**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 March 31, 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).




Yes o  No x




As
      of May
      11, 2007, the registrant had 5,694,914 shares of common stock outstanding.









**BabyUniverse,
      Inc.**




INDEX




**Page**PART
                I. FINANCIAL INFORMATION
            3Item 1.
                Financial Statements (Unaudited)
            3Consolidated
                Balance Sheets
            3Consolidated
                Statements of Operations
            4Consolidated
                Statements of Stockholders’ Equity (Deficit)
            5Consolidated
                Statements of Cash Flows
            6Notes
                to Consolidated Financial Statements (Unaudited)
            7Item 2.
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            18Item 3.
                Quantitative and Qualitative Disclosures About Market Risk
            23Item 4.
                Controls and Procedures
            23PART
                II. OTHER INFORMATION
            24Item
                1. Legal Proceedings
            24Item
                1A. Risk Factors
            24Item 2.
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            24Item
                3. Defaults Upon Senior Securities
            24Item 4.
                Submission of Matters to a Vote of Security Holders
            25Item
                5. Other Information
            25Item 6.
                Exhibits
            26SIGNATURES
            27EXHIBIT
                2.1EXHIBIT
                4.1EXHIBIT
                31.1EXHIBIT
                31.2EXHIBIT
                32.1EXHIBIT
                32.2




2




**PART
      I. FINANCIAL INFORMATION**




**ITEM
      1. Financial Statements (Unaudited)**




**BabyUniverse,
      Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**




**March
                  31, 2007**
                (Unaudited)
              
              **December
                  31, 2006****Assets**Cash
              
              $
              1,217,322
              
              $
              3,473,278Accounts
                  Receivable
              
              
              632,309
              
              
              732,186Inventory,
                  Net
              
              
              1,832,839
              
              
              2,048,485Prepaid
                  Expenses
              
              
              613,716
              
              
              331,457**Total
                  Current Assets**
              
              
              4,296,186
              
              
              6,585,406Fixed
                  Assets - Net
              
              
              2,011,242
              
              
              1,936,740Intangible
                  Assets - Net
              
              
              2,752,190
              
              
              2,811,627Deposits
              
              
              142,640
              
              
              137,760Goodwill
              
              
              18,832,041
              
              
              18,832,041**Total
                  Assets**
              
              $
              28,034,299
              
              $
              30,303,574**Liabilities
                  and Stockholders’ Equity**Accounts
                  Payable
              
              $
              4,154,782
              
              $
              4,664,107Accrued
                  Expenses
              
              
              304,102
              
              
              501,704Gift
                  Certificate Liability
              
              
              148,463
              
              
              115,192Note
                  And Capital Lease Payables - Current Portion
              
              
              1,083,020
              
              
              561,090Deferred
                  Revenue
              
              
              770,301
              
              
              787,758**Total
                  Current Liabilities**
              
              
              6,460,668
              
              
              6,629,851Deferred
                  Rent
              
              
              227,411
              
              
              189,542Note
                  And Capital Lease Payables - Long Term Portion
              
              
              5,324,495
              
              
              5,777,841**Total
                  Liabilities**
              
              
              12,012,574
              
              
              12,597,234**Stockholders’
                  Equity**Preferred
                  Stock, $.001 par value, 10,000,000 shares authorized, no shares
                  issued
              
              
              —
              
              
              —Common
                  Stock, $.001 par value, 50,000,000 shares authorized, 5,686,470
                  shares
                  issued and outstanding at March 31, 2007 and December 31,
                  2006
              
              
              5,686
              
              
              5,686Additional
                  Paid in Capital
              
              
              24,002,254
              
              
              23,943,189Accumulated
                  Deficit
              
              
              (7,986,215
              )
              
              (6,242,535
              )**Total
                  Stockholders’ Equity**
              
              
              16,021,725
              
              
              17,706,340**Total
                  Liabilities and Stockholders’ Equity**
              
              $
              28,034,299
              
              $
              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)**


**Quarter
                  Ended March 31,****2007**
              
              **2006****Gross
                  sales**
              
              $
              9,164,620
              
              $
              9,997,810Less
                  - discounts & returns
              
              
              (626,544
              )
              
              (529,648
              )**Net
                  sales**
              
              
              8,538,076
              
              
              9,468,162**Cost
                  of goods sold**
              
              
              6,085,533
              
              
              6,513,621**Gross
                  profit**
              
              
              2,452,543
              
              
              2,954,541**Operating
                  expenses:**Advertising
              
              
              1,349,211
              
              
              981,188Salaries
                  and benefits
              
              
              1,218,005
              
              
              793,050Share-based
                  compensation
              
              
              50,779
              
              
              38,032Technology
              
              
              67,257
              
              
              88,484Restructuring
              
              
              -
              
              
              116,585General
                  and administrative
              
              
              1,292,621
              
              
              1,049,005**Total
                  operating expenses**
              
              
              3,977,873
              
              
              3,066,344**Operating
                  income (loss)**
              
              
              (1,525,330
              )
              
              (111,803
              )**Other
                  income (expense):**Interest
                  income
              
              
              31,229
              
              
              47,293Interest
                  expense
              
              
              (249,579
              )
              
              (111,211
              )**Income
                  (loss) before provision for income taxes**
              
              
              (1,743,680
              )
              
              (175,721
              )Provision
                  for income taxes
              
              
              -
              
              
              21,000**Net
                  income (loss)**
              
              $
              (1,743,680
              )
              $
              (196,721
              )**Earnings
                  (loss) per common share:**Basic
              
              $
              (0.31
              )
              $
              (0.04
              )Diluted
              
              $
              (0.31
              )
              $
              (0.04
              )**Weighted
                  average common shares outstanding:**Basic
              
              
              5,686,470
              
              
              5,296,308Diluted
              
              
              5,686,470
              
              
              5,296,308




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




4




**BabyUniverse,
      Inc. and Subsidiaries**


**Consolidated
      Statements of Stockholders’ Equity (Deficit)**


**(Unaudited)**




**Description**
            
            **Shares**
            
            **Amount**
            
            **Paid
                in Capital**
            
            **Unearned
                Compensation**
            
            **Accumulated
                Deficit**
            
            **Total****December
                31, 2006**
            
            
            5,686,470
            
            $
            5,686
            
            $
            23,943,189
            
            
            -
            
            
            ($6,242,535
            )
            $
            17,706,340Vesting
                of restricted stock
            
            
            -
            
            
            -
            
            
            22,832
            
            
            -
            
            
            -
            
            
            22,832Share
                based compensation for employee stock options
            
            
            
            
            
            
            
            
            27,946
            
            
            -
            
            
            -
            
            
            27,946Options
                granted to a content provider
            
            
            -
            
            
            -
            
            
            8,287
            
            
            -
            
            
            -
            
            
            8,287Net
                Loss - March 31, 2007
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,743,680
            )
            
            (1,743,680
            )**March
                31, 2007**
            
            
            5,686,470
            
            $
            5,686
            
            $
            24,002,254
            
            
            -
            
            
            ($7,986,215
            )
            $
            16,021,725




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




5




**BabyUniverse,
      Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**




**Quarter
                  Ended March 31,****2007**
              
              **2006****Operating
                  activities:**Net
                  income (loss)
              
              $
              (1,743,680
              )
              $
              (196,721
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation
                  and amortization
              
              
              193,651
              
              
              101,882Share-based
                  compensation
              
              
              50,779
              
              
              38,032Amortization
                  of prepaid finance costs
              
              
              70,405
              
              
              -Changes
                  in operating assets and liabilities:(Increase)
                  decrease in accounts receivable
              
              
              99,877
              
              
              (33,879
              )(Increase)
                  decrease in inventory
              
              
              215,646
              
              
              (531,544
              )(Increase)
                  decrease in prepaid expenses
              
              
              (273,972
              )
              
              30,264(Increase)
                  in deposits
              
              
              (4,880
              )
              
              (96,231
              )Increase
                  (decrease) in accounts payable
              
              
              (509,325
              )
              
              560,686(Decrease)
                  in accrued expenses
              
              
              (197,602
              )
              
              (31,777
              )Increase
                  (decrease) in gift certificate liability
              
              
              33,271
              
              
              (12,994
              )Increase(decrease)
                  in deferred revenue
              
              
              (17,457
              )
              
              434,785Increase
                  in deferred rent
              
              
              37,869
              
              
              2,493**Net
                  cash provided by (used in) operating activities:**
              
              
              (2,045,418
              )
              
              264,996**Investing
                  activities:**Purchase
                  of fixed assets
              
              
              (208,716
              )
              
              (603,335
              )Cash
                  paid in acquisition of Posh Tots, net of cash received
              
              
              -
              
              
              (5,991,144
              )**Net
                  cash used in investing activities:**
              
              
              (208,716
              )
              
              (6,594,479
              )**Financing
                  activities:**Public
                  offering costs
              
              
              -
              
              
              (14,742
              )Decrease
                  in capital lease
              
              
              (1,822
              )
              
              (786
              )**Net
                  cash provided by financing activities:**
              
              
              (1,822
              )
              
              (15,528
              )Net
                  (decrease) in Cash
              
              
              (2,255,956
              )
              
              (6,345,011
              )Beginning
                  Cash
              
              
              3,473,278
              
              
              9,925,806Ending
                  Cash
              
              $
              1,217,322
              
              $
              3,580,795


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.




***Strategic
      Alternatives***




On
      August
      14, 2006, the Company announced that its Board of Directors decided to begin
      a
      process to explore strategic alternatives to enhance shareholder value
      including, but not limited to, the acquisition of a substantial private company,
      the acquisition of a complementary public company or a potential sale of the
      Company. On October 5, 2006, the Company announced that it had retained Banc
      of
      America Securities LLC as its financial advisor.




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, par value $0.001 per share (the “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
      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.




7




***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.




***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 Securities and Exchange Commission 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
      March 31, 2007 includes $260,000 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 March 31, 2007, the Company had cash of approximately $1.2
      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 March 31, 2007 or December 31,
      2006.




8




***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 March 31, 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 Directors and Officers liability
      insurance, acquisition costs and strategic initiative costs.




***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 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
      March 31, 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.




9




***Deferred
      Revenue***




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




***Revenue
      Recognition***




The
      Company has adopted the Securities and Exchange Commission’s Staff Accounting
      Bulletin No. 101*(SAB No.101) — Revenue Recognition* ,
      which
      defines 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•
            Collectibility
                is reasonably assured




Per
      SAB
      No. 104 ** ,
      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 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 Plan under Accounting Principles Board
      (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      instead
      of SFAS No. 123.




10




As
      of
      March 31, 2007, an aggregate of 405,289 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 102,054
      and
      117,000 shares, respectively, and 186,235 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 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 quarters ended March 31, 2007 and 2006, the
      Company capitalized costs of $119,995 and $214,234, respectively.




***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 FASB’s Financial
      Interpretation Number 48 (FIN No. 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. 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 No. 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 No. 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 No. 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 stock based compensation including stock options, restricted stock
      awards, warrants and other convertible securities.




11




For
      the
      quarters ended March 31, 2007 and 2006, 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 March 31,
      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.




***Recently
      Issued Accounting Standards***




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines the 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 Securities and Exchange Commission (SEC) issued SAB No.
      108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      This
      SAB 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, 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 FASB No. 159 to have a material
      impact, if any, on the Company’s consolidated financial position or results of
      operations.




12




**Note
      2 - Goodwill**




Intangible
      assets with indefinite lives and goodwill are not amortized, but are tested
      at
      least annually for impairment, or if circumstances change that will more likely
      than not reduce the fair value of the reporting unit below its carrying
      amount.




The
      following table sets forth goodwill, net, as of December 31, 2006 and March
      31, 2007 (unaudited):




**December
                  31, 2006**
              
              **Acquisition**
              
              **Impairment**
                **Losses**
              
              **March
                  31, 2007**Dreamtime
                  Baby
              
              $
              6,760,124
              
              
              —
              
              
              —
              
              $
              6,760,124PoshTots
              
              
              12,071,917
              
              
              —
              
              
              —
              
              
              12,071,917Total
                  Goodwill
              
              $
              18,832,041
              
              
              —
              
              
              —
              
              
              18,832,041




**Note
      3 - 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* .
      During
      the quarter ended March 31, 2006, the Company acquired PoshTots. (See Note
      1, The Company)




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 March 31, 2007 (unaudited):




**Useful**
                **Life**
              
              **Gross**
                **Carrying**
                **Amount**
              
              **Acquisition**
              
              **Accumulated**
                **Amortization**
              
              **Net****Dreamtime
                  Baby**Trade
                  name
              
              
              5
                  years
              
              $
              140,000
              
              $
              —
              
              $
              (43,167
              )
              $
              96,833Non-competition
                  Agreement
              
              
              3
                  years
              
              
              50,000
              
              
              —
              
              
              (25,694
              )
              
              24,306190,000
              
              
              —
              
              
              (68,861
              )
              
              121,139**Posh
                  Tots**Trade
                  name
              
              
              Indefinite
              
              
              2,200,000
              
              
              —
              
              
              —
              
              
              2,200,000Customer
                  list
              
              
              4
                  years
              
              
              260,000
              
              
              —
              
              
              (82,917
              )
              
              177,083Contents
                  of catalogue / website
              
              
              3
                  years
              
              
              200,000
              
              
              —
              
              
              (81,667
              )
              
              118,3332,660,000
              
              
              —
              
              
              (164,584
              )
              
              2,495,416ePregnancy
              
              
              3
                  years
              
              
              184,257
              
              
              —
              
              
              (48,622
              )
              
              135,635**Total
                  Intangible Assets**
              
              
              
              
              $
              3,034,257
              
              $
              —
              
              $
              (282,067
              )
              $
              2,752,190




13




Amortization
      expense for the three months ended March 31, 2007 and 2006 was $59,438 and
      $44,083, respectively. Estimated amortization expense remaining for the periods
      ending December 31, are as follows (unaudited):




2007
            
            $
            178,3142008
            
            
            232,8912009
            
            
            121,1502010
            
            
            19,835$
            552,190




**Note
      4 - Note And Capital Lease Payables**




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




**March
                  31,**
                **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
              
              
              (618,623
              )
              
              (689,029
              )Capital
                  leases
              
              
              26,138
              
              
              27,960Total
                  notes payable and capital leases
              
              
              6,407,515
              
              
              6,338,931Less:
                  Current maturities
              
              
              (1,083,020
              )
              
              (561,090
              )Total
                  notes payable and capital leases
              
              $
              5,324,495
              
              $
              5,777,841


On
      May
      15, 2007, the Company informed its lender for 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 will
      need to close a financing transaction that will enable it to cure the default
      within the 45 day period. There can be no assurance that the Company will be
      able to complete such a financing, or, if so able, that such financing will
      be
      on terms acceptable to the Company.




**Note
      5 - 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 BabyUniverse 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.




14




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 $118,000. Approximately $49,000 was recognized as
                restructuring expenses for the quarter ended March 31, 2006, including
                $6,930 which was paid during the quarter.•
            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 $95,000, of which approximately $68,000 was recognized
                as
                restructuring expenses for the quarter ended March 31,
                2006.




**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:




**Quarter
                  Ended March 31, (Unaudited)****2007**
              
              **2006**Net
                  income (loss)
              
              $
              (1,743,680
              )
              $
              (196,721
              )Weighted
                  average common shares outstanding
              
              
              5,686,470
              
              
              5,296,308Basic
                  earnings (loss) per common share
              
              $
              (0.31
              )
              $
              (0.04
              )*Dilutive
                  effect of stock options and warrants*
              
              
              —
              
              
              —*Common
                  stock and common stock equivalents*
              
              
              5,686,470
              
              
              5,296,308Diluted
                  earnings (loss) per share
              
              
              (0.31
              )
              
              (0.04
              )


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:




**Quarter
                  Ended March 31, (Unaudited)****2007**
              
              **2006***Dilutive
                  effect of stock options and warrants*
              
              
              727,249
              
              
              636,398




15




**Note
      7 - Stock Options**




The
      Company amended its 2001 Stock Award Plan in April 2005 and renamed it 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 seven 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.




In
      February 2007, the Company granted options to purchase up to 50,000 shares
      of
      the Company’s common stock with an exercise price of $6.16 in exchange for the
      rights to broadcast certain content on BabyTV.com for a period of 18 months.
      The
      options vest 50% in two months with the remaining 50% vesting in equal monthly
      amounts over a 16 month period and expire in 30 months. During the quarter
      ended
      March 31, 2007, options to purchase 15,000 shares of the Company’s common stock
      were forfeited by former employees. For stock options granted during the quarter
      ended March 31, 2007, the fair value was estimated at the date of grant using
      the Black-Scholes option pricing model with the following range of
      assumptions:




Risk-free
                  interest rate
              
              
              4.84
              %Dividends
              
              
              —Volatility
                  factor
              
              
              56
              %Expected
                  life
              
              
              2.5
                  yearsAnnual
                  forfeiture rate
              
              
              0
              %


The
      following table summarizes information about stock option transactions for
      the
      quarters ended March 31, 2007 and 2006 (unaudited):




**2007**
              
              **2006****Shares**
              
              **Weighted
                  Average Exercise Price**
              
              **Shares**
              
              **Weighted
                  Average Exercise Price**Outstanding
                  at beginning of the quarter
              
              
              236,248
              
              $
              6.55
              
              
              104,248
              
              $
              3.76Granted
              
              
              50,000
              
              $
              6.16
              
              
              125,000
              
              $
              8.10Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Forfeited
              
              
              (15,000
              )
              $
              8.10
              
              
              -
              
              
              -Outstanding
                  at end of the quarter
              
              
              271,248
              
              $
              6.39
              
              
              229,248
              
              $
              6.13Options
                  exercisable at end of quarter
              
              
              141,415
              
              $
              5.05
              
              
              104,248
              
              $
              3.76Weighted
                  average fair value of options granted during the quarter
              
              
              
              
              $
              2.36
              
              
              
              
              $
              2.76




16




The
      following table summarizes information about stock options outstanding at March
      31, 2007 (unaudited):




**Options
                  Outstanding**
              
              **Options
                  Exercisable****Range
                  of Exercise Prices**
              
              **Number
                  Outstand-ing at March 31, 2007**
              
              **Weighted
                  Average Remaining Contractual Life**
              
              **Weighted
                  Average Exercise Price**
              
              **Number
                  Exercisable at March 31, 2007**
              
              **Weighted
                  Average Exercise Price**$0.01
                  to $3.50
              
              
              52,124
              
              
              6.76
              
              $
              1.27
              
              
              52,124
              
              $
              1.27$3.51
                  to $7.00
              
              
              104,124
              
              
              4.34
              
              $
              6.22
              
              
              52,624
              
              $
              6.26$7.01
                  to $9.86
              
              
              115,000
              
              
              1.00
              
              $
              8.86
              
              
              36,667
              
              $
              8.70


The
      Company recorded $27,946 and $29,097 of compensation expense for employee stock
      options during the three month periods ended March 31, 2007 and 2006 ,
      respectively. At March 31, 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 March 31, 2007, the Company did not grant any additional
      restricted shares under the Company’s 2005 Stock Incentive Plan, and no
      restricted shares vested. As such, at March 31, 2007 there are 102,054 unvested
      restricted shares.




As
      of
      March 31, 2007, an aggregate of 405,289 shares of common stock are reserved
      for issuance under the 2005 Stock Incentive Plan. Restricted stock grants and
      stock option grants were outstanding for an aggregate of 102,054 and 117,000
      shares of common stock, respectively, and 186,235 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 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 No. 48 on January 1, 2007. As a result
      of
      the implementation of FIN No. 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.




17




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




**Overview**




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.




The
      Company is pursuing a dual strategy of organic growth and acquisition growth
      that is designed to establish the Company as the leader in the online baby
      marketplace. Beyond the baby segment, the Company intends to leverage its
      e-commerce platform to acquire other female-oriented e-commerce, marketing
      and
      new media companies. The overall objective of the Company is to establish a
      market-leading e-commerce and new media business focused on the high-growth
      female marketplace.




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.




18




**Recent
      Developments**




***Strategic
      Alternatives***




On
      August
      14, 2006, the Company announced that its Board of Directors decided to begin
      a
      process to explore strategic alternatives to enhance shareholder value
      including, but not limited to, the acquisition of a substantial private company,
      the acquisition of a complementary public company or a potential sale of the
      Company. On October 5, 2006, the Company announced that it had retained Banc
      of
      America Securities LLC as its financial advisor.




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, par value $0.001 per share (the “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
      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.




19




**Results
      of Operations**




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




**Quarter
                  Ended March 31,****2007**
              
              **2006**Gross
                  sales
              
              
              107.3
              
              
              105.6Less
                  - Discounts and returns
              
              
              (7.3
              )
              
              (5.6
              )Net
                  sales
              
              
              100.0
              %
              
              100.0
              %Cost
                  of goods sold
              
              
              71.3
              
              
              68.8Gross
                  profit
              
              
              28.7
              
              
              31.2Operating
                  expensesAdvertising
              
              
              15.8
              
              
              10.4Salaries
                  and benefits
              
              
              14.3
              
              
              8.4Share
                  based compensation
              
              
              0.6
              
              
              0.4Technology
              
              
              0.8
              
              
              0.9Restructuring
                  costs
              
              
              0.0
              
              
              1.2General
                  and administrative
              
              
              15.1
              
              
              11.1Total
                  operating expenses
              
              
              46.6
              
              
              32.4Operating
                  income (loss)
              
              
              (17.9
              )
              
              (1.2
              )Other
                  income (expense)
              
              
              (2.5
              )
              
              (0.7
              )Income
                  (loss) before income taxes
              
              
              (20.4
              )
              
              (1.9
              )Provision
                  for income taxes
              
              
              0.0
              
              
              (0.2
              )Net
                  income (loss)
              
              
              (20.4
              )
              
              (2.1
              )




The
      above
      table may not sum due to rounding.




The
      following 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 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 & 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 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.




*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.




20




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




***Comparison
      of Quarter Ended March 31, 2007 to Quarter Ended March 31,
      2006***




*Gross
      sales.* Gross
      sales were $9,164,620 for the quarter ended March 31, 2007, a decrease
      of 8.3% from $9,997,810 for the quarter ended March 31, 2006. Our gross sales
      decline was attributable to a decrease in BabyUniverse.com and DreamtimeBaby.com
      sales of approximately $516,000 or 9.5% and $740,000 or 28%, respectively,
      compared to the quarter ended March 31, 2006, which were partially offset by
      an
      increase in PoshTots sales of approximately $423,000 or 21.8% as compared to
      the
      quarter ended March 31, 2006. The BabyUniverse.com and DreamtimeBaby.com
      businesses continue to feel the impact of our 2006 restructuring plan and our
      strategic alternatives process which, combined with increasing competition
      in
      our markets, have negatively impacted gross sales. While DreamtimeBaby.com
      gross
      sales increased approximately $337,000 or 21.5% over gross sales during the
      quarter ended December 31, 2006, an improving trend, BabyUniverse.com gross
      sales declined approximately $265,000 or 5.1% when compared to the quarter
      ended
      December 31, 2006.




*Discounts
      and returns.* Discounts
      and returns amounted to $626,544, or 7.3% of net sales for the quarter ended
      March 31, 2007, compared to $529,648, or 5.6% of net sales for the
      quarter ended March 31, 2006. The increase in discounts and returns is
      reflective of the increased competition in the pregnancy, baby, toddler and
      maternity marketplace.




*Gross
      profit.* Gross
      profit was $2,452,543 for the quarter ended March 31, 2007, a decrease
      of 17.0% from $2,954,541 for the quarter ended March 31, 2006. This decrease
      was
      primarily reflective of the decline in gross sales, increased shipping costs
      and
      changes in the sales mix for BabyUniverse.com and DreamtimeBaby.com. Gross
      margin was 28.7% for the quarter ended March 31, 2007 compared to
      31.2% for the quarter ended March 31, 2006.




*Operating
      expenses.* Operating
      expenses increased to $3,977,873 for the quarter ended March 31, 2007
      from $3,066,344 for the quarter ended March 31, 2006. As a percentage
      of net sales, operating expenses were 46.6% for the quarter ended March 31,
      2007
      compared to 32.4% for the quarter ended March 31, 2006. The increase in
      operating expenses as a percentage of net sales was primarily attributable
      to:




•
            management
                salaries and salary increases to expand the infrastructure to support
                our
                new media strategy•
            substantially
                higher general and administrative expenses incurred for rent of the
                new
                PoshTots and corporate headquarters locations, increased depreciation
                expense as a result of the asset additions related to the new locations
                and increased amortization expense for capitalized website and software
                development costs




Advertising
      expenses increased to 15.8% of net sales for the quarter ended
      March 31, 2007 from 10.4% for the quarter ended
      March 31, 2006. Most of the advertising expense increase, as a
      percentage of net sales, was due to the commission paid to on-line shopping
      affiliates such as Amazon.com, Shopping.com and Buy.com.




*Other
      income (expense).* Other
      expense, net, was $218,350 for the quarter ended March 31, 2007
      compared to other expense, net, of $63,918 for the quarter ended March 31,
      2006.
      Included in the quarter ended March 31, 2007 was interest expense of $249,579
      associated with the notes payable to our institutional
      lenders .




*Net
      income (loss).* The net
      loss for the quarter ended March 31, 2007 was $1,743,680, or ($0.31)
      per diluted share, compared to a net loss of $196,721, or ($0.04) per diluted
      share for the quarter ended March 31, 2006.




**Liquidity
      and Capital Resources**




*Sources
      of funds and Liquidity.* Since
      inception, we have funded our operations through the sale of equity securities
      and indebtedness, and cash generated from operations. In addition, our business
      model contains 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 receivables from credit card
      processors.




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. We will
      need to close a financing transaction in order to repay our notes payable to
      our
      institutional lenders and to provide sufficient working capital to fund
      operations in advance of our contemplated merger with eToys Direct. There can
      be
      no assurance that the Company will be able to complete such a financing, or
      if
      it is so able, that such financing will be on terms acceptable to us. If
      we are unable to complete a financing transaction, we may be unable to fund
      operations.




21




On
      May
      15, 2007, we informed Hercules Technology Growth Capital, Inc. (Hercules) that
      we were in default of Section 7.2 of its Senior Loan and Security Agreement
      with
      Hercules, for failure to maintain a working capital ratio of 1.0 as of March
      31,
      2007. Under the Senior Loan and Security Agreement, we have a period of 45
      days from such date to complete a financing transaction resulting in the cure
      of
      the default. We will need to close a financing  transaction to cure the
      default within the 45-day period. There can be no assurance that we will be
      able
      to secure such financing or that the terms of any such financing will be
      acceptable to us.




*Uses
      of funds.* Net
      cash
      used by operating activities was $2,045,418 for the quarter ended
      March 31, 2007, compared to net cash provided by operating activities
      of $264,996 for the quarter ended March 31, 2006. The decrease in cash provided
      by operating activities was primarily due to the net loss for the quarter plus
      an increase in prepaid expenses and a decrease in accounts payable and accrued
      liabilities.




Net
      cash
      used in investing activities was $208,716 for the quarter ended
      March 31, 2007 and was primarily related to capital expenditures
      associated with enhancing our technology system infrastructure and our
      BabyTV.com new media offering.




As
      of
      March 31, 2007, we had no material commitments for capital
      expenditures.




**Contractual
      Obligations**




The
      following tables summarize our contractual obligations as of
      March 31, 2007 and the expected effect on liquidity and cash flows.
      Payments remaining due by period are as follows:




**Operating**
                **Leases**
              
              **Notes**
                **Payable**
              
              **Capital**
                **Leases**2007
              
              $
              496,341
              
              $
              836,062
              
              $
              5,7362008
              
              
              599,244
              
              
              6,163,938
              
              
              5,0902009
              
              
              577,573
              
              
              -
              
              
              4,3602010
              
              
              591,488
              
              
              -
              
              
              4,2632011
              
              
              453,187
              
              
              -
              
              
              4,263Thereafter
              
              
              280,900
              
              
              -
              
              
              2,427Total
                  obligations
              
              $
              2,998,733
              
              $
              7,000,000
              
              $
              26,138




Capital
      leases consist of warehouse equipment with capitalized amounts of $39,727 as
      of
      March 31, 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:




22




•
            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•
            we
                may not be successful in our efforts to cure the default under our
                Senior
                Loan and Security Agreement with Hercules•
            we
              may not be successful in our efforts to raise the funds necessary to
              fund
              our working capital requirements during the period prior to our
              contemplated merger with eToys Direct




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. 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 March 31, 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.




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.




23




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**




Except
      as
      follows, 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.




**If
      we are unable to obtain additional financing in order to cure our default,
      as
      described in greater detail in Item 3 of this Part II, for failure to maintain
      minimum working capital requirements, our lender may enforce the default
      provisions of the Senior Loan and Security Agreement.**




If
      the
      default is not cured by us or waived by our lender within 45 days, our lender
      (i) has the right to terminate its commitment to make advances, (ii) may,
      at its option, accelerate and demand payment of all or part of the secured
      obligations and declare them to be immediately due and payable and (iii) may
      notify our debtors to make payments directly to our lender. In addition, our
      lender may exercise all rights and remedies with respect to the collateral
      under
      the loan documents including the right to release, hold, sell, lease, liquidate,
      collect or otherwise dispose of all or part of the collateral, which includes
      our accounts receivable and inventory. If our lender were to seize its
      collateral under the loan documents, the Company would not be able to continue
      to conduct business.




**If
      we are unable in the near term to raise additional amounts of working capital,
      our ability to continue to conduct our business will be materially adversely
      impacted.**




In
      order
      to continue to conduct our business, we will need in the near term to raise
      additional funds to finance our working capital requirements, in an amount
      in
      excess of the amount needed to cure our existing default under the Senior Loan
      and Security Agreement. There can be no assurance that we will be successful
      in
      our attempts to raise this financing, or that the terms of any such financing
      will be acceptable to the Company. In the event that we are not able in the
      near
      term to raise sufficient funds to finance our working capital requirements
      on
      terms acceptable to us, our ability to continue to conduct our business, our
      financial condition, our results of operations and our prospects will be
      materially adversely impacted.




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




None




**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.




24




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 (the “Lydian
      Loan Agreement”), 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 and has 45 days from May 15, 2007 to complete a
      financing transaction resulting in a cure of the default. While the Company
      believes that it will complete such a financing transaction within such time
      period, there can be no assurance that the Company will be able to do so, or
      that any such transaction will be on terms acceptable to the Company. If the
      Company is unable to complete such a transaction and/or if the violation of
      this
      financial covenant were to trigger an event of default under the Lydian Loan
      Agreement, it would have a material adverse effect on the Company’s financial
      position, results of operations and prospects.




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




None




**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 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 (the “Lydian
      Loan Agreement”), 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 and has 45 days from May 15, 2007 to complete a
      financing transaction resulting in a cure of the default. While the Company
      believes that it will complete such a financing transaction within such time
      period, there can be no assurance that the Company will be able to do so, or
      that any such transaction will be on terms acceptable to the Company. If the
      Company is unable to complete such a transaction and/or if the violation of
      this
      financial covenant were to trigger an event of default under the Lydian Loan
      Agreement, it would have a material adverse effect on the Company’s financial
      position, results of operations and prospects.




25




**Item 6.
      Exhibits**




**Number**
            
            **Description
                of Document**2.1
            
            Agreement
                and Plan of Merger among BabyUniverse, Inc., Baby Acquisition Sub,
                Inc.
                and eToys Direct, Inc. dated March 13, 2007 (incorporated by reference
                to
                Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-32577)
                filed
                by BabyUniverse, Inc. on March 16, 2007)4.1
            
            Voting
                Agreement dated March 13, 2007 between eToys Direct, Inc. and Wyndcrest
                BabyUniverse Holdings, LLC, Wyndcrest BabyUniverse Holdings II, LLC,
                Wyndcrest BabyUniverse Holdings III, LLC, John C. Textor, Jonathan
                Teaford
                and Stuart Goffman (incorporated by reference to Exhibit 4.1 to the
                Current Report on Form 8-K (File No. 001-32577) filed by BabyUniverse,
                Inc. on March 16, 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.




26




**Signatures**




Pursuant
      to the requirements of the Securities Exchange 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:
                May 15, 2007/s/ Michael
              R. HullMichael
                R. HullChief
                Financial Officer
              (Principal
                Financial Officer and
              Duly
                Authorized Officer)




27




**EXHIBIT
      INDEX**


**Number**
                
                **Description
                    of Document**2.1
                
                Agreement
                    and Plan of Merger among BabyUniverse, Inc., Baby Acquisition
                    Sub, Inc.
                    and eToys Direct, Inc. dated March 13, 2007 (incorporated by
                    reference to
                    Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-32577)
                    filed
                    by BabyUniverse, Inc. on March 16, 2007)4.1
                
                Voting
                    Agreement dated March 13, 2007 between eToys Direct, Inc. and
                    Wyndcrest
                    BabyUniverse Holdings, LLC, Wyndcrest BabyUniverse Holdings II,
                    LLC,
                    Wyndcrest BabyUniverse Holdings III, LLC, John C. Textor, Jonathan
                    Teaford
                    and Stuart Goffman (incorporated by reference to Exhibit 4.1
                    to the
                    Current Report on Form 8-K (File No. 001-32577) filed by BabyUniverse,
                    Inc. on March 16, 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




28