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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended December 31, 2003

or

For the transition period from                      to                     

Commission File No. 0-15586

EOS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

199 Elm Street, New Canaan, Connecticut 06840

(Address of Principal Executive Office, including Zip Code)

(203) 652-2525

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

As of February 10, 2004, 109,095,099 shares of the registrant’s common stock were outstanding.

EOS INTERNATIONAL, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

EOS INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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EOS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS (unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2

EOS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3

EOS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4

EOS INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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EOS INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying consolidated financial statements of Eos International, Inc., a Delaware corporation, which include the accounts of Discovery Toys, Inc., a California corporation, for all periods, Regal Greetings & Gifts Corporation, an Ontario, Canada Canadian corporation, for all periods, and I.F.S. of New Jersey, Inc., a New Jersey corporation, for the period from the date of acquisition, January 14, 2003 through December 31, 2003, have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America.

All references to “we,” “us,” and “our” refer to Eos International, Inc., and its current subsidiaries unless otherwise specified. All references to “Eos” refer to Eos International, Inc. All references to “Discovery Toys” refer to Discovery Toys, Inc. All references to “Regal” refer to Regal Greetings & Gifts Corporation. All references to “IFS” refer to I.F.S. of New Jersey, Inc.

In our opinion, our unaudited consolidated financial statements reflect all the adjustments considered necessary for a fair presentation of our financial position. Operating results for the three months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004. These statements should be read in conjunction with the audited financial statements and notes thereto for the nine months ended September 30, 2003 (transition period) included in our Form 10-K filed with the SEC on December 11, 2003. Information with respect to the interim periods ended December 31, 2003 and December 31, 2002 is unaudited.

On January 14, 2003, Eos acquired all of the outstanding capital stock of IFS. The IFS business consists of all the tangible assets of an ongoing business, including cash, accounts receivable, property and equipment, inventory, prepaid expenses, franchisee relationships and goodwill. The acquisition was accounted for as a purchase. The financial results of IFS are included in our consolidated financial statements for the periods following January 14, 2003.

In March 2003, we changed from a calendar year for financial reporting purposes to the 12-month period commencing on October 1 and ending on September 30. We filed a transition report on Form 10-K with the SEC on December 11, 2003 for the period beginning January 1, 2003 and ending on September 30, 2003.

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We account for employee stock options using the intrinsic value method. We have no current plans to change our accounting. If the fair value method of accounting had been applied, our results would have been:

NOTE 2. LIQUIDITY

Due to lack of working capital at Eos and possible non-compliance with bank covenants, there is uncertainty as to whether Eos can continue as a going concern. The report of our auditors on our consolidated financial statements as of September 30, 2003 contains a separate paragraph stating that substantial doubt exists about our ability to continue as a “going concern.” Uncertainty existed as to whether Eos would have sufficient working capital, whether Discovery Toys would be successful in receiving a waiver on default of its bank covenants at September 30, 2003 and renegotiating covenants for the remainder of 2003 and 2004, and whether our other operating subsidiaries will be able to continue to comply with certain borrowing covenants during the fiscal year ending September 30, 2004. On December 17, 2003, Discovery Toys received the waiver, and renegotiated its covenants for the fiscal year ending September 30, 2004. Should we be unable to secure additional financing for Eos or be in default of our debt agreements because of covenant violations, a lender could call its line of credit. These conditions raise substantial doubt about our ability to continue as a “going concern.”

At December 31, 2003, Eos, on a stand alone basis, had negative working capital of $524,000, including $262,000 of restricted cash and approximately $74,000 of unrestricted cash, offset by accounts payable of $345,000 and other accrued liabilities of $738,000, consisting of related party balances of $367,000 for management fees, and estimated costs of $155,000 for the offer and sale of its common stock incurred in the quarter ended December 31, 2003. We are registering an aggregate of 85,381,594 shares of our common stock offered for resale by the selling shareholders named in the prospectus which is part of the Form S-1 filed with the SEC on January 15, 2004. Except for cash received from the sale of our securities, Eos has no separate source of cash other than payments received from our operating subsidiaries, and our operating subsidiaries’ lenders limit the amount of parent company expenditures that may be funded by Discovery Toys, Regal, and IFS. Eos does not have any line of credit. On December 17, 2003, Discovery Toys entered into an amendment to its line of credit agreement with PNC Bank, National Association (“PNC Bank”) which prohibits Discovery Toys from making any payments to Eos for corporate overhead expenses during calendar year 2004. On December 18, 2003, IFS entered into an amendment to its line of credit agreement with PNC Bank to allow IFS to fund $500,000 of Eos’ overhead expenses. The amendment also authorizes IFS to pay (i) management or other fees to Eos or any affiliate, provided that the fees do not exceed an aggregate of $300,000 (exclusive of the $500,000 overhead payment to Eos) in any consecutive 12 month period and that no Default (as defined) or Event of Default

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(as defined) occurs or has occurred and (ii) the management or other fees to Eos on or prior to January 31, 2004, so long as no Default or Event of Default occurs or has occurred, and is continuing or would occur as a result of such payment. IFS paid cost-sharing fees of $500,000 to Eos on January 16, 2004. We believe that Eos has sufficient cash to fund its operations through March 31, 2004. We proposed to McGuggan LLC and I.F.S. Management LLC, related parties that provide consulting services to Eos, Discovery Toys, and IFS, that we defer payment on amounts owed to them under consulting agreements and utilize the funds for Eos corporate expenses. If our negotiation is successful, we expect that IFS will transfer approximately $250,000 to Eos in April 2004 and that Eos will have sufficient funds to fund its operations through May 2004. Eos will need to identify additional sources of cash to fund operations beyond May 2004.

Discovery Toys, Regal, and IFS are highly seasonal operating subsidiaries and have revolving lines of credit established with lenders to provide seasonal financing for their operations. Historically, Discovery Toys and Regal have recognized approximately 40-50% of their annual sales revenues in the fourth calendar quarter and IFS has recognized up to 60% of its annual sales revenue in the fourth calendar quarter. Borrowings on our operating subsidiaries’ lines of credit decreased from $15.0 million at September 30, 2003 to $4.2 million at December 31, 2003. These lines of credit require that each of Discovery Toys, Regal, and IFS maintain certain financial ratios and performance measures to remain in compliance with their borrowing covenants. There can be no assurance that these operating subsidiaries will remain in compliance with their borrowing covenants or that their lenders will negotiate modified covenants to avoid default. In the future, should we be in default, our lenders could call the loans due and payable.

We expect Regal to be out of compliance with certain of these financial covenant ratios from time to time during fiscal 2004. We are currently negotiating with the Bank of Nova Scotia for modification of these covenants for Regal to remain in compliance with its loan agreements. We can provide no assurances that the bank will agree to these modifications.

We continue to explore how to restructure our lines of credit, long-term debt and Series D Preferred Stock. Our objectives are to eliminate restrictions that limit payments of cash for corporate overhead expenses from our operating subsidiaries to Eos, to provide additional working capital to Eos, to reduce our total short-term borrowing requirements by allowing intercompany cash transfers, to extend the maturities of our long-term debt and to replace our Series D Preferred Stock. We cannot give any assurances that we will accomplish any of these restructuring plans.

We are reviewing our management consulting agreements with related parties and other vendors for possible future cost savings opportunities. We cannot assure that we will be successful in renegotiating these arrangements.

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NOTE 3. BALANCE SHEET COMPONENTS:

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NOTE 4. BORROWING ARRANGEMENTS

Under existing line of credit agreements and given borrowing base restrictions in effect on December 31, 2003, we had borrowed funds of $4.2 million and had additional funds available to borrow of $13.9 million, as follows: Discovery Toys had no borrowed funds and $1.5 million of funds available for borrowing. Regal had no borrowed funds and had $4.7 million available for borrowing. IFS had borrowed funds of $4.2 million and had $7.7 million available for borrowing. Eos had no borrowings and no funds available for borrowing. Due to the seasonal nature of our business, we expect IFS’ borrowings under its line of credit to decrease during the three months ending March 31, 2004 and we expect that Discovery Toys will start to use its line of credit. These lines of credit require that each of Discovery Toys, Regal, and IFS maintain certain

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financial ratios and performance measures to remain in compliance with their borrowing covenants. There can be no assurance that these operating subsidiaries will remain in compliance with their borrowing covenants or that their lenders will negotiate modified covenants to avoid default. In the future, should we be in default, our lenders could demand repayment of the loans and take other actions such as foreclosure on the assets of the borrower which secure the loan.

Discovery Toys was out of compliance with its “seasonal overadvance amounts” and borrowing covenants as of September 30, 2003. On October 1, 2003, Discovery Toys entered into an amendment with PNC Bank to extend the ending “seasonal overadvance period” date from September 30, 2003 to October 31, 2003 and to allow a “seasonal overadvance amount” for October 1 to October 31 of $250,000. As of October 31, 2003, there were no seasonal overadvances outstanding.

On December 3, 2003, Discovery Toys received an acknowledgement of default from PNC Bank confirming the occurrence of an Event of Default (as defined in the loan agreement) under Discovery Toys’ loan agreement with PNC Bank due to a failure by Discovery Toys to maintain the required Tangible Net Worth (as defined in the loan agreement) as of September 30, 2003. While PNC Bank informed us that it did not intend to take any immediate action with respect to the Event of Default, upon an Event of Default, PNC Bank could have, at its discretion, terminated the loan and declared the loan immediately due and payable. On December 18, 2003, PNC Bank waived the Event of Default which had occurred as a result of the failure by Discovery Toys to maintain the required Tangible Net Worth, provided that actual Tangible Net Worth for the quarter ended September 30, 2003 was not less than ($156,000). Tangible Net Worth was not less than $(156,000) at September 30, 2003. Discovery Toys and PNC Bank also agreed to terms to establish a “Seasonal Overadvance Period” from April 1, 2004 through October 31, 2004. In connection with the waiver and revised terms, Discovery Toys agreed to pay a $50,000 fee to PNC Bank which will be amortized to expense over the remaining life of the line of credit.

On December 17, 2003, IFS entered into an amendment of its loan agreement with PNC Bank to extend the term of the line of credit and note payable from December 31, 2003 to December 31, 2004. In connection with this amendment, IFS agreed to pay a $25,000 fee to PNC Bank which was expensed.

We expect that Regal will not be able to remain in compliance with certain financial covenant ratios required by its loan agreement with the Bank of Nova Scotia from time to time during fiscal year 2004. We are currently negotiating with the Bank of Nova Scotia for modification of these covenants to enable Regal to remain in compliance with its loan agreements. We can give no assurances that the bank will agree to such modifications.

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Our operating subsidiaries’ lenders limit the amount of parent company expenditures that may be funded by Discovery Toys, Regal, and IFS. On December 17, 2003, Discovery Toys entered into an amendment of its loan agreement with PNC Bank which prohibited Discovery Toys from making any payments during calendar year 2004 to Eos to cover Eos’ overhead expenses. On December 18, 2003, IFS entered into an amendment of its loan agreement with PNC Bank which also authorized IFS to make a payment of $500,000 to Eos to cover Eos’ overhead expenses. IFS paid cost sharing fees of $500,000 to Eos on January 16, 2004. PNC also authorized IFS to pay (i) management or other fees to Eos or any affiliate, provided that the fees do not exceed an aggregate of $300,000 (exclusive of the $500,000 overhead payment to Eos) in any consecutive 12 month period and that no Default or Event of Default occurs or has occurred and (ii) the management or other fees to Eos on or prior to January 31, 2004 so long as no Default or Event of Default has occurred and is continuing or would occur as a result of such payment.

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NOTE 5. ACQUISITION

I.F.S. of New Jersey, Inc.

On January 14, 2003, Eos acquired IFS, a privately held consumer products fund-raising company. Under the terms of the merger agreement with IFS, Eos issued 15,988,001 unregistered shares of its common stock and 1,000 unregistered shares of Series E Junior Convertible Preferred Stock in exchange for all of the outstanding shares of IFS common stock. Effective May 21, 2003, the 1,000 unregistered shares of Series E Junior Convertible Preferred Stock were converted into 11,000,000 unregistered shares of Eos common stock.

By virtue of the transaction, IFS became a wholly-owned subsidiary of Eos. Eos common stock was valued at $0.55 per share based on the fair value of Eos common stock as of December 12, 2002, the date on which the merger agreement was executed, the terms of the transaction were agreed upon, and the transaction was announced. The estimated fair value was based on the average closing price of Eos common stock during the period from December 6, 2002 through December 12, 2002. Series E Junior Convertible Preferred Stock was valued at $6,050 per share.

The following summarized unaudited pro forma combined results of operations of Eos, Discovery Toys, Regal and IFS for the three months ended December 31, 2002 is presented as if the acquisition of IFS had occurred on the first day of the period presented and includes adjustments (increase in amortization of intangible assets) directly attributable to the acquisition and expected to have a continuing impact on the combined company. The unaudited pro forma combined results of operations of Eos, Discovery Toys, Regal and IFS for the three months ended December 31, 2002 include adjustments resulting from the following transactions, as if these transactions had occurred on the first day of the period presented and includes adjustments (interest expense and preferred dividends) directly attributable to these transactions. Each of the acquisition of IFS by Eos, Eos’ private equity offering, and the short-term bridge note re-financing transaction was contingent upon the occurrence of each of the other two transactions: (i) Eos’ $7.5 million private equity offering of 15,000,000 shares of Eos common stock at $0.50 per share, less cash issuance costs of $375,000, and issuance of 900,000 shares of common stock as a placement fee, and (ii) the repayment of Eos’ short-term bridge notes, including $930,000 of interest payable, with $4.0 million in cash and the issuance of 1,000 shares of redeemable Series D Preferred Stock

The unaudited pro forma results are provided for comparative purposes only and are not necessarily indicative of what actual results would have been had the IFS, private equity offering and short-term bridge note financing transactions been consummated on such dates, nor do they give effect to the synergies, cost savings and other changes expected to result from the acquisitions. Accordingly, the pro forma financial results do not purport to be indicative of results of operations as of the date hereof or for any period ended on the date hereof or for any other future date or period.

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Unaudited Pro Forma Information:

NOTE 6. GOODWILL, OTHER INDEFINITE-LIVED INTANGIBLE ASSETS, AND OTHER INTANGIBLE ASSETS

Goodwill was recorded as part of the purchase price allocation in conjunction with the acquisitions of Regal on December 14, 2001 and IFS on January 14, 2003. We assess goodwill and indefinite-lived assets for impairment annually unless events occur that require more frequent reviews. We assessed goodwill and indefinite-lived assets for impairment at December 31, 2003 and there was no impairment.

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Changes in the net carrying account of tradename and goodwill for the three months ended December 31, 2003 are as follows:

Other intangible assets includes the acquired customer list purchased in connection with the acquisition of Regal and the acquired franchisee relationships in connection with the acquisition of IFS, and are amortized over an estimated useful life of five years. As of December 31, 2003 and September 30, 2003, other intangible assets, net, consisted of the following:

Amortization expense related to other intangible assets was $256,000 and $321,000 for the three months ended December 31, 2003 and 2002, respectively.

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NOTE 7. EQUITY TRANSACTIONS

In connection with Mr. Ferreira’s employment agreement dated with Eos as of September 24, 2003, Jose Ferreira, Jr. became the Chief Executive Officer and President of Eos and we granted 10 million restricted shares of our common stock to Mr. Ferreira, two million shares of which vested upon grant and the remaining eight million shares of which are to vest in equal portions on each of the first and second anniversaries of the date of grant, respectively, provided that Mr. Ferreira is Chief Executive Officer of Eos on such dates. The fair value of the 10 million shares awarded was $10.0 million based on the closing market price of our common stock, which was $1.00 on September 26, 2003, the business day prior to the date of grant. We recorded $2.0 million of stock-based compensation expense and $8.0 million of deferred compensation expense in connection with this restricted stock grant during the three months ended September 30, 2003. We recorded $1.0 million of stock-based compensation expense during the three months ended December 31, 2003. For so long as shares of the restricted stock grant are unvested or deferred, Mr. Ferreira is not permitted to vote or dispose of the shares. Our Compensation Committee will vote all 10 million shares of the grant. The 10 million shares are held in a rabbi trust and are considered treasury stock.

OPTIONS

There were options to purchase 12,732,753 shares of Eos common stock outstanding at December 31, 2003, and there were options to purchase 11,370,747 shares of common stock available for grant at December 31, 2003.

WARRANTS

There were warrants to purchase 3,400,000 shares of Eos common stock outstanding at December 31, 2003.

NOTE 8. RELATED PARTY TRANSACTIONS

On January 14, 2003, we acquired I.F.S. of New Jersey, Inc., a privately held consumer products fund-raising company. This acquisition was made to continue our strategy of expanding our direct selling operations.

Prior to our acquisition of IFS, we and IFS shared, and we and IFS continue to share, certain common officers, directors and stockholders. James M. Cascino, who currently serves as our Corporate Executive Vice President and is a director of Eos, and who formerly served as President and Chief Executive Officer of Eos, also serves as a director and president and chief executive officer of IFS. Jack B. Hood, Chief Financial Officer and Treasurer of Eos, also serves as a director and chief financial officer of IFS. Anthony R. Calandra, Julius Koppelman, and William S. Walsh each served on both the Eos and IFS Board of Directors prior to and on the date of the acquisition of IFS by Eos. James J. Liati, Secretary of Eos, and Frank M. Adubato, each of whom is a significant stockholder of Eos, and Mr. Calandra are each principals and/or officers of, and beneficially own 75% of, McGuggan, L.L.C. Messrs. Calandra and Adubato were, prior to and at the date of acquisition of IFS by Eos, directors of IFS. Mr.Walsh is the managing director of McGuggan, L.L.C.

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In connection with the acquisition of IFS, in exchange for their shares of IFS, Mr. Cascino received 1,779,859 shares of Eos common stock and Mr. Hood received 1,352,099 shares of Eos common stock. In connection with the acquisition of IFS, in exchange for their shares of IFS, McGuggan, L.L.C., Mr. Walsh and Mr. Koppelman received 11,567,057, 6,746,999 and 1,926,493 shares of Eos common stock, respectively, including shares of common stock obtained upon the conversion of shares of Eos Series E Junior Convertible Preferred Stock. Messrs. Cascino, Hood, and Walsh, together with members of McGuggan, L.L.C., a New Jersey limited liability company, collectively owned or controlled approximately:

The consideration that we paid to acquire IFS was determined through arms’-length negotiation by only the independent board members of Eos and the majority stockholders of IFS.

We have management consulting services agreements with a board member and two separate companies, each of which owns equity securities of Eos and, prior to our acquisition of IFS, owned equity securities of IFS:

1. Discovery Toys pays annual management fees of $192,000 to IFS. Discovery Toys and IFS have certain common management, certain common directors and certain common stockholders. Discovery Toys had unpaid fees under this agreement of $288,000 and $240,000 at December 31, 2003 and September 30, 2003, respectively. Pursuant to the terms of this agreement, Discovery Toys incurred management fees of $48,000 in each of the three months ended December 31, 2003 and 2002. These intercompany management fees were eliminated in consolidation after January 14, 2003.

2. Discovery Toys also receives management services from William S. Walsh, a member of our Board of Directors, who is also a stockholder of our company, and McGuggan LLC, a stockholder of our company. Certain members of McGuggan LLC are directors and significant stockholders of our company. Discovery Toys pays annual fees equal to the greater of $75,000 or a percentage of revenues, as defined in the agreement, to William S. Walsh, and annual fees equal to the greater of $225,000 or a percentage of revenues, as defined in the agreement, to McGuggan LLC for these services. This agreement expires December 31, 2012 and may be extended or terminated at any time by mutual consent of the parties. Discovery Toys had unpaid fees under this agreement of $300,000 and $225,000 at December 31, 2003 and September 30, 2003, respectively. Pursuant to the terms of these agreements, Discovery Toys incurred management fee expenses of $75,000 in each of the three month periods ended December 31, 2003 and 2002.

3. We entered into an agreement with McGuggan, LLC for management consulting services for Regal in December 2001. The agreement assigns responsibility for performance of the services to William S. Walsh and Anthony R. Calandra. Messrs. Walsh and Calandra are directors and stockholders

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of our company. The agreement called for payment of $500,000 CDN annually for such services (approximately $350,000 U.S.). Our Board of Directors approved payment of $500,000 CDN in annual management fees to Mr. Walsh and Mr. Calandra for services rendered in 2002 and approval for payment of these fees for 2003 is pending. Pursuant to the terms of these agreements, Regal incurred management fee expenses of $97,000 in the three months ended December 31, 2003 and $80,000 in the three months ended December 31, 2002 which Regal paid to Eos. Eos had unpaid fees to McGuggan under this agreement of $367,000 and $270,000 at December 31, 2003 and September 30, 2003, respectively.

4. Effective October 16, 1997, IFS entered into an agreement to receive management consulting services from an affiliated entity, IFSM. IFSM is beneficially owned 33.33% by William S. Walsh, a director of our company, 9.52% by Julius Koppelman, a director of our company, and 57.15% by McGuggan, LLC, a stockholder of our company in which Mr. Calandra owns a 25% interest. Mr. Calandra, a director of our company, is a member of McGuggan LLC and Mr. Liati, Secretary of our company, is also a member of McGuggan, LLC. Pursuant to the terms of this agreement, we are required to pay IFSM fees equal to 0.6% of gross revenues for each fiscal year. The agreement expires December 31, 2010 and may be extended or terminated at any time by mutual consent of the parties. Management fees pursuant to this agreement amounted to $170,000 for the three months ended December 31, 2003 and are recorded as general and administrative expense. IFS had unpaid fees under this agreement of $177,000 and $7,000 at December 31, 2003 and September 30, 2003, respectively.

NOTE 9. SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. In reporting to management, the entities’ operating results are categorized into three segments. Discovery Toys markets and sells educational toys. Regal markets and sells consumer gift products. IFS sells product-based fundraising programs to schools. Overhead costs associated with Eos are characterized as “Corporate.” Financial information for our business segments for the three months ended December 31, 2003 and 2002 is as follows (in thousands):

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NOTE 10. EARNINGS PER SHARE (EPS) AND WEIGHTED SHARES OUTSTANDING

Basic EPS is calculated by dividing net earnings for the period by the weighted average common shares outstanding for that period. Basic EPS includes 2,000,000 shares of vested restricted stock held in a rabbi trust at December 31, 2003. Diluted EPS takes into account the effect of dilutive instruments, such as stock options and warrants and unvested restricted shares of common stock, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares. There were 8,000,000 unvested restricted shares held in a rabbi trust at December 31, 2003.

The following is a summary of the number of shares used in calculating basic and diluted EPS:

For the three months ended December 31, 2003 and 2002, the following were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive: options to purchase 725,000 and 4,521,000 shares of Eos common stock and warrants to purchase 400,000 and 3,200,000 shares of Eos common stock, respectively.

NOTE 11. WARRANTY RETURNS

We have warranty obligations in connection with the sales of Discovery Toys products. Discovery Toys offers a limited warranty on its products. Discovery Toys estimates its warranty returns at the point of sale for a given product based on historical rates. The change in Discovery Toys’ accrued warranty obligations for the three months ended December 31, 2003 and 2002 was as follows:

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NOTE 12. FOREIGN CURRENCY EXCHANGE CONTRACTS

Pursuant to a credit agreement with the Bank of Nova Scotia, Regal entered into forward currency exchange contracts to buy U.S. dollars during the three months ended December 31, 2003. As of December 31, 2003, Regal had no forward exchange contracts outstanding to buy U.S. dollars. Regal uses forward currency exchange contracts to minimize the adverse earnings impact from the effect of exchange rate fluctuations on its purchases of U.S. dollar denominated inventory and the resulting U.S. dollar accounts payable balances. However, the Company does not qualify for hedge accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 133. Accordingly, gains and losses on hedge contracts are recorded as other income (expense) based on the fair value of the contracts. During the three months ended December 31, 2003 and 2002, Regal realized no gains or losses from changes in the fair value of its forward currency contracts.

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Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “can be,” “expects,” “may affect,” “may depend,” “believe,” “estimate,” “project,” “intend,” “anticipate,” “will,” 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 we caution you that any forward-looking information provided by us or on our behalf is not a guarantee of future performance. Our actual results could differ materially from those anticipated by such forward-looking statements due to a number of factors, some of which are beyond our 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, including currency fluctuations (iii) our ability to attract and maintain relationships with our independent and hired sales forces, (iv)the uncertain effects of potential intellectual property and other claims, (v) the impact of a failure by us to successfully implement and execute our acquisition strategies, and (vi) the impact of a failure by us to raise additional sources of financing or capital to satisfy our operating expenses and working capital needs. You should also read carefully the risk factors described in this Quarterly Report on Form 10-Q and the risk factors described in our Annual Report on Form 10-K for the nine months ended September 30, 2003 (transition period) filed with the SEC on December 11, 2003, under Item 1- Business, and under Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as those discussed in our other public filings with the SEC thereafter. All such forward-looking statements are current only as of the date on which such statements were made. We assume no obligation for updating such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Overview

The following discussion and analysis refers to Eos International, Inc., a Delaware corporation, and its operating subsidiaries on a consolidated basis, including Discovery Toys, Inc., a California corporation, Regal Greetings & Gifts Corporation, a Canadian corporation, and I.F.S. of New Jersey, Inc., a New Jersey corporation. All references to “we,” “us,” and “our” refer to Eos International, Inc. and its subsidiaries unless otherwise specified. All references to “Eos” refer to Eos International, Inc. All references to “Discovery Toys” refer to Discovery Toys, Inc. All references to “Regal” refer to Regal Greetings & Gifts Corporation. All references to “IFS” refer to I.F.S. of New Jersey, Inc.

Eos is a publicly held holding company owning capital stock of product marketing companies focused on direct selling of consumer goods. Eos owns 100% of the outstanding capital stock of Discovery Toys and an 85% ownership interest in Regal. On January 14, 2003, Eos acquired all of the outstanding capital stock of IFS.

Effective January 1, 2003, we changed our fiscal year end for financial reporting from a calendar year end to the 12 month period commencing October 1 and ending September 30.

The accompanying consolidated financial statements include the accounts of (i) Eos for all periods, (ii) Discovery Toys for all periods, (iii) Regal for all periods, and (iv) IFS from the date of acquisition, January 14, 2003 through December 31, 2003, as applicable.

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Discovery Toys is a multi-level marketer of approximately 200 educational products, including toys, games, books, and software. Discovery Toys sells its products to its network of approximately 25,000 independent sales representatives who in turn sell the merchandise to friends, family, neighbors, and co-workers. 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 to its network of over 400,000 independent sales representatives who in turn sell the merchandise to friends, family, co-workers, and neighbors. Regal distributes merchandise to its independent sales representatives from its 42 representative service centers located throughout Canada as well as from its main warehouse in Mississauga, Ontario. Regal also sells merchandise via its website.

IFS sells product-based fundraising programs and services to schools throughout the United States and the Caribbean. School fundraising sponsors provide interested students with IFS products which they sell to their friends, families and neighbors. IFS sells its products to its school fundraising sponsors at 30% to 50% off the aggregate retail price of the products sold by students.

Recent Developments

On January 5, 2004, Eos and IFS entered into a Cost Sharing Agreement pursuant to which certain of general corporate overhead expenses of not less than $500,000 for the fiscal year ending September 30, 2004 are to be allocated to, and paid by, IFS. IFS will also bear the costs of any portions of direct expenses such as insurance, accounting and audit services, and legal services that Eos incurs directly on behalf of IFS. On January 16, 2004, IFS paid Eos $500,000 under this agreement.

On January 15, 2004, we filed a registration statement on Form S-1 with the SEC which has not yet been declared effective by the SEC. This registration statement was filed for the purpose of registering for resale 85,381,594 shares of Eos common stock held by selling stockholders named in the prospectus that is part of the registration statement. If the registration statement is declared effective by the SEC and by the states in which the shares are proposed to be sold under the registration statement, when shares are resold pursuant to the registration statement, we will not receive any of the proceeds from such resale. The selling stockholders will receive all of the proceeds from any sale of their shares of Eos common stock, less any brokerage commission or other expenses incurred by them.

Effective January 16, 2004, Peter Lund, Chairman of the Board of Eos, agreed to waive his right to receive his salary until otherwise agreed upon by Eos and Mr. Lund. Mr. Lund’s salary had been $3,000 per month since July 1, 2002.

Update to Critical Accounting Policies

See Critical Accounting Policies in our 2003 Transition Report on Form 10-K filed with the SEC on December 11, 2003, for a full discussion of our Critical Accounting Policies.

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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:

Segment Results

We operate three strategic business units that provide differing products using different direct sales forces: Discovery Toys, Regal, and IFS. Discovery Toys, Regal, and IFS 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 Eos are characterized as “Corporate.” Corporate includes legal and accounting expenses, staff salaries, directors and officers’ insurance, and board of director expenses for all periods presented and includes salary, cash bonus, and stock compensation expense for our Chief Executive Officer and President for the three months ended December 31, 2003. For the three months ended December 31, 2002, corporate expenses do not include salary, cash bonus, and stock compensation expense for our former Chief Executive Officer and President who was an employee of IFS. IFS was to be reimbursed in part for the services of IFS executives, including our former Chief Executive Officer and President, for performing services to Eos and our subsidiaries pursuant to a reimbursement agreement between IFS and Discovery Toys. Discovery Toys had unpaid fees owed to IFS under this reimbursement agreement of $288,000 at December 31, 2003.

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The following table sets forth the revenues, gross profit, and operating profit (loss) for our Discovery Toys, Regal and Corporate segments for the three months ended December 31, 2002 and 2003, and for our IFS segment for the three months ended December 31, 2003 (in thousands):