---

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 September 30, 2006       
|                                                        
|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)                          
|                                                                    
|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 (as defined in Rule 12b-2 of the Exchange Act):

|Large Accelerated   Filero | Accelerated Filero | Non-Accelerated Filerx
|-------------------------- | ------------------ | ----------------------

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 November 10, 2006, the registrant had 5,686,470 shares of common stock outstanding.

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BABYUNIVERSE, INC. INDEX

|                                                                                                 | Page
|------------------------------------------------------------------------------------------------ | ----
|                                                                                                 |     
|PART I.  FINANCIAL INFORMATION                                                                   | 3   
|                                                                                                 |     
|Item 1.  Financial Statements                                                                    | 3   
|                                                                                                 |     
|Notes to Consolidated Financial Statements                                                       | 7   
|                                                                                                 |     
|Item 2.  Managements Discussion and Analysis of   Financial Condition and Results of Operations | 17  
|                                                                                                 |     
|Item 3.  Quantitative and Qualitative Disclosures   About Market Risk                            | 25  
|                                                                                                 |     
|Item 4.  Controls and Procedures                                                                 | 25  
|                                                                                                 |     
|PART II.  OTHER INFORMATION                                                                      | 26  
|                                                                                                 |     
|Item 1.  Legal Proceedings                                                                       | 26  
|                                                                                                 |     
|Item 1A.  Risk Factors                                                                           | 26  
|                                                                                                 |     
|Item 2.  Unregistered Sales of Equity Securities and   Use of Proceeds                           | 26  
|                                                                                                 |     
|Item 3.  Defaults   Upon Senior Securities                                                       | 26  
|                                                                                                 |     
|Item 4.  Submission of Matters to a Vote of Security   Holders                                   | 26  
|                                                                                                 |     
|Item 5.  Other Information                                                                       | 26  
|                                                                                                 |     
|Item 6.  Exhibits                                                                                | 27  
|                                                                                                 |     
|Signatures                                                                                       | 28  
|                                                                                                 |     
|Exhibit 4.1                                                                                      |     
|                                                                                                 |     
|Exhibit 4.2                                                                                      |     
|                                                                                                 |     
|Exhibit 10.1                                                                                     |     
|                                                                                                 |     
|Exhibit 10.2                                                                                     |     
|                                                                                                 |     
|Exhibit 10.3                                                                                     |     
|                                                                                                 |     
|Exhibit 10.4                                                                                     |     
|                                                                                                 |     
|Exhibit 10.5                                                                                     |     
|                                                                                                 |     
|Exhibit 31.1                                                                                     |     
|                                                                                                 |     
|Exhibit 31.2                                                                                     |     
|                                                                                                 |     
|Exhibit 32.1                                                                                     |     
|                                                                                                 |     
|Exhibit 32.2                                                                                     |     
|                                                                                                 |     
|Exhibit   99.1                                                                                   |     

2

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PART I. FINANCIAL INFORMATION

|Item 1. | Financial   Statements
|------- | ----------------------

BabyUniverse, Inc. and Subsidiaries Consolidated Balance Sheets

|                                                                                                                                                                                   |  | September   30, 2006 |            | December   31, 2005 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ---------- | ------------------- | -
|                                                                                                                                                                                   |  |                      |            |                     |  
|                                                                                                                                                                                   |  | (Unaudited)          |            |                     |  
|Assets                                                                                                                                                                             |  |                      |            |                     |  
|Cash   and cash equivalents                                                                                                                                                        |  | $                    | 2,406,884  |                     | $
|Accounts   receivable                                                                                                                                                              |  |                      | 1,048,951  |                     |  
|Inventory                                                                                                                                                                          |  |                      | 1,662,199  |                     |  
|Prepaid   expenses - current                                                                                                                                                       |  |                      | 235,206    |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Current Assets                                                                                                                                                               |  |                      | 5,353,240  |                     |  
|Fixed   assets - net                                                                                                                                                               |  |                      | 1,914,557  |                     |  
|Intangible   assets - net                                                                                                                                                          |  |                      | 2,871,065  |                     |  
|Deposits                                                                                                                                                                           |  |                      | 137,760    |                     |  
|Prepaid   expenses - long term portion                                                                                                                                             |  |                      | 282,015    |                     |  
|Goodwill                                                                                                                                                                           |  |                      | 18,832,041 |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Assets                                                                                                                                                                       |  | $                    | 29,390,678 |                     | $
|                                                                                                                                                                                   |  |                      |            |                     |  
|Liabilities   and Stockholders Equity (Deficit)                                                                                                                                   |  |                      |            |                     |  
|Accounts   payable                                                                                                                                                                 |  | $                    | 3,069,633  |                     | $
|Accrued   expenses                                                                                                                                                                 |  |                      | 363,552    |                     |  
|Gift   certificate liability                                                                                                                                                       |  |                      | 96,728     |                     |  
|Note   and capital lease payables - current portion                                                                                                                                |  |                      | 400,154    |                     |  
|Deferred   revenue                                                                                                                                                                 |  |                      | 1,248,603  |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Current Liabilities                                                                                                                                                          |  |                      | 5,178,670  |                     |  
|Deferred   rent                                                                                                                                                                    |  |                      | 160,246    |                     |  
|Note   and capital lease payables - long term portion                                                                                                                              |  |                      | 4,343,365  |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Liabilities                                                                                                                                                                  |  |                      | 9,682,281  |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Commitments   and Contingencies                                                                                                                                                    |  |                      |           |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Stockholders   Equity (Deficit)                                                                                                                                                   |  |                      |            |                     |  
|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 and 5,125,203   shares issued and outstanding at September 30, 2006 and December 31, 2005,   respectively |  |                      | 5,686      |                     |  
|Additional   paid in capital                                                                                                                                                       |  |                      | 23,900,589 |                     |  
|Unearned   compensation                                                                                                                                                            |  |                      |           |                     |  
|Accumulated   deficit                                                                                                                                                              |  |                      | (4,197,878 | )                   |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Stockholders Equity (Deficit)                                                                                                                                               |  |                      | 19,708,397 |                     |  
|                                                                                                                                                                                   |  |                      |            |                     |  
|Total Liabilities and Stockholders Equity   (Deficit)                                                                                                                             |  | $                    | 29,390,678 |                     | $
|                                                                                                                                                                                   |  |                      |            |                     |  

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

3

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BabyUniverse, Inc. and Subsidiaries Consolidated Statements of Operations(Unaudited)

|                                              |  | Quarter   Ended September 30, |            | Year to   Date Ended September 30, |  
|--------------------------------------------- |  | ----------------------------- | ---------- | ---------------------------------- | -
|                                              |  |                               |            |                                    |  
|                                              |  | 2006                          |            | 2005                               |  
|                                              |  |                               |            |                                    |  
|Gross   sales                                 |  | $                             | 9,436,920  |                                    | $
|Less - discounts & returns                    |  |                               | (561,578   | )                                  |  
|                                              |  |                               |            |                                    |  
|Net   sales                                   |  |                               | 8,875,342  |                                    |  
|Cost   of goods sold                          |  |                               | 6,201,720  |                                    |  
|                                              |  |                               |            |                                    |  
|Gross   profit                                |  |                               | 2,673,622  |                                    |  
|                                              |  |                               |            |                                    |  
|Operating   expenses:                         |  |                               |            |                                    |  
|Advertising                                   |  |                               | 1,314,803  |                                    |  
|Salaries and benefits                         |  |                               | 1,303,016  |                                    |  
|Share based compensation                      |  |                               | 63,380     |                                    |  
|Technology                                    |  |                               | 62,870     |                                    |  
|Restructuring                                 |  |                               |           |                                    |  
|General and administrative                    |  |                               | 1,164,662  |                                    |  
|                                              |  |                               |            |                                    |  
|Total   operating expenses                    |  |                               | 3,908,731  |                                    |  
|                                              |  |                               |            |                                    |  
|Operating   income (loss)                     |  |                               | (1,235,109 | )                                  |  
|Other   income (expense):                     |  |                               |            |                                    |  
|Interest income                               |  |                               | 10,055     |                                    |  
|Interest expense                              |  |                               | (201,982   | )                                  |  
|Gain on early extinguishment of debt          |  |                               | 1,500,000  |                                    |  
|                                              |  |                               |            |                                    |  
|Income   (loss) before income tax benefit     |  |                               | 72,964     |                                    |  
|Provision (benefit) for income taxes          |  |                               | (30,000    | )                                  |  
|                                              |  |                               |            |                                    |  
|Net   income (loss)                           |  | $                             | 102,964    |                                    | $
|                                              |  |                               |            |                                    |  
|Earnings   (loss) per common share:           |  |                               |            |                                    |  
|Basic                                         |  | $                             | 0.02       |                                    | $
|Diluted                                       |  | $                             | 0.02       |                                    | $
|Weighted   average common shares outstanding: |  |                               |            |                                    |  
|Basic                                         |  |                               | 5,396,406  |                                    |  
|Diluted                                       |  |                               | 6,121,953  |                                    |  

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

4

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BabyUniverse, Inc.and SubsidiariesConsolidated Statements of Stockholders Equity

|Description                                                        |  | Shares |           | Amount |   | Paid in   Capital |  | Unearned   Compensation |            | Accumulated      Deficit |   | Total    |  
|------------------------------------------------------------------ |  | ------ | --------- | ------ | - | ----------------- |  | ----------------------- | ---------- | ------------------------ | - | -------- | -
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|December 31, 2005                                                  |  |        | 5,125,203 |        | $ | 5,125             |  | $                       | 19,592,369 |                          | $ | (553,684 | )
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|Reclassification of unearned   compensation according to FAS123(R) |  |        |          |        |   |                  |  |                         | (553,684   | )                        |   | 553,684  |  
|Initial public offering   expenses                                 |  |        |          |        |   |                  |  |                         | (14,742    | )                        |   |         |  
|Issuance of common stock -   Posh Tots acquisition                 |  |        | 237,248   |        |   | 237               |  |                         | 2,013,999  |                          |   |         |  
|Issuance of warrants - Posh   Tots acquisition                     |  |        |          |        |   |                  |  |                         | 361,548    |                          |   |         |  
|Issuance of employee options                                       |  |        |           |        |   |                   |  |                         | 29,097     |                          |   |         |  
|Restricted stock                                                   |  |        | 13,722    |        |   | 14                |  |                         | 8,921      |                          |   |         |  
|Net loss - March 31, 2006                                          |  |        |          |        |   |                  |  |                         |           |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|March 31,   2006 (Unaudited)                                       |  |        | 5,376,173 |        | $ | 5,376             |  | $                       | 21,437,508 |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|Stock-based compensation for   employee stock options              |  |        |          |        |   |                  |  |                         | 50,334     |                          |   |         |  
|Stock-based compensation                                           |  |        | 16,361    |        |   | 16                |  |                         | 37,686     |                          |   |         |  
|Net loss - June 31, 2006                                           |  |        |          |        |   |                  |  |                         |           |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|June 30,   2006 (Unaudited)                                        |  |        | 5,392,534 |        | $ | 5,392             |  | $                       | 21,525,528 |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|Stock-based compensation                                           |  |        | 30,084    |        |   | 30                |  |                         | 37,672     |                          |   |         |  
|Stock-based compensation for   employee stock options              |  |        |          |        |   |                  |  |                         | 25,678     |                          |   |         |  
|Issuance of warrants -   Hercules Financing                        |  |        |          |        |   |                  |  |                         | 322,231    |                          |   |         |  
|Common stock purchase                                              |  |        | 263,852   |        |   | 264               |  |                         | 1,989,480  |                          |   |         |  
|Net income - September 30,   2006                                  |  |        |          |        |   |                  |  |                         |           |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  
|September   30, 2006 (Unaudited)                                   |  |        | 5,686,470 |        | $ | 5,686             |  | $                       | 23,900,589 |                          |   |         |  
|                                                                   |  |        |           |        |   |                   |  |                         |            |                          |   |          |  

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

5

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

|                                                                                                                        |  | Year to   Date Ended September 30, |           
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----------
|                                                                                                                        |  |                                    |           
|                                                                                                                        |  | 2006                               |           
|                                                                                                                        |  |                                    |           
|Operating activities:                                                                                                   |  |                                    |           
|Net income (loss)                                                                                                       |  | $                                  | (1,299,043
|Adjustments to reconcile net   income (loss) to net cash used in operating activities, net of effect of   acquisitions: |  |                                    |           
|Amortization   of prepaid financing costs                                                                               |  |                                    | 66,308    
|Depreciation   and amortization                                                                                         |  |                                    | 416,775   
|Gain   on early extinguishment of debt                                                                                  |  |                                    | (1,500,000
|Stock-based   compensation                                                                                              |  |                                    | 189,448   
|Changes in operating assets   and liabilities:                                                                          |  |                                    |           
|(Increase)   in accounts receivable                                                                                     |  |                                    | (272,873  
|(Increase)   in inventory                                                                                               |  |                                    | (318,424  
|(Increase)  decrease in prepaid expenses                                                                                |  |                                    | 201,477   
|(Increase)   in deposits                                                                                                |  |                                    | (88,587   
|Increase   in accounts payable                                                                                          |  |                                    | 402,752   
|Increase   (decrease) in accrued expenses                                                                               |  |                                    | (320,011  
|(Decrease)   in gift certificate liability                                                                              |  |                                    | (2,914    
|Increase   in deferred revenue                                                                                          |  |                                    | 195,856   
|Increase   in deferred rent                                                                                             |  |                                    | 144,703   
|                                                                                                                        |  |                                    |           
|Net cash   provided by (used in) operating activities:                                                                  |  |                                    | (2,184,533
|                                                                                                                        |  |                                    |           
|Investing   activities:                                                                                                 |  |                                    |           
|Purchase of fixed assets                                                                                                |  |                                    | (1,430,036
|Purchase of intangible   assets                                                                                         |  |                                    | (184,257  
|Cash paid in acquisition,   net of cash received                                                                        |  |                                    | (6,017,419
|Cash received from purchase   price adjustment                                                                          |  |                                    | 300,000   
|                                                                                                                        |  |                                    |           
|Net cash   used in investing activities:                                                                                |  |                                    | (7,331,712
|                                                                                                                        |  |                                    |           
|Financing   activities:                                                                                                 |  |                                    |           
|Repayment of note related to   Posh Tots acquisition                                                                    |  |                                    | (4,500,000
|Proceeds from Hercules debt   financing                                                                                 |  |                                    | 5,000,000 
|Debt issue expenses   associated with Hercules debt financing                                                           |  |                                    | (473,463  
|Proceeds from issuance of   common stock, net                                                                           |  |                                    | 1,989,744 
|Proceeds from initial public   offering                                                                                 |  |                                    |          
|Public offering costs                                                                                                   |  |                                    | (14,742   
|Proceeds from exercise of   options                                                                                     |  |                                    |          
|Net increase (decrease) in   capital lease obligations                                                                  |  |                                    | (4,216    
|Proceeds from exercise of   warrants                                                                                    |  |                                    |          
|Repayment of employee loans                                                                                             |  |                                    |          
|                                                                                                                        |  |                                    |           
|Net cash   provided by financing activities:                                                                            |  |                                    | 1,997,323 
|                                                                                                                        |  |                                    |           
|Net increase (decrease) in   Cash                                                                                       |  |                                    | (7,518,922
|Beginning Cash                                                                                                          |  |                                    | 9,925,806 
|                                                                                                                        |  |                                    |           
|Ending Cash                                                                                                             |  | $                                  | 2,406,884 
|                                                                                                                        |  |                                    |           

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

6

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BabyUniverse, Inc. and SubsidiariesNotes to Consolidated Financial Statements

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 markerplace. Through its
Web sites, 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 Web sites 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 PoshCravings.com, ePregnancy.com and the
soon-to-be-introduced, BabyTV.com the Company has also
established a widely recognized platform for the delivery of content and new
media resources to a national audience of expectant parents.

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 Board of
Directors changed the name of the corporation to BabyUniverse, Inc. Customer
purchases are shipped directly from the Companys warehouses, or are drop
shipped directly to customers from the Companys suppliers.  The
Company maintains its accounts 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 (Posh Tots), a luxury online retailer of baby and childrens furnishings.  The results of Posh Tots operations have been included in the consolidated financial statements of the Company since that date.

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 2005 filed with the Securities and Exchange Commission.  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

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (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.  We base our estimates on historical experience and on other assumptions that we believe 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.

Cash and Cash Equivalents

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 and cash equivalents.  The Companys Cash and Cash Equivalents balance as of September 30, 2006 includes $250,000 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.

Goodwill

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.

7

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Stock-Based Compensation

Effective with the Companys current fiscal year that began on January 1, 2006, the Company has adopted the accounting and disclosure provisions of Statement of Financial Accounting Standard SFAS No. 123(R), Share-Based Payment, 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 that 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.  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.

The Company had previously accounted for the Plan under APB Opinion No. 25 and its related interpretations, and adopted the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting For Stock-Based Compensation - Transition and Disclosure.  The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months and nine months ended September 30, 2005:

|                                                                                                 |  | Three   Months EndedSeptember 30, 2005 |          | Nine   Months Ended    September 30, 2005 |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------------- | -------- | ----------------------------------------- | -
|                                                                                                 |  |                                        |          |                                           |  
|Net income (loss), as   reported                                                                 |  | $                                      | (125,275 | )                                         | $
|Add:  Stock-based compensation expense, as reported                                              |  |                                        | 22,349   |                                           |  
|Deduct:  Stock-based compensation expense   determined under fair-value-based method, net of tax |  |                                        | (39,611  | )                                         |  
|                                                                                                 |  |                                        |          |                                           |  
|Pro forma net income (loss)                                                                      |  | $                                      | (142,537 | )                                         | $
|                                                                                                 |  |                                        |          |                                           |  
|Earnings (loss) per share                                                                        |  |                                        |          |                                           |  
|Basic - as reported                                                                              |  | $                                      | (0.03    | )                                         | $
|Basic - pro forma                                                                                |  | $                                      | (0.03    | )                                         | $
|Diluted - as reported                                                                            |  | $                                      | (0.03    | )                                         | $
|Diluted - pro forma                                                                              |  | $                                      | (0.03    | )                                         | $

The following assumptions were used in applying the fair value method for 2005: no dividend yield; volatility factor of 70%; risk-free interest rates that ranged between 3.69% and 4.46%; and expected lives using the simplified method permitted by the SECs Staff Accounting Bulletin 107.

No comparable information is presented for the three-month and nine-month periods ended September 30, 2006 as the Company adopted the disclosure requirements for SFAS No. 123(R) using a modified prospective approach effective with periods commencing on January 1, 2006.  (See Note 8  Stock Options)

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.

For the quarter ended September 30, 2005 and the year-to-date periods ended September 30, 2006 and 2005, the Company reported a net loss.  The diluted earnings per share are not presented for these periods since the effect is antidilutive.

8

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Recently Issued Accounting Standards

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140.  This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.  This Statement:

| | a. | Requires an entity to   recognize a servicing asset or servicing liability each time it undertakes an   obligation to service a financial asset by entering into a servicing   contract.                                                                                             
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | Requires all separately   recognized servicing assets and servicing liabilities to be initially   measured at fair value, if practicable.                                                                                                                                            
| | c. | Permits an entity to   choose either the amortization method or the fair value measurement method   for subsequent measurement for each class of separately recognized servicing   assets and liabilities.                                                                           
| | d. | At its initial adoption,   permits a one-time reclassification of available-for-sale securities to   trading securities by entities with recognized servicing rights, without   calling into question the treatment of other available-for-sale securities   under Statement No. 115.
| | e. | Requires separate   presentation of servicing assets and liabilities subsequently measured at   fair value in the statement of financial position and additional disclosures.                                                                                                        

An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006.  Earlier adoption is permitted as of the beginning of an entitys fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year. The effective date of this Statement is the date an entity adopts the requirements of this Statement.  The adoption of this statement is not expected to have a material impact on the Companys consolidated financial statements.

In June 2006, the Emerging Issues Task Force (EITF) issued EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the income statement (That is, Gross versus Net Presentation) to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts

of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of our fiscal year 2007). We do not expect the adoption of EITF 06-3 will have a material impact on our consolidated results of operations, financial position or cash flow.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.  This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  This Interpretation is effective for fiscal years beginning after December 15, 2006.  Earlier application of the provisions of this Interpretation is encouraged
if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted.  Management does not expect adoption of Interpretation No. 48 to have a material impact, if any, on the Companys consolidated financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Issues No. 157, Fair Value Measurements(SFAS 157), 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 we have not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We are currently evaluating the impact SFAS 157 may have on our consolidated financial condition or results of operations.

9

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In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). 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 108 establishes an approach that requires quantification of financial statement errors based on the effects of each of the companys balance sheet and statement of operations and the related financial statement disclosures. The SAB 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. We are currently evaluating the impact SAB 108 may have to our consolidated financial condition or results of operations.

In September
        2006, the FASB issued Statement No. 158, Employers Accounting for
        Defined Benefit Pension and Other Postretirement Plansan amendment
        of FASB Statements No. 87, 88, 106, and 132(R). This Statement 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. This Statement 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 this
        Statement is not permitted.  Management does not expect adoption of
        Statement No. 158 to have a material impact, if any, on the
        Companys consolidated financial position or results of
        operations.

Note 2  Acquisitions

On June 15, 2006, the Company acquired certain assets related specifically to the business of ePregnancy.com and ePregnancy Magazine.  The selected assets acquired include the URL www.ePregnancy.com, the ePregnancy trademark, a related online community website, message boards, and an expansive archive of content.  The magazines prior owners discontinued publication of ePregnancy Magazine and the final published issue was distributed in late April as the May 2006 issue.  BabyUniverse intends to focus its efforts on growing and supporting the online community at ePregnancy.com and does not intend to revive the magazine.

The revenue-producing activity of the business component did not exist at the time selected assets were acquired by the Company.  In addition, none of the following attributes were included among the selected assets acquired by the Company: physical facilities, employee base, sales force or production techniques.  As a result of these facts, the Company has accounted for the ePregnancy transaction as an acquisition of selected assets, and not as the acquisition of a business, consistent with guidance provided in Rule 11-01 (d) of Regulation S-X of the Securities and Exchange Commission.  The allocation of the purchase price to the intangible assets acquired is preliminary.  Final adjustments to the valuation analysis could result in a material change in the allocation.

On January 13, 2006 BabyUniverse completed an acquisition of substantially all of the assets of Posh Tots, LLC (Posh Tots).  The acquisition was consummated pursuant to the terms and provisions of an Asset Purchase Agreement dated as of January 13, 2006 by and between Posh Tots, Inc., a wholly owned subsidiary of the Company, and Posh Tots.

In connection with the acquisition, the Company issued a promissory note, as adjusted, of $5,570,981, and paid $6,000,000 in cash.  In addition, the Company issued 237,248 shares of the Companys common stock and warrants to purchase 110,000 shares of common stock.  The shares were valued at the date of acquisition and resulted in a value of $2,014,236.  The warrants are exercisable at $8.10 per share, have a contractual life of two years, and vest one year following the acquisition date.  The warrants were valued at $300,753 using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 4.23%, a volatility factor of 56%, and an expected term of two years.

Approximately
$600,000 of the purchase price, related to repayment of the promissory note, was
deposited into an escrow fund to secure possible claims related to the
representations and warranties.  The escrow fund was subsequently
distributed to the seller in August 2006, net of a post-closing working capital
adjustment pursuant to the agreement (See Note 4  Goodwill).  The
difference between the purchase price and the fair value of the acquired net
assets of Posh Tots of $12,071,917 was recorded as goodwill.

10

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, January 13, 2006:

|Current assets              |  | $ | 516,464    |  
|--------------------------- |  | - | ---------- | -
|Property and equipment      |  |   | 60,974     |  
|Intangible assets           |  |   | 2,660,000  |  
|Goodwill                    |  |   | 12,071,917 |  
|                            |  |   |            |  
|Total assets acquired       |  |   | 15,309,355 |  
|Current liabilities assumed |  |   | (934,546   | )
|                            |  |   |            |  
|Net assets acquired         |  | $ | 14,374,809 |  
|                            |  |   |            |  

Of the $2,660,000 of acquired intangible assets, $2,200,000 was assigned to the Posh Tots trade name that has an indefinite life, $260,000 was assigned to customer list that has a useful life of 4 years, and $200,000 was assigned to catalogue and website content that has a useful life of 3 years.

The accompanying unaudited pro forma summary represents consolidated results of operations for BabyUniverse as if the acquisition of Posh Tots had been consummated on January 1, 2005.  Certain pro forma adjustments were reflected in the consolidated results of operations as follows:

| | 1. | To reflect members   salaries on a going-forward basis as agreed to in employment contracts   entered into by Posh Tots, Inc. and three former members of Posh Tots,   LLC.  The employment contracts specify   annual cash-based compensation of $360,000.    The adjustment decreased actual members salaries to the contracted   amounts.                                                                                                                                                    
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2. | To reflect the accumulated   amortization and related amortization expense of certain intangible assets   that were created in connection with the acquisition of Posh Tots assets.                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 3. | The federal income tax effect   has been omitted because BabyUniverse believes it can apply its net operating   loss carryforwards to profits generated.    However, the pro forma income of Posh Tots, LLC would be subject to   Virginia state income tax.    BabyUniverses Florida state net operating loss carryforwards would   not be applicable to Virginia state income.    The applicable 2005 Virginia state tax rate of six percent has been   applied to the Virginia pro forma income.

The pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of future consolidated results of the Company.

|                                       |  | Year Ended      December 31, 2005 |           
|-------------------------------------- |  | --------------------------------- | ----------
|                                       |  |                                   |           
|                                       |  | Pro Forma                         |           
|                                       |  |                                   |           
|Net sales                              |  | $                                 | 29,981,753
|Net loss                               |  | $                                 | (153,858  
|Earnings per share:                    |  |                                   |           
|Basic                                  |  | $                                 | (0.04     
|Diluted                                |  | $                                 | (0.04     
|Weighted average shares   outstanding: |  |                                   |           
|Basic                                  |  |                                   | 3,905,161 
|Diluted                                |  |                                   | 4,489,323 

Note 3  Inventory

Inventory, which consists primarily of car seats, strollers, bedding, furniture, 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. There were no reserves for obsolescence at September 30, 2006.

11

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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 based on 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 numbers of products we sell that are owned by others.

Note 4  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.

On January 13, 2006, BabyUniverse acquired Posh Tots (See Note 2.  Acquisitions).  The following table sets forth goodwill, net, as of December 31, 2005 and September 30, 2006:

|              |  | December 31, 
        2005 |           | Acquisition/
        Adjustments |   | Impairment 
        Losses |  | September 30, 
        2006 |  
|------------- |  | -------------------------- | --------- | -------------------------------- | - | -------------------------- |  | --------------------------- | -
|              |  |                            |           |                                  |   |                            |  |                             |  
|DreamtimeBaby |  | $                          | 6,620,057 |                                  | $ | 140,067                    |  | $                           | 
|Posh Tots     |  |                            |          |                                  |   | 12,071,917                 |  |                             | 
|              |  |                            |           |                                  |   |                            |  |                             |  
|              |  | $                          | 6,620,057 |                                  | $ | 12,211,984                 |  | $                           | 
|              |  |                            |           |                                  |   |                            |  |                             |  

During 2006,
the Company recognized additional adjustments to the DreamtimeBaby goodwill of
$140,067. These adjustments resulted from additional transaction costs for the
DreamtimeBaby acquisition of approximately $43,000, as well as a settlement with
the seller that reduced the post-closing working capital adjustment by $97,000.
The Company also recognized an additional adjustment during 2006 to the Posh
Tots goodwill resulting from a settlement with the seller that reduced the
post-closing working capital adjustment by $143,227.

Note 5  Intangible Assets

BabyUniverse
        reviews for the impairment of identifiable intangible assets 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. 142, Goodwill and Other Intangible Assets.

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 September 30, 2006:

|                                |  | Useful   Life |            | Gross   Carrying    Amount |   | Acquisition |  | Accumulated   Amortization |           | Net |  
|------------------------------- |  | ------------- | ---------- | -------------------------- | - | ----------- |  | -------------------------- | --------- | --- | -
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|Dreamtime   Baby                |  |               |            |                            |   |             |  |                            |           |     |  
|Trade name                      |  |               | 5 years    |                            | $ | 140,000     |  | $                          |          |     | $
|Non-competition Agreement       |  |               | 3 years    |                            |   | 50,000      |  |                            |          |     |  
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|                                |  |               |            |                            |   | 190,000     |  |                            |          |     | $
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|Posh Tots                       |  |               |            |                            |   |             |  |                            |           |     |  
|Trade name                      |  |               | Indefinite |                            |   |            |  |                            | 2,200,000 |     |  
|Customer list                   |  |               | 4 years    |                            |   |            |  |                            | 260,000   |     |  
|Contents of catalogue / website |  |               | 3 years    |                            |   |            |  |                            | 200,000   |     |  
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|                                |  |               |            |                            |   |            |  |                            | 2,660,000 |     |  
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|ePregnancy                      |  |               | 3 years    |                            |   |            |  |                            | 184,257   |     |  
|                                |  |               |            |                            |   |             |  |                            |           |     |  
|Total   Intangible Assets       |  |               |            |                            | $ | 190,000     |  | $                          | 2,844,257 |     | $
|                                |  |               |            |                            |   |             |  |                            |           |     |  

12

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Amortization expense for the three month and year-to-date periods ended September 30, 2006 were $59,497 and $150,104, respectively.  Estimated amortization expense for the twelve months ending December 31 is as follows:

|2006 |  | $ | 209,602 | 
|---- |  | - | ------- | 
|2007 |  |   | 237,752 | 
|2008 |  |   | 232,891 | 
|2009 |  |   | 121,150 | 
|2010 |  |   | 19,834  | 
|     |  |   |         | 
|     |  | $ | 821,229 | 
|     |  |   |         | 

Note 6  Note and Capital Lease Payables

Notes and capital leases outstanding at September 30, 2006 and December 31, 2005 was as follows:

|                                                               |  | September 30,    2006 |           | December 31,    2005 |  
|-------------------------------------------------------------- |  | --------------------- | --------- | -------------------- | -
|                                                               |  |                       |           |                      |  
|Notes payable, prime rate plus 2.35%    (10.6%), due July 2009 |  | $                     | 5,000,000 |                      | $
|Unamortized debt discount associated with note payable         |  |                       | (286,220  | )                    |  
|Capital leases                                                 |  |                       | 29,739    |                      |  
|                                                               |  |                       |           |                      |  
|Total debt                                                     |  |                       | 4,743,519 |                      |  
|Less short-term debt and current maturities                    |  |                       | (400,154  | )                    |  
|                                                               |  |                       |           |                      |  
|Total Note and Capital Lease   Payables - long-term            |  | $                     | 4,343,365 |                      | $
|                                                               |  |                       |           |                      |  

On July 11,
2006, the Company completed a $5.0 million debt financing transaction with
Hercules Technology Growth Capital, Inc. Proceeds from the financing were used
primarily to refinance the Companys existing debt, thereby enabling the
Company to realize a negotiated $1.5 million discount of the $6.0 million
note.  The pre-payment and principal reduction in the note payable of $1.5
million was recognized in other income and expense as a gain on early
extinguishment of debt in accordance with the accounting treatment prescribed by
Accounting Principles Board Opinion 26, Early Extinguishment of Debt, and
SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections.  The Company
previously stated in its Form 10-Q for the quarter ended June 30, 2006 (Note 9
 Subsequent Event) that,The pre-payment and principal
reduction in the note payable subsequent to June 30, 2006 will reduce the Companys goodwill amount related to the Posh Tots acquisition by $1.5 million. This initial determination as to the proposed accounting treatment was based on limited consideration at that time of the relevant accounting pronouncements applicable to the underlying facts of this transaction. Based on subsequent review and consideration, the Company believes that SFAS 141 is not relevant to the essential facts of this transaction.

The Senior Loan and
Agreement (Loan or Loan Agreement) is for a term of 36
months, at an interest rate equal to the prime interest rate plus 2.35%. The
Loan Agreement allows for interest-only payments for 12 months, with principal
and interest payments due monthly thereafter. The interest-only period and the
term of the Loan may be extended up to six months based on meeting certain
financial tests. The Loan is secured by a perfected first priority security
interest in all of the Companys tangible and intangible assets and
requires compliance with certain financial covenants, including a current ratio
requirement, by which the Company must maintain a current ratio of at least .85
for the quarter ending September 30, 2006, at least .90 for the quarter ending
December 31, 2006, and at least 1.0 for each subsequent calendar quarter
thereafter. The Company was in compliance with all covenants as of September 30, 2006. (See PART II, OTHER INFORMATION - Item 1A., Risk Factors, for further information.)

In conjunction with the Loan Agreement, the Company issued a warrant to Hercules Technology Growth Capital, Inc. to purchase 91,912 shares of common stock of the Company at an exercise price of $8.16 per share. The warrant vested immediately upon execution of the Loan Agreement and is exercisable for seven years. The fair value of the warrant as of July 11, 2006 is $333,034, and the pro-rata value of the warrant will be classified as debt discount and amortized during the 36-month term of the Loan in accordance with Accounting Principles Board Opinion No. 14.

Note 7  Operational Reorganization and Restructuring

During the first quarter of 2006, the Company initiated a multi-faceted reorganization and restructuring plan (the Plan), which was essentially 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:

13

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| |  | Open the Companys new distribution center in 24,000 square feet of   leased space in Las Vegas in January 2006.                                                                                                                                                                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implement a new warehouse management system for the Las Vegas   distribution center by late March 2006.                                                                                                                                                                                                                                 
| |  | Relocate DreamtimeBabys business operations and inventory from its Los   Angeles-area headquarters to the Las Vegas distribution center by late March   2006.                                                                                                                                                                          
| |  | Relocate the BabyUniverse inventory and distribution activities from   its Fort Lauderdale warehouse to the Las Vegas distribution center during   February 2006.                                                                                                                                                                       
| |  | Restructure the BabyUniverse e-commerce business operations by   consolidating certain activities within the Posh Tots management   organization in Richmond during May 2006.                                                                                                                                                          
| |  | Reorganize and consolidate the senior management organization in   corporate offices in Jupiter, Florida during June 2006. The corporate offices   will house the Companys executive management organization and certain   corporate services including strategic planning, finance, technology,   logistics and new media development.

The restructuring expenses related to the Plan were accounted for pursuant to Statement of Financial Accounting Standard 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 total expense incurred for restructuring activities was approximately $506,000, of which $116,000 and $390,000 were recognized during the first and second quarters of 2006, respectively.

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

| |  | One-time   termination benefits were provided to certain current employees that were   involuntarily terminated pursuant to the Plan, which was announced in   February.  The affected employees were   required to render service through various dates to June 30, 2006 in order to   receive the termination benefits. The total expense incurred for one-time   termination benefits was approximately $111,000. Approximately $43,000 and   $68,000 of one-time termination benefits were recognized as restructuring   expenses for the first and second quarters of 2006, respectively.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We ceased using   leased space for our offices and warehouse in Fort Lauderdale, Florida during   the second quarter of 2006. We have recognized a liability of $72,752 during   the quarter ended June 30, 2006, which represents the fair value of the lease   costs that will continue to be incurred under the lease, net of sub-lease   opportunities, for its remaining term through May 2008.                                                                                                                                                                                          
| |  | Other costs   incurred as a result of the restructuring include costs to consolidate or   close our facilities in Fort Lauderdale and Los Angeles and to relocate   certain activities to the Las Vegas distribution center, to Posh Tots   headquarters in Richmond, and to our corporate office in Jupiter, Florida.   The total amount of other restructuring costs was approximately $323,000, of   which $74,000 and $249,000 were incurred and recognized as restructuring   expenses in the first and second quarters of 2006, respectively.                                          

Note 8  Stock Options

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

The fair value of
each stock option granted is estimated on the date of the grant using the
Black-Scholes option pricing model.  The Company uses an estimated
forfeiture rate of 0% due to limited experience with historical employee
forfeitures. The Black-Scholes option pricing model also requires assumptions
for risk free interest rates, dividend rate, stock volatility and expected life
of an option grant. The risk free interest rate is based on the U.S. Treasury
Bill rate with a maturity based on the expected life of the options. Dividend
rates are based on the Companys dividend history. The stock volatility
factor is based on a peer group analysis of the stock market prices for eight
comparable companies determined by the Company. Expected life is determined
using the simplified method permitted by the SECs Staff
Accounting Bulletin 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.

During the quarter ended September 30, 2006, the Company did not grant any stock options, and 30,000 stock options were forfeited by a former employee.

14

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The following table summarizes information about stock option transactions for the quarter ended September 30, 2006:

|                                                             |  | Shares |         | Weighted-Average Exercise Price |   | Weighted-Average Remaining Contractual Term (Years) |  | Aggregate Intrinsic Value |     
|------------------------------------------------------------ |  | ------ | ------- | ------------------------------- | - | --------------------------------------------------- |  | ------------------------- | ----
|                                                             |  |        |         |                                 |   |                                                     |  |                           |     
|Outstanding at June 30, 2006                                 |  |        | 279,248 |                                 | $ | 6.80                                                |  |                           |     
|Granted                                                      |  |        | -0-     |                                 |   | -0-                                                 |  |                           |     
|Exercised                                                    |  |        | -0-     |                                 |   | -0-                                                 |  |                           |     
|Forfeited                                                    |  |        | 30,000  |                                 | $ | 8.10                                                |  |                           |     
|                                                             |  |        |         |                                 |   |                                                     |  |                           |     
|Outstanding at September 30, 2006 and total expected to vest |  |        | 249,248 |                                 | $ | 6.64                                                |  |                           | 4.49
|                                                             |  |        |         |                                 |   |                                                     |  |                           |     
|Options exercisable at September 30, 2006                    |  |        | 108,415 |                                 | $ | 4.00                                                |  |                           |     

The weighted average grant-date fair value of options granted during the nine month period ended September 30, 2006 was $3.00 per share.

The following table summarizes information about stock options outstanding at September 30, 2006:

|                         |  | Options Outstanding           |         |                                                     |  |                                 | Options Exercisable |                              
|------------------------ |  | ----------------------------- | ------- | --------------------------------------------------- |  | ------------------------------- | ------------------- | -----------------------------
|                         |  |                               |         |                                                     |  |                                 |                     |                              
|Range of Exercise Prices |  | Number Outstanding at 9/30/06 |         | Weighted-Average Remaining Contractual Life (years) |  | Weighted Average Exercise Price |                     | Number Exercisable at 9/30/06
|                         |  |                               |         |                                                     |  |                                 |                     |                              
|$0.01 to $3.50           |  |                               | 52,124  |                                                     |  | 7.76                            |                     | $                            
|$3.51 to $7.00           |  |                               | 52,124  |                                                     |  | 8.05                            |                     | $                            
|$7.01 to $10.00          |  |                               | 145,000 |                                                     |  | 2.03                            |                     | $                            

The Company recorded $25,678 of compensation expense for employee stock options during the three month period ending September 30, 2006. At September 30, 2006 there was a total of $353,973 of unrecognized compensation costs related to non-vested stock-based compensation arrangements under the 2005 Plan. The cost is expected to be recognized over a weighted average period of 1 year.

As of September 30, 2006, 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 222,054 shares of stock, and 183,235 shares remained available for grant. In addition, there were outstanding options to purchase a total of 104,248 shares of our common stock, and 20,000 shares of restricted stock, which were granted outside of the 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 9  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.

15

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

|                                                                                                                                                                                                                                                   |  | Quarter Ended    September 30, |           | Year-to-Date Ended    September 30, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | ----------------------------------- | -
|                                                                                                                                                                                                                                                   |  |                                |           |                                     |  
|                                                                                                                                                                                                                                                   |  | 2006                           |           | 2005                                |  
|                                                                                                                                                                                                                                                   |  |                                |           |                                     |  
|Net income (loss)                                                                                                                                                                                                                                  |  | $                              | 102,964   |                                     | $
|Weighted   average common shares outstanding                                                                                                                                                                                                       |  |                                | 5,396,406 |                                     |  
|Basic earnings (loss) per common share                                                                                                                                                                                                             |  | $                              | 0.02      |                                     | $
|Dilutive   effect of stock options and warrants                                                                                                                                                                                                    |  |                                | 725,547   |                                     |  
|Common   stock and common stock equivalents                                                                                                                                                                                                        |  |                                | 6,121,953 |                                     |  
|Diluted earnings (loss) per share                                                                                                                                                                                                                  |  | $                              | 0.02      |                                     | $
|                                                                                                                                                                                                                                                  
|The
        following is a summary of the securities outstanding during the
        respective periods that have been excluded from the calculations because
        the effect on earnings (loss) per share would have been
        antidilutive: | 
|                                                                                                                                                                                                                                                  
|Dilutive effect of stock options and warrants                                                                                                                                                                                                      |  |                                |          |                                     |  

Note 10  Related Party Transaction

On September 22, 2006, BabyUniverse, Inc. closed on $2 million in new equity financing.  The equity financing was provided by affiliates of Wyndcrest Holdings, LLC, a company controlled by BabyUniverse CEO John Textor.  In connection with the financing, the Company received aggregate proceeds of approximately $2 million, based on the issuance of 263,852 shares of common stock priced at $7.58 per share, a 7.5% premium to the closing price on September 22, 2006.  These funds will be used for general corporate purposes.

The shares of the common stock issued in the private placement have not been registered under the Securities Act of 1933, pursuant to the exemption provided in Section 4(2), and may not be subsequently offered or sold by the investors in the United States absent registration or an applicable exemption from the registration requirements. BabyUniverse has agreed to file a registration statement covering resales of the common stock by the investors.

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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results   of Operations
|------- | ---------------------------------------------------------------------------------------

Overview

BabyUniverse
is a leading Internet content, commerce and new media company in the pregnancy,
baby and toddler marketplace.  Through its web sites 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 web sites
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 web sites
PoshCravings.com, ePregnancy.com and the soon  to  be 
introduced, BabyTV.com, BabyUniverse has also established a widely recognized
platform for the delivery of content and new media resources to a national
audience of expectant parents.

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

According to the United States Department of Commerce, the total online market for consumer products grew at a compound annual growth rate of 25.2% from $28.0 billion in 2000 to $86.3 billion in 2005.  In the second quarter of 2006, this market continued expanding by growing 23.0% over the second quarter of 2005.  Furthermore, the percentage of retail Internet sales occurring in the United States compared to total sales occurring at retail in the United States has increased from 0.9% in 2000 to 2.7% in the second quarter of 2006.  eMarketer, Inc., a leading aggregator of online research reports, predicts that online retail sales will rise to $121 billion by 2007, or 2.9% of total retail sales. In addition, independent reports, including a May 2005 study by Forrester Research and a May 2005 report by e-Marketer, have indicated that women are becoming a more powerful driver of this








 growth in online purchasing
activity. As the total online retail market continues to grow, we believe that the market for baby, toddler and maternity products sold over the Internet will also grow and that we are strategically positioned to participate substantially in such growth.

We offer over 30,000 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 100,000 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 growth in sales, gross margin and operating income.  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 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 are continuing 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. However, as we execute our acquisition strategy, we may acquire businesses that use a different inventory model.

17

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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
website 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 net income. 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
BizRate.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.

We believe that we are one of the largest online retailers of baby, toddler and maternity products in terms of product offerings and revenues. As an industry leader, we have grown our business internally since inception by increasing our presence in what we have identified to be the largest and most efficient Internet portals and by keyword paid search advertising, resulting in substantially increased traffic to our website. We have also increased our sales conversion rate by broadening our product offerings and by actively managing the placement of the best-selling products on our website. As a result, our sales have increased substantially year over year since our inception. For the years ended December 31, 2005, 2004 and 2003, we reported gross sales, excluding acquisitions, of $21.5 million, $14.8 million and $9.2 million, respectively, which represents a compound annual growth rate of 59.1








% since 2002.

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 seasoned 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.

Recent Developments

Posh Tots Acquisition

On January 13, 2006,
through our wholly owned subsidiary Posh Tots, Inc., we acquired substantially
all of the assets of Posh Tots, LLC (Posh Tots), in exchange for
$6.0 million in cash, a promissory note for $6.0 million, 237,248 shares of
BabyUniverse common stock and warrants to purchase 110,000 shares
of BabyUniverse common stock at a price of $8.10 per share.  Through
its primary website, PoshTots.com, the Richmond-based PoshTots 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 recently extended its brand with the Fall
2005 introduction of a new website, www.PoshLiving.com, offering designer
quality home furnishings to its existing and growing base of affluent,
predominantly female, customers.  In March 2006, Posh Tots introduced another new website,
www.PoshCravings.com, designed as a content driven initiative targeted at the affluent female customer base already developed by Posh Tots.

Purchase of Selected ePregnancy Assets

On June 15, 2006, the Company acquired certain assets related specifically to the business of ePregnancy.com and ePregnancy Magazine.  The selected assets acquired include the URL www.ePregnancy.com, the ePregnancy trademark, a related online community website, message boards, and an expansive archive of content. The magazines prior owners discontinued publication of ePregnancy Magazine and the final published issue was distributed in late April as the May 2006 issue.  BabyUniverse intends to focus its efforts on growing and supporting the online community at ePregnancy.com and does not intend to revive the magazine. The acquisition of these assets furthers the overall objective of BabyUniverse, which is to establish a market-leading e-commerce and new media business focused on the high-growth female marketplace.

Debt Financing Transaction

On July 11, 2006, BabyUniverse completed a $5.0 million debt financing transaction with Hercules Technology Growth Capital, Inc. (NASDAQ: HTGC), a leading specialty finance company providing venture capital and private equity backed technology and life science companies with debt and equity growth capital. Proceeds from the financing were used primarily to refinance BabyUniverses existing debt. (See Note 6  Note and Capital Lease Payables, in Notes to Consolidated Financial Statements, and Liquidity and Capital Resources, Managements Discussion and Analysis of Financial Condition and Results of Operations,)

18

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Strategic Alternatives

On August 14, 2006, BabyUniverse, Inc. 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 retained Banc of America Securities LLC as its financial advisor.  There can be no assurance that a transaction will result from this process and the Company does not intend to disclose developments regarding its exploration unless and until the Companys Board of Directors has approved a specific transaction.

Private Placement of Equity Securities

On September 22, 2006, BabyUniverse, Inc. closed on $2 Million in new equity financing.  The equity financing was provided by affiliates of Wyndcrest Holdings, LLC, a company controlled by BabyUniverse CEO John Textor.  In connection with the financing, the company received aggregate proceeds of approximately $2 Million, based on the issuance of 263,852 shares of common stock priced at $7.58 per share, a 7.5% premium to the closing price on September 22, 2006.  These funds will be used for general corporate purposes. (See Liquidity and Capital Resources, Managements Discussion and Analysis of Financial Condition and Results of Operations.)

The shares of the common stock issued in the private placement have not been registered under the Securities Act of 1933, pursuant to the exemption provided in Section 4(2), and may not be subsequently offered or sold by the investors in the United States absent registration or an applicable exemption from the registration requirements. BabyUniverse has agreed to file a registration statement covering resales of the common stock by the investors.

BabyTV.com

On November 1,
2006, the Company announced that it has reached agreement with Alpha Mom, its
first content partner, to secure programming for BabyTV.com.  Scheduled to
debut in late 2006, BabyTV.com plans to cross-market to the 1.7 million monthly
unique visitors of BabyUniverse-owned e-commerce properties such as
BabyUniverse.com, PoshTots.com and DreamTimeBaby.com, and to content properties
such as PoshCravings.com and ePregnancy.com.  BabyTV.com will be presented
in an interactive format in which the consumer can tune in to broadcast-quality
streaming television, upload videos to share with the community, interact with
live events, engage in e-commerce transactions, browse links on the Web, and
participate in BabyTV.coms  online community. BabyTV.com will be the
Internets first integrated broadcast channel and social networking
community focused on the needs of new and expectant parents.

Launched in May 2005, Alpha Mom quickly established itself as a parenting and video on demand brand, receiving  national and local media attention in publications such as The New York Times, Associated Press, New York Post and Child magazine. Alpha Mom offers an extensive selection of video programming on a wide range of topics for the new or expectant mom.  Alpha Mom distinguishes itself with subject matter on substantive child-rearing issues while at the same time providing guidance to women on how they can maintain their sense-of-self upon entering mommyhood.  Alpha Mom TV has distribution through Comcast Cable to approximately 10 million homes, and will soon be available in over 1.5 million Cox Cable homes.

Operational Restructuring and Reorganization

During the first quarter of 2006, the Company initiated a multi-faceted reorganization and restructuring plan (the Plan), which was essentially 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:

| |  | Open the Companys new distribution center in 24,000 square feet of   leased space in Las Vegas in January 2006.                                                                                                                                                                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implement a new warehouse management system for the Las Vegas   distribution center by late March 2006.                                                                                                                                                                                                                                 
| |  | Relocate DreamtimeBabys business operations and inventory from its Los   Angeles-area headquarters to the Las Vegas distribution center by late March   2006.                                                                                                                                                                          
| |  | Relocate the BabyUniverse inventory and distribution activities from   its Fort Lauderdale warehouse to the Las Vegas distribution center during   February 2006.                                                                                                                                                                       
| |  | Restructure the BabyUniverse e-commerce business operations by   consolidating substantially all activities within the Posh Tots management   organization in Richmond during May 2006.                                                                                                                                                
| |  | Reorganize and consolidate the senior management organization in   corporate offices in Jupiter, Florida during June 2006. The corporate offices   will house the Companys executive management organization and certain   corporate services including strategic planning, finance, technology,   logistics and new media development.

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The restructuring expenses related to the Plan were accounted for pursuant to Statement of Financial Accounting Standard 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 total expense incurred for restructuring activities was approximately $506,000, of which $116,000 and $390,000 were recognized during the first and second quarters of 2006, respectively.

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

| |  | One-time   termination benefits were provided to certain current employees that were   involuntarily terminated pursuant to the Plan, which was announced in   February.  The affected employees were   required to render service through various dates to June 30, 2006 in order to   receive the termination benefits. The total expense incurred for one-time   termination benefits was approximately $111,000. Approximately $43,000 and   $68,000 of one-time termination benefits were recognized as restructuring   expenses for the first and second quarters of 2006, respectively.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We ceased using   leased space for our offices and warehouse in Fort Lauderdale, Florida during   the second quarter of 2006. We have recognized a liability of $72,752 during   the quarter ended June 30, 2006, which represents the fair value of the lease   costs that will continue to be incurred under the lease, net of sub-lease   opportunities, for its remaining term through May 2008.                                                                                                                                                                                          
| |  | Other costs incurred as a result of the
restructuring include costs to consolidate or close our facilities in Fort
Lauderdale and Los Angeles and to relocate certain activities to the Las Vegas
distribution center, to Posh Tots headquarters in Richmond, and to our
corporate office in Jupiter, Florida. The total amount of other restructuring
costs was approximately $322,000, most of which was incurred and recognized as
restructuring expenses in the second quarter of 2006.                                                                                                  

The Company
experienced a significant amount of temporary but duplicative salary expense
during the second quarter of 2006 due to the overlapping of positions during the
extended training phase of its reorganization. A total of approximately 34
positions were relocated, replaced and retrained during this reorganization, and
the cost of the overlapping salary expense included in restructuring expenses
during the second quarter amounted to $151,831. Most of this duplication of
salary expense ended during the second quarter, and the remainder ended
during the first half of the third quarter.

Current Operating Environment

Throughout this
period of restructuring, reorganization and business integration that began
during the first quarter of 2006, the Company experienced substantial
operational difficulties. Although the nature of these problems was anticipated
at the outset of the reorganization and integration projects, the extent of the
operating problems was not completely foreseen. These difficulties largely
resulted from the complexity of simultaneously integrating within our
newly-opened Las Vegas distribution center, both (1) the DreamtimeBaby business
operations and inventory from its former location in Los Angeles, and (2) the
BabyUniverse inventory and fulfillment operations from Fort Lauderdale. This
consolidation project was further complicated by software problems associated
with the newly-introduced warehouse management system in the Las Vegas
distribution center, the additional complexity of relocating the BabyUniverse call center and much of
its remaining business operations to Posh Tots Richmond headquarters, and also the relocation and consolidation of senior management and the Information Technology, Accounting and Logistics functions from former offices in Fort Lauderdale, Florida to new executive offices in Jupiter, Florida.

During the
second quarter, as a result of the restructuring, reorganization and business
integration, we experienced an increased incidence of delayed shipments of
customer orders, a higher level of order cancellations, and an increased level
of product returns and discounts. These problems continued, to a lesser degree,
during the third quarter, as we continued to focus significant attention and
resources on resolving the cause of the various problems. As a result our Amazon customer feedback has improved to a
satisfaction score of more than 90%, from a low point in July of less than
60%.

However, the
diversion of managements attention from more normal activities during the
third quarter significantly impacted our sales performance during this period.
Although site traffic across the BabyUniverse.com website increased 15% and 20% in
September and October, respectively, compared to the same periods last year, our
conversion rates were lower.  This was directly attributable to the reduced
availability of high velocity inventory items to fulfill sales orders due to
organizational and procedural issues involving inventory ordering and
replenishment.  Newly-appointed operations management, replenishment
process reengineering, and continued training of newly-hired employees during
the quarter are expected to improve inventory availability and reduce backorders
prospectively.

Our profit performance during the quarter also continued to be significantly impacted by increased Salary & Benefits and General & Administrative expenses incurred (1) to expand the platform to support our acquisition growth strategy, and (2) to pursue the recent initiatives to expand our content and new media business, which is comprised of PoshCravings.com, ePregnancy.com and the soon-to-be-introduced, BabyTV.com.

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Results of Operations

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

|                                        |  | Quarter Ended September 30 |       | Year to Date Ended September 30 | 
|--------------------------------------- |  | -------------------------- | ----- | ------------------------------- | 
|                                        |  |                            |       |                                 | 
|                                        |  | 2006                       |       | 2005                            | 
|                                        |  |                            |       |                                 | 
|Gross sales                             |  |                            | 106.3 |                                 | 
|Less - Discounts and returns            |  |                            | (6.3  | )                               | 
|                                        |  |                            |       |                                 | 
|Net sales                               |  |                            | 100   | %                               | 
|Cost of goods sold                      |  |                            | 69.9  |                                 | 
|                                        |  |                            |       |                                 | 
|Gross profit                            |  |                            | 30.1  |                                 | 
|Operating expenses                      |  |                            |       |                                 | 
|Advertising                             |  |                            | 14.8  |                                 | 
|Salaries and benefits                   |  |                            | 14.7  |                                 | 
|Stock-based compensation                |  |                            | 0.7   |                                 | 
|Technology                              |  |                            | 0.7   |                                 | 
|Restructuring costs                     |  |                            | 0.0   |                                 | 
|General and administrative              |  |                            | 13.1  |                                 | 
|                                        |  |                            |       |                                 | 
|Operating expenses                      |  |                            | 44.0  |                                 | 
|                                        |  |                            |       |                                 | 
|Operating income (loss)                 |  |                            | (13.9 | )                               | 
|Other income (expense)                  |  |                            | (2.2  | )                               | 
|Gain on early extinguishment of debt    |  |                            | 16.9  |                                 | 
|Income (loss) before income tax benefit |  |                            | 0.8   |                                 | 
|Provision (benefit) for income taxes    |  |                            | (0.3  | )                               | 
|                                        |  |                            |       |                                 | 
|Net income (loss)                       |  |                            | 1.2   |                                 | 
|                                        |  |                            |       |                                 | 

The above table may not sum due to rounding

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

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

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

Gross profit.Our gross profit consists of gross sales, less discounts and returns and 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. 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 credit card fees and public company expenses.

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

Comparison of Quarter Ended September 30, 2006 to Quarter Ended September 30, 2005

The operational difficulties and their impact on the Companys performance during the first three quarters of 2006 relating to the restructuring, reorganization and business integration initiatives undertaken by the Company are described above in Managements Discussion and Analysis of Financial Condition and Results of Operations, Recent Developments,Current Operating Environment.

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Gross sales.Gross sales increased 61.6% to $9.437 million for the quarter ended September 30, 2006 from $5.840 million for the comparable quarter last year.  The most significant driver of our increase in gross sales was the consolidation of operating results of DreamtimeBaby and Posh Tots as of their September 13, 2005 and January 13, 2006 acquisition dates, respectively.

Discounts and returns.Discounts and returns amounted to $561,578, or 6.3% of net sales for the quarter ended September 30, 2006 compared to $122,711, or 2.1% of net sales for the quarter ended September 30, 2005.

Gross profit.Gross profit increased 78.4% to $2.674 million for the quarter ended September 30, 2006 from $1.499 million for the comparable quarter last year, and the increase primarily reflected the inclusion in the third quarter of the operating results of the DreamtimeBaby and Posh Tots acquisitions, both of which occurred since the second quarter last year. The consolidated gross margin increased to 30.1% for the quarter ended September 30, 2006 compared to 26.2% for the quarter ended September 30, 2005. The consolidated gross margin primarily reflected the benefit from the higher gross margin resulting from the Posh Tots business.

Operating expenses.Operating expenses increased to $3.909 million for the quarter ended September 30, 2006 from $1.705 million for the quarter ended September 30, 2005.  As a percentage of net sales, operating expenses were 44.0% for this years third quarter compared to 29.8% for the comparable quarter last year.  The increase in operating expenses as a percentage of net sales was primarily attributable to:

| |  | increased   management salaries and technology-related depreciation expenses to expand   the infrastructure to support our acquisition strategy, as well as the   development of our content and new media business,                                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased general   and administrative expenses incurred as a result of our becoming a public   company in August 2005, including increased expenses for insurance, legal,   accounting and investor relations,                                      
| |  | and increased rent   expense associated with the newly-developed Las Vegas distribution center, as   well as office relocations and expansions for Posh Tots headquarters in   Richmond, Virginia and the Companys headquarters in Jupiter, Florida.

Advertising expenses increased to 14.8% of net sales for the quarter ended September 30, 2006 from 13.6% for the quarter ended September 30, 2005.  The increase in advertising expense, as a percentage of net sales, was due to the Companys increased investment this quarter to re-establish market momentum and consumer confidence following our reorganization and customer service difficulties during the preceding quarter, as well as to the expansion of our business with Amazon, which carries a higher commission rate.

Other income (expense). Other income, net, was $1.308 million for the quarter ended September 30, 2006 compared to $81,141 for the comparable quarter last year. Included in this years quarter was a $1.5 million gain from extinguishment of debt. See Note 6  Note and Capital Lease Payables to Notes to Consolidated Financial Statements. This amount was partially offset by interest expense of $201,982.

Income taxes.The income tax benefit was $30,000 for the quarter ended September 30, 2006, and represents a reduction of estimated state income taxes on the basis of filing consolidated state income tax returns. There was no provision for income taxes for the comparable quarter last year. We had net operating loss carry forwards of $3,004,520 at December 31, 2005, which will expire in various years through 2025. We recorded a valuation allowance which fully offset the deferred tax benefit of the net operating loss carry forwards.

Net income (loss).   The net income for the quarter ended September 30, 2006 was $102,964, or $0.02 per diluted share, compared to a net loss of $125,275, or ($0. 03) per diluted share for the quarter ended September 30, 2005.

Comparison of Nine Months Ended September 30, 2006 to Nine Months Ended September 30, 2005

Gross sales.Gross sales increased 77.30% to $28.579 million for the nine months ended September 30, 2006 from $16.122 million for the comparable period last year.  The most significant driver of our increase in gross sales was the consolidation of operating results of DreamtimeBaby and Posh Tots as of their September 13, 2005 and January 13, 2006 acquisition dates, respectively.

Discounts and returns.Discounts and returns amounted to $1,710,433, or 6.4% of net sales for the nine months ended September 30, 2006 compared to $589,169, or 3.8% of net sales for the comparable period last year.

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Gross profit.Gross profit increased 108.6% to $7.983 million for the nine months ended September 30, 2006 from $3.828 million for the comparable period last year, and the increase primarily reflected the inclusion in the first nine months of 2006 of the operating results of the DreamtimeBaby and Posh Tots acquisitions, both of which occurred since the second quarter last year. The consolidated gross margin increased to 29.7% for the nine months ended September 30, 2006 compared to 24.6% for the comparable period last year.  Most of the consolidated gross margin improvement reflected the benefit of the higher gross margin for the Posh Tots brand, which exceeded 40% during the current period.

Operating expenses.Operating expenses increased to $10.533 million for the nine months ended September 30, 2006 from $4.457 million for the comparable period last year.  As a percentage of net sales, operating expenses were 39.2% for the nine months ended September 30, 2006 compared to 28.7% for the comparable period last year.  The increase in operating expenses as a percentage of net sales was primarily attributable to:

| |  | restructuring expenses during the second quarter of approximately
$506,000 to open our new distribution center and to integrate the recent
acquisitions of DreamtimeBaby and Posh Tots with the BabyUniverse e-commerce
business,                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased   management salaries and technology-related depreciation expenses to expand   the infrastructure to support our acquisition strategy, as well as the   development of our content and new media business,                             
| |  | increased general   and administrative expenses incurred as a result of our becoming a public   company in August 2005, including increased expenses for insurance, legal,   accounting and investor relations,                                  
| |  | increased rent   expense associated with the newly-developed Las Vegas distribution center, as   well as office relocations and expansions for Posh Tots headquarters in   Richmond, Virginia and the Companys headquarters in Jupiter, Florida,
| |  | and share-based compensation   of $189,448, resulting from the adoption of SFAS No. 123(R), Share-Based Payment, effective January 1, 2006.                                                                                                      

Advertising expenses improved to 12.1% of net sales for the nine months ended September 30, 2006 from 15.2% for the comparable period last year.  The advertising expense improvement, as a percentage of net sales, was due to the substantially lower rate of advertising spending inherent in the DreamtimeBaby and Posh Tots business models.

Other income (expense). Other income, net, was $1.229 million for the nine months ended September 30, 2006 compared to $83,912 for the comparable period last year.  Included in this years period was a $1.5 million gain from extinguishment of debt (See Note 6  Note and Capital Lease Payables to Notes to Consolidated Financial Statements), as well as $131,638 of interest income earned on cash and cash equivalents.  These amounts were partially offset by $402,841 of interest expense.

Income taxes.The income tax benefit was $22,000 for the nine months ended September 30, 2006, and represents a reduction of estimated state income taxes on the basis of filing consolidated state income tax returns. There was no provision for income taxes for the comparable period last year. We had net operating loss carry forwards of $3,004,520 at December 31, 2005, which will expire in various years through 2025. We recorded a valuation allowance which fully offset the deferred tax benefit of the net operating loss carry forwards.

Net loss.  The net loss for the nine months ended September 30, 2006 was $1,299,043, or ($0.24) per diluted share, compared to a net loss of $544,549, or ($0.17) per diluted share for the comparable period last year.

Liquidity and Capital Resources

Sources of funds and Liquidity.Since inception, we have funded our operations through the sale of equity securities and convertible indebtedness, and cash generated from operations.  The significant components of our working capital are inventory and liquid assets such as cash and cash equivalents.  As of December 31, 2005, our working capital was $8.7 million, which resulted primarily from the proceeds of our initial public offering of common stock in August 2005.  As of September 30, 2006, our working capital had declined to approximately $175,000.  Most of this decline is attributable to investing activities, described below under Uses of funds.

On July 11, 2006, BabyUniverse completed a $5.0 million debt financing transaction with Hercules Technology Growth Capital, Inc. (NASDAQ: HTGC), a leading specialty finance company providing venture capital and private equity backed technology and life science companies with debt and equity growth capital. Proceeds from the financing were used primarily to refinance BabyUniverses existing debt. (See Note 6  Note and Capital Lease Payables)

On September 22, 2006, BabyUniverse, Inc. closed on $2 million in new equity financing.  The equity financing was provided by affiliates of Wyndcrest Holdings, LLC, a company controlled by BabyUniverse CEO John Textor.  In connection with the financing, the company received aggregate proceeds of approximately $2 million, based on the issuance of 263,852 shares of common stock priced at $7.58 per share, a 7.5% premium to the closing price on September 22, 2006.  These funds will be used for general corporate purposes. (See Note 10  Related Party Transaction)

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Uses of funds.Net cash used in operating activities was $2,184,533 for the nine months ended September 30, 2006, compared to net cash provided by operating activities of $557,886 for the comparable period last year. The increase in cash used in operating activities was primarily due to an increase in net loss for the period to $1,299,043, including a non-cash gain of $1,500,000 on repayment of debt, compared to a net loss of $544,549 for the same period last year.

Net cash used in investing activities was approximately $7.6 million for the nine months ended September 30, 2006 and was primarily related to the acquisition of Posh Tots ($6.0 million), and to a lesser extent, capital expenditures ($1.6 million) associated with our business restructuring and integration, as well as enhancements to our technology system infrastructure.

On June 23, 2006, the Companys credit card merchant agreement for its Dreamtime Baby business was unilaterally terminated by the processing company and funding bank, due to a recent increase in the volume of customer refunds and chargebacks. The unilateral termination of the merchant agreement was not confirmed to the Company until July 18, 2006, despite repeated attempts by the Company to clarify the then-existing situation.  When confirmation of the termination was verbally received on July 18, 2006, the Company established a new credit card processing and funding account for its Dreamtime Baby business through another of its existing credit card processing agreements.

In conjunction with termination of the agreement, and pursuant to rights based on its sole discretion, the funding bank unilaterally established a reserve account by withholding funding to the Company of credit card proceeds from June 23 until July 18, 2006.  The resulting reserve account balance as of September 30, 2006 was $371,000, and was included in the accompanying Consolidated Balance Sheet as Accounts Receivable.  Based on recent discussions with the processing company and funding bank, it is expected that the entire balance of the reserve account will be released to the Company within a period ranging between 90 and 180 days of termination.

The proceeds from our initial public offering in August 2005 had been sufficient to fund our acquisitions and operational requirements for the past several quarters.  However, the Company secured the additional debt and equity financings described above, in order to fund a repayment of its debt, as well as for general corporate purposes.  We are currently evaluating additional financing alternatives to fund our operational requirements and a continuation of our acquisition strategy.  Any future debt or equity financing may not be available on terms acceptable to us, or at all. (See PART II, OTHER INFORMATION - Item 1A., Risk Factors, for further information.)

As of September 30, 2006, we had no material commitments for capital expenditures.

Contractual Obligations

The following tables summarize our contractual obligations as of September 30, 2006 and the expected effect on liquidity and cash flows.  Payments due by period are as follows:

|                 |  | Total |           | 2006 |   | 2007   through    2009 |  | 2010    through    2011 |           | After 2011 |  
|---------------- |  | ----- | --------- | ---- | - | ---------------------- |  | ----------------------- | --------- | ---------- | -
|                 |  |       |           |      |   |                        |  |                         |           |            |  
|Operating leases |  | $     | 3,669,353 |      | $ | 161,753                |  | $                       | 2,081,115 |            | $
|Capital leases   |  |       | 32,713    |      |   | 2,198                  |  |                         | 19,532    |            |  

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 Securities and Exchange Commission. 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:

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

Furthermore, in some cases, you can identify forward-looking statements by terminology such as may, could, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology.  These statements are only predictions.  In evaluating these statements, you should specifically consider various factors including the risks outlined in the Risk Factors section of the Companys Annual Report on Form 10-K dated March 30, 2006 and filed with the Securities and Exchange Commission. 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 and cash equivalents balance as of September 30, 2006 was held in money market accounts or invested in investment grade commercial paper with maturities less than 90 days.  Cash not required to fund our operating activities will continue to be invested in cash equivalents and short-term securities, pending the application of such proceeds.

|Item 4. | 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 is recorded, processed, summarized and reported
within the time periods specified by the rules and forms of the Securities and
Exchange Commission (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) of the Securities Exchange Act of 1934, 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.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1A.  Risk Factors

Provided below are additional risk factors that supplement our risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

1.      We have significant working capital needs and if we are unable to obtain additional financing, when needed, we may not have sufficient cash flow to run our business.

As of September 30, 2006, our cash on hand amounted to just over $2 million.  While we intend to finance our future operations from our cash balance and from cash flow from operations, these sources may not provide us with adequate financing.  In that event, we would need to seek additional financing from lenders and investors.  If we are not able to obtain such adequate financing, when needed, it would have a material adverse effect on our financial condition and results of operations.

2.      The terms of our indebtedness may restrict our ability to operate and grow our business

The terms of our Senior Loan and Security Agreement with Hercules Technology Capital, Inc. (the Loan or the Loan Agreement) impose restrictions on our ability to, among other things, borrow and make investments, acquire other businesses, and make capital expenditures and distributions on our capital stock.  In addition, the Loan Agreement requires us to satisfy specified financial covenants, including a covenant to maintain a current ratio of at least .85 on September 30, 2006, at least .90 on December 31, 2006 and at least 1.0 thereafter.  Our ability to comply with these provisions depends, in part, on factors over which we may not have control.  These restrictions could adversely affect our ability to pursue our operating and growth strategy.  If we fail to maintain the required current ratio, we have certain rights to cure such failure with an equity financing,








but there can be no assurance
that we would be able to raise such equity financing to effectuate such a cure.  If we were to breach any of our financial covenants or fail to make scheduled payments, and such breach continues beyond applicable cure periods, our creditors could declare all amounts owed to them to be immediately due and payable.  We may not have available funds sufficient to repay the amounts declared due and payable and may have to sell our assets to repay those amounts. The Loan is secured by substantially all of our assets. If we cannot repay all amounts that we have borrowed under the Loan Agreement, our lender could proceed against our assets.

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

On September 28, 2006, the Company filed a Current Report on Form 8-K reporting that it closed on $2 Million in new equity financing on September 22, 2006.  The equity financing was provided by affiliates of Wyndcrest Holdings, LLC, a company controlled by BabyUniverse CEO John Textor.  The Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2006 is incorporated herein by reference.

Item 3.  Defaults Upon Senior Securities

None

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

None

Item 5.  Other Information

|1.) | On November 10, 2006,   the Company issued a press release announcing the resignation of certain   officers and other organizational changes related to the companys prior   restructuring efforts and the initiation of new lines of business.  A   copy of the press release is furnished as Exhibit 99.1 and is incorporated   herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    | Certain of the management changes are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2.) | On November 10,   2006, the Compensation Committee of the Board of Directors approved annual   salary increases effective October 1, 2006 for John C. Textor, Chief Executive   Officer, Jonathan Teaford, Executive Vice President, and Georgianne K. Brown,   Executive Vice President of the Company and Divisional President  Mainstream   eCommerce. The Amended Employment Agreements are included as Exhibits 10.3,   10.4 and 10.5, and are included herein by reference.

Item 6.  Exhibits

(a)     Exhibits

|Number |  | Description of Document                                                                                                                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                                                                                    
|4.1    |  | Senior Loan and   Security Agreement dated July 11, 2006 by and between BabyUniverse, Inc. and   Hercules Technology Growth Capital, Inc. 1                                                                                                        
|4.2    |  | Warrant Agreement   dated as of July 11, 2006 to Purchase Shares of the Common Stock of    BabyUniverse, Inc. 1                                                                                                                                    
|10.1   |  | Subscription Agreement dated as of September 22, 2006 by and between   BabyUniverse, Inc., a Florida corporation, and affiliates of Wyndcrest   Holdings, LLC, a company controlled by BabyUniverse Chief Executive Officer   John Textor. 2       
|10.2   |  | Registration Rights Agreement dated as of September 22, 2006 by and   between BabyUniverse, Inc., a Florida corporation, and affiliates of Wyndcrest   Holdings, LLC, a company controlled by BabyUniverse Chief Executive Officer   John Textor. 2
|10.3   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   John Textor.                                                                                                                                          
|10.4   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   Jonathan Teaford.                                                                                                                                     
|10.5   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   Georgianne Brown.                                                                                                                                     
|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.                                                                     
|99.1   |  | Press Release dated November 10, 2006.                                                                                                                                                                                                             

| 
|-
|1
|2

27

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SIGNATURES

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

|                          | BabyUniverse, Inc.                                            
|------------------------- | --------------------------------------------------------------
|                          |                                                               
|                          | Registrant                                                    
|                          |                                                               
|Date: November 14,   2006 |                                                               
|                          |                                                               
|                          | /s/ Stuart Goffman                                            
|                          |                                                               
|                          | Stuart Goffman                                                
|                          | Chief Financial   Officer                                     
|                          | (Principal   Financial Officer and    Duly Authorized Officer)

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EXHIBIT INDEX

|Number |  | Description of Document                                                                                                                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |                                                                                                                                                                                                                                                    
|4.1    |  | Senior Loan and   Security Agreement dated July 11, 2006 by and between BabyUniverse, Inc. and   Hercules Technology Growth Capital, Inc. 1                                                                                                        
|4.2    |  | Warrant Agreement   dated as of July 11, 2006 to Purchase Shares of the Common Stock of    BabyUniverse, Inc. 1                                                                                                                                    
|10.1   |  | Subscription Agreement dated as of September 22, 2006 by and between   BabyUniverse, Inc., a Florida corporation, and affiliates of Wyndcrest   Holdings, LLC, a company controlled by BabyUniverse Chief Executive Officer   John Textor. 2       
|10.2   |  | Registration Rights Agreement dated as of September 22, 2006 by and   between BabyUniverse, Inc., a Florida corporation, and affiliates of   Wyndcrest Holdings, LLC, a company controlled by BabyUniverse Chief Executive   Officer John Textor. 2
|10.3   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   John Textor.                                                                                                                                          
|10.4   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   Jonathan Teaford.                                                                                                                                     
|10.5   |  | Amendment to   Employment Agreement dated November 10, 2006 between BabyUniverse, Inc. and   Georgianne Brown.                                                                                                                                     
|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.                                                                     
|99.1   |  | Press Release dated November 10, 2006.                                                                                                                                                                                                             

| 
|-
|1
|2

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