active in selling for the company. Sales of new product kits to experienced educational consultants declined by $300,000 in 2002 compared to 2001 consistent with the decline in the number of active educational consultants.

During 2002, Discovery Toys implemented its internet ecommerce web template online ordering system to allow its educational consultants’ customers the convenience of ordering online. This innovation resulted in a decrease in catalogue sales and business center sales to our educational consultants of $200,000 in 2002 compared to 2001. Catalogue and business center revenue is expected to decline further in future years as more customers access the internet. We expect that product sales via the internet will increase in the future and exceed the decrease in catalogue and business center sales.

Discovery Toys plans to grow its revenues by specifically targeting new markets for educational consultants. Historically, Discovery Toy consultants have been well-educated stay-at home mothers living in more affluent areas. A key strategy is to attract mothers from the emerging Hispanic, African American and Asian populations in the United States. We will continue to focus on introduction of new recruiting programs and tools, making it easier for its educational consultants and customers to do business with Discovery Toys, and to develop and introduce new products.

If Regal had been acquired on January 1, 2001, 2001 full year revenues for Regal would have been $54.4 million compared to 2002 revenues of $55.2 million, an increase of $800,000, or 1%. Revenues from product sales increased by $4.1 million from 2001 to 2002, primarily driven by increased sales by fundraising representatives using the Gift Catalogue published for the October through December period. Furthermore, Regal advanced the Winter Catalogue by one week providing additional sales opportunity during the Christmas season. These revenue increases were offset by a $2.1 million increase in sales incentives given to our representatives that is attributable to both the increase in revenues as well as the relative increase in sales by our Club Prestige sales representatives who receive higher product discounts. Promotional discounts increased by $400,000 due to increased marketing activity. Finally, the change in the foreign exchange rate between the U.S. and Canadian dollar negatively impacted revenues by $800,000.

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Cost of revenues and gross profit

Cost of revenues consists of cost of products, printing costs of catalogues and variable labor and freight charges. A portion of Regal’s catalogue printing and shipping costs are also classified as sales and marketing expense as the majority of its catalogues are distributed free of charge. Consolidated cost of revenues increased by $25,719,000, or 99%, from $25,920,000 in 2001 to $51,639,000 in 2002, primarily attributable to the $26,658,000 increase in cost of revenues from 2001 to 2002 of Regal which was acquired on December 14, 2001. Cost or revenues at Discovery Toys decreased by $939,000, or 4%, from $24,724,000 in 2001 to $23,785,000 in 2002, corresponding to lower revenues of $2,065,000 in 2002 compared to 2001, although gross margin declined slightly from 41% of revenues in 2001 to 40% in 2002. Consolidated gross margin increased from 41% of revenues in 2001 to 46% of revenues in 2002, primarily attributable to the large increase in higher margin revenues for Regal. Regal accounted for 6% of revenues in 2001 compared to 58% of revenues in 2002. Regal’s gross margin in 2002 was 50% compared to Discovery Toy’s gross margin of 40%. Regal’s higher margins are achieved through higher markup on products and minimal low margin shipping revenues as the majority of Regal product is distributed at the representative service centers which are classified as warehousing and operations expenses, offset by comparatively higher sales incentives that are classified as a reduction of revenue.

The decrease in gross margin at Discovery toys from 41% of revenues in 2001 to 40% of revenues in 2002 is primarily due to higher discounting on products to stimulate sales, including lower unit prices for educational consultant kits to attract new consultants, offering 50% more hostess free products, and a promotional sale on new products not included in the new product Kit.

Gross margin at Regal for 2002 was 50% compared to gross margin for the period from December 14, 2001 to December 31, 2001 of 51%. The slight decline from 2002 to 2001 is primarily due to lower margins achieved on shipping revenues.

Regal attempts to identify products that will allow for adequate markup to support its earning opportunity for its sales representatives, provide excellent perceived value to its end customers, and support its margin requirements needed for the operation of its representative service centers (distribution centers) for the convenience of its sales force. Regal also sells products at its distribution centers that are not in its current catalogues as a method to reduce excess inventories and generate more sales activity at its distribution centers.

Sales and marketing expenses

Sales and marketing expenses consist primarily of personnel and related costs in our marketing organizations which select our products and product mix and develop our catalogues, as well as costs for non-cash incentives for our sales representatives, and credit card processing and bad debt expenses. Sales and marketing expenses for Regal also include costs to publish and distribute mail-order catalogues free of charge. Our sales and marketing expenses increased $7,403,000, or 102%, from $7,287,000 in 2001 to $14,960,000 in 2002. This increase is primarily attributable to the $8,011,000 increase in sales and marketing expenses for Regal in 2002 which we acquired on December 14, 2001. The sales and marketing expenses for Discovery Toys decreased by $338,000, or 5%, from $6,941,000 in 2001 to $6,603,000 in 2002 as Discovery Toys continued to focus on cost control.

Warehousing and operations expenses

Warehousing and operations expenses consist primarily of the facilities and personnel and related costs for our warehouses and representative service centers. Warehousing and operations expenses increased by $8,864,000, or 266%, from $3,338,000 in 2001 to $12,202,000 in 2002. This increase is primarily attributable to the $9,052,000 increase in 2002 warehousing and operations expenses for Regal which was acquired on December 14, 2001. Warehousing and operations expenses for Discovery Toys decreased by $188,000, or 6%, from $2,964,000 in 2001 to $2,776,000 in 2002 as Discovery Toys continued to focus on cost control by subleasing some of its warehouse facility which reduced rent expense by $138,000 in 2002.

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General and administrative expenses

General and administrative expenses consist primarily of personnel and related costs of our finance and administrative organizations, as well as professional fees, insurance and regulatory compliance costs and amortization of a customer list. General and administrative expenses increased by $7,529,000, or 100%, from $7,525,000 in 2001 to $15,054,000 in 2002. This increase is primarily attributable to the $6,927,000 increase in 2002 general and administrative expenses for Regal which was acquired on December 14, 2001, which includes $1,282,000 of amortization expense for the acquired customer list and a $323,000 management fee paid to Eos by Regal which in turn was paid by Eos to a related party for consulting services related to Regal. General and administrative expenses for Discovery Toys increased by $407,000, or 6%, from $6,286,000 in 2001 to $6,693,000 in 2002, which includes a $250,000 management fee paid to Eos by Discovery Toys as well as executive severance. General and administrative expenses attributable to the operation of the Eos parent represented $195,000 of the overall increase. The 2002 results include a full 12 months of Eos operating expenses compared to 2001 results which excluded approximately six months of Eos operating expenses, or approximately $600,000 due to the effect of Eos’ reverse merger by which Eos acquired Discovery Toys on July 18, 2001. In addition to the $600,000 for six months additional expenses, Eos’ expenses were offset by a reduction in salary for Eos’ Chairman of the Board of $121,000, and management fees from Discovery Toys of $250,000. The inter-company management fees discussed above are eliminated in consolidation.

Amortization of negative goodwill

Amortization of negative goodwill represents the excess of the fair value of the net assets over the purchase price resulting from the recapitalization of Discovery Toys in January 1999. Eos was amortizing negative goodwill over a ten-year period using the straight-line method and we recognized $525,000 of income for amortization of negative goodwill in 2001. Due to the adoption of SFAS 142 on January 1, 2002, amortization ceased as of December 31, 2001. See cumulative effect of a change in accounting principle discussed below.

Net interest expense

Interest expense consists of interest expense on notes payable, revolving lines of credit and capital leases calculated at stated interest rates as well as non-cash interest expense, including amortization of discounts on notes payable and increases in the value of redeemable warrants. Net interest expense increased $6.0 million, or 627%, from $957,000 in 2001 to $7.0 million in 2002. Of the $6.0 million increase, $3.7 million is attributable to interest expense and amortization of note discounts on debt to purchase Regal on December 14, 2001, $2.0 million of interest expense was recorded related to redeemable warrants issued in connection with the bridge notes issued by Eos in connection with the acquisition of Regal and $385,000 is attributable to the increase in value of the warrants issued to RoyNat in connection with the acquisition of Regal.

Net interest expense in 2003 is anticipated to be approximately $2.9 million lower than in 2002 because of the retirement on January 14, 2003 of Eos’ short-term bridge notes in the aggregate principal amount of $6.5 million from a portion of the proceeds received from Eos’ sale of 15,000,000 shares of unregistered common stock and from the issuance to the lenders of an aggregate of 1,000 shares of Eos’ Series D Preferred Stock. The payoff of the bridge notes and related modifications will result in approximately $800,000 less interest expense attributable to the stated interest rate of the bridge notes, the exclusion of amortization of the discount on the bridge notes of $1.0 million, and the exclusion of interest expense from the change in the put rights of redeemable warrants of $2.0 million in 2003. The incremental fair value of the warrant modification which amounted to approximately $0.9 million will be recorded as additional interest expense during 2003.

Other income (expense), net

Other income (expense), net decreased by $1,937,000, or 95%, from $2,030,000 in 2001 to $93,000 in 2002. In 2001, we recognized $2.1 million of income associated with a merchandising agreement with a former internet company due to a default on the agreement whereby we recognized the full remaining unamortized amount of unearned revenue associated with the agreement. We recognized no other income related to this agreement in 2002.

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Minority interest

Minority interest expense represents MDC Corporation, Inc.’s (MDC) 15% share of the net earnings of Regal as well as any changes in the valuation of put options issued to MDC. Minority interest expense increased by $85,000, or 944%, from $9,000 in 2001 to $94,000 in 2002. Minority interest expense in 2002 was comprised of a $206,000 expense for the increase in the put rights issued to MDC offset by a $112,000 benefit representing 15% of Regal’s loss for 2002. Minority interest expense of $9,000 in 2001 was comprised of 15% of Regal’s earnings from the date of acquisition, December 14, 2001, to December 31, 2001.

Income tax expense

Income tax provisions of $765,000 were recognized in 2002 compared to $59,000 in 2001. The provisions for 2001 reflected $52,000 of taxes from Regal based on its status as a new corporation in Canada and recognition of a small pretax profit from the short period from the date of its acquisition to the end of the year. Discovery Toys and Eos tax provisions consist mostly of state minimum tax amounts for both the years ended 2002 and 2001 as we had prior tax loss carry forwards that offset any significant taxable amounts.

A 100% valuation allowance has been recorded against $4.6 million of deferred tax assets associated with Eos, including its U.S. subsidiary, Discovery Toys, as of December 31, 2002. Historical earnings leads management to believe that realization of these assets is uncertain. Regal, a Canadian corporation, has gross deferred tax assets of $2.4 million. Management has established a $2.0 million valuation allowance against these assets. Management has estimated its valuation allowance after considering the nature of the future tax deductions, the timing of those deductions, and historical earnings.

Cumulative effect of a change in accounting principle

In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

We adopted the provisions of SFAS No. 141 as of July 1, 2001 and with the adoption of SFAS No. 142, on January 1, 2002, the remaining unamortized negative goodwill has been recorded as the cumulative effect of a change in accounting principle. As a result, we have recorded a benefit of approximately $3.7 million in the first quarter of 2002 resulting from the write-off of negative goodwill recorded on the books of Discovery Toys. Goodwill was also recorded as part of the purchase price allocation in conjunction with the acquisition of Regal on December 14, 2001. In compliance with the adoption of SFAS No. 142 this goodwill was tested for impairment during the second and fourth quarters of 2002 and no impairment was noted at that time.

Net earnings (loss) and other measures

Net earnings decreased by $4.6 million, or 267%, from $1.7 million in 2001 to a loss of $2.9 million in 2002. The primary reasons for the decrease were the increase in interest expense of $5.9 million related to interest expense, including debt amortization and increase in the put price of the redeemable warrants, on debt to purchase Regal on December 14, 2001, exclusion of other income of $1.9 million primarily related to 2001 revenue on a one-time merchandising agreement, exclusion of a benefit of negative goodwill amortization of $525,000 due to the adoption of SFAS 142, offset by inclusion of a $3.7 million gain from the cumulative effect of a change in accounting principle also due to the adoption of SFAS 142. Consolidated operating profit

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increased by $411,000, comprised primarily of additional operating profit of $2.1 million contributed by Regal which was acquired on December 14, 2001, offset by a $1.5 million decrease in operating profit at Discovery Toys primarily due to lower revenues and gross margin, and a $195,000 increase in operating loss for Eos.

Eos’ loss per share before minority interest and cumulative effect of change in accounting principle for 2002 was $(0.12) compared to earnings per share before minority interest and cumulative effect of change in accounting principle for 2001 of $0.04. Eos’ loss per share for 2002 is $(0.05) compared to earnings per share of $0.04 per share in 2001.

In 2003, net interest expense is anticipated to be $2.9 million lower than in 2002 and there will not be a $3.7 million gain from the cumulative effect of a change in accounting principle related to negative goodwill.

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

Revenues

We record revenues from sales made to our independent sales representatives, net of the cash incentives earned by these representatives under our incentive bonus plans. Revenues increased by 10.3% from $40,131,000 in 2000 to $44,280,000 in 2001. The revenues from the acquisition of Regal contributed $2,455,000 or 6.1% of the increase as a result of inclusion of Regal’s sales from the acquisition date, December 14, 2001, through December 31, 2001. The remaining $1,694,000 or 4.2% of the increase represents an increase in the sales of Discovery Toys. Discovery Toys’ increase in product sales (toys, books and software) contributed 5.0% of the increase in revenues. New product sales increased 50% in 2001 compared to 2000, which generated increases in product orders and average order. Shipping and handling revenues on these products contributed 0.9% of the 10.3% increase to the overall revenues. These gains were offset by increased compensation plan costs of 1.3% of sales and lower volume of new education consultant kit revenue of approximately 0.4% of sales. Sales of New Educational Consultant (“EC”) kits are a primary measure of sales representative recruiting for our company. We had a decrease of 10.8% in recruiting of new representatives for the year ended December 31, 2001 using this measure. Discovery Toys engaged in more promotional discounting of these new EC kits in fiscal year 2000 as compared to fiscal year 2001 which we believe led to increased purchases of the kit in fiscal 2000 as a result of the product value included as part of the kit, without generating new ECs that became active in selling for the Company. We believe this to be a factor in the lower recruiting numbers reflected in the year ended December 31, 2001.

To offset the effect of the lower number of recruits, we changed our maintenance policy for inactive recruits during 2001 and pursued programs to reactivate representatives who had ceased to actively promote our products. This campaign is believed to have been a contributor to our growth in pre-Christmas sales realized during the fourth quarter of 2001.

Although the total number of sales representatives from which we received orders decreased by 2.2% from 2000 to 2001, order count increased 5.1%, reflecting a more active sales force that was also reflected in net growth of our group manager sales consultant rank.

During the year, Discovery Toys implemented its internet “e-clic” online ordering system to allow its educational consultants the convenience of ordering online and to simplify its ordering process by automating much of the mathematical process sales representatives previously had to perform in submitting orders.

Discovery Toys hopes to continue its sales growth trend by continuing to focus on introduction of new recruiting programs and tools, continuing to make it easier for its educational consultants and customers to do business with the company and continuing to develop and introduce new products into its product line.

Cost of revenues

Cost of revenues increased by $1,730,000, or 7%, from $24,190,000 for the year ended December 31, 2000 to $25,920,000 for the year ended December 31, 2001 but decreased as a percentage of sales from 60.3% of sales in 2000 to 59.1% of sales in 2001. Cost of revenues for Regal were $1,196,000 from the date of acquisition, December 14, 2001, through December 31, 2001. Discovery Toys’ cost of revenues as a percentage of sales improved 1.2%, decreasing from 60.3% of sales for the year ended December 31, 2000 to 59.1% of sales for the year ended December 31, 2001. Overall cost of revenues were aided by lower new EC kit sales in the 2001

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product mix, which tend to generate lower margins than regular product sales and improved margins on those new EC kits sold. This contributed a decrease of 1.3% to the cost of revenues as a percentage of sales. The balance of the improvement came from improved cost recovery of shipping and handling and catalogue printing costs.

Regal attempts to identify products that will allow for adequate markup to support its earning opportunity for its sales representatives, provide excellent perceived value to its end customers, and support its margin requirements needed for its operation of its representative service centers for the convenience of its sales force. Regal also sells products at its representative service centers that are not in its current catalogues as a method to reduce excess inventories and generate more sales activity at its representative service centers.

As Regal has a lower cost of revenues as a percentage of sales than Discovery Toys, the inclusion of Regal’s results for the short period from December 14, 2001 to December 31, 2001 had the effect of decreasing overall cost of revenues as a percentage of sales by 0.6%. Regal experienced a 48.7% cost of revenues as a percentage of revenues during the period from the acquisition date, December 14, 2001, until the end of the 2001 fiscal year.

Sales and marketing expenses

Sales and marketing expenses increased by $347,000, or 5%, from $6,940,000 for the year-ended December 31, 2000 to $7,287,000 for the year ended December 31, 2001. Inclusion of the results of operations for Regal added $346,000 of expense from the date of acquisition, December 14, 2001, until December 31, 2001. Discovery Toys sales and marketing expenses were flat for the year ended December 31, 2001 as compared to the year ended December 31, 2000 as Discovery Toys continued to focus on cost control.

Warehousing and operations expenses

Warehousing and operations expenses increased by $439,000, or 15%, from $2,899,000 for the year ended December 31, 2000 to $3,338,000 for the year ended December 31, 2001. Inclusion of the results of operations for Regal added $374,000 of expense from the date of acquisition, December 14, 2001 until December 31, 2001.

General and administrative expenses

General and administrative expenses increased by $818,000, or 12%, from $6,707,000 for the year ended December 31, 2000 to $7,525,000 for the year ended December 31, 2001. Overhead attributable to the operation of Eos represented $886,000 of the overall increase as a result of the assumption of salaries, rent, insurance, and regulatory compliance costs related to its structure as a public company. Eos corporate expenses increased in the fourth quarter as activity around evaluation of potential acquisitions, and work done by accountants and attorneys to meet regulatory reporting requirements increased. The acquisition of Regal added $353,000 to consolidated general and administrative expenses during the year ended December 31, 2001 representing Regal’s general and administrative expenses from December 14, 2001 to December 31, 2001.

Discovery Toys general and administrative expenses declined by $421,000, or 6.3%, from $6,707,000 for the year ended December 31, 2000 to $6,286,000 for the year ended December 31, 2001. Savings in the Information Technology (“IT”) area was the primary reason as we benefited from a new contract with our IT contractor, EDS, that dropped our fixed base level of support.

Amortization of negative goodwill

Amortization of negative goodwill in the amount of $525,000 represents the excess of the fair value of the net assets over the purchase price resulting from the recapitalization of Discovery Toys in January 1999. Eos was amortizing negative goodwill over a ten-year period using the straight-line method. Amortization ceased on December 31, 2001 upon adoption of SFAS No. 142.

Net interest expense

Net interest expense was $957,000 for the year ended December 31, 2001 compared to $44,000 for the year-end December 31, 2000. The increase is primarily due to increased line of credit use and lower cash balances due to the stock repurchase and stockholder distribution totaling $5,985,000 prior to the July 18, 2001 recapitalization.

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Other income

Other income primarily consisted of recognition of unearned revenue from a merchandising agreement with a former internet retailer. We recognized $2,074,000 of income associated with this agreement in the year ended December 31, 2001 due to a default on the agreement whereby we recognized the full remaining unamortized amount of unearned revenue associated with the agreement. We recognized other income of $394,000 related to this agreement in the year ended December 31, 2000. We believe we have no continuing obligations under the agreement.

Income tax expense

Income tax provisions of $59,000 were recognized for the year ended December 31, 2001 compared to $6,000 for the year-ended December 31, 2000. The provisions for the year ended December 31, 2001 reflected $52,000 of taxes from Regal based on its status as a new corporation in Canada and recognition of a small pretax profit from the short period from the date of its acquisition to the end of the year. Discovery Toys and Eos tax provisions consist mostly of state minimum tax amounts for both the years ended 2001 and 2000 as we had prior tax loss carry forwards that offset any significant taxable amounts.

A 100% valuation allowance has been recorded against $4.6 million of deferred tax assets associated with Eos, including its U.S. subsidiary, Discovery Toys, as of December 31, 2001. Historical earnings leads management to believe that realization of these assets is uncertain. Regal, a Canadian corporation, has gross deferred tax assets of $2.7 million. Management has established a $ 2.1 million valuation allowance against these assets. Management has estimated its valuation allowance after considering the nature of the future tax deductions, the timing of those deductions, and historical earnings.

Net income and other measures

Net income increased by $1,413,000, or 432%, from $327,000 for the year ended December 31, 2000 to $1,740,000 for the year ended December 31, 2001.

The additional contribution from Discovery Toys sales and operating improvements assisted in covering the additional corporate overhead generated as a result of the Discovery Toys’ reverse merger with Eos, which along with the recognition of the unearned revenue related to the termination of the internet retailer merchandising agreement, were the primary reasons for the increase.

Eos earnings per share increased by $0.03 per share, or 300%, from $0.01 for the year ended December 31, 2000 to $0.04 per share for the year ended December 31, 2001.

Liquidity and capital resources

Cash and cash equivalents decreased by $2.4 million, or 22%, from $10.8 million at December 31, 2001 to $8.4 million at December 31, 2002. The $2.4 million decrease resulted primarily from a payment of $1.3 million on long-term debt to acquire Regal, payments for acquisition and equity financing costs of $761,000, net purchases of property and equipment of $408,000, and negative cash flows from operations of $541,000, offset by borrowings by Eos of $500,000 on a line of credit. Negative cash flows from operations is primarily attributable to increased inventory levels of $2.7 million and cash paid for interest expense of $1.2 million, offset by operating profits of $1.1 million. Increased inventory levels at Regal are due to the purchase of Spring 2003 Catalogue items in late 2002 compared to Spring 2002 Catalogue items which were purchased in early 2002. Non-cash interest expense of $5.6 million in 2002 consisted of amortization of discounts on notes payable of $1.9 million, interest expense associated with the increase in put price of warrants held by Eos’ short-term bridge lenders of $2.0 million and the increase in valuation of warrants held by mezzanine lenders of $385,000. Accrued interest payable is based on the stated interest rates on our notes, including accrued interest payable on Eos’ bridge notes of $857,000, accrued interest on the note issued by Discovery Toys to Avon Products Inc., in the

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principal amount of $3,500,000 which added to principal of $185,000, and deferred interest on Eos’ note payable to MDC which added to principal of $277,000.

Working capital decreased by $4.2 million, or 51%, from $8.4 million at December 31, 2001 to $4.1 million at December 31, 2002, primarily due to a $4.6 million increase in total current liabilities. This increase consisted of the $2.0 million increase in the value of redeemable warrants held Eos’ former short-term bridge lenders, amortization of the discount on Eos’ short-term bridge notes of $1.0 million, increase in accrued interest payable on the bridge notes of $896,000, the $500,000 net increase in line of credit, and other changes to accounts payable, accrued liabilities and income taxes payable.

During 2002, we were constrained by an insufficient amount of working capital to meet our short-term obligations. At January 1, 2002, we had working capital of $8.4 million. Eos as a separate holding company, had $6.2 million of negative working capital at January 1, 2002. Of that negative working capital, $5.9 million represented short-term bridge notes, $6.5 million face value of the short-term notes net of a $1.0 million discount on the notes, and $0.4 million was attributable to the put rights on redeemable warrants issued to Eos’ former short-term bridge lenders with the notes. The total amount due on the notes, including interest on the notes and the minimum amount payable to the holders upon their exercise of the put rights contained in the redeemable warrants due on April 13, 2002 was $7.2 million. Eos has no separate source of income. Due to the seasonal nature of our subsidiaries’ businesses, we experienced net operating losses of $7.8 million and negative cash flows from operations of $14.6 million for the first nine months of the year. In the fourth quarter of 2002, our subsidiaries generated positive operating cash flows and operating income but we were subject to restrictions imposed by lenders and certain note holders of our subsidiaries that limited advances that Discovery Toys and Regal may make to Eos to cover Eos’ corporate overhead and operating expenses. Eos did not repay these short-term notes on April 13, 2002; however, Eos repaid the notes in full on January 14, 2003 as discussed later. The maturity date of our short-term bridge notes was extended from April 13, 2002 to May 15, 2002, June 7, 2002, July 15, 2002, August 15, 2002, September 30, 2002, October 31, 2002, November 30, 2002, December 31, 2002 and January 31, 2003 in exchange for certain modifications to the warrants issued in connection with the short-term bridge notes.

In connection with the issuance of the short-term bridge notes in December 2001, Eos issued warrants to purchase an aggregate of 2,600,000 shares of Eos common stock to Eos’ short-term bridge lenders at an exercise price of $2.95 per share. The warrants also contained put rights that allowed the warrant holders to sell their warrants back to Eos for $0.15 per share through April 14, 2002. As Eos’ short-term notes were not repaid by their original maturity date of April 13, 2002, we incurred $1,170,000 of expense associated with an increase in the price at which the holders may have sold or put their warrants back to us during the second quarter of 2002, from $0.15 per share to $0.60 per share. Since we did not repay these short-term notes and we were unable to exercise its call option and repurchase the warrants issued to the note holders by August 14, 2002, we incurred an additional $780,000 of expense in the third quarter of 2002, associated with an increase in the redemption value of the warrants following this date, from $0.60 per share to $0.90 per share. On October 31, 2002, we agreed to modify, among other things, the strike price of the warrants from $2.95 per underlying share to the weighted average price paid for each share of common stock sold by Eos from April 15, 2002 to November 30, 2002. On November 27, 2002, we agreed to modify, among other things, the strike price of the warrants from $2.95 per underlying share to the weighted average price paid for each share of common stock sold by Eos from April 15, 2002 to December 31, 2002. There were no sales of common stock between April 15, 2002 and December 31, 2002 and no additional expense was recorded. As discussed below, on January 14, 2003, we modified the warrants to, among other things, eliminate put provisions.

In connection with the issuance of the short-term bridge notes in December 2001, Eos had also committed to issue an aggregate of 16,667 warrants to purchase common stock, at $0.01 per share, per day if the bridge notes were not repaid in full at December 9, 2002. The Company negotiated for successive extensions for the commencement of the penalty warrants from December 9, 2002 to December 31, 2002 and January 31, 2003. As discussed below, on January 14, 2003, the warrants were modified to, among other things, eliminate this provision.

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On April 26, 2002, Discovery Toys entered into an amendment of its loan agreement with PNC Bank (“PNC”) that permitted Discovery Toys to pay funds to Eos for corporate overhead charges incurred by Eos in the amount of $250,000 until June 30, 2002 and an additional $150,000 during the remainder of 2002, for a total of $400,000 in total during the year. Discovery Toys paid Eos $250,000 during 2002 under this agreement. This agreement allows an additional $300,000 of payments to Eos in 2003, subject to certain conditions.

In July 2002, Discovery Toys entered into an amendment of its loan agreement with PNC that allows relaxation of its borrowing base requirements (“Overadvances”) from July 1, 2002 until November 30, 2002. The modification eased the borrowing base restrictions by $600,000 in July 2002, $1.5 million in August 2002, $1,750,000 in September and October 2002, and $700,000 in November 2002. This amendment prohibits the payment of management fees payable to certain related parties and advances to Eos if such payments result in outstanding Overadvances. The amendment also extends the term of Discovery Toys’ line of credit agreement to July 31, 2003. On March 17, 2003, Discovery Toys and PNC amended this agreement and extended the term costs.

In August 2002, Eos entered into a Grid Demand Promissory Note agreement with JP Morgan Chase Bank establishing an unsecured line of credit of $500,000. The line of credit expires on the earlier of August 19, 2003, or on demand. As of December 31, 2002, Eos had drawn funds against the line of credit of $500,000 with payments of interest due only. On January 29, 2003, Eos repaid the line of credit.

On October 22, 2002, pursuant to the amendment to his employment agreement, Mr. Lund, Chairman of the Board and former Chief Executive Officer of Eos, forfeited his deferred bonus of $3,000,000, resulting in a reclassification of long-term deferred compensation payable to additional paid-in capital, in exchange for an award of non-qualified stock options, subject to stockholder approval, with a 10 year term and an exercise price and grant date to be determined contingent upon Eos securing a minimum level of additional financing and eliminated Eos’ potential requirement to make such $3.0 million deferred compensation payment to Mr. Lund.

On December 27, 2002, Discovery Toys amended its notes payable to Avon Products, Inc. (“Avon”) which extended the maturity date of the Avon note payable to June 30, 2003 with respect to payment of $150,000 of accrued interest and the balance of the note to the earlier of December 31, 2004 or the sale or transfer of all or substantially all of the assets of Discovery Toys or 50% or more of the fully diluted outstanding capital stock of Discovery Toys to an entity not controlled by Eos.

Eos had working capital of $4.1 million as of December 31, 2002. Eos, as a separate entity, had $11.4 million of negative working capital as of December 31, 2002. Of that negative working capital, $9.7 million would have become due on January 31, 2003 and consisted of the $6.5 million carrying value of Eos’ short-term bridge notes, $896,000 of accrued interest payable on the bridge notes, and $2.3 million of redeemable warrants granted in connection with the bridge financing. The remaining $1.7 million of negative working capital on Eos’ books as of December 31, 2002, represents a line of credit of $500,000 and $1.2 million of current liabilities other than the short-term notes in excess of cash and prepaid expenses. Our lenders also limit the funds that Discovery Toys and Regal may advance to the Eos holding company to fund its operations.

On January 14, 2003, Eos acquired all of the outstanding stock of I.F.S. of New Jersey, Inc. (“IFS”). IFS sells product based fundraising packages and services to schools and non-profit organizations across the United States and the Caribbean. The consideration paid by Eos for the acquisition of IFS was determined through arms length negotiation by only the independent board members of Eos and the majority stockholders of IFS. The purchase price consisted of 15,998,001 shares of Eos common stock and 1,000 shares of Series E Junior Convertible Preferred Stock. Each share of Series E Junior Convertible Preferred Stock is convertible into 11,000 shares of Eos common stock upon the increase in authorization of Eos common stock sufficient for such a conversion. Eos intends to seek stockholder approval of such an increase at its 2003 Annual Meeting of Stockholders. The acquisition of IFS was accounted for as a purchase.

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Concurrent with the acquisition of IFS, Eos raised $7.5 million through a private equity offering of 15,000,000 shares of Eos common stock and issued 900,000 shares as a placement fee. Eos exchanged its short-term bridge notes payable totaling $6,500,000 and accrued interest payable of $896,000 for an aggregate of $4,000,000 in cash and 1,000 shares of redeemable Eos Series D Preferred Stock, which requires us to pay a 13% annual dividend upon redemption. Eos also exchanged the old warrants to purchase 2,600,000 shares of Eos common stock at an original exercise price of $2.95 per share granted to Eos’ short-term bridge lenders in December 2001 for new amended and restated five year immediately exercisable warrants to purchase an aggregate of 3,000,000 shares of Eos common stock at an exercise price of $0.25 per share. In connection with this exchange, the warrant holders’ put rights totaling $2,340,000 were eliminated. See the Notes to Consolidated Financial Statements included herein.

As a result of the acquisition and financing transactions that occurred on January 14, 2003, Eos on a stand alone basis improved its working capital by $13.1 million, resulting in total positive working capital of $1.7 million. Of the $3.5 million cash retained from the $7.5 million private equity offering after repayment of Eos’ short-term bridge notes, all must be used for general corporate purposes, of which $1.2 million must be spent on specific items as defined in the agreement with Eos’ former short-term bridge lenders. Improvements in the cash position and working capital of the Eos holding company on a standalone basis is significant because our operating subsidiaries’ lenders limit the amount of parent company expenditures that may be funded by Discovery Toys, Regal, and IFS. Consolidated working capital increased by approximately $17.3 million as of January 14, 2003, from $4.1 million to over $21 million.

Discovery Toys, Regal and IFS are highly seasonal operating subsidiaries and have revolving lines of credit established with lenders to provide seasonal financing for its operations. The Company recognizes approximately 40-50% of its annual sales revenues in the fourth calendar quarter. Under existing line of credit agreements and given borrowing base restrictions in effect on December 31, 2002, Discovery Toys had funds available for borrowing of $1.5 million, Regal had funds available for borrowing of $3.2 million, and Eos had no funds available for borrowing at December 31, 2002. Eos repaid its line of credit with proceeds from a $7.5 million private equity offering that was completed on January 14, 2003. These lines of credit require that subsidiaries maintain certain financial ratios to remain in compliance with bank covenants. Based on current first quarter 2003 estimated operating results, there can be no assurance that the operating subsidiaries will remain in compliance with the bank covenants or that the lenders will negotiate modified covenants to avoid default.

We expect Regal to be out of compliance with certain of these financial covenant ratios during periods of 2003. Management is currently negotiating with the Bank of Nova Scotia for modification of these covenants for Regal to remain in compliance with its loan agreements. There can be no assurance that the bank will agree to these modifications. There can be no assurance based on current estimated results of Discovery Toys operations that Discovery Toys will remain compliant with the financial covenant requirements in its bank credit agreements for 2003.

Due to possible non-compliance with bank covenants, there is uncertainty as to whether Eos can continue as a going concern. The report of the Company’s auditors on the financial statements of the Company as of December 31, 2002 and 2001 and for the years ended December 31, 2002 and 2001 contains a separate paragraph stating that the accompanying financial statements have been prepared assuming that the Company will continue as a “going concern.” As discussed in Note 2 to the financial statements, uncertainty exists as to whether the Company will be able to continue to comply with certain borrowing covenants during 2003. Should the Company be in default of the debt agreement because of covenant violations, the lender could call the lines of credit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

New Accounting Pronouncements

See Note 4 to the Consolidated Financial Statements for a discussion of new accounting pronouncements and their potential impact on our company.

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Risk factors that may affect results of operation and financial condition

An investment in our common stock involves risks and uncertainties. Investors evaluating us and our business should consider the factors described below and all other information contained in this Annual Report on Form 10-K before purchasing our common stock. Any of the following factors could materially harm our business, operating results and financial condition, as well as additional factors and uncertainties not currently known to us or that we currently consider immaterial. Investors could lose all or part of their investment as a result of these factors.

Possible defaults under bank loan agreements of Regal and Discovery Toys.

Based on current first quarter 2003 estimated operating results, we do not expect that our operating subsidiaries will remain in compliance with bank covenants related to their lines of credit throughout 2003. If the lenders do not waive these defaults or agree to modify the covenants, the lenders may refuse to make further advances and thus the operating companies may not be able to meet their working capital requirements during their seasonal operating cycles or the lenders may accelerate the maturity of the loan and demand repayment. Failure to negotiate satisfactory agreements with their lenders to meet the seasonal financing requirements of Discovery Toys and Regal, or if the loan maturities accelerate it, could result in the cessation of operations or an involuntary bankruptcy of one or more of the subsidiaries. As a result of the foregoing, our independent accountants’ report on our financial statements indicates that substantial doubt exists as to our ability to continue as a going concern.

We are highly leveraged and may not be able to meet our loan commitments and covenants.

We have to operate at certain performance levels to maintain our financing arrangements to provide adequate liquidity for our operations to continue. There are no guarantees that we will be able to operate at these performance levels. We also have restrictions that may limit our ability to cover our parent company overhead costs beyond its current working capital ability.

We may not be able to access capital markets.

We may not be able to access capital markets through the sale of our parent company common stock or preferred stock, long term debt, or a combination thereof. Even if such access is available, the prices at which such securities may be sold and the terms of the securities may be unacceptable to us.

We may not be successful in implementing our business strategy.

Our current strategy is to acquire and grow consumer product companies with an emphasis on direct selling. There can be no assurance that we will be successful in executing this strategy. These risks include our ability to identify and complete appropriate future acquisitions; successfully integrate completed acquisitions; manage the cost of pursuing and completing acquisitions; raise financing to meet the cash needs for the acquired companies; achieve profitability and revenue growth in the acquired companies; and attract, retain and motivate qualified management and other personnel.

Our businesses are negatively affected by lack of consumer confidence.

Lack of consumer confidence results in lower consumer purchasing and lower numbers of hostess parties where are independent sales representatives demonstrate and sell our products. Consumer confidence is unfavorably impacted by negative economic conditions, threat of terrorism, war and other factors.

We may not be able to continue to recruit and maintain our independent sales force.

We rely on growth and maintenance of independent sales forces to provide revenue generation. We cannot give assurances of the Company’s ability to maintain these sales forces at their existing levels or to grow these sales forces beyond their current levels.

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We may not be able to continue to identify, develop and provide acceptable products for our customer markets.

We must continue to provide consumer products that are desirable to purchase and introduce new products to support revenue generation. There are no assurances of acceptance of our products in the marketplace.

Many of our products are sourced from foreign markets.

We can provide no assurance that situations will not arise that could interrupt our ability to source our products.

We could face product liability claims.

Our products are designed for use by consumers including children. There can be no assurance that use of the products will not give rise to liability claims that could materially effect the ability of the Company to continue.

Our success depends on our key personnel.

Our success is substantially dependent on the ability and experience of our senior management and other key personnel, particularly Peter Lund, our Chairman, and James M. Cascino, our Chief Executive Officer. If one or more members of our management team become unable or unwilling to continue in their present positions, our business could be materially harmed.

We may not be able to compete successfully against current and future competitors.

Eos’ success will depend upon our ability to identify and attract high quality acquisition candidates. Many of our competitors have longer operating histories, more extensive industry experience, greater brand recognition and significantly greater financial, marketing and other resources than we have. If we are unable to successfully compete, our business, operating results and financial condition would be materially harmed.

We may not be able to protect our intellectual property rights.

We regard our tradenames, trade secrets and similar intellectual property as important to our success. We have applied for the registration of some of our tradenames and service marks in the United States and in selected foreign jurisdictions. We have also entered into licensing agreements. However, our efforts to establish and protect our intellectual property rights may be inadequate to prevent misappropriation or infringement of our intellectual property rights. If we are unable to safeguard our intellectual property rights, it could materially harm our business, operating results and financial condition.

We are subject to government regulation and legal liabilities that may be costly and may interfere with our ability to conduct business.

Laws and regulations directly applicable to the status of independent sales representative could change the economics of our business model. These laws and regulations could expose us to compliance costs and substantial liability, which could materially harm our business, operating results and financial condition.

You may experience dilution of your shares.

We plan to continue to explore, and may complete, acquisitions using primarily our equity as consideration. If we are successful in completing acquisitions in this manner, it will require the issuance of additional shares of common and preferred stock which could result in substantial dilution of your holdings. We may also issue our parent company common and preferred stock to raise funds required to operate our business. Such action could result in the issuance of shares which would substantially dilute your share holdings.

Our stock price may fluctuate, which may make it difficult to resell your shares at attractive prices.

The market price of our common stock may be highly volatile. Factors that could cause volatility in our stock price include fluctuations in our quarterly operating results; deviations in our results of operations from estimates; changes in the market valuations of other direct marketing companies and stock market price and volume fluctuations generally; economic conditions specific to direct marketing and consumer product markets; announcements by us or our competitors relating to new products, significant acquisitions, strategic relationships, joint ventures or capital commitments; regulatory developments; and additions or departures of our key personnel.

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Sales of shares eligible for future sale could impair our stock price.

In June 2001, we issued 2,000,000 shares of our common stock in a private placement which were restricted securities as defined by Rule 144 under the Securities Act of 1933. On July 18, 2001, in two separate transactions, we issued an aggregate of 36,172,143 shares of our common stock which were restricted securities as defined by Rule 144 under the Securities Act of 1933. As a result of such transactions, if the Company is in compliance with the reporting requirements of Rule 144, subject to certain volume limitations with respect to sales by affiliates, 38,172,143 shares of our common stock may be sold pursuant to Rule 144 after July 18, 2002. The market price of our common stock could drop due to the sale of a large number of shares of our common stock, including shares sold under Rule 144, or the perception that these sales could occur. These factors could also make it more difficult to raise funds through future offerings of common stock.

In January 2003, Eos issued to former stockholders of I.F.S. of New Jersey, Inc., as consideration for our acquisition of IFS, an aggregate of 15,988,001 shares of Eos common stock and 1,000 shares of Series E Junior Convertible Preferred Stock. Each share of Series E Junior Convertible Preferred stock is convertible into 11,000 shares of common stock subject to stockholder approval of an increase in authorized shares.

In January 2003, we issued 15,000,000 shares of Eos common stock in a private equity offering. We also issued 900,000 shares of Eos common stock to Allen & Company LLC as a placement fee. These shares are restricted securities as defined by Rule 144 under the Securities Act of 1933.

In connection with our issuance of shares in our $7.5 million private equity offering and acquisition of IFS, we agreed to register for resale by July 14, 2003 the 900,000 shares of Eos common stock issued to Allen & Company LLC, the 15,998,001 shares of common stock issued to the former stockholders of IFS and either the 11,000,000 shares of Eos Common stock issuable upon the conversion of Eos’ Series E Junior Convertible Preferred Stock or the 1,000 shares of Series E Junior Convertible Preferred Stock, if such shares cannot be converted by such time, and the 15,000,000 shares issued in the private equity offering. In addition, we will have to register 3,000,000 common shares to be issued in connection with the warrants granted to our former short-term bridge lenders.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign currency exchange risk

We use the U.S. dollar as our functional currency, except for our Canadian subsidiary, Regal, which uses the Canadian dollar as its functional currency. Foreign currency assets and liabilities, including U.S. dollar denominated assets and liabilities held by Regal, are remeasured into the Canadian dollar functional currency using end-of-period exchange rates for monetary assets and liabilities and historical exchange rates for non-monetary assets and liabilities. Foreign currency revenues and expenses are remeasured using average exchange rates in effect during each period. Gains and losses arising from the remeasurement of monetary assets and liabilities are reflected in the Company’s statements of operations in the period they occur. For consolidation purposes, Regal’s financial statements are translated to the U.S. dollar reporting currency using period-end rates of exchange for assets and liabilities and using monthly rates for revenues and expenses. Gains and losses arising from the translation of assets and liabilities are deferred and included in the cumulative translation adjustment component of other comprehensive income (loss) in stockholders’ equity.

Foreign currency exchange risk primarily arises from U.S. dollar denominated purchases of inventory from U.S. and foreign suppliers by Regal, our Canadian subsidiary. Currently, approximately 70% of Regal’s inventory purchases are denominated in U.S. dollars. At December 31, 2002, current liabilities of $431,000 related to inventory purchases were denominated in U.S. Dollars.

Since Regal’s functional currency is the Canadian dollar, changes in the rate of exchange between the Canadian dollar and the U.S. dollar can affect Regal’s reported results in the following ways:

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To mitigate these risks, Regal began to use forward currency exchange contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations on its non-Canadian balance sheet exposures during the year ended December 31, 2002. The Company accounts for derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires a company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a fair value hedge, changes in the fair value of the hedged assets, liabilities or firm commitments are recognized through earnings. If the derivative is a cash flow hedge, the effective portion of changes in the fair value of the derivative are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. The Company has not designated any of its forward currency exchange contracts as hedges.

At December 31, 2002, Regal had no outstanding forward currency exchange contracts outstanding and therefore no notional value on contracts to buy U.S. dollars. These contracts, thus have no fair value as of December 31, 2002. For the twelve months ended December 31, 2002, the Company realized no net effect to other income from changes in the fair value of its forward currency exchange contracts. As we build up our inventory for fourth quarter sales through purchases made in the first three quarters of the year, Regal will implement forward currency exchange contracts in 2003 when seasonal inventory demands dictate the prudent use of such contracts.

A hypothetical 10% decrease in the value of the Canadian dollar at December 31, 2002 would have had an adverse impact of $43,000 on our reported results of operations related to the remeasurement of payables denominated in U.S. dollars, net of estimated mitigating effects of forward currency exchange contracts outstanding. This same hypothetical decrease in the value of the Canadian dollar at December 31, 2002 would not have had a significant negative effect on our reported gross margin since the majority of our sales in the year ended December 31, 2002 were of inventory purchased in earlier periods.

Our forward currency exchange contracts involve counterparty risk. The counterparty to these contracts is the Bank of Nova Scotia, with regard to which we believe that there is no significant default risk involved.

Interest rate exchange risk

Our long-term debt has a fair value, based on current interest rates, of approximately $17,389,000 at December 31, 2002. Fair value will vary as interest rates change. The following table presents the aggregate maturities and historical cost amounts of the debt outstanding and related weighted-average-interest, stated rates by maturity dates at December 31, 2002:

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Contractual obligations

The Company has contractual obligations to make future payments under its short-term bridge notes, long-term notes payable, and non-cancelable lease agreements. The following table sets forth these contractual obligations (in thousands):

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by Item 8 are included in this report beginning on Page F-1.

None.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of Stockholders.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of Stockholders.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of Stockholders.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of Stockholders.

ITEM 14.    CONTROLS AND PROCEDURES

Disclosure controls and procedures

The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC and to process, summarize and disclose this information within the periods specified in the rules of the SEC. The Company’s Chief Executive and Chief Financial Officers are responsible for establishing and maintaining these procedures, and as required by the rules of the SEC, evaluate their effectiveness. Based on their evaluation of the Company’s disclosure controls and procedures which took place as of a date within 90 days of the filing date of this report, the Chief Executive and Chief Financial Officers believe that these procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

Internal controls

The Company maintains a system of internal controls designed to provide reasonable assurance that: transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary (1) to permit preparation of financial statements in conformity with generally accepted accounting principles, and (2) to maintain accountability for assets; access to assets is permitted only in accordance with management’s general or specific authorization; and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Since the date of the most recent evaluation of the Company’s internal controls by the Chief Executive and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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