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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended DECEMBER 31, 2000 Commission file number 000-25709

------------------------

eTOYS INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-4633006
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

12200 W. OLYMPIC BOULEVARD
LOS ANGELES, CALIFORNIA 90064
(Address of principal executive offices, zip code)

Registrant`s telephone number, including area code: [phone]

------------------------

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 / /

217,598,608 shares of $0.0001 par value common stock outstanding as of
February 12, 2001

Page 1 of 38
Exhibit Index on Page 38

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ETOYS INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000

PRELIMINARY STATEMENT

Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us.

We have engaged Goldman, Sachs & Co. as our financial advisor to explore
strategic alternatives for the company, which might include a merger, asset
sale, or another comparable transaction or a financial restructuring. However,
in the event we are unsuccessful in completing one of these strategic
alternatives, we will be required to cease operations. In that case, our common
stock will have no value. In addition, potential investors in our securities
should consider the risk that, even if we are successful in completing a
strategic transaction as described above, our common stock will nonetheless have
no value.

Any person considering an investment in any of our securities is urged to
consider both the risk that we will cease operations at or around March 31,
2001, and the risk that our securities will be worthless even assuming
completion of a strategic transaction. All of the statements set forth in this
report are qualified by reference to those facts. Please see "Item 2.
Management`s Discussion and Analysis of Financial Condition and Results of
Operations--Additional Factors That May Affect Future Results" for a discussion
of these and other risk factors relating to us and an investment in our
securities.
eTOYS INC.

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2000


INDEX

PAGE
--------
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements................. 3
Item 2. Management`s Discussion and Analysis of Financial
Condition and Results of Operations................. 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 33

PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................. 35
Item 2. Changes in Securities and Use of Proceeds......... 35
Item 3. Defaults upon Senior Securities................... 35
Item 4. Submission of Matters to a Vote of Security
Holders............................................. 35
Item 5. Other Information................................. 35
Item 6. Exhibits and Reports on Form 8-K.................. 36

Signatures.................................................. 37
Exhibit Index............................................... 38

2

PART I--FINANCIAL INFORMATION


ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

eTOYS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales....................................... $131,166 $ 106,751 $ 182,004 $ 128,032
Cost of sales................................... 99,317 86,467 138,866 103,676
-------- --------- --------- ---------
Gross profit.................................... 31,849 20,284 43,138 24,356
Operating expenses:
Marketing and sales........................... 72,174 66,017 127,381 97,602
Web site and technology....................... 20,411 13,596 46,954 30,619
General and administrative.................... 10,694 4,002 24,788 11,256
Goodwill amortization......................... 8,545 9,532 25,580 19,158
Deferred compensation amortization............ 2,760 3,495 8,977 10,591
-------- --------- --------- ---------
Total operating expenses.................... 114,584 96,642 233,680 169,226
-------- --------- --------- ---------
Operating loss.................................. (82,735) (76,358) (190,542) (144,870)
Other income (expense):
Interest income............................... 900 1,760 4,637 4,726
Interest expense.............................. (3,981) (889) (10,280) (1,069)
Provision for taxes............................. (1) -- (1) (1)
-------- --------- --------- ---------
Net loss........................................ (85,817) (75,487) (196,186) (141,214)
Accretion of discount and dividends on preferred
stock......................................... (3,418) -- (12,514) --
-------- --------- --------- ---------
Net loss applicable to common shareholders...... $(89,235) $ (75,487) $(208,700) $(141,214)
======== ========= ========= =========
Basic and diluted net loss per common share..... $ (0.62) $ (0.63) $ (1.60) $ (1.39)
======== ========= ========= =========
Shares used in computation of basic and diluted
net loss per common share..................... 144,002 119,716 130,297 101,944
======== ========= ========= =========

See accompanying notes.

3
eTOYS INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


DECEMBER 31, MARCH 31,
2000 2000
------------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62,767 $ 139,627
Inventories............................................... 67,671 60,309
Prepaids and other current assets......................... 19,677 14,350
--------- ---------
Total current assets........................................ 150,115 214,286
Property and equipment...................................... 158,556 60,717
Accumulated depreciation and amortization................. (22,004) (6,229)
--------- ---------
136,552 54,488
Goodwill (net of accumulated amortization of $51,365 and
$25,786 at December 31, 2000 and March 31, 2000,
respectively)............................................. 118,890 142,828
Other assets................................................ 11,375 13,556
--------- ---------
Total assets................................................ $ 416,932 $ 425,158
========= =========

LIABILITIES AND STOCKHOLDERS` EQUITY
Current liabilities:
Accounts payable.......................................... $ 74,367 $ 32,422
Accrued expenses.......................................... 13,148 10,789
Current portion of long-term notes payable and capital
lease obligations....................................... 19,773 6,090
--------- ---------
Total current liabilities................................... 107,288 49,301
Long-term notes payable and capital lease obligations....... 27,730 10,471
Long-term convertible subordinated notes.................... 150,000 150,000
Series D Redeemable Convertible Preferred Stock: $.0001 par
value, 10,000 shares authorized; 2,367 and none issued and
outstanding at December 31, 2000 and March 31, 2000,
respectively.............................................. 18,324 --
Commitments and contingencies
Stockholders` equity:
Common stock: $.0001 par value, 600,000,000 shares
authorized; 178,397,368 and 121,214,105 issued and
outstanding at December 31, 2000 and March 31, 2000,
respectively............................................ 18 12
Additional paid-in capital................................ 563,071 476,529
Receivables from stockholders............................. (549) (1,817)
Deferred compensation..................................... (18,701) (37,082)
Accumulated other comprehensive loss...................... (1,096) (1,803)
Accumulated deficit....................................... (429,153) (220,453)
--------- ---------
Total stockholders` equity.................................. 113,590 215,386
--------- ---------
Total liabilities and stockholders` equity.................. $ 416,932 $ 425,158
========= =========

See accompanying notes.

4
eTOYS INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS` EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLES OTHER
---------------------- PAID-IN FROM DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION LOSS DEFICIT
----------- -------- ---------- ------------ -------------- --------------- ------------
Balance at March 31, 2000... 121,214,105 $12 $476,529 $(1,817) $(37,082) $(1,803) $(220,453)
Exercise of stock options
and warrants............ 1,151,632 -- 779 -- -- -- --
Issuance of common stock
under Employee Stock
Purchase Plan........... 361,067 -- 1,672 -- -- -- --
Common stock issued for
acquisition of eParties
Inc..................... 250,000 -- 1,641 -- -- -- --
Deferred compensation, net
of cancellations........ -- -- (9,404) -- 9,404 -- --
Amortization of deferred
compensation............ -- -- -- -- 8,977 -- --
Repayment of receivables
from stockholders....... -- -- -- 1,192 -- -- --
Forfeiture of non-vested
restricted stock........ (52,285) -- (76) 76 -- -- --
Beneficial conversion
feature from issuance of
Series D Redeemable
Convertible Preferred
Stock................... -- -- 10,000 -- -- -- --
Issuance of warrants to
purchase common stock in
connection with the
Series D Redeemable
Convertible Preferred
Stock offering.......... -- -- 15,855 -- -- -- --
Dividends on Series D
Redeemable Convertible
Preferred Stock......... 771,858 -- 2,832 -- -- -- (2,832)
Accretion of discount on
Series D Redeemable
Convertible Preferred
Stock................... -- -- -- -- -- -- (9,682)
Conversion of Series D
Redeemable Convertible
Preferred Stock into
common stock............ 54,700,991 6 63,243 -- -- -- --
Comprehensive loss:
Net loss................ -- -- -- -- -- -- (196,186)
Net unrealized gain on
investments........... -- -- -- -- -- 1,641 --
Foreign currency
translation loss...... -- -- -- -- -- (934) --
Comprehensive loss........
----------- --- -------- ------- -------- ------- ---------
Balance at December 31,
2000...................... 178,397,368 $18 $563,071 $ (549) $(18,701) $(1,096) $(429,153)
=========== === ======== ======= ======== ======= =========


TOTAL
---------
Balance at March 31, 2000... $ 215,386
Exercise of stock options
and warrants............ 779
Issuance of common stock
under Employee Stock
Purchase Plan........... 1,672
Common stock issued for
acquisition of eParties
Inc..................... 1,641
Deferred compensation, net
of cancellations........ --
Amortization of deferred
compensation............ 8,977
Repayment of receivables
from stockholders....... 1,192
Forfeiture of non-vested
restricted stock........ --
Beneficial conversion
feature from issuance of
Series D Redeemable
Convertible Preferred
Stock................... 10,000
Issuance of warrants to
purchase common stock in
connection with the
Series D Redeemable
Convertible Preferred
Stock offering.......... 15,855
Dividends on Series D
Redeemable Convertible
Preferred Stock......... --
Accretion of discount on
Series D Redeemable
Convertible Preferred
Stock................... (9,682)
Conversion of Series D
Redeemable Convertible
Preferred Stock into
common stock............ 63,249
Comprehensive loss:
Net loss................ (196,186)
Net unrealized gain on
investments........... 1,641
Foreign currency
translation loss...... (934)
---------
Comprehensive loss........ (195,479)
---------
Balance at December 31,
2000...................... $ 113,590
=========

See accompanying notes.

5
eTOYS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


NINE MONTHS ENDED
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss.................................................... $(196,186) $(141,214)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 15,650 3,305
Amortization of intangibles............................... 27,246 19,645
Deferred compensation amortization related to stock
options................................................. 8,977 10,591
Other, net................................................ 153 145
Changes in operating assets and liabilities:
Inventories............................................. (7,362) (55,327)
Prepaids and other current assets....................... (1,141) (11,123)
Accounts payable........................................ 42,547 74,907
Accrued expenses........................................ 2,317 4,119
--------- ---------
Net cash used in operations................................. (107,799) (94,952)

INVESTING ACTIVITIES
Capital expenditures for property and equipment............. (97,579) (28,274)
Proceeds from the sale of property and equipment............ 16,357 2,564
Net cash received from acquisition of BabyCenter, net of
acquisition costs......................................... -- 2,571
Other, net.................................................. (1,731) (2,738)
--------- ---------
Net cash used in investing activities....................... (82,953) (25,877)

FINANCING ACTIVITIES
Proceeds from the issuance of convertible subordinated
notes..................................................... -- 150,000
Debt financing costs........................................ -- (4,810)
Net proceeds from issuance of Series D Redeemable
Convertible Preferred Stock............................... 97,788 --
Proceeds from issuance of common stock and exercise of stock
options................................................... 2,428 177,632
Proceeds from notes payable and revolving credit facility... 118,687 --
Payments on notes payable, capital leases and revolving
credit facility........................................... (105,269) (2,229)
Proceeds from receivables from stockholders................. 1,192 138
--------- ---------
Net cash provided by financing activities................... 114,826 320,731
Effect of foreign exchange rate changes on cash............. (934) (146)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (76,860) 199,756
Cash and cash equivalents at beginning of period............ 139,627 20,173
--------- ---------
Cash and cash equivalents at end of period.................. $ 62,767 $ 219,929
========= =========
Supplemental disclosures:
Income taxes paid......................................... $ 1 $ 1
Interest paid............................................. $ 11,448 $ 359
Notes payable and capital lease obligations incurred...... $ 17,524 $ 11,434
Acquisition of BabyCenter:
Fair value of assets acquired (including goodwill)...... $ -- $ 197,634
Liabilities assumed..................................... -- (9,017)
Stock issued............................................ -- (189,987)
Assumption of receivables from stockholders............. -- 1,862
--------- ---------
Cash paid............................................... -- 492
Cash acquired........................................... -- (3,063)
--------- ---------
Net cash received from acquisition of BabyCenter............ $ -- $ 2,571
========= =========

See accompanying notes.

6
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


1. ACCOUNTING POLICIES


UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated financial statements as of December 31, 2000 and 1999 have
been prepared by eToys Inc. ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). These
statements are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and accruals) necessary
to present fairly the results for the periods presented. The balance sheet at
March 31, 2000 has been derived from the audited financial statements at that
date. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such SEC rules and regulations.
Operating results for the quarter and nine months ended December 31, 2000 are
not necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2001. These consolidated financial statements should be
read in conjunction with the audited financial statements and the accompanying
notes included in the Company`s Annual Report on Form 10-K for the fiscal year
ended March 31, 2000.

The Company`s cash, cash equivalents and cash that may be generated from
operations are expected to be sufficient to meet its anticipated cash needs only
to approximately March 31, 2001, although there can be no assurance in this
regard. In order to continue operations beyond that date, the Company would
require an additional, substantial capital infusion. Management does not believe
that additional capital will be available to the Company.

The Company has engaged Goldman, Sachs & Co. as its financial advisor to
explore strategic alternatives which might include a merger, asset sale or
another comparable transaction or a financial restructuring. However, in the
event that the Company is unsuccessful in completing one of these strategic
alternatives, the Company will be required to cease operations.


RECLASSIFICATIONS

Certain prior-period balances have been reclassified to conform to the
current-period presentation.


CASH AND CASH EQUIVALENTS

All highly liquid investments with maturities of three months or less at the
date of purchase are considered to be cash equivalents and are carried at cost
plus accrued interest, which approximates fair value.


INVENTORIES

Inventories on hand consist of finished goods.


PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.

7
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

The functional currency of the Company`s foreign subsidiaries is the local
currency. Assets and liabilities of the foreign subsidiaries are translated into
U.S. dollars at the period end exchange rates, and revenues and expenses are
translated at average rates prevailing during the periods presented. Translated
adjustments are included in accumulated other comprehensive loss, a separate
component of stockholders` equity. Transaction gains or losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved, which have been insignificant, are included in the consolidated
statements of operations.


USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.


COMPREHENSIVE LOSS

Comprehensive loss is composed of net loss, net unrealized gains or losses
on investments and foreign currency translation adjustments. Comprehensive loss
was $85.6 million and $75.6 million for the quarters ended December 31, 2000 and
1999, respectively, and $195.5 million and $141.4 million for the nine months
ended December 31, 2000 and 1999, respectively.


NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share is computed by dividing net loss
applicable to common shareholders, which consists of net loss less accretion of
discount and dividends on preferred stock, by the weighted average number of
common stock shares outstanding during each period. Shares associated with stock
options and the Series A, B, C and D Redeemable Convertible Preferred Stock are
not included because they are antidilutive. Effective upon the closing of the
Company`s initial public stock offering in May 1999, the shares of Series A, B
and C Redeemable Convertible Preferred Stock automatically converted into common
stock and are included in the calculation of the weighted average number of
shares as of that date. During the quarter ended December 31, 2000,
4,533 shares of Series D Redeemable Convertible Preferred Stock have been
converted into 47,706,206 shares of common stock. During the nine months ended
December 31, 2000, 7,633 shares of Series D Redeemable Convertible Preferred
Stock have been converted into 54,700,991 shares of common stock. Such
conversions are included in the calculation of the weighted average number of
shares as of their respective dates of conversion.

8
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per common share for the periods indicated (in thousands, except per share
amounts):

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Numerator:
Net loss......................... $(85,817) $(75,487) $(196,186) $(141,214)
Dividends on preferred stock..... (976) -- (2,832) --
Accretion of discount and
dividends on preferred stock... (2,442) -- (9,682) --
-------- -------- --------- ---------
Net loss applicable to common
shareholders..................... $(89,235) $(75,487) $(208,700) $(141,214)
======== ======== ========= =========
Denominator:
Weighted average shares.......... 144,002 119,716 130,297 101,944
-------- -------- --------- ---------
Denominator for basic and diluted
net loss per common share
calculation.................... 144,002 119,716 130,297 101,944
======== ======== ========= =========
Basic and diluted net loss per
common share..................... $ (0.62) $ (0.63) $ (1.60) $ (1.39)
======== ======== ========= =========


RECENT ACCOUNTING PRONOUNCEMENTS

In July 2000, the EITF reached a consensus on EITF Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs" ("Issue 00-10"). Specifically, Issue
00-10 addresses in a sale transaction for goods, how the seller should classify
amounts billed and incurred for shipping and handling in the income statement,
and the composition or types of costs that would be required to be classified as
costs of sales. The EITF concluded that all shipping and handling billings to a
customer in a sale transaction represent the fees earned for the goods provided
and, accordingly, amounts billed related to shipping and handling should be
classified as revenue. The consensus does not address how costs incurred by the
seller for shipping and handling should be classified. The adoption of this
consensus will not impact the Company`s financial position or results of
operations as the Company already records all charges for outbound shipping and
handling as revenue. All outbound shipping costs are classified as costs of
sales. All other fulfillment costs incurred for handling by the Company are
classified within marketing and sales expenses.


2. REVOLVING CREDIT FACILITY

In November 2000, the Company entered into a secured revolving credit
facility (the "Credit Facility") providing for borrowings of up to $40 million.
The Credit Facility is collateralized by substantially all of the Company`s
assets, including its inventory of children`s and baby products located in the
Company`s distribution centers. Availability under the Credit Facility is based
upon a formula of eligible inventory as defined in the Credit Facility
agreement. Borrowings under the Credit Facility bear interest, at the Company`s
option, at either prime rate (9.5% as of December 31, 2000) plus 0.5% or

9
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

2. REVOLVING CREDIT FACILITY (CONTINUED)
Libor plus the Libor rate margin (6.2% as of December 31, 2000 plus 2.75%).
Additionally, the Company is required to pay fees of 1.25% per annum for the
unused portion of the Credit Facility. The Credit Facility has a term of two
years and requires the Company to comply with certain financial convenants as
described in the Credit Facility agreement. As of December 31, 2000,
$8.9 million was outstanding under the Credit Facility. As of February 12, 2001,
all borrowings under the Credit Facility have been fully repaid.


3. LONG-TERM CONVERTIBLE SUBORDINATED NOTES

In December 1999, the Company issued $150 million principal amount of
6.25% convertible subordinated notes (the "Convertible Notes") due December 1,
2004. In connection with the issuance of the Convertible Notes, the Company
incurred financing costs of $4.8 million, resulting in net proceeds to the
Company of $145.2 million. The Convertible Notes are unsecured and are
subordinated to existing and future senior debt as defined in the indenture
pursuant to which the Convertible Notes were issued. The principal amount of the
Convertible Notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the Convertible Notes is fully
repaid. The Convertible Notes may be converted into the Company`s common stock
at the option of the holder at any time prior to December 1, 2004, unless the
Convertible Notes have been previously redeemed or repurchased by the Company.
The conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of the Company`s common stock for each $1,000 principal amount of the
Convertible Notes, which is equivalent to a conversion price of approximately
$73.90 per share. Additionally, on or after December 1, 2002, the Company may
redeem all or a portion of the Convertible Notes that have not been previously
redeemed or repurchased, at any time at redemption prices set forth in the
indenture pursuant to which the Convertible Notes were issued, plus any accrued
and unpaid interest to the redemption date. The Company currently has an
effective shelf registration statement with the Securities and Exchange
Commission covering resales of the $150 million of Convertible Notes and common
stock issuable upon conversion of the Convertible Notes.


4. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On June 12, 2000, the Company issued 10,000 shares of non-voting Series D
Redeemable Convertible Preferred Stock ("Series D"), $10,000 stated value per
share, and warrants to purchase 5,018,296 shares of the Company`s common stock
with a current warrant exercise price of $7.17375 per share in a private
placement to select institutional investors. The total proceeds of the offering
were $100.0 million. The Series D shares carry a dividend rate of 7% per annum,
payable semi-annually during the first year and quarterly thereafter or upon
conversion or redemption. At the Company`s option, dividends may be paid in cash
or shares of common stock, subject to certain conditions described within the
documents relating to the issuance of Series D and related warrants.

The Series D shares mature on June 12, 2003, subject to extension in some
circumstances, at which time the Series D shares must be redeemed or converted
at the Company`s option. If the Company elects to redeem any Series D shares
outstanding on June 12, 2003, the amount required to be paid will be equal to
the liquidation preference of the Series D shares, which equals the price
originally paid for such shares plus accrued and unpaid dividends. If the
Company elects to convert any Series D shares

10
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
outstanding on June 12, 2003, the Company will be required to issue shares in an
amount determined based upon the criteria described below.

Both the Company and the holders of the Series D shares currently have the
right to convert the shares of Series D without restriction. Regardless of
whether the selling securityholders elect to convert or the Company requires
conversion, the number of shares of common stock to be issued upon conversion of
a Series D share is determined by dividing the sum of $10,000 plus accrued and
unpaid dividends by the applicable conversion price. The applicable conversion
price will be a percentage of the lowest closing bid price of the Company`s
common stock for the five consecutive trading days ending on and including the
conversion date, provided that the conversion price will not exceed $25.00 per
share, subject to adjustment. The conversion percentage equaled 100% on
June 12, 2000 and then decreased permanently one percentage point on the first
day of every calendar month following June 12, 2000, provided that the
conversion percentage will never be less than 85%, except in the event the
Company requires conversion following the announcement of a merger transaction.

The Company also has the right, provided specified conditions are satisfied,
to redeem some or all of the outstanding Series D shares for cash equal to a
percentage of the price paid for each preferred share plus accrued dividends.
The redemption percentage equaled 100% on June 12, 2000 and then increased
permanently one percentage point on the first day of every calendar month
following June 12, 2000, provided that the redemption percentage will never be
greater than 124%.

The net cash proceeds of the offering, after expenses, were approximately
$97.8 million. The proceeds were further discounted by $15.9 million,
representing the valuation of the 5,018,296 warrants issued in connection with
the sale of the Series D shares, and $10.0 million allocated to the beneficial
conversion feature associated with the Series D shares. The beneficial
conversion feature represents the difference between the fair market value of
the Company`s common stock on the date of conversion and the discounted
conversion price as described above that is available to the securityholders
upon conversion. The discount amounts representing the warrants valuation and
the issuance costs and expenses will be amortized, or accreted, over thirty-six
months and the amount representing the beneficial conversion feature will be
accreted over fifteen months in order to adjust the Series D shares to their
appropriate redemption value at any given point in time for the period that the
Series D shares are outstanding. The accretion amounts are charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. Additionally, the
7% dividend payable associated with the Series D shares are also charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. The accretion of
discount and dividends on the Series D shares was $3.4 million for the quarter
ended December 31, 2000 and $12.5 million for the nine months ended
December 31, 2000.

As of December 31, 2000, 7,633 shares of Series D with an aggregate stated
value of $76.3 million, had been converted into 54,700,991 shares of the
Company`s common stock, representing an average conversion rate of $1.40 per
share of common stock. Additionally, in December 2000, 771,858 shares of the
Company`s common stock were issued in lieu of cash as a dividend payment on
Series D.

For the period from January 1, 2001 to February 12, 2001, 718 shares of
Series D stock were converted into 38,565,669 shares of the Company`s common
stock.

11
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)


5. COMMITMENTS AND CONTINGENCIES


LEGAL PROCEEDINGS

From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including employment-related claims and claims
of alleged infringement of trademarks, copyrights and other intellectual
property rights.

Since December 15, 2000, the Company has stated that its cash, cash
equivalents and cash that may be generated from operations are expected to be
sufficient to meet its anticipated cash needs only to approximately March 31,
2001, although there can be no assurance in this regard. The Company has also
engaged an investment banking firm to explore strategic alternatives for the
Company, which might include a merger, asset sale, or another comparable
transaction or a financial restructuring. In order to preserve its cash and
extend the time period during which such a transaction might be consummated, the
Company has entered into a standstill agreement with an informal committee of
its unsecured creditors.

Pursuant to this standstill agreement, through and including February 15
(which date is subject to extension if agreed to by the creditors committee),
the Company has agreed not to pay any past due debts and to operate under a
budget designed to maintain its current operations. As of December 31, 2000, the
Company`s outstanding obligations included $150 million principal amount of its
6.25% convertible subordinated notes due December 1, 2004, $8.9 million of
borrowings under its revolving credit facility (the balance of which was zero as
of February 12, 2001), notes payable and capital lease obligations of $38.6
million, a trade payable balance of $38.1 million, a non-trade payable balance
of $36.3 million and accrued expenses of $13.1 million.

The Company`s agreement not to pay past due debts under the standstill
agreement may result in a default on some or all of these obligations. As a
result, the Company has become subject to approximately fifteen lawsuits seeking
collection of past due invoices totaling approximately $17.2 million from
various vendors. The Company has received numerous other threats of similar
litigation from other vendors and anticipates that it will become subject to
additional, comparable collection lawsuits in the future.

Similarly, the Company has been threatened with litigation or other
collection procedures by a number of the lessors of its real property and
personal property. For instance, Kilroy Realty, L.P., the landlord of the
Company`s headquarters building in Los Angeles, has declared a default under the
Company`s lease and related promissory note and has drawn $15.0 million under a
letter of credit facility related thereto. In addition, Heller Financial
Leasing, Inc., the lessor of certain equipment used in the operation of the
Company`s Blairs, Virginia distribution center, has threatened to bring a
lawsuit seeking payment of approximately $9.0 million due to the Company`s
failure to post a letter of credit in the amount of approximately $2.1 million.

The Company has also received notice from etoy corporation, the holder of
the "etoy" domain name, that it has filed a trademark infringement lawsuit
against the Company pertaining to the use of the Company`s "eToys" trademark.
The Company believes this lawsuit is without merit and intends to vigorously
defend against it.

The Company believes that it will increasingly become subject to claims,
lawsuits and other comparable collection procedures such as those described
above due to its obligations under the

12
eTOYS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
standstill agreement and the fact that its cash, cash equivalents and cash that
may be generated from operations are expected to be sufficient to meet its
anticipated cash needs only to approximately March 31, 2001. After that date,
the Company would be required to cease operations unless it is able to
consummate a strategic transaction or financial restructuring.


6. STOCKHOLDERS` EQUITY

In March 1999, the Company`s Board of Directors declared a stock split of
three shares for every one share of common stock then outstanding. The stock
split was effective May 24, 1999, the date the Company`s public offering of
common stock closed. Accordingly, the accompanying financial statements and
footnotes have been restated to reflect the stock split. The par value of the
shares of common stock to be issued in connection with the stock split was
credited to common stock and a like amount charged to additional paid-in
capital.

On May 24, 1999, the Company completed its initial public offering of
9,568,000 shares of its common stock. Net proceeds to the Company aggregated
$175.8 million. As of the closing date of the offering, all of the Series A, B
and C convertible preferred stock then outstanding was converted into an
aggregate of 58,779,267 shares of common stock.


7. DEFERRED COMPENSATION

The following table shows the amounts of deferred compensation amortization
that would have been recorded under the following income statement categories
had deferred compensation amortization not been separately stated in the
consolidated statements of operations (in thousands):


QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Marketing and sales........................ $ 713 $ 903 $2,319 $ 2,737
Web site and technology.................... 904 1,145 2,941 3,470
General and administrative................. 1,143 1,447 3,717 4,384
------ ------ ------ -------
$2,760 $3,495 $8,977 $10,591
====== ====== ====== =======

13

ITEM 2. MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Form 10-Q and the following "Management`s Discussion and Analysis of
Financial Condition and Results of Operations" include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This Act provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about themselves so long
as they identify these statements as forward-looking and provide meaningful
cautionary statements identifying important factors that could cause actual
results to differ from the projected results. All statements other than
statements of historical fact made by us in this Form 10-Q are forward-looking.
In particular, the statements herein regarding industry prospects and our future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect our current expectations and are inherently
uncertain. Our actual results may differ significantly from our expectations,
and we assume no responsibility to update forward-looking statements made
herein. The section entitled "Additional Factors That May Affect Future Results"
describes some, but not all, of the factors that could cause these differences.

Since December 15, 2000, we have stated that our cash, cash equivalents and
cash that may be generated from operations are expected to be sufficient to meet
our anticipated cash needs only to approximately March 31, 2001, although there
can be no assurance in this regard. In order to continue operations beyond that
date, we would require an additional, substantial capital infusion. We do not
believe that additional capital will be available to us. Although we have
engaged Goldman, Sachs & Co. as our financial advisor to explore strategic
alternatives for the company, if we are unsuccessful in completing a strategic
transaction, we will be required to cease operations. In that case, our common
stock would have no value. In addition, potential investors in our securities
should consider the risk that, even if we are successful in completing a
strategic transaction as described above, our common stock will nonetheless have
no value. Any person considering an investment in any of our securities is urged
to consider both the risk that we will cease operations at or around March 31,
2001 and the risk that our securities will be worthless even assuming completion
of a strategic transaction. All of the statements set forth in this report are
qualified by reference to those facts.

In July 2000, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue
00-10"). Specifically, Issue 00-10 addresses in a sale transaction for goods,
how the seller should classify amounts billed and incurred for shipping and
handling in the income statement, and the composition or types of costs that
would be required to be classified as costs of sales. The EITF concluded that
all shipping and handling billings to a customer in a sale transaction represent
the fees earned for the goods provided and, accordingly, amounts billed related
to shipping and handling should be classified as revenue. However, the EITF
overturned its previous tentative conclusion that all costs incurred by the
seller for shipping and handling should be classified as cost of sales. In
addition, the EITF decided not to address the types of costs that would be
required to be classified as costs of sales. The adoption of this consensus will
not impact our financial position or results of operations as we already record
all charges for outbound shipping and handling as revenue. All outbound shipping
costs are classified as costs of sales. We currently record all other
fulfillment costs incurred for handling within marketing and sales expenses.

14
RESULTS OF OPERATIONS


NET SALES

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Net sales.................... $131,166 $106,751 23% $182,004 $128,032 42%

Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift wrapping and are net of product returns,
promotional discounts and coupons. The growth in net sales for the quarter ended
and nine months ended December 31, 2000 as compared to the same periods in the
prior year reflects an increase in units sold due to the growth of our customer
base, repeat purchases from our existing customers and growth in our baby and
toy categories, partially offset by a downturn in video game sales. Cumulative
customer accounts increased to 3.4 million during the quarter ended
December 31, 2000 as compared to 1.7 million cumulative customer accounts at
December 31, 1999. International sales, which consists of export sales to
customers outside the US from our US Web site as well as sales by our Web site
in the United Kingdom, eToys.co.uk, to customers within the United Kingdom and
Europe, were not material during the quarter ended and nine months ended
December 31, 2000. It should be noted that net sales for the quarter ended
December 31, 2000 were substantially below our original estimate of $210 million
to $240 million, due to a harsh retail climate and dampened enthusiasm for
Internet retailing. This shortfall had a material negative impact on our results
of operations and financial condition for the quarter and have caused us to seek
a strategic transaction or financial restructuring or, in the absence of these
alternatives, cease operations by approximately March 31, 2001.


GROSS PROFIT

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Gross profit..................... $31,849 $20,284 57% $43,138 $24,356 77%

Gross profit is net sales less cost of sales, which consists of the costs of
products sold to customers, outbound and inbound shipping costs, and gift
wrapping costs. Gross profit increased in absolute dollars for the quarter ended
and nine months ended December 31, 2000 as compared to the same periods in the
prior year, reflecting our increased sales volume. Our gross profit increased as
a percentage of net sales by approximately 5.3% and 4.7% for the quarter ended
and nine months ended December 31, 2000, respectively, as compared to the same
periods in the prior year. This increase in gross profit as a percentage of net
sales is primarily attributable to a continuing shift towards higher margin
specialty products, including products and advertising sold by our BabyCenter
unit.

Shipping margins were adversely impacted for the nine months ended
December 31, 2000 as compared to the same period in the prior year primarily due
to inefficiencies in the start-up of our bi-coastal distribution centers and an
increase in the shipments of larger merchandise which have higher shipping
costs. This adverse impact was partially offset in the quarter ended
December 31, 2000 due to the initial operation of our new East Coast
distribution center locations in Danville, Virginia and Greensboro, North
Carolina. These new locations began shipping operations in June 2000 and allowed
us to reduce the costs incurred from shipping since they are located closer to
the majority of our customers. Prior to June 2000, overall shipping margins were
adversely impacted by the location of our distribution centers principally in
the western United States. This resulted in increased shipping

15
costs as we shipped cross-country to the majority of our customer base located
in the eastern United States.

Shipping margin, which represents shipping revenues less outbound shipping
costs included in cost of sales, was a profit of $0.3 million for the quarter
ended December 31, 2000 as compared to a loss of $3.7 million for the quarter
ended December 31, 1999. Shipping margin resulted in a loss of $1.6 million and
$4.0 million for the nine months ended December 31, 2000 and 1999, respectively.


MARKETING AND SALES

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Marketing and sales............. $72,174 $66,017 9% $127,381 $97,602 31%

Marketing and sales expenses consist of advertising expense, fulfillment,
customer service and credit card fees, and other marketing and sales expense,
including personnel and general overhead. Marketing and sales expenses increased
in absolute dollars for the quarter ended and nine months ended December 31,
2000 as compared to the same periods in the prior year. This increase is
primarily attributable to increases in our advertising and promotional
expenditures for the holiday season, increased payroll and related costs for
receiving inventory and fulfilling the higher level of customer demand, and
additional costs incurred in the expansion of our distribution facilities.
Marketing and sales expenses decreased as a percentage of net sales during the
quarter ended and nine months ended December 31, 2000 as compared to the same
periods in the prior year due to the increase in net sales during such periods.

Advertising expense was $38.7 million, or 30% of net sales, for the quarter
ended December 31, 2000 and $60.2 million, or 33% of net sales, for the nine
months ended December 31, 2000.

Fulfillment, customer service and credit card fees were $33.9 million, or
26% of net sales, for the quarter ended December 31, 2000 and $59.6 million, or
33% of net sales, for the nine months ended December 31, 2000. In addition,
marketing and sales expenses were favorably impacted for the quarter and nine
months ended December 31, 2000 by the recovery of a $7.7 million reserve related
to resolution of a third party vendor dispute in our favor.

On March 31, 2000, we ceased receiving fulfillment services from our
third-party vendor, Fingerhut Business Services, and since that time we have
relied solely on our own distribution centers. The transition of inventory from
Fingerhut facilities was completed during July 2000. Total costs incurred
associated with this transition were not material.


WEB SITE AND TECHNOLOGY

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Web site and technology.......... $20,411 $13,596 50% $46,954 $30,619 53%

Web site and technology expenses consist primarily of payroll and related
expenses for merchandising, development, and systems and telecommunications
personnel, and infrastructure costs related to systems and telecommunications.
Web site and technology also includes costs related to the development of
internal-use software. All development costs incurred in the preliminary project
stage, as well as maintenance and training, are expensed as incurred. Certain
plans of development are so uncertain that it is not probable that they will be
completed and are therefore expensed when incurred. Once the development project
has completed the preliminary project stage and it is deemed probable

16
that the project will be completed and used as intended, the project is
considered to have moved into the application development stage. All costs
incurred for the development or purchase of internal-use software that are
incurred in the application development stage are capitalized as incurred within
property and equipment and amortized over their estimated useful lives.

Web site and technology expenses increased in absolute dollars for the
quarter ended and nine months ended December 31, 2000 as compared to the same
periods in the prior year. This increase is primarily attributable to increased
expenses associated with our significant investment in both front-end and
back-end infrastructure and maintenance of our existing systems and
telecommunications hardware. This included increased staffing of systems and
telecommunication personnel, increased investment in systems and
telecommunications hardware as well as increased costs incurred for projects
intended to enhance the features, content and functionality of our Web site and
transaction-processing systems. Such project costs arise from either costs
incurred in the preliminary development stage, which are expensed as incurred,
or from amortization of such project costs that had been capitalized within the
quarter or a previous period and have been placed into service. Web site and
technology expenses increased as a percentage of net sales during the quarter
ended and nine months ended December 31, 2000 as compared to the same periods in
the prior year due to the shortfall in net sales for the quarter ended
December 31, 2000 which were substantially below our original expectations.


GENERAL AND ADMINISTRATIVE

QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
2000 1999 % CHANGE 2000 1999 % CHANGE
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
General and administrative........ $10,6

[BoersenBalou]

Die Frage ist, was machen wir daraus?

Weiter zocken? Bis wann kommen mal wieder News? ich kann mir einfach nicht vorstellen, daß EToys einfach so vom Kurszettel verschwindet

Gruß Balou

[Bat2k1]

Wann kapiert ihr eigentlich, daß ETOYS nicht am Neuen Markt gelistet ist?