**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
      10-Q**




x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the quarterly period ended June 30, 2007****OR**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from
                        to**




**Commission
      file number: 1-32577**




**BabyUniverse,
      Inc.**


*(Exact
      name of registrant as specified in its charter)*




**Florida**
            
            **65-0797093***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            *(I.R.S.
                Employer*
              *Identification
                No.)*




**150
                South U.S. Highway One, Suite 500****Jupiter,
                Florida**
            
            **33477***(Address of principal
              executive offices)*
            
            *(Zip
                Code)***Registrant’s
                telephone number, including area code:
                (561) 277-6400**




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  o






Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                Accelerated Filer o
            Accelerated
                Filer o
            Non-Accelerated
                Filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yeso
            Nox




As
      of
      August 11, 2007, the registrant had 6,970,768 shares of common stock
      outstanding.




1


**BABYUNIVERSE,
      INC.**





**INDEX**






Page**PART
                  I. FINANCIAL INFORMATION**
              
              
              3**Item
                  1. Financial Statements**
              
              
              3**Notes
                  to Consolidated Financial Statements (Unaudited)**
              
              
              7**Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations**
              
              
              20**Item
                  3. Quantitative and Qualitative Disclosures About Market
                  Risk**
              
              
              27**Item
                  4T. Controls and Procedures**
              
              
              27**PART
                  II. OTHER INFORMATION**
              
              
              28**Item
                  1. Legal Proceedings**
              
              
              28**Item
                  1A. Risk Factors**
              
              
              28**Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds**
              
              
              29**Item
                  3. Defaults Upon Senior Securities**
              
              
              29**Item
                  4. Submission of Matters to a Vote of Security
                  Holders**
              
              
              29**Item
                    5. Other Information**
              
              
              30**Item
                    6. Exhibits**
              
              
              30**SIGNATURES**
              
              
              31**Exhibit
                  31.1****Exhibit
                  31.2****Exhibit
                  32.1****Exhibit
                  32.2**




2





**PART
      I. FINANCIAL INFORMATION** ****




**Item
      1. Financial Statements** ****




******BabyUniverse,
                Inc. and Subsidiaries****Consolidated
                Balance Sheets**




**December
                31,****June
                30, 2007**
            
            **2006****(Unaudited)****Assets**Cash
            
            $
            6,192,157
            
            $
            3,473,278Accounts
                receivable
            
            
            556,554
            
            
            732,186Inventory,
                net
            
            
            1,445,340
            
            
            2,048,485Prepaid
                expenses
            
            
            662,933
            
            
            331,457**Total
                Current Assets**
            
            
            8,856,984
            
            
            6,585,406Fixed
                assets, net
            
            
            1,905,395
            
            
            1,936,740Intangible
                assets, net
            
            
            2,692,751
            
            
            2,811,627Deposits
            
            
            140,110
            
            
            137,760Goodwill
            
            
            18,832,041
            
            
            18,832,041**Total
                Assets**
            
            $
            32,427,281
            
            $
            30,303,574**Liabilities
                and Stockholders' Equity**Accounts
                payable
            
            $
            3,218,694
            
            $
            4,664,107Accrued
                expenses
            
            
            605,697
            
            
            501,704Gift
                certificate liability
            
            
            162,725
            
            
            115,192Notes
                and capital lease payables - current portion
            
            
            1,616,172
            
            
            561,090Deferred
                revenue
            
            
            767,472
            
            
            787,758**Total
                Current Liabilities**
            
            
            6,370,760
            
            
            6,629,851Deferred
                rent
            
            
            218,430
            
            
            189,542Notes
                and capital lease payables - long term portion
            
            
            4,859,888
            
            
            5,777,841**Total
                Liabilities**
            
            
            11,449,078
            
            
            12,597,234**Stockholders'
                Equity**Series
                A Convertible Preferred Stock, $.001 par value, 10,000,000 shares
                authorized, 317,259 and 0 issued and outstanding at June 30, 2007
                and
                December 31, 2006, respectively
            
            
            317
            
            
            -Common
                Stock, $.001 par value, 50,000,000 shares authorized, 6,391,699 and
                5,686,470 shares issued and outstanding at June 30, 2007 and December
                31,
                2006, respectively
            
            
            6,391
            
            
            5,686Additional
                paid in capital
            
            
            30,920,241
            
            
            23,943,189Accumulated
                deficit
            
            
            (9,948,746
            )
            
            (6,242,535
            )**Total
                Stockholders' Equity**
            
            
            20,978,203
            
            
            17,706,340**Total
                Liabilities and Stockholders' Equity**
            
            $
            32,427,281
            
            $
            30,303,574




The
      accompanying notes are an integral part of these consolidated financial
      statements.




3




**BabyUniverse,
                  Inc. and Subsidiaries****Consolidated
                  Statements of Operations****(Unaudited)**
   **For
                  the Three Months Ended June 30,**
              
              **For
                  the Six Months Ended June 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Gross
                  sales**
              
              $
              7,833,593
              
              $
              9,144,134
              
              $
              16,998,213
              
              $
              19,141,944Less
                  - discounts and returns
              
              
              (395,906
              )
              
              (619,207
              )
              
              (1,022,450
              )
              
              (1,148,855
              )**Net
                  sales**
              
              
              7,437,687
              
              
              8,524,927
              
              
              15,975,763
              
              
              17,993,089**Cost
                  of goods sold**
              
              
              5,427,181
              
              
              6,169,702
              
              
              11,512,714
              
              
              12,683,323**Gross
                  profit**
              
              
              2,010,506
              
              
              2,355,225
              
              
              4,463,049
              
              
              5,309,766**Operating
                  expenses:**Advertising
              
              
              1,217,125
              
              
              952,238
              
              
              2,566,336
              
              
              1,933,426Salaries
                  and benefits
              
              
              1,121,599
              
              
              858,970
              
              
              2,339,604
              
              
              1,652,020Share-based
                  compensation
              
              
              49,379
              
              
              88,036
              
              
              100,158
              
              
              126,068Technology
              
              
              64,272
              
              
              27,933
              
              
              131,529
              
              
              116,417Restructuring
              
              
              -
              
              
              389,822
              
              
              -
              
              
              506,407General
                  and administrative
              
              
              1,176,047
              
              
              1,241,153
              
              
              2,468,668
              
              
              2,290,158**Total
                  operating expenses**
              
              
              3,628,422
              
              
              3,558,152
              
              
              7,606,295
              
              
              6,624,496**Operating
                  income (loss)**
              
              
              (1,617,916
              )
              
              (1,202,927
              )
              
              (3,143,246
              )
              
              (1,314,730
              )**Other
                  income (expense):**Interest
                  income
              
              
              32,807
              
              
              74,289
              
              
              64,036
              
              
              121,582Interest
                  expense
              
              
              (277,422
              )
              
              (89,648
              )
              
              (527,001
              )
              
              (200,859
              )**Income
                  (loss) before provision (benefit) for income
                  taxes**
              
              
              (1,862,531
              )
              
              (1,218,286
              )
              
              (3,606,211
              )
              
              (1,394,007
              )Provision
                  (benefit) for income taxes
              
              
              -
              
              
              (13,000
              )
              
              -
              
              
              8,000**Net
                  loss attributable to preferred stockholders**
              
              
              (1,862,531
              )
              
              (1,205,286
              )
              
              (3,606,211
              )
              
              (1,402,007
              )**Beneficial
                  conversion feature**
              
              
              (100,000
              )
              
              -
              
              
              (100,000
              )
              
              -**Net
                  loss attributable to common stockholders**
              
              
              ($1,962,531
              )
              
              ($1,205,286
              )
              
              ($3,706,211
              )
              
              ($1,402,007
              )**Earnings
                  (loss) per common share:**Basic
              
              
              ($0.34
              )
              
              ($0.23
              )
              
              ($0.65
              )
              
              ($0.26
              )Diluted
              
              
              ($0.34
              )
              
              ($0.23
              )
              
              ($0.65
              )
              
              ($0.26
              )**Weighted
                  average common shares outstanding:**Basic
              
              
              5,779,402
              
              
              5,336,712
              
              
              5,733,193
              
              
              5,316,662Diluted
              
              
              5,779,402
              
              
              5,336,712
              
              
              5,733,193
              
              
              5,316,662




The
      accompanying notes are an integral part of these consolidated financial
      statements.





4





**BabyUniverse,
                Inc. and Subsidiaries****Consolidated
                Statements of Stockholders' Equity**
              **(Unaudited)**




**Series
                A Convertible Preferred Stock**
            
            **Common
                Stock****Shares**
            
            **Par
                Value**
            
            **Shares**
            
            **Par
                Value**
            
            **Paid
                in Capital**
            
            **Accumulated
                Deficit**
            
            **Total
                Capital**Balance
                January 1, 2007
            
            
            -
            
            $
            -
            
            
            5,686,470
            
            $
            5,686
            
            $
            23,943,189
            
            $
            (6,242,535
            )
            $
            17,706,340Restricted
                stock compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            39,812
            
            
            -
            
            
            39,812Share-based
                compensation for employee stock options
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            60,346
            
            
            -
            
            
            60,346Options
                granted to content provider
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            27,912
            
            
            -
            
            
            27,912Vesting
                of restricted shares
            
            
            
            
            
            
            
            
            41,166
            
            
            41
            
            
            (41
            )
            
            -
            
            
            -Private
                sale of convertible preferred stock and warrants to purchase common
                stock,
                including full amortization of the beneficial conversion feature,
                valued
                at $100,000 as of June 30, 2007
            
            
            317,259
            
            
            317
            
            
            -
            
            
            -
            
            
            2,599,684
            
            
            (100,000
            )
            
            2,500,001Private
                sales of common stock
            
            
            -
            
            
            -
            
            
            664,063
            
            
            664
            
            
            4,249,339
            
            
            -
            
            
            4,250,003Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (
                3,606,211
            )
            
            (3,606,211
            )Balance
                June 30, 2007
            
            
            317,259
            
            $
            317
            
            
            6,391,699
            
            $
            6,391
            
            $
            30,920,241
            
            $
            (9,948,746
            )
            $
            20,978,203





The
        accompanying notes are an integral part of these consolidated financial
        statements.


5




**BabyUniverse,
                Inc. and Subsidiaries****Consolidated
                Statements of Cash Flows****(Unaudited)**




**Year
                to Date Ended June 30,****Operating
                activities:**
            
            **2007**
            
            **2006**Net
                income (loss)
            
            
            ($3,606,211
            )
            
            ($1,402,007
            )Adjustments
                to reconcile net loss to net cash used in operating activities, net
                of
                effect of acquisitions:Depreciation
                and amortization
            
            
            390,916
            
            
            244,517Amortization
                of prepaid financing costs
            
            
            140,817
            
            
            -Share-based
                compensation
            
            
            100,158
            
            
            126,068Option
                expense for service
            
            
            27,912
            
            
            -Changes
                in operating assets and liabilities:Decrease
                in accounts receivable
            
            
            175,632
            
            
            330,109Decrease
                (Increase) in inventory
            
            
            603,145
            
            
            (288,914
            )(Increase)
                in prepaid expenses
            
            
            (331,476
            )
            
            (38,264
            )(Increase)
                in deposits
            
            
            (2,350
            )
            
            (88,587
            )Increase
                (decrease) in accounts payable
            
            
            (1,445,413
            )
            
            486,279Increase
                (decrease) in accrued expenses
            
            
            135,193
            
            
            (78,188
            )Increase
                    (decrease) in gift certificate liability
            
            
            47,533
            
            
            (2,133
            )Increase
                (decrease) in deferred revenue
            
            
            (20,286
            )
            
            236,052Increase
                in deferred rent
            
            
            28,888
            
            
            72,961**Net
                cash used in operating activities:**
            
            
            (3,755,542
            )
            
            (402,107
            )**Investing
                activities:**Purchase
                of fixed assets
            
            
            (271,895
            )
            
            (1,242,282
            )Purchase
                of ePregnancy intangible assets
            
            
            -
            
            
            (184,257
            )Cash
                paid in acquisition of Posh Tots, net of cash received
            
            
            -
            
            
            (6,017,419
            )**Net
                cash used in investing activities:**
            
            
            (271,895
            )
            
            (7,443,958
            )**Financing
                activities:**Net
                (decrease) in capital lease
            
            
            (3,688
            )
            
            (2,480
            )Public
                offering costs
            
            
            -
            
            
            (14,742
            )Sale
                of Convertible Preferred Stock
            
            
            2,500,001
            
            
            -Sale
                of Common Stock
            
            
            4,250,003
            
            
            -**Net
                cash provided by (used in) financing activities:**
            
            
            6,746,316
            
            
            (17,222
            )Net
                increase (decrease) in Cash
            
            
            2,718,879
            
            
            (7,863,287
            )Beginning
                Cash
            
            
            3,473,278
            
            
            9,925,806Ending
                Cash
            
            $
            6,192,157
            
            $
            2,062,519




The
      accompanying notes are an integral part of these consolidated financial
      statements




6




**BabyUniverse,
      Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements** **(Unaudited)**





**Note
      1 - Description of the Company and Summary of Significant Accounting
      Policies**







***The
      Company*** ****




BabyUniverse,
      Inc. (the “Company’’) is a leading Internet content, commerce and new media
      company in the pregnancy, baby and toddler marketplace. Through its websites,
      BabyUniverse.com and DreamtimeBaby.com, the Company is a leading online retailer
      of brand-name baby, toddler and maternity products in the United States. Through
      its websites, PoshTots.com and PoshLiving.com, the Company has extended its
      offerings in the baby and toddler market as a leading online provider of luxury
      furnishings to the country’s most affluent female consumers. Through its
      websites, PoshCravings.com, ePregnancy.com and the recently-introduced,
      BabyTV.com, the Company has also established a recognized platform for the
      delivery of content and new media resources to a national audience of expectant
      parents. Customer purchases are shipped directly from the Company’s warehouses,
      or are drop shipped directly to customers from the Company’s
      suppliers.




The
      Company was incorporated on October 15, 1997 under the laws of the State of
      Florida as Everything But The Baby, Inc.  On November 16, 2001, the Company
      changed its name to BabyUniverse, Inc. The Company operates on a calendar year
      basis.




On
      September 13, 2005, the Company acquired 100% of the outstanding capital stock
      of Huta Duna, Inc., d/b/a DreamtimeBaby.com (“Dreamtime Baby”). The results of
      Dreamtime Baby’s operations have been included in the consolidated financial
      statements of the Company since that date.




On
      January 13, 2006, the Company acquired, through a newly-created wholly-owned
      subsidiary, substantially all of the assets of PoshTots, LLC, a luxury online
      retailer of baby and children’s furnishings. The results of operations of
      PoshTots have been included in the consolidated financial statements of the
      Company since that date. Through its primary website, www.PoshTots.com, the
      Richmond-based PoshTots, LLC has long been recognized as a leading online
      retailer of high-end, artisan-crafted furniture to this country’s most affluent
      new mothers.  Beyond the baby and children’s segments, PoshTots extended
      its brand with the Fall 2005 introduction of www.PoshLiving.com, offering
      designer quality home furnishings to its existing and growing base of affluent,
      predominantly female, customers. In March 2006, PoshTots introduced another
      new
      website, www.PoshCravings.com, designed as a content driven initiative targeted
      at the affluent female customer base already developed by PoshTots.




***Proposed
      Merger***




On
      March
      13, 2007, the Company entered into a definitive Agreement and Plan of Merger
      (the “Merger Agreement”) with eToys Direct, Inc. (“eToys Direct”), an e-commerce
      and direct marketer of toys and other youth-related products.  Under the
      terms of the Merger Agreement, which has been approved by the Company’s board of
      directors and the board of directors of eToys Direct, the Company will exchange
      shares of its Common Stock, for all the outstanding shares of eToys
      Direct.  Immediately following the merger contemplated by the Merger
      Agreement (the “Merger”), the Company’s shareholders and option holders at the
      time immediately prior to the Merger will own approximately one-third, and
      eToys
      Direct shareholders at the time immediately prior to the Merger will own
      approximately two-thirds, of the outstanding Common Stock.




The
      Company and eToys Direct have made customary representations, warranties and
      covenants to one another in the Merger Agreement.  Consummation of the
      Merger is subject to certain conditions, including, among others, the approval
      of the Merger Agreement by the holders of the Common Stock, the repayment by
      the
      Company of all of its indebtedness for borrowed money outstanding as of the
      closing of the Merger, and the absence of any law or order prohibiting the
      consummation of the Merger. The Merger Agreement contains certain termination
      rights for both the Company and eToys Direct, and further provides that, upon
      termination of the Merger Agreement under specified circumstances, the Company
      may be required to pay eToys Direct a termination fee of $1,567,178 and
      reimburse eToys Direct for the expenses incurred by it in connection with the
      transaction in a maximum amount of $1,500,000.




7
 
   For
        more
        information on the Merger, please see the Company’s Registration Statement on
        Form S-4 as originally filed with the Securities and Exchange Commission
        (the
“SEC”) on June 14, 2007, as amended by Amendment No. 1 thereto filed with the
        SEC on July 23, 2007.





***Private
      Placement Transactions***





*May
      24, 2007 Transactions*





On
      May 24, 2007, the Company entered into Securities Purchase Agreements with
      two affiliates of a large institutional investment fund (each, a “Preferred
      Purchaser”) pursuant to which it sold to the Preferred Purchasers (i) an
      aggregate of 317,259 shares of the Company’s Series A Convertible Preferred
      Stock, par value $0.001 per share at the closing price of the Company’s Common
      Stock on The Nasdaq Capital Market on May 24, 2007 (the “Closing Price”),
      and (ii) warrants to purchase an aggregate of 79,315 shares of the Common
      Stock, at an exercise price per share (subject to certain adjustments) equal
      to
      the Closing Price ($7.88) (the “Preferred Private Placement”). The closing of
      the Preferred Private Placement occurred on May 29, 2007.





The
      Preferred Private Placement resulted in gross proceeds to the Company of
      approximately $2.5 million before deducting fees payable to the placement
      agent in the Preferred Private Placement and other transaction expenses payable
      by the Company. The Company agreed to pay aggregate placement agent fees equal
      to seven percent of the gross proceeds to the Company resulting from the
      Preferred Private Placement. The shares of preferred stock, and 50% of the
      warrants, issued to the Preferred Purchasers in the Preferred Private Placement
      were subsequently cancelled in exchange for shares of the Company’s common stock
      (and a nominal amount of cash). For more information, see Note 9 - *Subsequent
      Events* below.





*June
      13, 2007 Transaction*





On
      June 13, 2007, the Company entered into definitive Stock Purchase
      Agreements (the “Purchase Agreements”) with (i) three affiliates of a large
      institutional investment fund and (ii) one other “accredited investor” as
      defined in Rule 501(a) of Regulation D promulgated under the Securities Act
      of 1933, as amended (the “Securities Act”) (the “Purchasers”), pursuant to which
      it agreed to sell to the Purchasers an aggregate of 1,171,875 shares of Common
      Stock (the “Private Placement”). The Private Placement is expected to close in
      two tranches, the closing for the first of which, covering an aggregate of
      664,063 shares of Common Stock, closed on June 20, 2007, and the closing of
      the second of which, covering an aggregate of 507,812 shares of Common Stock,
      is
      expected to occur contemporaneously with the closing of the Company’s proposed
      merger (the “Merger”) with eToys Direct and prior to the effective time of the
      Merger under applicable Delaware law. The funds representing the purchase price
      for the shares of Common Stock issuable in connection with the closing of the
      second tranche of the Private Placement have been placed in escrow with an
      independent escrow agent.





Assuming
      that both tranches of the Private Placement close as intended, the Private
      Placement will result in gross proceeds to the Company of $7.5 million
      before deducting fees payable to the placement agent in the Private Placement
      and other transaction expenses payable by the Company. The Company agreed to
      pay
      aggregate placement agent fees equal to seven percent of the gross proceeds
      to
      the Company resulting from the Private Placement.





For
      more
      information, see Note 5 - *Private
      Placement Transactions* below .







***Principles
      of Consolidation***




The
      Company’s consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America
      (“GAAP”) and include the accounts of the Company and its wholly-owned
      subsidiaries. All material inter-company transactions and balances have been
      eliminated in consolidation.




***Reclassifications***




Certain
      account balances in the prior year have been reclassified to permit comparison
      with the current year.




8




***Basis
      of Presentation***




The
      accompanying unaudited consolidated financial statements should be read in
      conjunction with the Notes to Consolidated Financial Statements contained in
      the
      Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006
      filed with the SEC on April 2, 2007. The same accounting policies are followed
      for preparing quarterly and annual financial statements. In the opinion of
      management, all adjustments necessary for the fair presentation of the results
      of operations, financial position and cash flows have been included and are
      of a
      normal recurring nature.




***Use
      of Estimates***




The
      Company’s consolidated financial statements have been prepared in accordance
      with GAAP.  The preparation of these financial statements requires
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, revenues and expenses, and related disclosures of contingent assets
      and liabilities in the consolidated financial statements and accompanying
      notes.  The Company bases its estimates on historical experience and on
      other assumptions that it believes to be reasonable under the
      circumstances.  However, estimates inherently relate to matters that are
      uncertain at the time the estimates are made, and are based upon information
      presently available.  Actual results may differ significantly from these
      estimates under different assumptions, judgments, or conditions.




***Concentration
      of Credit Risk***




The
      Company’s financial instruments that are exposed to concentration of credit risk
      are cash. Additionally, the Company maintains cash balances in bank deposit
      and
      money market accounts that, at times, may exceed federally insured limits.




***Cash***




The
      Company considers cash in banks, commercial paper and other highly liquid
      investments with insignificant interest rate risk and maturities of three months
      or less at the time of acquisition to be cash.  The Company’s cash balance
      as of June 30, 2007 includes $270,000 held by a commercial bank in a certificate
      of deposit in support of the bank’s $250,000 purchase card credit facility
      extended to the Company. At June 30, 2007, the Company had cash of approximately
      $6.2 million.




***Accounts
      Receivable***




The
      Company’s accounts receivable consist primarily of cash due from credit card
      companies for orders fulfilled prior to the receipt of funds. No allowance
      for
      doubtful accounts has been provided as of June 30, 2007 or December 31,
      2006.




***Inventory***




Inventory,
      which consists primarily of car seats, strollers, bedding, baby toys, learning
      tools and other small items available for sale, is accounted for using the
      first-in first-out (“FIFO”) method, and is valued at the lower of cost or market
      value. This valuation requires the Company to make judgments, based on currently
      available information, about the likely method of disposition, such as sales
      to
      individual customers, returns to product vendors, or liquidations, and expected
      recoverable values of each method of disposition. As of June 30, 2007 and
      December 31, 2006, the Company has provided a reserve for inventory obsolescence
      of $0 and $49,000, respectively.




***Prepaid
      Expenses***




Prepaid
      expenses include amounts paid in advance for acquisition costs and strategic
      initiative costs.




9




***Fixed
      Assets***




Fixed
      assets are stated at historical cost. Depreciation and amortization are computed
      using the straight line method over the estimated useful life of the asset.
      Leasehold improvements are amortized over the term of their estimated useful
      lives or the related leases, whichever is shorter.




The
      Company capitalizes certain costs incurred in connection with the development
      of
      or obtaining internal use software in accordance with American Institute of
      Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use* ,
      and
      Emerging Issues Task Force (“EITF”) 00-2, *Accounting
      for Web Site Development Costs* .




***Long-Lived
      Assets***




The
      Company reviews its long-lived assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of the asset may not be
      recovered. The Company looks primarily to the undiscounted future cash flows
      in
      its assessment of whether or not long-lived assets have been impaired. At June
      30, 2007 and December 31, 2006, the Company determined there was no
      impairment.




***Deposits***




Deposits
      consist of security deposits for the lease of the Company’s office and warehouse
      facilities.




***Goodwill***




Statement
      of Financial Accounting Standard (“SFAS”) No. 141, *Business
      Combinations* ,
      requires that all business combinations be accounted for using the purchase
      method of accounting and that certain intangible assets acquired in a business
      combination be recognized as assets separate from goodwill. Goodwill is not
      subject to amortization and is tested for impairment annually or more frequently
      if events or changes in circumstances indicate that the asset may be impaired
      in
      accordance with SFAS No. 142, *Goodwill
      and Other Intangible Assets.* The
      impairment test consists of a comparison of the fair value of the reporting
      unit
      with its carrying amount.  If the carrying amount of the reporting unit
      exceeds its fair value, then an analysis will be performed to compare the
      implied fair value with the carrying amount of goodwill. An impairment loss
      would be recognized in an amount equal to the difference. Fair value is
      generally based upon future cash flows discounted at a rate that reflects the
      risk involved or market-based comparables. After an impairment loss is
      recognized, the adjusted carrying amount of goodwill becomes its new accounting
      basis.




***Gift
      Certificate Liability***




The
      Company sells gift certificates to be exchanged for merchandise at the
      discretion of the certificate holder. The Company has determined that
      certificates over one year old, generally, are not redeemed.  Certificates
      of less than one year are recorded as a current liability on the Company’s
      Consolidated Balance Sheets. Based on historical data, the Company has
      determined that the dollar value of certificates redeemed, whose age is greater
      than one year, is immaterial to total revenue.




***Deferred
      Revenue***




Deferred
      revenue represents payments received from customers before products are
      shipped.




***Revenue
      Recognition***




The
      Company has adopted the SEC’s Staff Accounting Bulletin (“SAB”) ** No. 101 *—
      Revenue Recognition* ,
      which
      provides that revenue is both earned and realizable when the following four
      conditions are met:




•
            Pervasive
                evidence of an arrangement exists,•
            The
                selling price is fixed or determinable,•
            Delivery
                or performance has occurred, and•
            Collectibility
                is reasonably assured




10




Per
      SAB
      No. 104 *Revenue
      Recognition,* which
      further clarifies SAB No. 101, if merchandise is shipped to customers
      F.O.B. Shipping Point, title is considered to have transferred to the customer
      at the time the merchandise is delivered to the carrier. The Company’s policy is
      to ship F.O.B. Shipping Point from its warehouses and drop ship locations,
      and
      therefore delivery is deemed to have occurred at time of shipment.




The
      Company has also adopted EITF 99-19 *,
      Reporting Revenue Gross as a Principal versus Net as an Agent* ,
      as its
      formal guidelines for the recognition of revenue in its financial statements.
      All sales are completed through the Company and liability for product purchases
      is paid by the Company. Therefore, the Company recognizes the gross sales price
      as its revenue at the time that the product is delivered to the
      carrier.




Return
      allowances, which reduce product revenue, are estimated using historical
      experience.




***Cost
      of Goods Sold***




Cost
      of
      goods sold consists of the purchase price of the Company’s products that were
      sold, inbound and outbound shipping costs, and purchase discounts and credits
      that the Company earned.




***Advertising***




The
      Company’s marketing consists primarily of online advertising with a number of
      Internet providers, which includes portal advertising, search engine marketing,
      other programs designed to educate customers about the Company’s brands and
      products and commissions paid to online comparison shopping sites. All
      advertising costs are expensed as incurred.




***Share-Based
      Compensation***




Effective
      upon the commencement of the Company’s fiscal year that began on January 1,
      2006, the Company adopted the accounting and disclosure provisions of SFAS
      No. 123(R), *Share-Based
      Payments* ,
      which
      requires that new, modified and unvested share-based payment transactions with
      employees, such as awards of stock options and restricted stock, be measured
      at
      fair value and recognized as compensation expense over the vesting period.




The
      Company adopted SFAS No. 123(R) using the modified prospective application
      transition method.  Under the modified prospective application transition
      method, compensation cost is recognized on or after the required effective
      date
      for the portion of outstanding awards at the date of adoption, for which the
      requisite service has not yet been rendered, based on the grant-date fair value
      of those awards calculated under SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      for
      either recognition or pro forma disclosures.  As part of adopting the
      modified prospective approach during the transitional period, the Company
      considered the determination of a one-time cumulative effect adjustment for
      the
      portion of stock options granted prior to January 1, 2006 that had not
      vested.  However, as of January 1, 2006, no cumulative effect adjustment
      was required, because the requisite service had previously been fully rendered
      for outstanding awards, and because the Company accounted for the Company’s 2005
      Stock Incentive Plan under Accounting Principles Board (“APB”) Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      instead
      of SFAS No. 123.




As
      of
      June 30, 2007, an aggregate of 364,123 shares of common stock are reserved
      for issuance under the Company’s 2005 Stock Incentive Plan. Restricted stock
      grants and stock option grants were outstanding for an aggregate of 43,999
      and
      114,500 shares, respectively, and 205,624 shares remained available for
      grant. In addition, there were outstanding options to purchase a total of
      154,248 shares of the Company’s common stock, and 30,000 shares of
      restricted stock, which were granted outside of the Company’s 2005 Stock
      Incentive Plan.  Shares issued pursuant to the Company’s 2005 Stock
      Incentive Plan will be newly-issued and authorized shares of common stock or
      treasury shares.




***Technology***




Technology
      costs are expensed as incurred, except in those circumstances where the costs
      are related to the development of internal-use software and website
      development.  In accordance with SOP 98-1, these costs are capitalized
      and depreciated over a 5-year period. During the three and six month periods
      ended June 30, 2007, the Company capitalized costs of $56,823 and $156,618,
      respectively.




11




***Income
      Taxes***




The
      Financial Accounting Standards Board (“FASB”) issued SFAS No. 109, *Accounting
      for Income Taxes* ,
      which
      requires companies to use the asset and liability method of accounting for
      income taxes. Under the asset and liability method, deferred income taxes are
      recognized for the tax consequence of temporary differences by applying enacted
      statutory tax rates applicable to future year’s differences between the
      financial statements carrying amounts and the tax basis of existing assets
      and
      liabilities. Pursuant to SFAS No. 109, the effect on deferred taxes of
      a change in tax rates is recognized in income in the period that includes the
      enactment date. Under the deferred method, deferred taxes were recognized using
      the tax applicable to the year of the calculation and were not adjusted for
      subsequent changes in tax rates.




Beginning
      January 1, 2007, the Company adopted the provisions of the FASB’s Financial
      Interpretation Number 48 (FIN. 48), *Accounting
      for Uncertain Income Tax Positions.* When
      tax
      returns are filed, it is highly certain that some positions taken would be
      sustained upon examination by the taxing authorities, while others are subject
      to uncertainty about the merits of the position taken or the amount of the
      position that would be ultimately sustained. In accordance with the guidance
      of
      FIN 48, the benefit of a tax position is recognized in the financial statements
      in the period during which, based on all available evidence, management believes
      it is more likely than not that the position will be sustained upon examination,
      including the resolution of appeals or litigation processes, if any. Tax
      positions taken are not offset or aggregated with other positions. Tax positions
      that meet the more-likely-than-not recognition threshold are measured as the
      largest amount of tax benefit that is more than 50 percent likely of being
      realized upon settlement with the applicable taxing authority. The portion
      of
      the benefits associated with tax positions taken that exceeds the amount
      measured as described above should be reflected as a liability for unrecognized
      tax benefits in the accompanying balance sheet along with any associated
      interest and penalties that would be payable to the taxing authorities upon
      examination. The Company believes its tax positions are all highly certain
      of
      being upheld upon examination. As such, the Company has not recorded a liability
      for unrecognized tax benefits.




Effective
      January 1, 2007, the Company adopted FASB Staff Position FIN
      48-1,*Definition
      of Settlement in FASB Interpretation No. 48*,
      (“FSP
      FIN 48-1”), which was issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 to
      provide guidance on how an entity should determine whether a tax position is
      effectively settled for the purpose of recognizing previously unrecognized
      tax
      benefits. The term “effectively settled” replaces the term “ultimately settled”
when used to describe recognition, and the terms “settlement” or “settled”
replace the terms “ultimate settlement” or “ultimately settled” when used to
      describe measurement of a tax position under FIN 48. FSP FIN 48-1 clarifies
      that
      a tax position can be effectively settled upon the completion of an examination
      by a taxing authority without being legally extinguished. For tax positions
      considered effectively settled, an entity would recognize the full amount of
      tax
      benefit, even if the tax position is not considered more likely than not to
      be
      sustained based solely on the basis of its technical merits and the statute
      of
      limitations remains open. The adoption of FSP FIN 48-1did not
      have an impact on the accompanying financial statements.






***Earnings
      (Loss) per Share***




The
      Company computes earnings (loss) per share in accordance with the provisions
      of
      SFAS No. 128, *Earnings
      per Share* .
      Under
      the provisions of SFAS No. 128, basic earnings per share (EPS) is computed
      by dividing the net earnings (loss) from operations for the period by the
      weighted average number of common shares outstanding for the period. Diluted
      EPS
      reflects the potential dilution that could occur from common stock issuable
      through share-based compensation including stock options, restricted stock
      awards, warrants and other convertible securities.




For
      the
      three and six month periods ended June 30, 2007, the Company reported net
      losses. The diluted earnings per share are not presented for those periods
      since
      the effect is antidilutive.




***Fair
      Value of Financial Instruments***




The
      carrying amounts of financial instruments including cash, accounts receivable,
      accounts payable and accrued expenses, approximate fair value as of June 30,
      2007, as a result of the relatively short maturity of these instruments. Notes
      and capital leases are reflected at fair value and are recorded net of the
      unamortized discount.




12




***Recently
      Issued Accounting Standards***




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value and expands
      disclosures about fair value measurements. This statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. Early adoption is encouraged,
      provided that the adopting company has not yet issued financial statements
      for
      that fiscal year, including any financial statements for an interim period
      within that fiscal year. The Company is currently evaluating the impact SFAS
      No.
      157 may have on its consolidated financial condition or results of operations.




In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB No.
      108 provides guidance on the consideration of the effects of prior year
      misstatements in quantifying current year misstatements for the purpose of
      a
      materiality assessment. SAB No. 108 establishes an approach that requires
      quantification of financial statement errors based on the effects on each of
      the
      Company’s balance sheet and statement of operations and the related financial
      statement disclosures. SAB No. 108 permits existing public companies to record
      the cumulative effect of initially applying this approach in the first year
      ending after November 15, 2006 by recording the necessary correcting adjustments
      to the carrying values of assets and liabilities as of the beginning of that
      year with the offsetting adjustment recorded to the opening balance of retained
      earnings. Additionally, the use of the cumulative effect transition method
      requires detailed disclosure of the nature and amount of each individual error
      being corrected through the cumulative adjustment and how and when it arose.
      Management does not expect SAB No. 108 to have a material impact, if any, on
      its
      consolidated financial condition or results of operations.




In
      September 2006, the FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans—an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* .
      SFAS
      No. 158 improves financial reporting by requiring an employer to recognize
      the
      overfunded or underfunded status of a defined benefit postretirement plan (other
      than a multiemployer plan) as an asset or liability in its statement of
      financial position and to recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income of a business entity or
      changes in unrestricted net assets of a not-for-profit organization. SFAS No.
      158 also improves financial reporting by requiring an employer to measure the
      funded status of a plan as of the date of its year-end statement of financial
      position, with limited exceptions. ** An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006.  Earlier application of the recognition or measurement
      date provisions is encouraged; however, early application must be for all of
      an
      employer’s benefit plans. Retrospective application of SFAS No. 158 is not
      permitted.  Management does not expect adoption of SFAS No. 158 to have a
      material impact, if any, on the Company’s consolidated financial position or
      results of operations.




In
      February 2007, the FASB issued SFAS No. 159 *,
      The
      Fair Value Option for Financial Assets and Financial Liabilities-Including
      an
      amendment of FASB Statement No. 115* .
      SFAS
      No. 159  expands
      the use of fair value accounting but does not affect existing standards which
      require assets and liabilities to be carried at fair value. Under SFAS No.
      159,
      a company may elect to use fair value to measure accounts and loans receivable,
      available-for-sale and held-to-maturity securities, equity method investments,
      accounts payable, guarantees, issued debt and other eligible financial
      instruments. SFAS No. 159 is effective for fiscal years beginning after November
      15, 2007. Management does not expect adoption of SFAS No. 159 to have a material
      impact, if any, on the Company’s consolidated financial position or results of
      operations.








**Note
      2 - Intangible Assets**




The
      Company reviews for the impairment of long-lived assets and certain identifiable
      intangibles whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable in accordance with the
      provisions of SFAS No. 144, **** *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .





13
 
  Identifiable
        intangible assets are amortized under the straight-line method over the period
        of expected benefit ranging from three to five years, unless they were
        determined to be subject to indefinite lives.  The following table sets
        forth the components of intangible assets as of June 30, 2007
        (Unaudited):





**Gross****Useful**
            
            **Carrying**
            
            
            
            **Accumulated****Life**
            
            **Amount**
            
            **Acquisition**
            
            **Amortization**
            
            **Net****Dreamtime
                Baby**Trade
                name
            
            
            5
                years
            
            $
            140,000
            
            $
            --
            
            
            ($50,167
            )
            $
            89,833Non-competition
                Agreement
            
            
            3
                years
            
            
            50,000
            
            
            --
            
            
            (29,861
            )
            
            20,139190,000
            
            
            --
            
            
            ($80,028
            )
            
            109,972**Posh
                Tots**Trade
                name
            
            
            Indefinite
            
            
            2,200,000
            
            
            --
            
            
            --
            
            
            2,200,000Customer
                list
            
            
            4
                years
            
            
            260,000
            
            
            --
            
            
            (100,000
            )
            
            160,000Contents
                of catalogue / website
            
            
            3
                years
            
            
            200,000
            
            
            --
            
            
            (97,500
            )
            
            102,5002,660,000
            
            
            --
            
            
            (197,500
            )
            
            2,462,500**ePregnancy**
            
            
            3
                years
            
            
            184,257
            
            
            --
            
            
            (63,978
            )
            
            120,279**Total
                Intangible Assets**
            
            
            
            
            $
            3,034,257
            
            $
            --
            
            
            ($341,506
            )
            $
            2,692,751







Amortization
      expense for the three month and year-to-date periods ended June 30, 2007 was
      $59,439 and $118,877, respectively. The estimated amortization expense remaining
      for the periods ending December 31, is as follows (unaudited):




2007
            
            $
            118,8762008
            
            
            232,8922009
            
            
            121,1502010
            
            
            19,833$
            492,751




**Note
      3 - Note and Capital Lease Payables**




Debt
      outstanding at June 30, 2007 (unaudited) and December 31, 2006 was as
      follows:




**June
                30,**
              **2007**
            
            
            **December
                31,**
              **2006**Note
                payable, prime rate plus 2.35%  (10.6%), due
                July 2009
            
            $
            5,000,000
            
            $
            5,000,000Note
                payable, at prime (8.25%) due July 2008
            
            
            2,000,000
            
            
            2,000,000Unamortized
                debt discount and finance costs associated with note payable
            
            
            (548,212
            )
            
            (689,029
            )Capital
                leases
            
            
            24,272
            
            
            27,960Total
                notes payable and capital leases
            
            
            6,476,060
            
            
            6,338,931Less:
                Current maturities
            
            
            (1,616,172
            )
            
            (561,090
            )Total
                notes payable and capital leases
            
            $
            4,859,888
            
            $
            5,777,841






On
      May
      15, 2007, the Company informed its lender with respect to the $5,000,000 note
      payable that the Company was in default of its working capital loan covenant
      for
      failure to maintain a working capital ratio of 1.0 as of March 31, 2007. Under
      the senior loan and security agreement controlling such note payable, the
      Company has a period of 45 days from the date of such notification of default
      to
      complete a financing transaction resulting in the cure of the default. The
      Company notified its lender on May 24, 2007 that it had cured its working
      capital loan covenant default as a result of the execution of a private
      placement transaction (See Note 5 - *Private
      Placement Transactions* ).





14





**Note
      4 - Operational Reorganization and Restructuring**






During
      the first quarter of 2006, the Company initiated a multi-faceted reorganization
      and restructuring plan (the “Plan”), which was completed during the second
      quarter of 2006. The objectives of the Plan were to (1) integrate the business
      operations of two recent acquisitions with the Company’s e-commerce business in
      order to achieve greater efficiency, and (2) benefit from certain business
      strengths and best practices of the acquired organizations. The Plan was
      comprised of the following specific elements:




•
            Opening
                the Company’s new distribution center in 24,000 square feet of leased
                space in Las Vegas in January 2006.•
            Implementing
                a new warehouse management system for the Las Vegas distribution
                center in
                March 2006.•
            Relocating
                DreamtimeBaby’s business operations and inventory from its Los
                Angeles-area headquarters to the Las Vegas distribution center during
                March 2006.•
            Relocating
                the BabyUniverse inventory and distribution activities from its Fort
                Lauderdale warehouse to the Las Vegas distribution center during
                February
                2006.•
            Restructuring
                the BabyUniverse e-commerce business operations by consolidating
                substantially all activities within the PoshTots’ management organization
                in Richmond during May 2006.•
            Reorganizing
                and consolidating the senior management organization in corporate
                offices
                in Jupiter, Florida during June 2006. The corporate offices house
                the
                Company’s executive management organization and certain corporate services
                including strategic planning, finance, technology, logistics and
                new media
                development.




The
      restructuring expenses related to the Plan have been accounted for pursuant
      to
      SFAS No. 146, *Accounting
      for Costs Associated with Exit or Disposal Activities* ,
      which
      addresses exit or disposal activities including one-time involuntary employee
      termination benefits, contract termination costs and costs to consolidate
      facilities or relocate employees.




The
      major
      costs associated with implementing the Plan were as follows:




•
            One-time
                termination benefits were provided to certain employees that were
                involuntarily terminated pursuant to the Plan, which was announced
                in
                February of 2006.  The affected employees were required to render
                service through various dates to June 15, 2006 in order to receive
                the
                termination benefits. The total amount paid for one-time termination
                benefits was approximately $111,000. Approximately $43,000 and $68,000
                of
                one-time termination benefits were recognized during the first and
                second
                quarters of 2006, respectively.•
            The
                Company entered into a sublease for the remainder of the term of
                the
                operating lease for its offices and warehouse in Fort Lauderdale,
                Florida.•
            Other
                costs incurred as a result of the restructuring include costs to
                close the
                Company’s facilities in Fort Lauderdale and Los Angeles and to relocate
                certain activities to the Las Vegas distribution center, to PoshTots’
                headquarters in Richmond, and to the Company’s corporate office in
                Jupiter, Florida. The total amount paid for other restructuring costs
                was
                approximately $323,000, of which approximately $249,000 was recognized
                as
                restructuring expenses for the quarter ended June 30,
                2006.





**Note
      5 - Private Placement Transactions**




*May
      24, 2007 Transactions*




On
      May 24, 2007, the Company entered into Securities Purchase Agreements with
      two affiliates of a large institutional investment fund (each, a “Preferred
      Purchaser”) pursuant to which it sold to the Preferred Purchasers (i) an
      aggregate of 317,259 shares of the Company’s Series A Convertible Preferred
      Stock, par value $0.001 per share (the “Preferred Stock”), at the closing price
      of the Company’s Common Stock on The Nasdaq Capital Market on May 24, 2007
      (the “Closing Price”), and (ii) warrants to purchase an aggregate of 79,315
      shares of the Common Stock, at an exercise price per share (subject to certain
      adjustments) equal to the Closing Price ($7.88) (the “Preferred Private
      Placement”). The warrants are exercisable on the date that is six months and one
      day from the date of issuance (the "Commencement Date") and expire seven years
      from the Commencement Date. The closing of the Preferred Private Placement
      occurred on May 29, 2007.




The
      shares of
      Preferred Stock (the "Preferred Shares") are convertible into shares of the
      Company's Common Stock, par value $0.001 per share (the "Common Stock"), at
      the
      option of the Preferred Purchasers, initially at a conversion ratio of 1:1,
      subject to adjustment.  If the Preferred Shares are not converted at the
      option of the Preferred Purchasers, such shares will convert automatically
      at a
      ratio of 1:1, subject to adjustment, into shares of Common Stock on the date
      on
      or prior to December 31, 2007 that the Company's proposed merger with eToys
      Direct is effective. In addition, if either the Company is unable to complete
      additional financing transactions with gross proceeds of $8.0 million, or if
      the
      proposed merger transaction with eToys Direct is not completed, in either case,
      prior to October 15, 2007, the Company will be required to issue an additional
      aggregate of 47,589 and 31,727 shares of Common Stock, respectively, to the
      Preferred Purchasers. If the Company completes a private placement transaction,
      subsequent to the Preferred Private Placement, on terms more favorable to the
      purchasers than the terms of the Preferred Private Placement, the Preferred
      Purchasers may, at any time prior to the completion of the proposed merger
      with
      eToys Direct, elect to exchange the Preferred Shares and 50% of the warrants
      for
      that number (and kind) of securities derived by dividing the gross proceeds
      to
      the Company from the Preferred Private Placement by the sale price per security
      of the subsequent private placement.  Additionally, the holders of the
      Preferred Shares were granted certain registration rights and related
      privileges.




15




The
      Preferred Private Placement resulted in gross proceeds to the Company of
      approximately $2.5 million before deducting fees payable to the placement
      agent in the Preferred Private Placement and other transaction expenses payable
      by the Company. The Company agreed to pay aggregate placement agent fees equal
      to seven percent of the gross proceeds to the Company resulting from the
      Preferred Private Placement. In accordance with Emerging Issues Task Force
      Abstracts EITF 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios,* and
      EITF
      00-27, *Application of Issue No. 98-5 to Certain Convertible
      Instruments* ,
      the
      Company recognized a beneficial conversion feature discount, in the amount
      of
      $100,000, in connection with the Preferred Private Placement. This discount
      was
      fully amortized to accumulated deficit as of May 29, 2007, the date the
      Preferred Stock first became convertible. The Company received proceeds of
      $2.5
      million in exchange for Preferred Stock and warrants with fair market values
      of
      $2.5 million and $104,000, respectively, on May 24, 2007. ** The
      shares of Preferred Stock, and 50% of the warrants, issued to the Preferred
      Purchasers in the Preferred Private Placement were subsequently cancelled in
      exchange for shares of the Common Stock (and a nominal amount of cash). ** For
      additional information, see Note 9 *-
      Subsequent Events* below *.*




On
      May 29, 2007, the Company filed with the Department of State of the State
      of Florida an amendment (the “Amendment”) to its Amended and Restated Articles
      of Incorporation which sets forth the number, designation, and relative rights,
      preferences and limitations of a series of the Company’s preferred stock
      designated as “Series A Convertible Preferred Stock”.





*June
      13, 2007 Transaction*





On
      June 13, 2007, the Company entered into definitive Stock Purchase
      Agreements (the “Purchase Agreements”) with (i) three affiliates of a large
      institutional investment fund and (ii) one other “accredited investor” as
      defined in Rule 501(a) of Regulation D promulgated under the Securities Act
      of 1933, as amended (the “Securities Act”) (the “Purchasers”), pursuant to which
      it agreed to sell to the Purchasers an aggregate of 1,171,875 shares of Common
      Stock (the “Private Placement”). The Private Placement is expected to close in
      two tranches, the closing for the first of which, covering an aggregate of
      664,063 shares of Common Stock, closed on June 20, 2007, and the closing of
      the second of which, covering an aggregate of 507,812 shares of Common Stock,
      is
      expected to occur contemporaneously with the closing of the Company’s proposed
      merger (the “Merger”) with eToys Direct and prior to the effective time of the
      Merger under applicable Delaware law. The funds representing the purchase price
      for the shares of Common Stock issuable in connection with the closing of the
      second tranche of the Private Placement have been placed in escrow with an
      independent escrow agent.





Assuming
      that both tranches of the Private Placement close as intended, the Private
      Placement will result in gross proceeds to the Company of $7.5 million
      before deducting fees payable to the placement agent in the Private Placement
      and other transaction expenses payable by the Company. The Company agreed to
      pay
      aggregate placement agent fees equal to seven percent of the gross proceeds
      to
      the Company resulting from the Private Placement.








**Note
      6 - Earnings (Loss) Per Share**





Basic
      earnings (loss) per share are based on the weighted average number of common
      shares outstanding. Diluted earnings (loss) per share are based on the weighted
      average number of common shares and equivalents outstanding. Common share
      equivalents included in the computation represent shares issuable upon assumed
      exercise of outstanding stock options and warrants.




The
      following table sets forth the computation of basic and diluted earnings (loss)
      per share:





16





**Quarter
                Ended**
              **June
                30,**
            
            **Year-to-Date
                Ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                loss attributable to common stockholders
            
            
            ($1,962,531
            )
            
            ($1,205,286
            )
            
            ($3,706,211
            )
            
            ($1,402,007
            )Weighted
                average common shares outstanding
            
            
            5,779,402
            
            
            5,336,712
            
            
            5,733,193
            
            
            5,316,662Basic
                earnings (loss) per common share
            
            
            ($0.34
            )
            
            ($0.23
            )
            
            ($0.65
            )
            
            ($0.26
            )Dilutive
                effect of stock options and warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --Common
                stock and common stock equivalents
            
            
            5,779,402
            
            
            5,336,712
            
            
            5,733,193
            
            
            5,316,662Diluted
                earnings (loss) per share
            
            
            ($0.34
            )
            
            ($0.23
            )
            
            ($0.65
            )
            
            ($0.26
            )The
                following is a summary of the securities outstanding during the respective
                periods that have been excluded from the calculations because the
                effect
                on earnings (loss) per share would have been
                antidilutive:Dilutive
                effect of stock options, warrants and convertible preferred
                stock
            
            
            838,245
            
            
            680,559
            
            
            763,164
            
            
            658,601








**Note
      7 - Stock Options**





The
      Company’s 2001 Stock Award Plan was amended in April 2005 by our board of
      directors and shareholders and was renamed the 2005 Stock Incentive Plan. Under
      the Company’s 2005 Stock Incentive Plan, the exercise price of each option
      equals the market price of the stock on the date of grant, the graded vesting
      period generally ranges between two and five years, and the contractual term
      ranges between two and ten years.





The
      fair
      value of each stock option granted is estimated on the date of the grant using
      the Black-Scholes option pricing model. The Company uses an estimated forfeiture
      rate of 0% due to limited experience with historical employee forfeitures.
      The
      Black-Scholes option pricing model also requires assumptions for risk-free
      interest rates, dividend rate, stock volatility and expected life of an option
      grant. The risk-free interest rate is based on the U.S. Treasury Bill rate
      with
      a maturity based on the expected life of the options. Dividend rates are based
      on the Company's dividend history. The stock volatility factor is based on
      a
      peer group analysis of the stock market prices for eight comparable companies
      determined by the Company. Expected life is determined using the “simplified
      method” permitted by the SEC’s SAB No. 107, since the Company does not have
      sufficient historical experience. The fair value of each option grant is
      recognized as compensation expense over the vesting period of the option on
      a
      straight line basis.





The
      following table summarizes information about stock option transactions for
      the
      quarters ended June 30, 2007 and 2006.





**2007**
            
            **2006****Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Shares**
            
            **Weighted
                Average Exercise Price**Outstanding
                at beginning of the quarter
            
            
            271,248
            
            $
            6.39
            
            
            229,248
            
            $
            6.13Granted
            
            
            -
            
            
            -
            
            
            50,000
            
            $
            9.86Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            (2,500
            )
            $
            8.10
            
            
            -
            
            
            -Outstanding
                at end of the quarter
            
            
            268,748
            
            $
            6.37
            
            
            279,248
            
            $
            6.80Options
                exercisable at end of quarter
            
            
            173,706
            
            $
            5.35
            
            
            104,248
            
            $
            3.76Weighted
                average fair value of options granted during the quarter
            
            
            
            
            
            n/a
            
            
            
            
            $
            3.81





17




The
      following table summarizes information about stock options outstanding at June
      30, 2007:





**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted
                Average****Range
                of**
            
            **Number**
            
            **Remaining**
            
            **Weighted**
            
            **Number****Exercise**
            
            **Outstanding**
            
            **Contractual
                Life**
            
            **Average**
            
            **Exercisable
                at**
            
            **Weighted
                Average****Prices**
            
            **at
                6/30/07**
            
            **(years)**
            
            **Exercise
                Price**
            
            **6/30/07**
            
            **Exercise
                Price**$0.01
                to $ 3.50
            
            
            52,124
            
            
            6.8
            
            $
            1.27
            
            
            52,124
            
            $
            1.27$3.51
                to $7.00
            
            
            104,124
            
            
            4.3
            
            $
            6.22
            
            
            80,749
            
            $
            6.26$7.01
                to $10.00
            
            
            112,500
            
            
            1.0
            
            $
            8.88
            
            
            40,833
            
            $
            8.70




The
      Company recorded $49,379 and $88,036 of compensation expense for employee stock
      options during the three month periods ended June 30, 2007 and 2006,
      respectively. At June 30, 2007 there was a total of $136,870 of unrecognized
      compensation costs related to non-vested share-based compensation arrangements
      under the Company’s 2005 Stock Incentive Plan. The cost is expected to be
      recognized over a weighted average period of 1.25 years.




During
      the three months ended June 30, 2007, the Company issued 41,166 shares of common
      stock related to restricted shares that vested and 16,889 unvested restricted
      shares were cancelled. The Company did not grant any additional restricted
      shares under the Company’s 2005 Stock Incentive Plan, during the three months
      ended June 30, 2007.  As such, at June 30, 2007 there are 43,999 unvested
      restricted shares.




As
      of
      June 30, 2007, an aggregate of 364,123 shares of common stock are reserved
      for issuance under the Company’s 2005 Stock Incentive Plan. Restricted stock
      grants and stock option grants were outstanding for an aggregate of 43,999
      and
      114,500 shares of common stock, respectively, and 205,624 shares of common
      stock remained available for grant. In addition, there were outstanding options
      to purchase a total of 154,248 shares of our common stock, and 30,000
      shares of restricted stock, which were granted outside of the Company’s 2005
      Stock Incentive Plan.  Shares issued pursuant to the Company’s 2005 Stock
      Incentive Plan will be newly-issued and authorized shares of common stock,
      or
      treasury shares.




**Note
      8 - Income Taxes**




The
      Company or one of its subsidiaries files income tax returns in the U.S. federal
      jurisdiction and various states. With one exception, the Company is no longer
      subject to U.S. federal or state income tax examinations by tax authorities
      for
      years before 2001. None of the tax years subject to examination are currently
      under examination by a tax authority and the Company has not received notice
      of
      the intent by any tax authority to commence an examination.




The
      Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
      the
      implementation of FIN 48, the Company did not recognize any liability for
      unrecognized tax benefits, since the Company has concluded that all of its
      tax
      positions are highly certain of being upheld upon examination by federal or
      state tax authorities.




**Note
      9 - Subsequent Events**




*July
      6* *th* *Transaction*




As
      of
      July 6, 2007, in addition to the transactions described in Note 5 - *Private
      Placement Transactions* above,
      the Company entered into definitive Stock Purchase Agreements with the Preferred
      Purchasers, pursuant to which all shares of the Company’s Series A Convertible
      Preferred Stock, par value $0.001 per share, and 50% of the warrants to purchase
      shares of the Common Stock, issued in connection with the Preferred Private
      Placement were cancelled and exchanged for (i) an aggregate of 390,625 shares
      of
      the Company’s Common Stock issued to the Preferred Purchasers, and (ii) a
      nominal amount of cash (for the purpose of avoiding the issuance of fractional
      shares of the Common Stock) paid to the Preferred Purchasers (the “Exchange”).
      The 50% of the warrants issued in the Preferred Private Placement that were
      not
      cancelled in the Exchange (the “Retained Warrants”) were retained by the
      Preferred Purchasers. The Preferred Purchasers elected to enter into the
      Exchange in order to receive terms comparable to those afforded the Purchasers
      in the June 13, 2007 Stock Purchase Agreements. The Company effected the
      Exchange pursuant to the terms of the original Preferred Purchase Agreements
      entered into with the Preferred Purchasers in connection with the Preferred
      Private Placement. The closing of the transactions constituting the Exchange
      occurred as of July 6, 2007.




18




The
      Exchange will not result in any proceeds to the Company in addition to those
      already received by the Company in connection with the Preferred Private
      Placement. As a result of the Exchange, an additional beneficial conversion
      feature discount of $519,657 will be recognized and amortized in accordance
      with
      EITF 98-5 and EITF 00-27. In total, as a result of the Exchange, the Company
      issued Common Stock and warrants with fair market values, as of May 24, 2007,
      of
      $3,078,125 and $52,000, respectively, in exchange for proceeds of $2.5 million.
      See Note 5 - *Private
      Placement Transactions* for
      further information.




*Exemption
      from Registration and Filing of Registration Statement*




The
      offer, issuance and sale of the securities in the Preferred Private Placement,
      the Private Placement, and the Exchange were exempt from registration under
      the
      Securities Act, pursuant to Section 4(2) thereof and Regulation D promulgated
      thereunder. Each of the Preferred Purchasers and the Purchasers has represented
      to the Company that it is an “accredited investor” as defined in Rule 501(a) of
      Regulation D.




The
      Company filed a Registration Statement on Form S-3 with the SEC on July 9,
      2007
      to register the resale of the aggregate of 1,094,346 shares of common stock
      issued as of such date to the purchasers in the private placements described
      above, including the shares of Common Stock underlying the Retained Warrants.
      Until such time as the SEC declares this Registration Statement to be effective,
      the resale of such shares of Common Stock will not be registered under the
      Securities Act.




19




**Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**




The
      Company is a leading Internet content, commerce and new media company in the
      pregnancy, baby, toddler and maternity marketplace.  Through its websites
      BabyUniverse.com and DreamtimeBaby.com, the Company is a leading online retailer
      of brand-name baby, toddler and maternity products in the United States. 
Through its websites PoshTots.com and PoshLiving.com, the Company has
      extended its offerings in the baby and toddler market as a leading online
      provider of luxury furnishings to the country’s most affluent female
      consumers.  Through its websites PoshCravings.com, ePregnancy.com and
      BabyTV.com, the Company has also established a recognized platform for the
      delivery of content and new media resources to a national audience of expectant
      parents.




We
      offer
      over 35,000 products from over 600 manufacturers in easy-to-use online shopping
      environments that include baby, toddler and maternity accessories, apparel,
      bedding, furniture, toys and gifts. These products are available in a variety
      of
      styles, colors and sizes which account for over 750,000 stock keeping units
      (“SKUs”). We also provide expert buyer’s guides and in-depth product
      descriptions to assist our customers with finding quality products and to help
      parents make informed decisions about their babies’ and toddlers’ needs and
      safety.  Overall, we provide a compelling combination of high quality
      products at competitive prices, a convenient shopping experience and excellent
      customer service that allows us to build an ongoing and potentially long-term
      relationship with our customers.




We
      review
      our operations based on both our financial results and various non-financial
      measures. Among the key financial factors upon which management focuses in
      reviewing performance are trends in sales, gross margin and operating income
      (or
      loss).  As an online retailer, we do not incur many of the operating costs
      associated with physical retail stores. However, a significant amount of our
      operating expenses, as a percentage of net sales, is spent on online advertising
      and commissions instead of maintaining physical retail stores and sales
      staff.  Our advertising and commission spending is an important factor in
      our sales growth, and we continuously monitor its effectiveness.  Our
      financial results, including our sales, gross profit and operating income (or
      loss) can and do vary significantly from quarter to quarter as a result of
      a
      number of factors, many of which are beyond our control. These factors include
      general economic conditions, the costs to acquire our inventory and fulfill
      orders, the mix of our product sales and our competitors’ pricing and marketing
      strategies.  Our total cost to fulfill orders is especially sensitive to
      potential fuel cost increases that may result from a continuing destabilization
      of world energy markets.




We
      generally own and hold only a portion of the inventory needed to support our
      level of sales. Although we have continued to increase inventory of those items
      with lower risk due to higher demand and turnover, a significant portion of
      the
      inventory we offer is owned by our suppliers. This enables us to reduce some
      of
      the cost and risk associated with carrying a full inventory of the products
      we
      sell. Upon receipt of a customer order for a specific product that will be
      drop-shipped from a supplier, we simultaneously purchase that product from
      our
      supplier, who ships it directly to our customer. Since our inception, our
      business model has minimized inventory risk by maximizing the number of products
      we sell that are owned by others.




Among
      the
      key non-financial measures which management reviews are customer feedback,
      website traffic, sales conversion rates ( *i.e.,* the
      percentage of visitors to our websites who make a purchase) and number of
      orders. We believe that maintaining high overall customer satisfaction and
      an
      enjoyable shopping experience are critical to our ongoing efforts to promote
      our
      brands and to increase our sales and improve our operating results. We actively
      solicit customer feedback about our websites’ functionality as well as the
      entire shopping experience through third-party business rating and price
      comparison websites such as Shopping.com and Shopzilla.com., Nextag.com,
      PriceGrabber.com and Shop.com. To maintain a high level of performance by our
      customer care representatives, we also undertake an ongoing customer feedback
      process. If we are unable to meet customer expectations with respect to price
      or
      do not successfully expand our product lines or otherwise fail to maintain
      high
      overall customer satisfaction, our financial condition and results of operations
      would be harmed.




The
      market for online retailers offering baby, toddler and maternity related
      products is highly fragmented, with a significant number of small competitors
      representing a significant percentage of total segment sales. We believe that
      our senior management team and our scalable business architecture make us
      well-suited to acquire both large and small industry competitors. As part of
      our
      acquisition strategy, we intend to preserve the goodwill and marketing
      relationships of acquired companies as necessary to maintain and grow market
      share. In addition, we may acquire companies that market products predominantly
      to women over the Internet, or companies that enhance our ability to market
      products to women.




20




**Recent
      Developments**




***Proposed
      Merger***




On
      March
      13, 2007, the Company entered into a definitive Agreement and Plan of Merger
      (the “Merger Agreement”) with eToys Direct, Inc. (“eToys Direct”), an e-commerce
      and direct marketer of toys and other youth-related products.  Under the
      terms of the Merger Agreement, which has been approved by the Company’s board of
      directors and the board of directors of eToys Direct, the Company will exchange
      shares of its Common Stock, for all the outstanding shares of eToys
      Direct.  Immediately following the merger contemplated by the Merger
      Agreement (the “Merger”), the Company’s shareholders and option holders at the
      time immediately prior to the Merger will own approximately one-third, and
      eToys
      Direct shareholders at the time immediately prior to the Merger will own
      approximately two-thirds, of the outstanding Common Stock of the
      Company.




The
      Company and eToys Direct have made customary representations, warranties and
      covenants to one another in the Merger Agreement.  Consummation of the
      Merger is subject to certain conditions, including, among others, the approval
      of the Merger Agreement by the holders of the Common Stock, the repayment by
      the
      Company of all of its indebtedness for borrowed money outstanding as of the
      closing of the Merger, and the absence of any law or order prohibiting the
      consummation of the Merger. The Merger Agreement contains certain termination
      rights for both the Company and eToys Direct, and further provides that, upon
      termination of the Merger Agreement under specified circumstances, the Company
      may be required to pay eToys Direct a termination fee of $1,567,178, and
      reimburse eToys Direct for the expenses incurred by it in connection with the
      transaction in a maximum amount of $1,500,000.






***Private
      Placement Transactions***




On
      July
      6, 2007, the Company completed a private placement of its equity securities
      to
      certain “qualified institutional buyers” (as that term is defined in Rule 144A
      promulgated under the Securities Act of 1933, as amended (the “Securities
      Act”)), and one “accredited investor” (as that term is defined in Regulation D
      promulgated under the Securities Act), the purpose of which was to raise the
      funds necessary to repay, in connection with the consummation of the Merger,
      all
      of its outstanding indebtedness and to pay its fees incurred in connection
      with
      the transactions contemplated by the Merger Agreement. As a result of this
      private placement, the Company has received to date an aggregate of
      approximately $6,750,000 in gross cash proceeds, and in exchange therefor,
      has
      issued an aggregate of 1,094,346 shares of its Common Stock (including such
      shares covered by warrants issued to the investors therein).




The
      Company filed a registration statement on Form S-3 with the SEC on July 9,
      2007
      to register the resale of the aggregate of 1,094,346 shares of Common Stock
      issued to the purchasers in the private placement as of such date, including
      the
      shares of Common Stock underlying the warrants issued to the purchasers in
      the
      private placement. Until such time as the SEC declares this registration
      statement to be effective, such shares of the Company’s Common Stock will not be
      registered under the Securities Act. A final closing of this private placement,
      covering an aggregate of an additional 507,812 shares of the Company’s Common
      Stock, is anticipated to occur contemporaneously with the closing of the Merger
      under the Merger Agreement. The funds representing the purchase price for the
      shares of the Company’s Common Stock issuable in connection with this final
      closing, in the aggregate amount of approximately $3,250,000, have been placed
      in escrow with an independent escrow agent. Pursuant to the terms of the
      applicable stock purchase agreements, the Company has also agreed to register
      the resale of the shares of the Company’s Common Stock issued in this final
      closing.




21




**Results
      of Operations**





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




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Gross
                  sales
              
              
              105.3%
              
              
              107.3%
              
              
              106.4%
              
              
              106.4%Less
                  - Discounts and returns
              
              
              (5.3
              )
              
              (7.3
              )
              
              (6.4
              )
              
              (6.4
              )Net
                  sales
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Cost
                  of goods sold
              
              
              73.0
              
              
              72.4
              
              
              72.1
              
              
              70.5Gross
                  profit
              
              
              27.0
              
              
              27.6
              
              
              27.9
              
              
              29.5Operating
                  expensesAdvertising
              
              
              16.4
              
              
              11.2
              
              
              16.1
              
              
              10.7Salaries
                  and benefits
              
              
              15.1
              
              
              10.1
              
              
              14.6
              
              
              9.2Share-based
                  compensation
              
              
              0.7
              
              
              1.0
              
              
              0.6
              
              
              0.7Technology
              
              
              0.9
              
              
              0.3
              
              
              0.8
              
              
              0.6Restructuring
                  costs
              
              
              0.0
              
              
              4.6
              
              
              0.0
              
              
              2.8General
                  and administrative
              
              
              15.8
              
              
              14.6
              
              
              15.5
              
              
              12.7Operating
                  expenses
              
              
              48.8
              
              
              41.7
              
              
              47.6
              
              
              36.8Operating
                  income (loss)
              
              
              (21.8
              )
              
              (14.1
              )
              
              (19.7
              )
              
              (7.3
              )Other
                  income (expense)
              
              
              (3.3
              )
              
              (0.2
              )
              
              (2.9
              )
              
              (0.4
              )(Loss)
                  before provision (benefit) for income taxes
              
              
              (25.1
              )
              
              (14.3
              )
              
              (22.6
              )
              
              (7.7
              )Provision
                  (benefit )for income taxes
              
              
              0.0
              
              
              (0.2
              )
              
              0.0
              
              
              0.1Net
                  loss attributable to preferred stockholders
              
              
              (25.1
              )
              
              (14.1
              )
              
              (22.6
              )
              
              (7.8
              )Beneficial
                  conversion feature
              
              
              (1.3
              )
              
              0.0
              
              
              (0.6
              )
              
              0.0Net
                  loss attributable to common stockholders
              
              
              (26.4%
              )
              
              (14.1%
              )
              
              (23.2%
              )
              
              (7.8%
              )




The
                  percentages in the above table may not sum due to
                  rounding




The
      following section describes certain line items set forth in our consolidated
      statement of operations.




*Gross
      sales.* Our gross sales relate to baby, toddler, maternity, bedding and furniture
      products sold through our websites, BabyUniverse.com, DreamtimeBaby.com,
      PoshTots.com and PoshLiving.com *.* Changes
      in gross sales from period to period are primarily attributable to the level
      and
      effectiveness of our advertising and commission spending which is impacted
      by
      competition for key words, as well as to factors such as changes in our sales
      conversion rates and expanded product offerings. Changes to gross sales are
      a
      reflection primarily of changes in the volume of products shipped and the mix
      of
      products sold, rather than price changes or the introduction of new products.
      Shipping charges billed to customers are also included in gross
      sales.




*Discounts
      and returns.* Those
      products that are returned from customers, or that are discounted, are charged
      to discounts and returns, which are subtracted from gross sales to arrive at
      net
      sales.




*Cost
      of goods sold.* Our cost
      of goods sold consists of the cost to us of products sold to customers, inbound
      and outbound shipping costs and insurance on shipments.




*Gross
      profit.* Our
      gross
      profit consists of gross sales less discounts, returns and cost of goods sold.
      Our gross margin consists of gross profit divided by net sales.




22




*Operating
      expenses.* Our
      major
      operating expenses consist primarily of advertising, including commissions
      related to our affiliate marketing program, salary and related benefit costs
      for
      our employees, and general and administrative expenses, including expenses
      relating to our status as a public company and credit card fees.




*Other
      income (expense).* Other
      income (expense) generally includes interest income and interest
      expense.






***Comparison
      of Quarter Ended June 30, 2007 to Quarter Ended June 30,
      2006***




*Gross
      sales.* Gross
      sales decreased to $7.834 million for the quarter ended June 30, 2007 from
      $9.144 million for the comparable quarter last year. The decrease in gross
      sales was the result of sales declines for BabyUniverse.com ($686,000),
      DreamtimeBaby.com ($498,000) and PoshTots.com ($226,000), which were only
      partially offset by an increase in advertising revenues from our content
      properties BabyTV.com, ePregnancy.com and PoshCravings.com of $100,000, as
      compared to the three months ended June 30, 2006. The BabyUniverse.com and
      DreamtimeBaby.com sales for the quarter ended June 30, 2007 have continued
      to be
      impacted as we have focused significant efforts on merger related activities
      and
      have been forced to delay significant new marketing and operating initiatives
      in
      contemplation of the proposed merger with eToys Direct. PoshTots.com sales
      were
      primarily affected by differences in the timing of catalog
      mailings.




*Discounts
      and returns.* Discounts
      and returns amounted to $395,906, or 5.3% of net sales for the quarter ended
      June 30, 2007, compared to $619,207, or 7.3% of net sales for the quarter
      ended June 30, 2006.




*Gross
      profit.* Gross
      profit decreased to $2.011 million for the quarter ended June 30, 2007 from
      $2.355 million for the comparable quarter last year. The decrease was the result
      of the decline in gross sales for the quarter and the decline in the gross
      margin as a percentage of net sales . The consolidated gross margin decreased
      to
      27.0% for the quarter ended June 30, 2007, compared to 27.6% for the
      quarter ended June 30, 2006.




*Operating
      expenses.* Operating
      expenses increased to $3.628 million for the quarter ended June
      30, 2007 from $3.558 million for the quarter ended June 30, 2006. As a
      percentage of net sales, operating expenses were 48.8% for this year’s second
      quarter, compared to 41.7% for the comparable quarter last year. The increase
      in
      operating expenses as a percentage of net sales was primarily attributable
      to:





·
            salaries
                and salary increases of $263,000, and increased rent and technology
                expenses of $88,000 and $36,000, respectively, as a result of our
                expanded
                infrastructure which supports our strategic initiative and our new
                media
                offerings


·
            depreciation
                and amortization expense increased $55,000 as result of our infrastructure
                investments and our 2006 acquisition of the assets of
                ePregnancy.com


·
            increases
                in costs were offset by declines in credit card fees ($55,000),
                restructuring costs ($390,000) and general and administrative costs
                ($65,000)




Advertising
      expenses increased to 16.4% of net sales for the quarter ended June
      30, 2007 from 11.2% for the quarter ended June 30, 2006. The
      advertising expense increase, as a percentage of net sales, was due to a
      $259,000 increase in commissions paid to our affiliates, such as Amazon.com,
      as
      compared to the same quarter last year.




*Other
      income (expense).* Other
      expense, net, was $244,615 for the quarter ended June 30, 2007 compared to
      other expense, net, of $15,359 for the comparable quarter last year. Included
      in
      this year’s quarter was interest expense of $277,422 associated with notes and
      capital leases payable. This amount was partially offset by interest income
      earned on cash invested in overnight sweep accounts.




*Income
      taxes.* There
      was
      no provision for income taxes for the quarter ended June 30, 2007, as
      compared to an income tax benefit of $13,000 for the three months ended June
      30,
      2006. We had net operating loss carry forwards of approximately $6.9 million
      at
      December 31, 2006, which will expire in various years through 2025. We recorded
      a valuation allowance which fully offset the deferred tax benefit of the net
      operating loss carry forwards.




*Net
      loss.* The net
      loss attributable to common stockholders for the quarter ended June
      30, 2007 was $1,962,531, or ($0.34) per share, compared to a net loss of
      $1,205,286, or ($0.23) per share for the quarter ended June 30, 2006.





23





***Comparison
      of Six Months Ended June 30, 2007 to Six Months Ended June 30,
      2006***




*Gross
      sales.* Gross
      sales were $16.998 million for the six months ended June 30, 2007 as
      compared to $19.142 million for the comparable period last year. The
      decrease in gross sales was the result of sales declines for BabyUniverse.com
      ($1,202,000), and DreamtimeBaby.com ($1,238,000), which were partially offset
      by
      an increase in gross sales at PoshTots.com ($69,000) and by an increase in
      advertising revenues from our content properties BabyTV.com, ePregnancy.com
      and
      PoshCravings.com ($227,000) as compared to the six months ended June 30, 2006.
      The BabyUniverse.com and DreamtimeBaby.com sales for the six months ended June
      30, 2007 have continued to be impacted by the strategic initiatives process,
      the
      prior year’s restructuring and more recently by the focus on merger related
      activities and the related necessity to delay significant new marketing and
      operating initiatives in contemplation of the proposed merger with eToys Direct.




*Discounts
      and returns.* Discounts
      and returns amounted to $1,022,450, or 6.4% of net sales for the six months
      ended June 30, 2007 compared to $1,148,855, or 6.4% of net sales for the
      comparable period last year.




*Gross
      profit.* Gross
      profit was $4.463 million, or 27.9% of net sales for the six months ended June
      30, 2007, compared to $5.310 million or 29.5% of net sales for the
      comparable period last year. The decrease was the result of the decline in
      year
      to date gross sales and the decline in the gross margin as a percentage of
      net
      sales .




*Operating
      expenses.* Operating
      expenses increased to $7.606 million for the six months ended June
      30, 2007 from $6.624 million for the comparable period last year. As a
      percentage of net sales, operating expenses were 47.6% for the six months ended
      June 30, 2007 compared to 36.8% for the comparable period last year. The
      increase in operating expenses as a percentage of net sales was primarily
      attributable to:





·
            salaries
                and salary increases of $688,000, and increased rent of $192,000
                are the
                result of our expanded infrastructure which supports our acquisition
                strategy and our new media offerings


·
            depreciation
                and amortization expense increased $146,000 as result of our
                infrastructure investments and our 2006 acquisition of the assets
                of
                ePregnancy.com


·
            these
                increases in costs were offset by declines in credit card fees ($92,000)
                and restructuring costs ($506,000)




Advertising
      expenses were 16.1% of net sales for the six months ended June 30, 2007,
      compared to 10.7% for the comparable period last year. The advertising expense
      increase, as a percentage of net sales, was due to a $410,000 increase in
      commissions paid to our affiliates, such as Amazon.com, as compared to the
      six
      months ended June 30, 2006.




*Other
      income (expense).* Other
      expense, net, was $462,965 for the six months ended June 30, 2007, compared
      to other expense, net, of $79,277 for the comparable period last year. Included
      in this year’s first half was interest expense of $527,001 associated with the
      notes and capital leases payable. This amount was partially offset by interest
      income earned on cash invested in overnight sweep accounts.




*Income
      taxes.* There
      was
      no provision for income taxes for the six months ended June 30, 2007, compared
      to an income tax provision of $8,000 for the six months ended June 30, 2006
      which represented state income taxes on the profit related to our Dreamtime
      Baby
      subsidiary.




*Net
      loss.* The net
      loss attributable to common stockholders for the six months ended June
      30, 2007 was $3,706,211, or ($0.65) per diluted share, compared to a net
      loss of $1,402,007, or ($0.26) per diluted share, for the six months ended
      June
      30, 2006.





**Liquidity
      and Capital Resources**





*Sources
      of funds and Liquidity.* Since
      inception, we have funded our operations through the sale of equity securities
      and convertible indebtedness, and cash generated from operations. In addition,
      our business model contains certain beneficial working capital characteristics.
      This is primarily due to the fact that we collect cash from sales to customers
      within several business days of the related sale, but we typically have extended
      payment terms with many of our suppliers. The significant components of our
      working capital are inventory and liquid assets such as cash and cash
      equivalents.




As
      of
      December 31, 2006, we had negative working capital of $44,000. As of
      March 31, 2007, we had negative working capital of $2,164,482. During
      the three months ended June 30, 2007, the Company generated $6.75 million from
      the sale of equity in private placement transactions, as described below. As
      a
      result, the Company has working capital of $2,486,224 as of June 30,
      2007.




24




*May
      24, 2007 Transactions*





On
      May 24, 2007, the Company entered into Securities Purchase Agreements with
      two affiliates of a large institutional investment fund (each, a “Preferred
      Purchaser”) pursuant to which it sold to the Preferred Purchasers (i) an
      aggregate of 317,259 shares of the Company’s Series A Convertible Preferred
      Stock, par value $0.001 per share (the “Preferred Stock”), at the closing price
      of the Company’s Common Stock on The Nasdaq Capital Market on May 24, 2007
      (the “Closing Price”), and (ii) warrants to purchase an aggregate of 79,315
      shares of the Common Stock, at an exercise price per share (subject to certain
      adjustments) equal to the Closing Price ($7.88) (the “Preferred Private
      Placement”). The closing of the Preferred Private Placement occurred on
      May 29, 2007 (the “Preferred Closing Date”).





The
      Preferred Private Placement resulted in gross proceeds to the Company of
      approximately $2.5 million before deducting fees payable to the placement
      agent in the Preferred Private Placement and other transaction expenses payable
      by the Company. The Company agreed to pay aggregate placement agent fees equal
      to seven percent of the gross proceeds to the Company resulting from the
      Preferred Private Placement. The shares of preferred stock, and 50% of the
      warrants, issued to the Preferred Purchasers in the Preferred Private Placement
      were subsequently cancelled in exchange for shares of the Company’s common stock
      (and a nominal amount of cash). For more information, see discussion under
      the
      caption “ *July
      6* *th* *Transaction”* below.





*June
      13, 2007 Transaction*





On
      June 13, 2007, the Company entered into definitive Stock Purchase
      Agreements (the “Purchase Agreements”) with (i) three affiliates of a large
      institutional investment fund and (ii) one other “accredited investor” as
      defined in Rule 501(a) of Regulation D promulgated under the Securities Act
      of 1933, as amended (the “Securities Act”) (the “Purchasers”), pursuant to which
      it agreed to sell to the Purchasers an aggregate of 1,171,875 shares of Common
      Stock (the “Private Placement”). The Private Placement is expected to close in
      two tranches, the closing for the first of which, covering an aggregate of
      664,063 shares of Common Stock, closed on June 20, 2007, and the closing of
      the second of which, covering an aggregate of 507,812 shares of Common Stock,
      is
      expected to occur contemporaneously with the closing of the Company’s proposed
      merger (the “Merger”) with eToys Direct and prior to the effective time of the
      Merger under applicable Delaware law. The funds representing the purchase price
      for the shares of Common Stock issuable in connection with the closing of the
      second tranche of the Private Placement have been placed in escrow with an
      independent escrow agent.





Assuming
      that both tranches of the Private Placement close as intended, the Private
      Placement will result in gross proceeds to the Company of $7.5 million
      before deducting fees payable to the placement agent in the Private Placement
      and other transaction expenses payable by the Company. As of June 30, 2007,
      the
      Private Placement has resulted in gross proceeds to the Company of $4.25 million
      (before deduction of placement agent fees and other transaction expenses).
      The
      Company agreed to pay aggregate placement agent fees equal to seven percent
      of
      the gross proceeds to the Company resulting from the Private
      Placement.




*July
      6* *th* *Transaction*




As
      of
      July 6, 2007, the Company entered into definitive Stock Purchase Agreements
      with
      the Preferred Purchasers, pursuant to which all shares of the Preferred Stock
      and 50% of the warrants to purchase shares of the Common Stock, issued in
      connection with the Preferred Private Placement were cancelled and exchanged
      for
      (i) an aggregate of 390,625 shares of the Company’s Common Stock issued to the
      Preferred Purchasers, and (ii) a nominal amount of cash (for the purpose of
      avoiding the issuance of fractional shares of the Common Stock) paid to the
      Preferred Purchasers (the “Exchange”). The 50% of the warrants issued in the
      Preferred Private Placement that were not cancelled in the Exchange (the
“Retained Warrants”) were retained by the Preferred Purchasers. The Preferred
      Purchasers elected to enter into the Exchange in order to receive terms
      comparable to those afforded the Purchasers in the June 13, 2007 Stock Purchase
      Agreements. The Company effected the Exchange pursuant to the terms of the
      original Preferred Purchase Agreements entered into with the Preferred
      Purchasers in connection with the Preferred Private Placement. The closing
      of
      the transactions constituting the Exchange occurred as of July 6,
      2007.




The
      Exchange will not result in any proceeds to the Company in addition to those
      already received by the Company in connection with the Preferred Private
      Placement.




25




*Exemption
      from Registration and Filing of Registration Statement*




The
      offer, issuance and sale of the securities in the Preferred Private Placement,
      the Private Placement, and the Exchange were exempt from registration under
      the
      Securities Act, pursuant to Section 4(2) thereof and Regulation D promulgated
      thereunder. Each of the Preferred Purchasers and the Purchasers has represented
      to the Company that it is an “accredited investor” as defined in Rule 501(a) of
      Regulation D.





The
      Company filed a Registration Statement on Form S-3 with the SEC on July 9,
      2007
      to register the resale of the aggregate of 1,094,346 shares of Common Stock
      issued as of such date to the purchasers in the private placements described
      above, including the shares of Common Stock underlying the Retained Warrants.
      Until such time as the SEC declares this Registration Statement to be effective,
      the resale of such shares of the Company’s Common Stock will not be registered
      under the Securities Act.








*Uses
      of funds.* Net
      cash
      used in operating activities was $3,755,542 for the six months ended June
      30, 2007, compared to net cash used by operating activities of $402,107 for
      the comparable period last year. The increase in cash used in operating
      activities was primarily due to an increase in net loss for the period to
      $3,606,211 compared to a net loss of $1,402,007 for the same period last year.





Net
      cash
      used in investing activities was $271,895 for the six months ended June
      30, 2007 and was primarily related to capital expenditures associated with
      enhancements to our technology system infrastructure.




As
      of
      June 30, 2007, we had no material commitments for capital
      expenditures.





**Contractual
      Obligations**





The
      following tables summarize our contractual obligations as of June 30, 2007
      and the expected effect on liquidity and cash flows. Payments remaining due
      by
      period are as follows:





**2008**
            
            **2011****through**
            
            **Through****Total**
            
            **2007**
            
            **2010**
            
            **2012**
            
            **After
                2012**Operating
                leases
            
            $
            2,385,667
            
            $
            333,275
            
            $
            1,768,305
            
            $
            629,475
            
            $
            104,612Notes
                Payable
            
            
            7,000,000
            
            
            836,062
            
            
            6,163,938
            
            
            -0-
            
            
            -0-Capital
                leases
            
            
            24,272
            
            
            3,869
            
            
            13,713
            
            
            6,690
            
            
            -0-




Capital
                leases consist of warehouse equipment with a capitalized amount of
                $36,168
                as of June 30, 2007 and 2006.


**Off-Balance
      Sheet Arrangements**





We
      do not
      have or engage in any off-balance sheet arrangements.





**Impact
      of Inflation**





The
      effect of inflation and changing prices on our operations was not significant
      during the periods presented.




**Special
      Note Regarding Forward Looking-Statements**




This
      Quarterly Report on Form 10-Q contains forward-looking statements that
      involve risks and uncertainties relating to future events or our future
      financial performance.  These statements involve known and unknown risks,
      uncertainties and other factors that may cause the actual results to differ
      materially from those expressed or implied by such forward-looking statements.
      You are advised to consult further disclosures we may make on related subjects
      in our future filings with the SEC. In addition to other factors discussed
      in
      this report, some of the important factors that could cause actual results
      to
      differ materially from those discussed in the forward-looking statements include
      the following:




26




•
            our
                limited operating history makes it difficult for us to accurately
                forecast
                our revenues and appropriately plan our expenses•
            purchasers
                of baby, toddler and maternity products and baby bedding and furniture
                may
                not choose to shop online, which could prevent us from increasing
                revenues•
            we
                intend to undertake acquisitions to expand our business, which may
                pose
                risks to our existing shareholders•
            we
                may not succeed in continuing to establish our various brands, which
                could
                prevent us from acquiring customers and increasing our
                revenues•
            we
                face significant competition•
            we
                rely exclusively on the sale of baby, toddler and maternity products
                and
                baby bedding and furniture for our revenues and demand for these
                products
                could decline•
            if
                we fail to successfully maintain or expand our fulfillment capabilities,
                we may not be able to increase our revenues•
            we
                rely on the services of our key personnel, any of whom would be difficult
                to replace•
            failure
                to adequately protect our intellectual property could damage our
                reputation and harm our business•
            if
                use of the internet for online commerce does not continue our business
                would be harmed•
            our
                revenues may be negatively affected if we are required to charge
                taxes on
                purchases•
            our
                failure to protect confidential information of our customers would
                harm
                our business•
            interruptions
                to our systems that impair customer access to our website would harm
                our
                business




Furthermore,
      in some cases, you can identify forward-looking statements by terminology such
      as “may,” “could,” “should,” “expect,” “plan,” “intend,” “anticipate,”
“believe,” “estimate,” “predict,” “potential” or “continue,” the negative of
      such terms or other comparable terminology.  These statements are only
      predictions.  In evaluating these statements, you should specifically
      consider various factors including the risks outlined in the Risk Factors
      section of the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2006 filed with the SEC, or referenced in Item 1A of Part II of
      this Quarterly Report on Form 10-Q. These factors may cause our actual results
      to differ materially from any forward-looking statement.




Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements.




**Item 3. 
      Quantitative and Qualitative Disclosures About Market
      Risk**




The
      primary objective of our investment activities is to preserve principal while
      at
      the same time maximizing yields without significantly increasing risk.  Our
      cash balance as of June 30, 2007 was held in an overnight sweep
      account.




**Item 4T. 
      Controls and Procedures**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our periodic reports filed pursuant
      to
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
      recorded, processed, summarized and reported within the time periods specified
      by the rules and forms of the SEC and that such information is accumulated
      and
      communicated to our management, including our chief executive officer and chief
      financial officer, as appropriate, to allow for timely decisions regarding
      required disclosure. In designing and evaluating the disclosure controls and
      procedures, management recognizes that any controls and procedures, no matter
      how well designed and operated, can provide only reasonable assurance of
      achieving the desired control objectives, and management must apply its judgment
      in evaluating the cost-benefit relationship of possible controls and
      procedures.




As
      required by Rule 13a-15(b) under the Exchange Act, we conducted an
      evaluation, under the supervision and with the participation of our management,
      including our chief executive officer and chief financial officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures as of the end of the period covered by this report. Based on the
      foregoing, our chief executive officer and chief financial officer concluded
      that our disclosure controls and procedures were effective at the reasonable
      assurance level to ensure that information required to be disclosed by us in
      reports that we file under the Exchange Act is recorded, processed, summarized
      and reported within the time periods specified in SEC rules and
      forms.




In
      addition, there has been no change in our internal controls over financial
      reporting during our most recent fiscal quarter that has materially affected,
      or
      is reasonably likely to materially affect, our internal controls over financial
      reporting.




27




Our
      management, including our chief executive officer and our chief financial
      officer, does not expect that our disclosure controls and procedures or our
      internal control over financial reporting are or will be capable of preventing
      or detecting all errors and all fraud. Any control system, no matter how well
      designed and operated, can provide only reasonable, not absolute, assurance
      that
      the control system’s objectives will be met. The design of a control system must
      reflect the fact that there are resource constraints and the benefits of
      controls must be considered relative to their costs. Further, because of the
      inherent limitations in all control systems, no evaluation of controls can
      provide absolute assurance that misstatements due to error or fraud will not
      occur or that all control issues and instances of fraud, if any, within the
      Company have been detected. These inherent limitations include the realities
      that judgments in decision-making can be faulty and that breakdowns can occur
      because of simple error or mistake. Controls can also be circumvented by the
      individual acts of some persons, by collusion of two or more people, or by
      management override of the controls. The design of any system of controls is
      based in part on certain assumptions about the likelihood of future events,
      and
      there can be no assurance that any design will succeed in achieving its stated
      goals under all potential future conditions.




**PART
      II.  OTHER INFORMATION**




**Item 1. 
      Legal Proceedings**




None




**Item
      1A.  Risk Factors**




There
      have been no material changes in our risk factors from those previously
      disclosed in our Annual Report on Form 10-K for the fiscal year ended December
      31, 2006, other than the following:





**Risks
      Related to Our Common Stock**





***Our
      single largest shareholder and our management team collectively own
      approximately 39.8% of our common stock and may be able to exercise significant
      influence over the outcome of matters to be voted on by our shareholders.***




As
      of
      July 17, 2007, John C. Textor, the other members of our management team, and
      certain of Mr. Textor’s affiliates that he controls, together beneficially owned
      approximately 39.8% of the outstanding shares of our common stock. Mr. Textor
      is
      the Chairman of our Board of Directors and our Chief Executive Officer.
      Accordingly, Mr. Textor, together with the other members of our management
      team,
      may be able to exercise significant influence with respect to the election
      of
      directors, offers to acquire us and other matters submitted to a vote of our
      shareholders, including the Company’s proposed merger with eToys Direct, Inc.
      (“eToys Direct”) (the “Merger”).





**Risks
      Related to Our Proposed Merger with eToys Direct**





***Completion
      of the Merger may result in dilution of future earnings per share to our
      shareholders.***




The
      completion of the Merger may result in greater net losses or a weaker financial
      condition compared to that which would have been achieved by either us or eToys
      Direct on a stand-alone basis. The Merger could fail to produce the benefits
      that the companies anticipate, or could have other adverse effects that the
      companies currently do not foresee. In addition, some of the assumptions that
      either company has made, such as the achievement of operating synergies, may
      not
      be realized. In this event, the Merger could result in greater losses as
      compared to the losses that would have been incurred by us or eToys Direct
      if
      the Merger had not occurred.





***If
      we fail to retain key employees, the benefits of the Merger could be diminished.***




The
      successful combination of us and eToys Direct will depend, in part, on the
      retention of key personnel. There can be no assurance that we will be able
      to
      retain its or eToys Direct’s key management personnel. If we fail to retain such
      key employees, we may not realize the anticipated benefits of the Merger.
      Following the consummation of the Merger, it is expected that the new management
      of the combined company will be composed primarily of the current management
      team of eToys Direct. Some members of this management team have no prior senior
      management experience at public companies.




28





***The
      costs associated with the Merger are difficult to estimate and may harm the
      financial results of the combined company.***




We
      and
      eToys Direct will incur substantial aggregate direct transaction costs
      associated with the Merger, and additional substantial costs associated with
      the
      consolidation and integration of operations after the consummation of the
      Merger, which cannot be estimated accurately at this time. If the benefits
      of
      the Merger do not exceed the total costs of the Merger, the financial results
      of
      the combined company could be adversely affected.





***Following
      the consummation of the Merger, our single largest shareholder and its
      affiliates will own in excess of 60% of our common stock and may be able to
      exercise significant influence over the outcome of matters to be voted on by
      our
      shareholders.***




Following
      the consummation of the Merger, certain entities within the D. E. Shaw group
      will collectively own in excess of 60% of our common stock. Accordingly, the
      D.
      E. Shaw group shareholders may be able to exercise significant influence with
      respect to the election of directors, offers to acquire us and other matters
      submitted to a vote of our shareholders. The D. E. Shaw group shareholders
      may
      have interests that are different from, or are in addition to, the interests
      of
      other shareholders generally.






**Item 2. 
      Unregistered Sales of Equity Securities and Use of
      Proceeds**




The
      information otherwise required to be disclosed in Item 2 of Part II of this
      Quarterly Report on Form 10-Q has been furnished in the following Current
      Reports on Form 8-K previously filed by the Company with the SEC:





·
            The
                Company’s Current Report on Form 8-K filed with the SEC on May 30,
                2007;


·
            The
                Company’s Current Report on Form 8-K filed with the SEC on June 19, 2007;
                and


·
            The
                Company’s Current Report on Form 8-K filed with the SEC on July 11,
                2007.




**Item 3. 
      Defaults Upon Senior Securities**




The
      Company became aware on May 15, 2007, that the Company was in violation of
      a
      financial covenant under Section 7.2 of the Senior Loan and Security Agreement
      among the Company, each of its subsidiaries, and Hercules Technology Growth
      Capital, Inc. (the “Lender”), dated July 11, 2006 (as amended, the “Senior Loan
      Agreement”), that requires the Company to maintain a “Current Ratio” (as defined
      in the Senior Loan Agreement) of 1.00-to-1.00 as of March 31, 2007. Generally,
      the Current Ratio is the ratio of the Company’s current assets to its current
      liabilities determined in accordance with generally accepted accounting
      principles in the United States of America, as in effect from time to time.
      As
      of March 31, 2007, the Company’s Current Ratio was 0.66-to-1.00.




A
      violation of this financial covenant, unless waived by the Lender or otherwise
      cured within 45 days of May 15, 2007, constitutes an event of default under
      the
      Senior Loan Agreement, giving the Lender the right to terminate its obligation
      to make additional advances under the Senior Loan Agreement, demand immediate
      payment in full of all amounts outstanding thereunder, foreclose on collateral
      and exercise other rights and remedies granted under the Senior Loan Agreement
      and related loan documents and as may be available pursuant to applicable law.
      As of May 15, 2007, approximately $5,000,000.00 of borrowings were outstanding
      under the Senior Loan Agreement. From May 15, 2007 until the date that the
      Company has cured the violation of this financial covenant, all amounts owing
      under the Senior Loan Agreement shall bear interest at all times at the “Default
      Rate” (as defined in the Senior Loan Agreement, equal to the base interest rate
      thereunder, plus 5%). In addition, the violation of this covenant, and any
      resulting event of default, may also trigger an event of default under the
      Loan
      Agreement, dated as of December 29, 2006 between the Company and Lydian Private
      Bank, under which $2,000,000.00 in borrowings were outstanding as of May 15,
      2007.




The
      Company notified the Lender regarding the violation of the Current Ratio
      covenant on May 15, 2007. On May 24, 2007, the Company notified the Lender
      that
      it had completed a private placement transaction and was no longer in violation
      of the working capital ratio covenant of the Senior Loan Agreement.




**Item 4. 
      Submission of Matters to a Vote of Security Holders**




**None**




29




**Item
      5.****Other
      Information**




The
      Company became aware on May 15, 2007, that the Company was in violation of
      a
      financial covenant under Section 7.2 of the Senior Loan and Security Agreement
      among the Company, each of its subsidiaries, and Hercules Technology Growth
      Capital, Inc. (the “Lender”), dated July 11, 2006 (as amended, the “Senior Loan
      Agreement”), that required the Company to maintain a “Current Ratio” (as defined
      in the Senior Loan Agreement) of 1.00-to-1.00 as of March 31, 2007. Generally,
      the Current Ratio is the ratio of the Company’s current assets to its current
      liabilities determined in accordance with generally accepted accounting
      principles in the United States of America, as in effect from time to time.
      As
      of March 31, 2007, the Company’s Current Ratio was 0.66-to-1.00.




A
      violation of this financial covenant, unless waived by the Lender or otherwise
      cured within 45 days of May 15, 2007, constitutes an event of default under
      the
      Senior Loan Agreement, giving the Lender the right to terminate its obligation
      to make additional advances under the Senior Loan Agreement, demand immediate
      payment in full of all amounts outstanding thereunder, foreclose on collateral
      and exercise other rights and remedies granted under the Senior Loan Agreement
      and related loan documents and as may be available pursuant to applicable law.
      As of May 15, 2007, approximately $5,000,000.00 of borrowings were outstanding
      under the Senior Loan Agreement. From May 15, 2007 until the date that the
      Company has cured the violation of this financial covenant, all amounts owing
      under the Senior Loan Agreement shall bear interest at all times at the “Default
      Rate” (as defined in the Senior Loan Agreement, equal to the base interest rate
      thereunder, plus 5%). In addition, the violation of this covenant, and any
      resulting event of default, may also trigger an event of default under the
      Loan
      Agreement, dated as of December 29, 2006 between the Company and Lydian Private
      Bank, under which $2,000,000.00 in borrowings were outstanding as of May 15,
      2007.




The
      Company notified the Lender regarding the violation of the Current Ratio
      covenant on May 15, 2007. On May 24, 2007, the Company notified the Lender
      that
      it had completed a private placement transaction and was no longer in violation
      of the working capital ratio covenant of the Senior Loan Agreement.




**Item 6.
      Exhibits** ****


Number
              
              Description
                  of Document3.1
              
              
              Articles
                  of Amendment to Articles of Incorporation of BabyUniverse, Inc.
                  (incorporated by reference to Exhibit 3.1 to the Current Report
                  on Form
                  8-K (File No. 001-32577) filed by BabyUniverse, Inc. on June 4,
                  2007).3.2
              
              
              Second
                  Amended and Restated Articles of Incorporation of BabyUniverse,
                  Inc.
                  (incorporated by reference to Exhibit 3.1 of the Registration Statement
                  on
                  Form S-3 (File No. 333-144430) filed on July 9, 2007).99.3
              
              
              Securities
                  Purchase Agreement between BabyUniverse, Inc. and Pequot Proprietary
                  Risk
                  Allocation Fund, L.P. (incorporated by reference to Exhibit 99.3
                  to
                  Amendment No. 1 to the Registration Statement on Form S-4 (File
                  No.
                  333-143765) filed by BabyUniverse, Inc. on July 23, 2007).99.4
              
              
              Securities
                  Purchase Agreement between BabyUniverse, Inc. and Pequot DM Fund,
                  L.P.
                  (incorporated by reference to Exhibit 99.4 to Amendment No. 1 to
                  the
                  Registration Statement on Form S-4 (File No. 333-143765) filed
                  by
                  BabyUniverse, Inc. on July 23, 2007).99.5
              
              
              Securities
                  Purchase Agreement between BabyUniverse, Inc. and Janus Investment
                  Fund on
                  behalf of its series Janus Venture Fund, Janus Capital Funds plc
                  on behalf
                  of its series US Venture Fund and Small Cap Growth Portfolio, a
                  series of
                  Ohio National Fund (incorporated by reference to Exhibit 99.5 to
                  Amendment
                  No. 1 to the Registration Statement on Form S-4 (File No. 333-143765)
                  filed by BabyUniverse, Inc. on July 23, 2007).99.6
              
              
              Securities
                  Purchase Agreement between BabyUniverse, Inc. and Plus Four Private
                  Equities, LP, a California limited partnership (incorporated by
                  reference
                  to Exhibit 99.6 to Amendment No. 1 to the Registration Statement
                  on Form
                  S-4 (File No. 333-143765) filed by BabyUniverse, Inc. on July 23,
                  2007).99.7
              
              
              Stock
                  Purchase Agreement between BabyUniverse, Inc. and Pequot Proprietary
                  Risk
                  Allocation Fund, L.P. (incorporated by reference to Exhibit 99.7
                  to
                  Amendment No. 1 to the Registration Statement on Form S-4 (File
                  No.
                  333-143765) filed by BabyUniverse, Inc. on July 23, 2007).99.8
              
              
              Stock
                  Purchase Agreement between BabyUniverse, Inc. and Pequot DM Fund,
                  L.P.(
                  incorporated by reference to Exhibit 99.8 to Amendment No. 1 to
                  the
                  Registration Statement on Form S-4 (File No. 333-143765) filed
                  by
                  BabyUniverse, Inc. on July 23, 2007).31.1
              
              
              Certification
                  of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Securities Exchange Act of 1934, as amended.31.2
              
              
              Certification
                  of Chief Financial Officer Required Under Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Securities Exchange Act of 1934, as amended.32.1
              
              
              Certification
                  of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
                  15d-14(b)
                  of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
                  Section
                  1350.32.2
              
              
              Certification
                  of Chief Financial Officer Required Under Rule 13a-14(b) or Rule
                  15d-14(b)
                  of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
                  Section
                  1350.




30




**Signatures**




Pursuant
      to the requirements of the Securities Act of 1934, the registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.






BabyUniverse,
                Inc.RegistrantDate:
                August 14, 2007/s/
                Michael R. HullMichael
                R. HullChief
                Financial Officer(Principal
                Financial Officer and
              Duly
                Authorized Officer)





31




**EXHIBIT
      INDEX**





**Number**
                
                **Description
                    of Document**3.1
                
                
                Articles
                    of Amendment to Articles of Incorporation of BabyUniverse, Inc.
                    (incorporated by reference to Exhibit 3.1 to the Current Report
                    on Form
                    8-K (File No. 001-32577) filed by BabyUniverse, Inc. on June
                    4,
                    2007).3.2
                
                
                Second
                    Amended and Restated Articles of Incorporation of BabyUniverse,
                    Inc.
                    (incorporated by reference to Exhibit 3.1 of the Registration
                    Statement on
                    Form S-3 (File No. 333-144430) filed on July 9, 2007).99.3
                
                
                Securities
                    Purchase Agreement between BabyUniverse, Inc. and Pequot Proprietary
                    Risk
                    Allocation Fund, L.P. (incorporated by reference to Exhibit 99.3
                    to
                    Amendment No. 1 to the Registration Statement on Form S-4 (File
                    No.
                    333-143765) filed by BabyUniverse, Inc. on July 23, 2007).99.4
                
                
                Securities
                    Purchase Agreement between BabyUniverse, Inc. and Pequot DM Fund,
                    L.P.
                    (incorporated by reference to Exhibit 99.4 to Amendment No. 1
                    to the
                    Registration Statement on Form S-4 (File No. 333-143765) filed
                    by
                    BabyUniverse, Inc. on July 23, 2007).99.5
                
                
                Securities
                    Purchase Agreement between BabyUniverse, Inc. and Janus Investment
                    Fund on
                    behalf of its series Janus Venture Fund, Janus Capital Funds
                    plc on behalf
                    of its series US Venture Fund and Small Cap Growth Portfolio,
                    a series of
                    Ohio National Fund (incorporated by reference to Exhibit 99.5
                    to Amendment
                    No. 1 to the Registration Statement on Form S-4 (File No. 333-143765)
                    filed by BabyUniverse, Inc. on July 23, 2007).99.6
                
                
                Securities
                    Purchase Agreement between BabyUniverse, Inc. and Plus Four Private
                    Equities, LP, a California limited partnership (incorporated
                    by reference
                    to Exhibit 99.6 to Amendment No. 1 to the Registration Statement
                    on Form
                    S-4 (File No. 333-143765) filed by BabyUniverse, Inc. on July
                    23,
                    2007).99.7
                
                
                Stock
                    Purchase Agreement between BabyUniverse, Inc. and Pequot Proprietary
                    Risk
                    Allocation Fund, L.P. (incorporated by reference to Exhibit 99.7
                    to
                    Amendment No. 1 to the Registration Statement on Form S-4 (File
                    No.
                    333-143765) filed by BabyUniverse, Inc. on July 23, 2007).99.8
                
                
                Stock
                    Purchase Agreement between BabyUniverse, Inc. and Pequot DM Fund,
                    L.P.(
                    incorporated by reference to Exhibit 99.8 to Amendment No. 1
                    to the
                    Registration Statement on Form S-4 (File No. 333-143765) filed
                    by
                    BabyUniverse, Inc. on July 23, 2007).31.1
                
                
                Certification
                    of Chief Executive Officer Required Under Rule 13a-14(a) or Rule
                    15d-14(a)
                    of the Securities Exchange Act of 1934, as amended.31.2
                
                
                Certification
                    of Chief Financial Officer Required Under Rule 13a-14(a) or Rule
                    15d-14(a)
                    of the Securities Exchange Act of 1934, as amended.32.1
                
                
                Certification
                    of Chief Executive Officer Required Under Rule 13a-14(b) or Rule
                    15d-14(b)
                    of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
                    Section
                    1350.32.2
                
                
                Certification
                    of Chief Financial Officer Required Under Rule 13a-14(b) or Rule
                    15d-14(b)
                    of the Securities Exchange Act of 1934, as amended, and 18 U.S.C.
                    Section
                    1350.


32