<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

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

                                   FORM 10-Q

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

<TABLE>
<S>                                            <C>
     For the quarter ended JUNE 30, 2000             Commission file number 000-25709
</TABLE>

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

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

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

                        3100 OCEAN PARK BLVD., SUITE 300
                         SANTA MONICA, CALIFORNIA 90405
               (Address of principal executive offices, zip code)

       Registrant's telephone number, including area code: (310) 664-8100

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

    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 / /

122,004,411 shares of $0.0001 par value common stock outstanding as of July 31,
2000

                                  Page 1 of 40
                            Exhibit Index on Page 40

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                   eTOYS INC.

                                   FORM 10-Q

                      FOR THE QUARTER ENDED JUNE 30, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
PART I--FINANCIAL INFORMATION
  Item 1. Consolidated Financial Statements.................      3
  Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................     13
  Item 3. Quantitative and Qualitative Disclosures About
        Market Risk.........................................     36

PART II--OTHER INFORMATION
  Item 1. Legal Proceedings.................................     37
  Item 2. Changes in Securities and Use of Proceeds.........     37
  Item 3. Defaults upon Senior Securities...................     37
  Item 4. Submission of Matters to a Vote of Security
        Holders.............................................     37
  Item 5. Other Information.................................     37
  Item 6. Exhibits and Reports on Form 8-K..................     38

Signatures..................................................     39
Exhibit Index...............................................     40
</TABLE>

                                       2
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                                   eTOYS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                                                      JUNE 30,
                                                              -------------------------
                                                                 2000          1999
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
<S>                                                           <C>           <C>
Net sales...................................................    $ 24,862      $  7,975
Cost of sales...............................................      19,415         6,457
                                                                --------      --------
Gross profit................................................       5,447         1,518
Operating expenses:
  Marketing and sales.......................................      29,603        11,573
  Web site and technology...................................      12,526         4,835
  General and administrative................................       7,500         2,956
  Goodwill amortization.....................................       8,490            80
  Deferred compensation amortization........................       3,109         3,782
                                                                --------      --------
    Total operating expenses................................      61,228        23,226
                                                                --------      --------
Operating loss..............................................     (55,781)      (21,708)
Other income (expense):
  Interest income...........................................       1,809           944
  Interest expense..........................................      (2,985)          (18)
Provision for taxes.........................................          --            (1)
                                                                --------      --------
Net loss....................................................     (56,957)      (20,783)
Accretion of discount and dividends on preferred stock......      (2,506)           --
                                                                --------      --------
Net loss applicable to common shareholders..................    $(59,463)     $(20,783)
                                                                ========      ========
Basic and diluted net loss per common share.................    $  (0.49)     $  (0.32)
                                                                ========      ========
Shares used in computation of basic and diluted net loss per
  common share..............................................     121,534        65,959
                                                                ========      ========
</TABLE>

                            See accompanying notes.

                                       3
<PAGE>
                                   eTOYS INC.

                          CONSOLIDATED BALANCE SHEETS

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                               JUNE 30,     MARCH 31,
                                                                 2000         2000
                                                              -----------   ---------
                                                              (UNAUDITED)
<S>                                                           <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $ 162,145    $139,627
  Inventories...............................................      52,500      60,309
  Prepaids and other current assets.........................      17,552      14,350
                                                               ---------    --------
Total current assets........................................     232,197     214,286
Property and equipment......................................     102,671      60,717
  Accumulated depreciation and amortization.................      (9,152)     (6,229)
                                                               ---------    --------
                                                                  93,519      54,488
Goodwill (net of accumulated amortization of $34,276 and
  $25,786 at June 30, 2000 and March 31, 2000,
  respectively).............................................     135,979     142,828
Other assets................................................      13,315      13,556
                                                               ---------    --------
Total assets................................................   $ 475,010    $425,158
                                                               =========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $  33,547    $ 32,422
  Accrued expenses..........................................       7,730      10,789
  Current portion of long-term notes payable and capital
    lease obligations.......................................       7,977       6,090
                                                               ---------    --------
Total current liabilities...................................      49,254      49,301
Long-term notes payable and capital lease obligations.......      12,550      10,471
Long-term convertible subordinated notes....................     150,000     150,000
Series D Redeemable Convertible Preferred Stock; $.0001 par
  value, 10,000 shares authorized; 10,000 and none issued
  and outstanding at June 30, 2000 and March 31, 2000,
  respectively..............................................      74,075          --
Commitments and contingencies
Stockholders' equity:
  Common stock; $.0001 par value, 600,000,000 shares
    authorized; 121,962,257 and 121,214,105 issued and
    outstanding at June 30, 2000 and March 31, 2000,
    respectively............................................          12          12
  Additional paid-in capital................................     504,028     476,529
  Receivables from stockholders.............................      (1,817)     (1,817)
  Deferred compensation.....................................     (32,370)    (37,082)
  Accumulated other comprehensive loss......................        (806)     (1,803)
  Accumulated deficit.......................................    (279,916)   (220,453)
                                                               ---------    --------
Total stockholders' equity..................................     189,131     215,386
                                                               ---------    --------
Total liabilities and stockholders' equity..................   $ 475,010    $425,158
                                                               =========    ========
</TABLE>

                            See accompanying notes.

                                       4
<PAGE>
                                   eTOYS INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                                                       ACCUMULATED
                                    COMMON STOCK        ADDITIONAL   RECEIVABLES                          OTHER
                               ----------------------    PAID-IN         FROM          DEFERRED       COMPREHENSIVE    ACCUMULATED
                                 SHARES       AMOUNT     CAPITAL     STOCKHOLDERS    COMPENSATION         LOSS           DEFICIT
                               -----------   --------   ----------   ------------   --------------   ---------------   ------------
<S>                            <C>           <C>        <C>          <C>            <C>              <C>               <C>
Balance at March 31, 2000....  121,214,105     $12       $476,529      $(1,817)        $(37,082)         $(1,803)       $(220,453)
  Exercise of stock options
    and warrants.............      356,059      --            276           --               --               --               --
  Issuance of common stock
    under Employee Stock
    Purchase Plan............      142,093      --            966           --               --               --               --
  Common stock issued for
    acquisition of eParties
    Inc......................      250,000      --          1,641           --               --               --               --
  Deferred compensation, net
    of cancellations.........           --      --         (1,603)          --            1,603               --               --
  Amortization of deferred
    compensation.............           --      --             --           --            3,109               --               --
  Beneficial conversion
    feature from issuance of
    Series D Redeemable
    Convertible Preferred
    Stock....................           --      --         10,000           --               --               --               --
  Issuance of warrants to
    purchase common stock in
    connection with the
    Series D Redeemable
    Convertible Preferred
    Stock offering...........           --      --         15,855           --               --               --               --
  Dividends on Series D
    Redeemable Convertible
    Preferred Stock..........           --      --            364           --               --               --             (364)
  Accretion of discount on
    Series D Redeemable
    Convertible Preferred
    Stock....................           --      --             --           --               --               --           (2,142)
  Comprehensive loss:
    Net loss.................           --      --             --           --               --               --          (56,957)
    Net unrealized gain on
      investments............           --      --             --           --               --            1,520               --
    Foreign currency
      translation loss.......           --      --             --           --               --             (523)              --
  Comprehensive loss.........
                               -----------     ---       --------      -------         --------          -------        ---------
Balance at June 30, 2000.....  121,962,257     $12       $504,028      $(1,817)        $(32,370)         $  (806)       $(279,916)
                               ===========     ===       ========      =======         ========          =======        =========

<CAPTION>

                                TOTAL
                               --------
<S>                            <C>
Balance at March 31, 2000....  $215,386
  Exercise of stock options
    and warrants.............       276
  Issuance of common stock
    under Employee Stock
    Purchase Plan............       966
  Common stock issued for
    acquisition of eParties
    Inc......................     1,641
  Deferred compensation, net
    of cancellations.........        --
  Amortization of deferred
    compensation.............     3,109
  Beneficial conversion
    feature from issuance of
    Series D Redeemable
    Convertible Preferred
    Stock....................    10,000
  Issuance of warrants to
    purchase common stock in
    connection with the
    Series D Redeemable
    Convertible Preferred
    Stock offering...........    15,855
  Dividends on Series D
    Redeemable Convertible
    Preferred Stock..........        --
  Accretion of discount on
    Series D Redeemable
    Convertible Preferred
    Stock....................    (2,142)
  Comprehensive loss:
    Net loss.................   (56,957)
    Net unrealized gain on
      investments............     1,520
    Foreign currency
      translation loss.......      (523)
                               --------
  Comprehensive loss.........   (55,960)
                               --------
Balance at June 30, 2000.....  $189,131
                               ========
</TABLE>

                            See accompanying notes.

                                       5
<PAGE>
                                   eTOYS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    QUARTER ENDED
                                                                      JUNE 30,
                                                              -------------------------
                                                                 2000          1999
                                                              -----------   -----------
                                                              (UNAUDITED)   (UNAUDITED)
<S>                                                           <C>           <C>
OPERATING ACTIVITIES
Net loss....................................................   $ (56,957)      (20,783)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation..............................................       2,961           314
  Amortization of intangibles...............................       9,050           189
  Deferred compensation amortization related to stock
    options.................................................       3,109         3,782
  Other, net................................................          --             3
  Changes in operating assets and liabilities:
    Inventories.............................................       7,809        (5,950)
    Prepaids and other current assets.......................      (2,001)       (2,005)
    Accounts payable........................................       1,727         8,947
    Accrued expenses........................................      (3,082)        1,216
                                                               ---------      --------
Net cash used in operations.................................     (37,384)      (14,287)

INVESTING ACTIVITIES
Capital expenditures for property and equipment.............     (41,487)       (3,302)
Proceeds from the sale of property and equipment............       4,936            --
Other, net..................................................          --        (2,330)
                                                               ---------      --------
Net cash used in investing activities.......................     (36,551)       (5,632)

FINANCING ACTIVITIES
Net proceeds from issuance of Series D Redeemable
  Convertible Preferred Stock...............................      97,788            --
Proceeds from issuance of common stock and exercise of stock
  options...................................................       1,242       176,074
Payments on notes payable and capital leases................      (2,054)          (85)
Proceeds from receivables from stockholders.................          --           107
                                                               ---------      --------
Net cash provided by financing activities...................      96,976       176,096
Effect of foreign exchange rate changes on cash.............        (523)           --
                                                               ---------      --------
Net increase in cash and cash equivalents...................      22,518       156,177
Cash and cash equivalents at beginning of period............     139,627        20,173
                                                               ---------      --------
Cash and cash equivalents at end of period..................   $ 162,145      $176,350
                                                               =========      ========
Supplemental disclosures:
  Income taxes paid.........................................   $      --      $      1
  Interest paid.............................................   $   5,003      $     18
  Notes payable and capital lease obligations incurred......   $   6,021      $  3,864
</TABLE>

                            See accompanying notes.

                                       6
<PAGE>
                                   eTOYS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1. ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL INFORMATION

    The consolidated financial statements as of June 30, 2000 and 1999 have been
prepared by eToys Inc. ("the Company") pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). These statements are
unaudited and, in the opinion of management, include all adjustments (consisting
of normal recurring adjustments and accruals) necessary to present fairly the
results for the periods presented. The balance sheet at March 31, 2000 has been
derived from the audited financial statements at that date. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such SEC rules and regulations. Operating results for the quarter
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2001. These consolidated financial
statements should be read in conjunction with the audited financial statements
and the accompanying notes included in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2000.

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

CASH AND CASH EQUIVALENTS

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

PRINCIPLES OF CONSOLIDATION

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

FOREIGN CURRENCY TRANSLATION

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

USE OF ESTIMATES

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

                                       7
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS

    As of April 1, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which establishes standards
for the reporting and display of comprehensive loss and its components in the
financial statements. Comprehensive loss is composed of net loss, net unrealized
gains or losses on investments and foreign currency translation adjustments.
Comprehensive loss was $56.0 million and $20.8 million for the quarters ended
June 30, 2000 and 1999, respectively.

NET LOSS PER COMMON SHARE

    Basic and diluted net loss per common share is computed by dividing net loss
applicable to common shareholders, which consists of net loss less accretion of
discount and dividends on preferred stock, by the weighted average number of
common stock shares outstanding during each period. Shares associated with stock
options and the Series A, B, C and D Redeemable Convertible Preferred Stock are
not included because they are antidilutive. Effective upon the closing of the
Company's Initial public stock offering in May 1999, the shares of Series A, B
and C Redeemable Convertible Preferred Stock automatically converted into common
stock and are included in the calculation of the weighted average number of
shares as of that date.

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

<TABLE>
<CAPTION>
                                                          QUARTER ENDED JUNE 30,
                                                          -----------------------
                                                             2000         1999
                                                          ----------   ----------
<S>                                                       <C>          <C>
Numerator:
  Net loss..............................................   $(56,957)    $(20,783)
  Accretion of discount and dividends on preferred
    stock...............................................     (2,506)          --
                                                           --------     --------
Net loss applicable to common shareholders..............   $(59,463)    $(20,783)
                                                           ========     ========
Denominator:
  Weighted average shares...............................    121,534       65,959
                                                           --------     --------
  Denominator for basic and diluted net loss per common
    share calculation...................................    121,534       65,959
                                                           ========     ========
Basic and diluted net loss per common share.............   $  (0.49)    $  (0.32)
                                                           ========     ========
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

    In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB 25" ("FIN 44"). This Interpretation
clarifies certain issues relating to stock compensation. FIN 44 is effective
July 1, 2000; however, certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. To the
extent that this Interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective

                                       8
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

1. ACCOUNTING POLICIES (CONTINUED)
basis from July 1, 2000. The Company does not believe the effects of adopting
FIN 44 will be material to its financial position or results of operations.

    In March 2000, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on EITF Issue 00-2, "Accounting
for Web Site Development Costs" ("Issue 00-2"). This consensus provides guidance
on what types of costs incurred to develop Web sites should be capitalized or
expensed. The consensus is effective for Web site development costs incurred for
fiscal quarters beginning after June 30, 2000. The Company does not believe the
effects of adopting this consensus will be material to its financial position or
results of operations.

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

2. LONG-TERM CONVERTIBLE SUBORDINATED NOTES

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

                                       9
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

3. REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

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

    For the period from the date of issuance to January 30, 2001, the Company
has the sole right to require conversion of any or all of the outstanding
Series D shares, subject to certain conditions. During this period, except in
limited circumstances, the securityholders do not have the right to convert any
of the Series D shares. After January 30, 2001, the holders of the Series D
shares have the right to convert their shares of Series D without restriction.
Regardless of whether the selling securityholders elect to convert or the
Company requires conversion, the number of shares of common stock to be issued
upon conversion of a Series D share is determined by dividing the sum of $10,000
plus accrued and unpaid dividends by the applicable conversion price. The
applicable conversion price will be a percentage of the lowest closing bid price
of the Company's common stock for the five consecutive trading days ending on
and including the conversion date, provided that the conversion price will not
exceed $25.00 per share, subject to adjustment. The conversion percentage equals
100% on June 12, 2000 and then decreases permanently one percentage point on the
first day of every calendar month following June 12, 2000, provided that the
conversion percentage will never be less than 85%, except in the event the
Company requires conversion following the announcement of a merger transaction.

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

    Under the terms of the agreement pursuant to which the Company sold the
Series D shares, the Company is obligated to deliver to each holder of the
Series D shares a conversion election notice and/ or redemption notice on each
of the following mandatory election dates: August 31, 2000, September 29, 2000,
October 31, 2000, November 30, 2000 and December 29, 2000. The number of shares
of Series D designated for conversion and/or redemption in such notices, when
combined with the number of Series D shares converted and/or redeemed prior to
such dates, must generally be equal to 10%, 20%, 30%, 40% and 50% of the number
of Series D shares initially issued, respectively. Accordingly, between the date
on which Series D was issued and the date upon which the conversion

                                       10
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

3. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
and/or redemption set forth in the December 29, 2000 notice is consummated, at
least an aggregate of one-half of the shares of Series D initially issued are
required to be converted and/or redeemed.

    The net cash proceeds of the offering, after expenses, were approximately
$97.8 million. The proceeds were further discounted by $15.9 million,
representing the valuation of the 5,018,296 warrants issued in connection with
the sale of the Series D shares, and $10.0 million allocated to the beneficial
conversion feature associated with the Series D shares. The beneficial
conversion feature represents the difference between the fair market value of
the Company's common stock on the date of conversion and the discounted
conversion price as described above that is available to the securityholders
upon conversion. The discount amounts representing the warrants valuation and
the issuance costs and expenses will be amortized, or accreted, over thirty-six
months and the amount representing the beneficial conversion feature will be
accreted over fifteen months in order to adjust the Series D shares to their
appropriate redemption value at any given point in time for the period that the
Series D shares are outstanding. The accretion amounts are charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. Additionally, the
7% dividend payable associated with the Series D shares are also charged against
accumulated deficit and are included in net loss applicable to common
shareholders in the calculation of net loss per common share. For the quarter
ended June 30, 2000, the accretion of discount and dividends on the Series D
shares was $2.5 million.

    Subsequent to June 30, 2000, 835 shares of Series D stock were converted
into 1,526,253 shares of the Company's common stock.

4. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

    From time to time, the Company is subject to legal proceedings and claims in
the ordinary course of business, including employment related claims and claims
of alleged infringement of trademarks, copyrights and other intellectual
property rights. The Company currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, prospects, financial
condition and operating results.

5. STOCKHOLDERS' EQUITY

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

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

                                       11
<PAGE>
                                   eTOYS INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

6. DEFERRED COMPENSATION

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

<TABLE>
<CAPTION>
                                                                 QUARTER ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Marketing and sales.........................................   $  803     $  977
Web site and technology.....................................    1,019      1,239
General and administrative..................................    1,287      1,566
                                                               ------     ------
                                                               $3,109     $3,782
                                                               ======     ======
</TABLE>

                                       12
<PAGE>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

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

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

RESULTS OF OPERATIONS

NET SALES

<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                                                     JUNE 30,
                                               --------------------
                                                 2000        1999     % CHANGE
                                               ---------   --------   --------
                                                  (IN THOUSANDS)
<S>                                            <C>         <C>        <C>
    Net sales................................  $  24,862   $  7,975     212%
</TABLE>

    Net sales consist of product sales to customers and charges to customers for
outbound shipping and handling and gift wrapping and are net of product returns,
promotional discounts and coupons. The growth in net sales for the quarter ended
June 30, 2000 as compared to the same period in the prior year reflects a
significant increase in units sold due to the growth of our customer base,
repeat purchases from our existing customers and growth in our baby and toy
categories, partially offset by a downturn in video game sales. Cumulative
customer accounts increased to more than 2.1 million during the quarter ended
June 30, 2000 as compared to 467,000 cumulative customer accounts at June 30,
1999. International sales, which consists of export sales to customers outside
the US from our US Web

                                       13
<PAGE>
site as well sales by our Web site in the United Kingdom, eToys.co.uk, to
customers within the United Kingdom and Europe, were not material during the
quarter ended June 30, 2000.

GROSS PROFIT

<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                                      JUNE 30,
                                                 -------------------
                                                   2000       1999     % CHANGE
                                                 --------   --------   --------
                                                   (IN THOUSANDS)
<S>                                              <C>        <C>        <C>
    Gross profit...............................  $  5,447   $ 1,518      259%
</TABLE>

    Gross profit is net sales less cost of sales, which consists of the costs of
products sold to customers, outbound and inbound shipping and handling costs,
and gift wrapping costs. Gross profit increased in absolute dollars for the
quarter ended June 30, 2000 as compared to the same period in the prior year,
reflecting our increased sales volume. Our gross profit increased as a
percentage of net sales by approximately 2.9% for the quarter ended June 30,
2000 as compared to the same period in the prior year. This increase in gross
profit as a percentage of net sales is primarily attributable to higher product
margins in most categories as well as the seasonally higher mix of our baby
business, partially offset by the impact of shipping margins.

    Shipping margins were adversely impacted for the quarter ended June 30, 2000
as compared to the same period in the prior year primarily due to an increase in
the shipments of larger baby merchandise which has higher shipping costs. In
addition, overall shipping margins in the quarters ended June 30, 2000 and 1999
were adversely impacted by the location of our distribution centers principally
in the western United States. This resulted in increased shipping costs as we
shipped cross-country to the majority of our customer base located in the
eastern United States. We expect that our new distribution center locations in
Danville, Virginia and Greensboro, North Carolina, which began shipping
operations in June 2000, will allow us to reduce the costs incurred from
shipping since they are located closer to the majority of our customers. The
loss from shipping, which represents shipping revenues less outbound shipping
and handling costs included in cost of sales, was $0.4 million in the quarter
ended June 30, 2000. During the quarter ended June 30, 1999, no loss on shipping
was incurred as shipping revenue was comparable to outbound shipping and
handling costs.

    We believe that providing our customers with superior customer service is an
essential component of our business strategy. Accordingly, we may incur
additional costs in order to meet customer expectations, which could decrease
gross profit. Over time, we intend to expand our operations by adding product
categories and by expanding the breadth and depth of our product or service
offerings. In subsequent periods, we expect to improve gross margin through
changes in product mix (including higher margin private label products),
additional non-fulfillment revenues such as sponsorship fees, improved
purchasing terms with higher volume purchasing and reduced shipping costs as a
result of our bi-coastal distribution centers.

MARKETING AND SALES

<TABLE>
<CAPTION>
                                                   QUARTER ENDED
                                                     JUNE 30,
                                                -------------------
                                                  2000       1999     % CHANGE
                                                --------   --------   --------
                                                  (IN THOUSANDS)
<S>                                             <C>        <C>        <C>
    Marketing and sales.......................  $ 29,603   $ 11,573     156%
</TABLE>

    Marketing and sales expenses consist of advertising expense, fulfillment,
customer service and credit card fees, and other marketing and sales expense,
including personnel and general overhead. Marketing and sales expenses increased
in absolute dollars for the quarter ended June 30, 2000 as

                                       14
<PAGE>
compared to the same period in the prior year. This increase is primarily
attributable to increases in our advertising expenditures incurred during our
spring branding campaign, increased payroll and related costs for fulfilling the
higher level of customer demand, and additional costs incurred in the expansion
of our distribution facilities. Marketing and sales expenses decreased as a
percentage of net sales during the quarter ended June 30, 2000 as compared to
the same period in the prior year due to the significant increase in net sales
during such period.

    During the quarter ended June 30, 2000, advertising expense was $15.6
million or 63% of net sales. Although we intend to continue to devote a
substantial amount of our capital resources to the pursuit of an aggressive
branding and marketing campaign, we expect advertising expense to decrease
significantly as a percentage of net sales in future periods.

    During the quarter ended June 30, 2000, fulfillment, customer service and
credit card fees were $9.9 million or 40% of net sales. Although we expect the
expansion and refinement of our distribution facilities to accommodate increases
in sales volume, coupled with costs incurred to meet customer expectations, to
result in continued increases in these expenses in absolute dollars, we believe
these expenses will decline significantly as a percentage of net sales and will
not materially exceed our gross profits during this fiscal year. During the
fiscal year ending March 31, 2002, we expect our gross profits to exceed these
expenses. We plan to reduce fulfillment, customer service and credit card fees
as a percentage of net sales through increased productivity arising from greater
automation and operating experience in fulfilling customer orders, as well as
through higher utilization of our distribution centers as revenues increase and
seasonality decreases.

    On March 31, 2000, we ceased receiving fulfillment services from our
third-party vendor, Fingerhut Business Services, and since that time we have
relied solely on our own distribution centers located in California, North
Carolina and Virginia for domestic fulfillment operations and in Swindon,
England for international fulfillment operations. The transition of inventory
from Fingerhut facilities was completed during July 2000. Total costs incurred
associated with this transition were not material. We expect to incur expenses
associated with the continued development and enhancement of our own
distribution operations and from our efforts to meet customer expectations with
respect to timely and accurate order fulfillment.

WEB SITE AND TECHNOLOGY

<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                                      JUNE 30,
                                                 -------------------
                                                   2000       1999     % CHANGE
                                                 --------   --------   --------
                                                   (IN THOUSANDS)
<S>                                              <C>        <C>        <C>
    Web site and technology....................  $ 12,526   $ 4,835       159%
</TABLE>

    Web site and technology expenses consist primarily of payroll and related
expenses for merchandising, development, and systems and telecommunications
personnel, and infrastructure costs related to systems and telecommunications.
Web site and technology also includes costs related to the development of
internal-use software. All development costs incurred in the preliminary project
stage, as well as maintenance and training, are expensed as incurred. Certain
plans of development are so uncertain that it is not probable that they will be
completed and are therefore expensed when incurred. Once the development project
has completed the preliminary project stage and it is deemed probable that the
project will be completed and used as intended, the project is considered to
have moved into the application development stage. All costs incurred for the
development or purchase of internal-use software that are incurred in the
application development stage are capitalized as incurred within property and
equipment and amortized over their estimated useful lives.

                                       15
<PAGE>
    Web site and technology expenses increased in absolute dollars for the
quarter ended June 30, 2000 as compared to the same period in the prior year.
This increase is primarily attributable to increased expenses associated with
our significant investment in both front-end and back-end infrastructure and
maintenance of our existing systems and telecommunications hardware. This
included increased staffing of systems and telecommunication personnel,
increased investment in systems and telecommunications hardware as well as
increased costs incurred for projects intended to enhance the features, content
and functionality of our Web site and transaction-processing systems. Such
project costs arise from either costs incurred in the preliminary development
stage, which are expensed as incurred, or from amortization of such project
costs that had been capitalized within the quarter or a previous period and have
been placed into service. Web site and technology expenses decreased as a
percentage of net sales during the quarter ended June 30, 2000 as compared to
the same period in the prior year due to the significant increase in net sales
during such period. We believe that continued investment in Web site and
technology is critical to attaining our strategic objectives. In addition to
ongoing investments in our online stores and infrastructure, we intend to
increase investments in product, service and international expansion. As a
result, Web site and technology expenses may increase significantly in absolute
dollars, but decrease as a percentage of net sales.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                                      JUNE 30,
                                                 -------------------
                                                   2000       1999     % CHANGE
                                                 --------   --------   --------
                                                   (IN THOUSANDS)
<S>                                              <C>        <C>        <C>
    General and administrative.................  $  7,500   $ 2,956       154%
</TABLE>

    General and administrative expenses consist of payroll and related expenses
for executive and administrative personnel, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expenses increased in absolute dollars for the quarter ended
June 30, 2000 as compared to the same period in the prior year. This increase
was primarily due to increased headcount and associated costs, professional
fees, facilities and other related costs. General and administrative expenses
decreased as a percentage of net sales during the quarter ended June 30, 2000 as
compared to the same period in the prior year due to the significant increase in
net sales during such period. We expect general and administrative expenses to
increase in absolute dollars, but decrease as a percentage of net sales, as we
expand our staff and incur additional costs related to the growth of our
business.

GOODWILL AND INTANGIBLE ASSETS AMORTIZATION

<TABLE>
<CAPTION>
                                                  QUARTER ENDED
                                                     JUNE 30,
                                               --------------------
                                                 2000       1999      % CHANGE
                                               --------   ---------   --------
                                                  (IN THOUSANDS)
<S>                                            <C>        <C>         <C>
    Goodwill amortization....................  $  8,490   $     80     10,513%
</TABLE>

    Goodwill represents the excess of the purchase price over the fair value of
the net tangible assets acquired in a business combination. As a result of the
acquisition of BabyCenter on July 1, 1999, we recorded goodwill of approximately
$189.0 million, which is being amortized over five years. Additionally, in
June 2000 we completed the acquisition of certain assets of eParties Inc. which
resulted in recording approximately $1.6 million of goodwill. The $1.6 million
of goodwill arising from the eParties acquisition will also be amortized over
five years. Accordingly, goodwill amortization for the quarter ended June 30,
2000 reflects amortization of goodwill from the BabyCenter and eParties
purchases, in addition to amortization of goodwill recorded from a previous
acquisition. In

                                       16
<PAGE>
January 2000, we completed the sale of substantially all of the assets and
related liabilities of BabyCenter's Consumer Health Interactive division for
approximately $20 million in a combination of cash and registrable securities.
As a result of the sale, goodwill amortization will decrease in amounts
proportionate to the sale proceeds in future periods due to the reduction of
goodwill related to CHI. To the extent that we do not generate additional
sufficient cash flow to recover the amount of the investment recorded, the
investment may be considered impaired or be subject to earlier write-off. In
such event, our net loss in any given period could be greater than anticipated.

DEFERRED COMPENSATION AMORTIZATION

<TABLE>
<CAPTION>
                                                    QUARTER ENDED
                                                      JUNE 30,
                                                 -------------------
                                                   2000       1999     % CHANGE
                                                 --------   --------   --------
                                                   (IN THOUSANDS)
<S>                                              <C>        <C>        <C>
    Deferred compensation amortization.........  $  3,109   $  3,782      (18)%
</TABLE>

    In the fiscal years ended March 31, 2000 and 1999, we recorded total
deferred stock compensation of $58.5 million in connection with stock options
granted during these periods. This amount represents the difference between the
exercise price of stock option grants and the deemed fair value of our common
stock at the time of such grants. Such amount has been reduced as a result of
amortization of deferred stock compensation initially recorded as well as
subsequent cancellations of stock options that originally generated the deferred
stock compensation charge. Deferred stock compensation is amortized to expense
over the vesting periods of the applicable options. Deferred compensation
amortization decreased for the quarter ended June 30, 2000 as compared to the
same period in the prior year. This decrease was primarily due to subsequent
cancellations of stock options that originally generated the deferred stock
compensation charge. We expect to record $9.8 million of amortization over the
remaining nine months ended March 31, 2001.

    Amortization of deferred compensation for each of the next three fiscal
years is expected to be as follows:

<TABLE>
<CAPTION>
                                                               AMOUNTS
                                                                 IN
YEAR ENDED                                                    THOUSANDS
----------                                                    ---------
<S>                                                           <C>
March 31, 2002..............................................   $13,113
March 31, 2003..............................................     9,157
March 31, 2004..............................................       261
</TABLE>

INTEREST INCOME AND EXPENSE

<TABLE>
<CAPTION>
                                                         QUARTER ENDED
                                                           JUNE 30,
                                                      -------------------
                                                        2000       1999     % CHANGE
                                                      --------   --------   --------
                                                        (IN THOUSANDS)
<S>                                                   <C>        <C>        <C>
    Interest income.................................   $1,809      $944          92%
    Interest expense................................   (2,985)     $(18)     16,483%
</TABLE>

    Interest income consists of earnings on our cash and cash equivalents.
Interest income increased for the quarter ended June 30, 2000 as compared to the
same period in the prior year. This increase was due to higher cash balances
resulting from the proceeds of the issuance of $150 million of Convertible Notes
and proceeds from the sale of the Series D Redeemable Convertible Preferred
Stock in June 2000. Interest expense consists primarily of interest from the
issuance of the Convertible Notes, the amortization of debt financing costs
related to the Convertible Notes as well as interest on asset

                                       17
<PAGE>
acquisitions financed through notes payable and capital leases. Interest expense
increased for the quarter ended June 30, 2000 as compared to the same period in
the prior year due to interest on the Convertible Notes and additional asset
acquisitions financed through notes payable and capital lease obligations.

INCOME TAXES

    We have not generated any taxable income to date and therefore have not paid
any federal income taxes since inception. Utilization of our net operating loss
carryforwards, which begin to expire in 2012, may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its realizability.

LIQUIDITY AND CAPITAL RESOURCES

    At June 30, 2000, the Company's principal source of liquidity consisted of
$162.1 million of cash and cash equivalents compared to $139.6 million of cash
and cash equivalents at March 31, 2000.

    Net cash used in operating activities for the quarter ended June 30, 2000
was $37.4 million. Net operating cash flows were primarily attributable to net
losses, reduced by noncash charges of depreciation and amortization, as well as
an increase in prepaid expenses and other and a decrease in accrued expenses,
which were offset by a decrease in inventories and an increase in accounts
payable. Net cash used in operating activities for the quarter ended June 30,
1999 was $14.3 million. Net operating cash flows were primarily attributable to
net losses, reduced by noncash charges of depreciation and amortization, as well
as increases in inventories, prepaid expenses and other, which were offset by
increases in accounts payable and accrued expenses.

    Net cash used in investing activities for the quarter ended June 30, 2000
was $36.6 million and consisted of purchases of fixed assets and other assets,
partially offset by proceeds from the sale of fixed assets. Net cash used in
investing activities for the quarter ended June 30, 1999 was $5.6 million and
consisted of purchases of fixed assets and other assets.

    Net cash provided by financing activities for the quarter ended June 30,
2000 was $97.0 million and resulted from a combination of the net proceeds from
the issuance of Series D Redeemable Convertible Preferred Stock and the issuance
of common stock and exercise of stock options, partially offset by payments on
notes payable and capital leases. Net cash provided by financing activities for
the quarter ended June 30, 1999 was $176.1 million and resulted from net
proceeds from the issuance of common stock in our initial public offering.

    As of June 30, 2000, our principal commitments consisted of the $150 million
of Convertible Notes outstanding, operating lease obligations, notes payable and
capital lease obligations incurred to finance fixed asset acquisitions and
future advertising commitments.

    The Convertible Notes, issued in December 1999, are unsecured and are
subordinated to our existing and future senior debt as defined in the indenture
pursuant to which the Convertible Notes were issued. The principal amount of the
Convertible Notes will be due on December 1, 2004 and will bear interest at an
annual rate of 6.25%, payable twice a year, on June 1 and December 1, beginning
June 1, 2000, until the principal amount of the Convertible Notes is fully
repaid. The Convertible Notes may be converted into our common stock at the
option of the holder at any time prior to December 1, 2004, unless the
Convertible Notes have been previously redeemed or repurchased by us. The
conversion rate, subject to adjustment in certain circumstances, is 13.5323
shares of our common stock for each $1,000 principal amount of convertible
notes, which is equivalent to a conversion price of approximately $73.90 per
share. Additionally, on or after December 1, 2002, we may redeem all or a
portion of the Convertible Notes, that have not been previously redeemed or
repurchased, at any time

                                       18
<PAGE>
at redemption prices set forth in the indenture pursuant to which the
Convertible Notes were issued, plus any accrued and unpaid interest to the
redemption date.

    In December 1999, we entered into an eleven year lease agreement to relocate
our corporate offices. The lease begins in October 2000. In connection with the
lease commitment, we delivered two letters of credit to the lessor totaling
$15.0 million, both of which we have cash collateralized. The letters of credit
will be held as security during the initial lease term.

    We believe that current cash and cash equivalents and cash that may be
generated from operations will be sufficient to meet our anticipated cash needs
through June 30, 2001. However, any projections of future cash needs and cash
flows are subject to substantial uncertainty. If current cash, cash equivalents
and cash that may be generated from operations are insufficient to satisfy our
liquidity requirements, we will likely seek to sell additional equity or debt
securities or to obtain a line of credit. The sale of additional equity or
equity-related securities would result in additional dilution to our
stockholders. In addition, we will, from time to time, consider the acquisition
of or investment in complementary businesses, products, services and
technologies, which might impact our liquidity requirements or cause us to issue
additional equity or debt securities. There can be no assurance that financing
will be available in amounts or on terms acceptable to us, if at all.

                                       19
<PAGE>
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

    In addition to the factors discussed in the "Overview" and "Liquidity and
Capital Resources" sections of this "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the following additional risk
factors may affect our future results.

                              RISKS RELATED TO OUR
                            SERIES D PREFERRED STOCK

THE CONVERSION OF OUR SERIES D PREFERRED SHARES AND THE EXERCISE OF THE RELATED
WARRANTS COULD RESULT IN SUBSTANTIAL NUMBERS OF ADDITIONAL SHARES BEING ISSUED
IF OUR MARKET PRICE DECLINES.

    On June 12, 2000, we issued 10,000 shares of our series D convertible
preferred stock, $10,000 stated value per share, and warrants to purchase
5,018,296 shares of our common stock with a current warrant exercise price of
$7.17375 per share. The series D preferred shares convert at a floating rate
based on the market price of our common stock, provided the conversion price may
not exceed $25.00 per share, subject to adjustment. As a result, the lower the
price of our common stock at the time of conversion, the greater the number of
shares the holder will receive.

    To the extent the series D preferred shares are converted or dividends on
the series D preferred shares are paid in shares of common stock rather than
cash, a significant number of shares of common stock may be sold into the
market, which could decrease the price of our common stock and encourage short
sales by selling securityholders or others. Short sales could place further
downward pressure on the price of our common stock. In that case, we could be
required to issue an increasingly greater number of shares of our common stock
upon future conversions of the series D preferred shares, sales of which could
further depress the price of our common stock.

    The conversion of and the payment of dividends in shares of common stock in
lieu of cash on the series D preferred shares may result in substantial dilution
to the interests of other holders of our common stock. Even though no selling
securityholder may convert its series D preferred shares if upon such conversion
the selling securityholder together with its affiliates would have acquired a
number of shares of common stock during the 60-day period ending on the date of
conversion which, when added to the number of shares of common stock held at the
beginning of such 60-day period, would exceed 9.99% of our then outstanding
common stock, excluding for purposes of such determination shares of common
stock issuable upon conversion of series D preferred shares which have not been
converted and upon exercise of warrants which have not been exercised, this
restriction does not prevent a selling securityholder from selling a substantial
number of shares in the market. By periodically selling shares into the market,
an individual selling securityholder could eventually sell more than 9.99% of
our outstanding common stock while never holding more than 9.99% at any specific
time.

WE MAY ISSUE ADDITIONAL SHARES, RESULTING IN DILUTION FOR EXISTING STOCKHOLDERS.

    Some events could result in the issuance of additional shares of our common
stock, which would result in dilution for existing stockholders. We may issue
additional shares of common stock or preferred stock:

    - to raise additional capital or finance acquisitions,

    - upon the exercise or conversion of outstanding options, warrants and
      shares of convertible preferred stock, and/or

    - in lieu of cash payment of dividends.

    As of June 30, 2000, other than the warrants issued to the holders of series
D preferred shares, there were outstanding warrants to acquire an aggregate of
4,000 shares of common stock, and there were outstanding options to acquire an
aggregate of 28,870,040 shares of common stock. If converted

                                       20
<PAGE>
or exercised, these securities would dilute the percentage ownership of common
stock by existing stockholders. These securities, unlike the common stock,
provide for anti-dilution protection upon the occurrence of stock splits,
redemptions, mergers, reclassifications, reorganizations and other similar
corporate transactions, and, in some cases, major corporate announcements. If
one or more of these events occurs, the number of shares of common stock that
may be acquired upon conversion or exercise would increase. In addition, as
disclosed in the preceding risk factor, the number of shares that may be issued
upon conversion of or payment of dividends in lieu of cash on the series D
preferred shares could increase substantially if the market price of our common
stock decreases during the period the series D preferred shares are outstanding.

WE MAY BE REQUIRED TO DELIST OUR SHARES FROM NASDAQ IF SPECIFIC EVENTS OCCUR.

    In accordance with Nasdaq Rule 4460, which generally requires stockholder
approval for the issuance of securities representing 20% or more of an issuer's
outstanding listed securities, and under the terms of the agreement pursuant to
which we sold the series D preferred shares and related warrants, we must
solicit stockholder approval of the issuance of such preferred shares and
warrants, including the shares of common stock issuable upon conversion of the
series D preferred shares and exercise of the warrants, at a meeting of our
stockholders, which shall occur on or before September 30, 2000. If we obtain
stockholder approval, there is no limit on the amount of shares that could be
issued upon conversion of the series D preferred shares. If we do not obtain
stockholder approval and are not obligated to issue shares because of
restrictions relating to Nasdaq Rule 4460, we may be required to redeem all or a
portion of the series D preferred shares. If we fail to redeem any series D
preferred shares as requested, the holders of at least two-thirds of the
outstanding series D preferred shares have the right to require that we
voluntarily delist our shares of common stock from the Nasdaq Stock Market. In
that event, trading in our shares would likely decrease substantially, and the
price of our shares of common stock may decline.

SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.

    If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and upon conversion of
and issuance of common stock dividends on the series D preferred shares and
exercise of the related warrants, the market price of our common stock could
fall. Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. As of June 30, 2000, we had outstanding 121,962,257 shares of
common stock and options to acquire an aggregate of 28,870,040 shares of common
stock, of which 6,024,479 options were vested and exercisable. As of June 30,
2000, of the shares that are currently outstanding, 50,712,421 are freely
tradeable in the public market and 71,249,836 are tradeable in the public market
subject to the restrictions, if any, applicable under Rule 144 and Rule 145 of
the Securities Act of 1933, as amended. All shares acquired upon exercise of
options will be freely tradeable in the public market.

    In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted securities for at least one year would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) one percent of the number of shares of common stock then
outstanding (which for eToys was 1,219,622 shares as of June 30, 2000) or
(b) the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
requirements with respect to manner of sale, notice, and the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been our affiliate at any time during the three months preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least two years, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Sales by

                                       21
<PAGE>
stockholders of a substantial amount of our common stock could adversely affect
the market price of our common stock.

WE MAY BE REQUIRED TO PAY SUBSTANTIAL PENALTIES TO THE HOLDERS OF THE SERIES D
PREFERRED SHARES AND RELATED WARRANTS IF SPECIFIC EVENTS OCCUR.

    In accordance with the terms of the documents relating to the issuance of
the series D preferred shares and the related warrants, we are required to pay
substantial penalties to a holder of the series D preferred shares under
specified circumstances, including, among others,

    - the nonpayment of dividends on the series D preferred shares in a timely
      manner,

    - our failure to deliver shares of our common stock upon conversion of the
      series D preferred shares or upon exercise of the related warrants after a
      proper request,

    - the nonpayment of the redemption price at maturity of the series D
      preferred shares,

    - failure to hold a meeting of our stockholders on or before September 30,
      2000 to approve the issuance of the shares of common stock issuable upon
      conversion of and in lieu of cash dividends on the series D preferred
      stock and upon exercise of the related warrants, or

    - the registration statement relating to the series D preferred shares and
      related warrants is unavailable to cover the resale of the shares of
      common stock underlying such securities.

    Such penalties are generally paid in the form of interest payments, subject
to any restrictions imposed by applicable law, on the amount that a holder of
series D preferred shares was entitled to receive on the date of determination.

                     RISKS RELATED TO OUR CONVERTIBLE NOTES

AS A RESULT OF THE ISSUANCE OF OUR CONVERTIBLE NOTES, WE HAVE A SIGNIFICANT
AMOUNT OF DEBT AND MAY HAVE INSUFFICIENT CASH FLOW TO SATISFY OUR DEBT SERVICE
OBLIGATIONS. IN ADDITION, THE AMOUNT OF OUR DEBT COULD IMPEDE OUR OPERATIONS AND
FLEXIBILITY.

    As a result of the issuance of $150 million of our 6.25% Convertible
Subordinated Notes due December 1, 2004, we have a significant amount of debt
and debt service obligations. If we are unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments on the notes,
including from cash and cash equivalents on hand, we will be in default under
the terms of the indenture which could, in turn, cause defaults under our other
existing and future debt obligations.

    Even if we are able to meet our debt service obligations, the amount of debt
we have could adversely affect us in a number of ways, including by:

    - limiting our ability to obtain any necessary financing in the future for
      working capital, capital expenditures, debt service requirements or other
      purposes;

    - limiting our flexibility in planning for, or reacting to, changes in our
      business;

    - placing us at a competitive disadvantage relative to our competitors who
      have lower levels of debt;

    - making us more vulnerable to a downturn in our business or the economy
      generally;

    - requiring us to use a substantial portion of our cash flow from operations
      to pay principal and interest on our debt, instead of contributing those
      funds to other purposes such as working capital and capital expenditures;
      and

    - requiring us to maintain specific financial ratios and comply with other
      restrictive covenants in our existing and future agreements governing our
      debt obligations.

                                       22
<PAGE>
    To be able to meet our debt service requirements we must successfully
implement our business strategy. We cannot assure you that we will successfully
implement our business strategy or that we will be able to generate sufficient
cash flow from operating activities to meet our debt service obligations and
working capital requirements. Our ability to meet our obligations will be
dependent upon our future performance, which will be subject to prevailing
economic conditions and to financial, business and other factors.

    To implement our business strategy, we will need to seek additional
financing. If we are unable to obtain such financing on terms that are
acceptable to us, we could be forced to dispose of assets to make up for any
shortfall in the payments due on our debt under circumstances that might not be
favorable to realizing the highest price for those assets. A substantial portion
of our assets consist of intangible assets, the value of which will depend upon
a variety of factors, including without limitation, the success of our business.
As a result, we cannot assure you that our assets could be sold quickly enough,
or for amounts sufficient, to meet our obligations, including our obligations
under the notes.

WE MAY BE UNABLE TO REPURCHASE THE NOTES UPON THE OCCURRENCE OF A CHANGE OF
  CONTROL.

    Upon the occurrence of a change of control of eToys, we are required to
offer to repurchase all outstanding notes. Although the indenture governing the
notes allows us, subject to satisfaction of certain conditions, to repurchase
the notes using shares of our common stock, if a change of control were to
occur, our ability to repurchase the notes with cash will depend on the
availability of sufficient funds and compliance with the terms of any debt
ranking senior to the notes. Our failure to repurchase tendered notes upon a
change of control would constitute an event of default under the indenture,
which could result in the acceleration of the maturity of the notes and all of
our other outstanding debt. These repurchase requirements may also delay or make
it harder for others to obtain control of us.

CLAIMS BY HOLDERS OF THE NOTES WILL BE SUBORDINATED TO CLAIMS BY HOLDERS OF OUR
  SENIOR DEBT.

    The notes rank behind all of our existing and future senior debt and
effectively behind all existing and future liabilities (including trade
payables) of our subsidiaries. As a result, if we declare bankruptcy, liquidate,
reorganize, dissolve or otherwise wind up our affairs or are subjected to
similar proceedings, we must repay all senior debt before we will be able to
make any payments on the notes. Likewise, upon a default in payment with respect
to any of our debt or an event of default with respect to this debt resulting in
its acceleration, our assets will be available to pay the amounts due on the
notes only after all senior debt has been paid in full. In addition, we have
located all of our inventory purchasing, distribution fulfillment functions,
customer service functions and other related activities in our distribution
subsidiary, eToys Distribution, LLC. The effect of this will be to increase the
amount of our subsidiary liabilities, especially during the third and fourth
calendar quarters. We may not have sufficient assets remaining to pay amounts
due on any or all of the notes then outstanding. The indenture does not prohibit
us or our subsidiaries from incurring additional senior debt, other debt or
other liabilities. Our ability to pay our obligations on the notes could be
adversely affected if we or our subsidiaries incur more debt.

    As of June 30, 2000, we had outstanding $20.5 million of senior debt and
$30.1 million of subsidiary liabilities (of which $9.0 million also qualifies as
senior debt) to which the notes are subordinated. Both we and our subsidiaries
expect that from time to time we will incur additional debt to which the notes
will be subordinated.

                                       23
<PAGE>
                         RISKS RELATED TO OUR BUSINESS

OUR LIMITED OPERATING HISTORY MAKES FUTURE FORECASTING DIFFICULT.

    We were incorporated in November 1996. We began selling products on our Web
site in October 1997. As a result of our limited operating history, it is
difficult to accurately forecast our net sales and we have limited meaningful
historical financial data upon which to base planned operating expenses. We base
our current and future expense levels on our operating plans and estimates of
future net sales, and our expenses are to a large extent fixed. Sales and
operating results are difficult to forecast because they generally depend on the
volume and timing of the orders we receive. As a result, we may be unable to
adjust our spending in a timely manner to compensate for any unexpected revenue
shortfall. This inability could cause our net losses in a given quarter to be
greater than expected.

WE ANTICIPATE FUTURE LOSSES AND NEGATIVE CASH FLOW.

    We expect operating losses and negative cash flow to continue for the
foreseeable future. Among other things, the sources of such losses will include
costs and expenses related to:

    - brand development, marketing and other promotional activities;

    - the expansion of our inventory management and distribution operations;

    - the continued development of our Web site and consumer-driven technology,
      transaction processing systems and our computer network;

    - the expansion of our product offerings and Web site content;

    - development of relationships with strategic business partners;

    - international operations; and

    - assimilation of operational personnel acquired with BabyCenter.

    As of June 30, 2000, we had an accumulated deficit of $279.9 million. We
incurred net losses of $57.0 million for the quarter ended June 30, 2000.

    Also, as a result of our acquisition of BabyCenter, we have recorded a
significant amount of goodwill, the amortization of which will significantly
reduce our earnings and profitability for the foreseeable future. The recorded
goodwill of approximately $189.0 million is being amortized over a five-year
period. To the extent we do not generate sufficient cash flow to recover the
amount of the investment recorded, the investment may be considered impaired and
could be subject to earlier write-off. In such event, our net loss in any given
period could be greater than anticipated and the market price of our stock could
decline.

    Our ability to become profitable depends on our ability to generate and
sustain substantially higher net sales while maintaining reasonable expense
levels. If we do achieve profitability, we cannot be certain that we would be
able to sustain or increase profitability on a quarterly or annual basis in the
future.

ANY FAILURE BY US TO SUCCESSFULLY EXPAND OUR DISTRIBUTION OPERATIONS WOULD HAVE
A MATERIAL ADVERSE EFFECT ON US.

    Any failure by us to successfully expand our distribution operations to
accommodate increases in demand and customer orders would have a material
adverse effect on our business prospects, financial condition and operating
results. Under such circumstances, the material adverse effects may include,
among other things, an inability to increase net sales in accordance with the
expectations of securities analysts and investors; increases in costs that we
may incur to meet customer expectations; increases in fulfillment expenses if we
are required to rely on more expensive fulfillment systems than anticipated or

                                       24
<PAGE>
incur additional costs for balancing merchandise inventories among multiple
distribution facilities; loss of customer loyalty and repeat business from
customers if they become dissatisfied with our delivery services; and damage to
our reputation and brand image arising from uncertainty with respect to our
distribution operations. These risks are greatest during the fourth calendar
quarter of each year, when our sales increase substantially relative to other
quarters and the demand on our distribution operations increases
proportionately. In addition, consistent with industry practice for online
retailers, we notify our customers via our Web site that we cannot guarantee all
products ordered after a specified date in December will be delivered by
Christmas day, which may deter potential customers from purchasing from us
following that date. Since our limited operating history makes it difficult to
accurately estimate the number of orders that may be received during the fourth
calendar quarter, we may experience either inadequate or excess fulfillment
capacity during this quarter, either of which could have a material adverse
impact on us. The occurrence of one or more of these events would be likely to
cause the market price of our securities to decline.

    We currently conduct our distribution operations through four facilities
operated by us, consisting of an approximately 105,000 square foot facility in
Commerce, California; an approximately 438,500 square foot facility in
Pittsylvania County, Virginia; an approximately 272,000 square foot facility in
Greensboro, North Carolina; and an approximately 46,000 square foot facility in
Swindon, England. Commencing in the fall of 2000, we also plan to conduct
distribution operations from an approximately 763,000 square foot facility in
Ontario, California that is currently being developed and to augment our
Virginia facility with an additional 715,000 square foot facility adjacent to
the existing facility. We have also entered into a lease for an approximately
108,000 square foot distribution facility in Belgium. We have in the past and
continue to devote substantial resources to the expansion of our distribution
operations among these facilities. This expansion may cause disruptions in our
business as well as unexpected costs. We are not experienced with coordinating
and managing distribution operations in geographically distant locations. This
may result in increased costs as we seek to meet customers' expectations,
balance merchandise inventories among our distribution facilities and take other
steps that may be necessary to meet the demands placed on our distribution
operations, particularly during the fourth calendar quarter of the year. Despite
the fact that we devote substantial resources to the expansion and refinement of
our distribution operations, there can be no assurance that our existing or
future distribution operations will be sufficient to accommodate increases in
demand and customer orders.

IF WE EXPERIENCE PROBLEMS IN OUR DISTRIBUTION OPERATIONS, WE COULD LOSE
CUSTOMERS.

    We rely upon third-party carriers for product shipments, including shipments
to and from our distribution facilities. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with such carriers'
ability to provide delivery services to meet our shipping needs. In addition,
failure to deliver products to our customers in a timely and accurate manner
would damage our reputation and brand. We also depend upon temporary employees
to adequately staff our distribution facilities, particularly during the holiday
shopping season. If we do not have sufficient sources of temporary employees, we
could lose customers.

OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET
THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF
OUR SECURITIES MAY DECLINE SIGNIFICANTLY.

    Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. Because our operating results are volatile and
difficult to predict, we believe that quarter-to-quarter comparisons of our
operating results are not a good indication of our future performance. It is
likely that in some future quarter our operating results may fall below the
expectations of securities analysts and investors. In this event, the trading
price of our securities may decline significantly.

                                       25
<PAGE>
    Factors that may harm our business or cause our operating results to
fluctuate include the following:

    - our inability to obtain new customers at reasonable cost, retain existing
      customers, or encourage repeat purchases;

    - decreases in the number of visitors to our Web site or our inability to
      convert visitors to our Web site into customers;

    - the mix of children's products, including toys, video games, books,
      software, videos, music and baby-oriented products sold by us;

    - seasonality;

    - our inability to manage inventory levels or control inventory shrinkage;

    - our inability to manage our distribution operations;

    - our inability to adequately maintain, upgrade and develop our Web site,
      the systems that we use to process customers' orders and payments or our
      computer network;

    - the ability of our competitors to offer new or enhanced Web sites,
      services or products;

    - price competition;

    - an increase in the level of our product returns;

    - fluctuations in the demand for children's and baby products associated
      with movies, television and other entertainment events;

    - our inability to obtain popular children's products, including toys, video
      games, books, software, videos, music and baby-oriented products from our
      vendors;

    - fluctuations in the amount of consumer spending on children's products,
      including toys, video games, books, software, videos, music and
      baby-oriented products;

    - the termination of existing or failure to develop new marketing
      relationships with key business partners;

    - the extent to which we are not able to participate in cooperative
      advertising campaigns with major brand names as we have done in the past;

    - increases in the cost of online or offline advertising;

    - the amount and timing of operating costs and capital expenditures relating
      to expansion of our operations, including international expansion;

    - unexpected increases in shipping costs or delivery times, particularly
      during the holiday season;

    - technical difficulties, system downtime or Internet brownouts;

    - government regulations related to use of the Internet for commerce or for
      sales and distribution of children's products, including toys, video
      games, books, software, videos, music and baby-oriented products; and

    - economic conditions specific to the Internet, online commerce and the
      children's and baby products industries.

    A number of factors will cause our gross margins to fluctuate in future
periods, including the mix of children's products, including toys, video games,
books, software, videos, music and baby-oriented products sold by us, inventory
management, inbound and outbound shipping and handling costs, the

                                       26
<PAGE>
level of product returns and the level of discount pricing and promotional
coupon usage. Any change in one or more of these factors could reduce our gross
margins in future periods.

BECAUSE WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR NET SALES, OUR QUARTERLY
RESULTS WILL FLUCTUATE AND OUR ANNUAL RESULTS COULD BE BELOW EXPECTATIONS.

    We have historically experienced and expect to continue to experience
seasonal fluctuations in our net sales. These seasonal patterns will cause
quarterly fluctuations in our operating results. In particular, a
disproportionate amount of our net sales have been realized during the fourth
calendar quarter and we expect this trend to continue in the future.

    In anticipation of increased sales activity during the fourth calendar
quarter, we hire a significant number of temporary employees to bolster our
permanent staff and we significantly increase our inventory levels. For this
reason, if our net sales were below seasonal expectations during this quarter,
our annual operating results could be below the expectations of securities
analysts and investors.

    Due to our limited operating history, it is difficult to predict the
seasonal pattern of our sales and the impact of such seasonality on our business
and financial results. In the future, our seasonal sales patterns may become
more pronounced, may strain our personnel and warehousing and order shipment
activities and may cause a shortfall in net sales as compared to expenses in a
given period.

WE FACE SIGNIFICANT INVENTORY RISK BECAUSE CONSUMER DEMAND CAN CHANGE FOR
PRODUCTS BETWEEN THE TIME THAT WE ORDER PRODUCTS AND THE TIME THAT WE RECEIVE
THEM.

    We carry a significant level of inventory. As a result, the rapidly changing
trends in consumer tastes in the market for children's products, including toys,
video games, books, software, videos, music and baby-oriented products, subject
us to significant inventory risks. It is critical to our success that we
accurately predict these trends and do not overstock unpopular products. The
demand for specific products can change between the time the products are
ordered and the date of receipt. We are particularly exposed to this risk
because we derive a majority of our net sales in the fourth calendar quarter of
each year. Our failure to sufficiently stock popular toys and other products in
advance of such fourth calendar quarter would harm our operating results for the
entire fiscal year.

    In the event that one or more products do not achieve widespread consumer
acceptance, we may be required to take significant inventory markdowns, which
could reduce our net sales and gross margins. This risk may be greatest in the
first calendar quarter of each year, after we have significantly increased
inventory levels for the holiday season. We believe that this risk will increase
as we open new departments or enter new product categories due to our lack of
experience in purchasing products for these categories. In addition, to the
extent that demand for our products increases over time, we may be forced to
increase inventory levels. Any such increase would subject us to additional
inventory risks.

BECAUSE WE DO NOT HAVE LONG-TERM OR EXCLUSIVE VENDOR CONTRACTS, WE MAY NOT BE
ABLE TO GET SUFFICIENT QUANTITIES OF POPULAR CHILDREN'S PRODUCTS IN A TIMELY
MANNER. AS A RESULT, WE COULD LOSE CUSTOMERS.

    If we are not able to offer our customers sufficient quantities of toys or
other products in a timely manner, we could lose customers and our net sales
could be below expectations. Our success depends on our ability to purchase
products in sufficient quantities at competitive prices, particularly for the
holiday shopping season. As is common in the industry, we do not have long-term
or exclusive arrangements with any vendor or distributor that guarantee the
availability of toys or other children's products for resale. Therefore, we do
not have a predictable or guaranteed supply of toys or other products.

                                       27
<PAGE>
TO MANAGE OUR GROWTH AND EXPANSION, WE NEED TO IMPROVE AND IMPLEMENT FINANCIAL
AND MANAGERIAL CONTROLS AND REPORTING SYSTEMS AND PROCEDURES. IF WE ARE UNABLE
TO DO SO SUCCESSFULLY, OUR RESULTS OF OPERATIONS WILL BE IMPAIRED.

    Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management, information systems and
resources. In addition, with the acquisition of BabyCenter, we added over 160
new employees, including managerial, technical and operations personnel, and
have been required to assimilate substantially all of BabyCenter's operations
into our operations. Further, during 1999 and 2000, we continued to expand our
distribution operations, which now include four facilities operated by us,
consisting of an approximately 105,000 square foot facility in Commerce,
California; an approximately 438,500 square foot facility in Pittsylvania
County, Virginia; an approximately 272,000 square foot facility in Greensboro,
North Carolina; and an approximately 46,000 square foot facility in Swindon,
England. Commencing in the fall of 2000, we also plan to conduct distribution
operations from an approximately 763,000 square foot facility in Ontario,
California that is currently being developed and to augment our Virginia
facility with an additional 715,000 square foot facility adjacent to the
existing facility. We have also entered into a lease for an approximately
108,000 square foot distribution facility in Belgium. This expansion may cause
disruptions in our business as well as unexpected costs. We are not experienced
with coordinating and managing distribution operations in geographically distant
locations.

    In order to manage this growth effectively, we need to continue to improve
our financial and managerial controls and reporting systems and procedures. If
we continue to experience a significant increase in the number of our personnel
and expansion of our distribution operations, our existing management team may
not be able to effectively train, supervise and manage all of our personnel or
effectively oversee all of our distribution operations. In addition, our
existing information systems may not be able to handle adequately the increased
volume of information and transactions that would result from increased growth.
Our failure to successfully implement, improve and integrate these systems and
procedures would cause our results of operations to be below expectations.

RISK OF INTERNATIONAL EXPANSION

    In October 1999, we launched eToys.co.uk, which serves customers in the
United Kingdom, and in November 1999, we began serving all provinces of Canada
through our eToys.com store. We also offer content and community to parents and
expectant parents through BabyCentre.co.uk. Our European operations are
conducted through a Netherlands subsidiary, and we are exploring opportunities
to separately finance its operations and will only continue to expand our
presence in foreign markets in a manner consistent with the availability and
extent of such financing opportunities. Then can be no assurance that such
financing opportunities will be available on terms acceptable to us or at all.

    We have relatively little experience in purchasing, marketing and
distributing products or services for these markets and may not benefit from any
first-to-market advantages. It will be costly to establish international
facilities and operations, promote our brand internationally, and develop
localized Web sites and stores and other systems. We may not succeed in our
efforts in these countries. If net sales from international activities do not
offset the expense of establishing and maintaining foreign operations, our
business prospects, financial condition and operating results will suffer.

    As the international online commerce market continues to grow, competition
in this market will likely intensify. In addition, governments in foreign
jurisdictions may regulate Internet or other online services in such areas as
content, privacy, network security, encryption or distribution. This may affect
our ability to conduct business internationally.

                                       28
<PAGE>
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS.

    The online commerce market is new, rapidly evolving and intensely
competitive. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could seriously
harm our net sales and results of operations. We expect competition to intensify
in the future because current and new competitors can enter our market with
little difficulty and can launch new Web sites at a relatively low cost. In
addition, the children's products industries, including toy, video game, books,
software, video, music and baby-oriented products, are intensely competitive.

    We currently or potentially compete with a variety of other companies,
including:

    - other online companies that include toys and children's and baby products
      as part of their product offerings, such as Amazon.com,
      Barnesandnoble.com, CDnow, Beyond.com, iBaby, BabyCatalog.com, iVillage
      and Women.com;

    - traditional store-based toy and children's and baby products retailers
      such as Toys R Us, FAO Schwarz, Zany Brainy, Noodle Kidoodle, babyGap,
      GapKids, Gymboree, KB Toys, The Right Start and Babies R Us;

    - major discount retailers such as Wal-Mart, Kmart and Target;

    - online efforts of these traditional retailers, including the online stores
      operated by Toys R Us, Wal-Mart, FAO Schwarz, babyGap, GapKids, KB Toys
      (i.e., KB Kids) and Gymboree;

    - physical and online stores of entertainment entities that sell and license
      children and baby products, such as The Walt Disney Company and Warner
      Bros.;

    - catalog retailers of children's and baby products as well as products for
      toddlers and expectant mothers;

    - vendors or manufacturers of children's and baby products that currently
      sell some of their products directly online, such as Mattel and Hasbro;

    - Internet portals and online service providers that feature shopping
      services, such as AOL, Yahoo!, Excite and Lycos; and

    - various smaller online retailers of children's and baby products, such as
      Smarterkids.com.

    Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors can devote substantially more resources to Web site
development than we can. In addition, larger, well-established and well-financed
entities may join with online competitors or suppliers of children's products,
including toys, video games, books, software, video, music and baby-oriented
products as the use of the Internet and other online services increases.

    Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a manner
that is not possible over the Internet.

                                       29
<PAGE>
IF WE ENTER NEW BUSINESS CATEGORIES THAT DO NOT ACHIEVE MARKET ACCEPTANCE, OUR
BRAND AND REPUTATION COULD BE DAMAGED AND WE COULD FAIL TO ATTRACT NEW
CUSTOMERS.

    Any new department or product category that is launched or acquired by us
which is not favorably received by consumers could damage our brand or
reputation. This damage could impair our ability to attract new customers, which
could cause our net sales to fall below expectations. The expansion of our
business to include any new department or product category will require
significant additional expenses, and strain our management, financial and
operational resources. This type of expansion would also subject us to increased
inventory risk. We may choose to expand our operations by developing other new
departments or product categories, promoting new or complementary products,
expanding the breadth and depth of products and services offered or expanding
our market presence through relationships with third parties. In addition, we
may pursue the acquisition of other new or complementary businesses, products or
technologies.

IF WE DO NOT SUCCESSFULLY EXPAND OUR WEB SITE AND THE SYSTEMS THAT PROCESS
CUSTOMERS' ORDERS, WE COULD LOSE CUSTOMERS AND OUR NET SALES COULD BE REDUCED.

    If we fail to rapidly upgrade our Web site in order to accommodate increased
traffic, we may lose customers, which would reduce our net sales. Furthermore,
if we fail to rapidly expand the computer systems that we use to process and
ship customer orders and process payments, we may not be able to successfully
distribute customer orders. As a result, we could lose customers and our net
sales could be reduced. In addition, our failure to rapidly upgrade our Web site
or expand these computer systems without system downtime, particularly during
the fourth calendar quarter, would further reduce our net sales. We may
experience difficulty in improving and maintaining such systems if our employees
or contractors that develop or maintain our computer systems become unavailable
to us. We have experienced periodic systems interruptions, which we believe will
continue to occur, while enhancing and expanding these computer systems.

OUR FACILITIES AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED PROBLEMS. THE OCCURRENCE OF A NATURAL DISASTER OR OTHER UNEXPECTED
PROBLEM COULD DAMAGE OUR REPUTATION AND BRAND AND REDUCE OUR NET SALES.

    We are vulnerable to natural disasters and other unanticipated problems that
are beyond our control. Our office facilities in California and London, England,
house substantially all of our product development and information systems. Our
third-party Web site hosting facilities located in Sunnyvale, California and
Herndon, Virginia, house substantially all of our computer and communications
hardware systems. Our distribution facilities located in California, North
Carolina, Virginia and England house substantially all of our product inventory.
A natural disaster, such as an earthquake, or harsh weather or other comparable
problems that are beyond our control could cause interruptions or delays in our
business and loss of data or render us unable to accept and fulfill customer
orders. Any such interruptions or delays at these facilities would reduce our
net sales. In addition, our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquakes and similar events. We have no formal disaster recovery
plan and our business interruption insurance may not adequately compensate us
for losses that may occur. In addition, the failure by the third-party
facilities to provide the data communications capacity required by us, as a
result of human error, natural disaster or other operational disruptions, could
result in interruptions in our service. The occurrence of any or all of these
events could damage our reputation and brand and impair our business.

OUR NET SALES COULD DECREASE IF OUR ONLINE SECURITY MEASURES FAIL.

    Our relationships with our customers may be adversely affected if the
security measures that we use to protect their personal information, such as
credit card numbers, are ineffective. If, as a result,

                                       30
<PAGE>
we lose many customers, our net sales could decrease. We rely on security and
authentication technology that we license from third parties. With this
technology, we perform real-time credit card authorization and verification with
our bank. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect a customer's personal
information.

    Furthermore, our servers may be vulnerable to computer viruses, physical or
electronic break-ins, denial of service attacks and similar disruptions. We may
need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches. We
cannot assure that we can prevent all security breaches.

OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD.

    A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.

WE FACE THE RISK OF INVENTORY SHRINKAGE.

    If the security measures we use at our distribution facilities do not reduce
or prevent inventory shrinkage, our gross profit margin may decrease. We have
undertaken a number of measures designed to address inventory shrinkage,
including the installation of enhanced security measures at our distribution
facilities. These measures may not successfully reduce or prevent inventory
shrinkage in future periods. Our failure to successfully improve the security
measures we use at our distribution facilities may cause our gross profit
margins and results of operations to be significantly below expectations in
future periods.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.

    If we face material delays in introducing new services, products and
enhancements, our customers may forego the use of our services and use those of
our competitors. To remain competitive, we must continue to enhance and improve
the functionality and features of our online store. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services embodying new technologies, or if new industry standards and
practices emerge, our existing Web site and proprietary technology and systems
may become obsolete.

    To develop our Web site and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our Web site, our transaction processing systems and our
computer network to meet customer requirements or emerging industry standards.

INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS.

    Other parties may assert infringement or unfair competition claims against
us. In the past, a toy distributor using a name similar to ours sent us notice
of a claim of infringement of proprietary rights, which claim was subsequently
withdrawn. We have also received a claim from the holders of a home shopping
video catalog patent and a remote query communication system patent that our
Internet marketing program and Web site operations, respectively, infringe such
patents, and BabyCenter has received a claim from the holder of an automated
registry patent that its Web site infringes such patent. We expect to receive
other notices from other third parties in the future. We cannot predict

                                       31
<PAGE>
whether third parties will assert claims of infringement against us, or whether
any past or future assertions or prosecutions will harm our business. If we are
forced to defend against any such claims, whether they are with or without merit
or are determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays. As a result of
such a dispute, we may have to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all. If there is a
successful claim of product infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, it could impair our business.

IF THE PROTECTION OF OUR TRADEMARKS AND PROPRIETARY RIGHTS IS INADEQUATE, OUR
BRAND AND REPUTATION COULD BE IMPAIRED AND WE COULD LOSE CUSTOMERS.

    The steps we take to protect our proprietary rights may be inadequate. We
regard our copyrights, service marks, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success. We rely on trademark
and copyright law, trade secret protection and confidentiality or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We currently hold registered trademarks for "eToys" and
"BabyCenter". Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which we will sell our
products and services online. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear. Therefore, we may be unable to prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our trademarks and other proprietary rights.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL, OR OUR FAILURE TO
ATTRACT, ASSIMILATE AND RETAIN OTHER HIGHLY QUALIFIED PERSONNEL IN THE FUTURE,
COULD DISRUPT OUR OPERATIONS AND RESULT IN A REDUCTION IN NET SALES.

    The loss of the services of one or more of our key personnel could seriously
interrupt our business. We depend on the continued services and performance of
our senior management and other key personnel, particularly Edward C. Lenk, our
President, Chief Executive Officer and Chairman of the Board. Our future success
also depends upon the continued service of our executive officers and other key
sales, marketing and support personnel as well as the successful integration of
BabyCenter's management with our senior management team. Our relationships with
our officers and key employees are generally at will. We do not have "key
person" life insurance policies covering any of our employees.

THERE ARE RISKS ASSOCIATED WITH THE BABYCENTER MERGER AND OTHER POTENTIAL
ACQUISITIONS. AS A RESULT, WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF THE
BABYCENTER MERGER AND OTHER POTENTIAL ACQUISITIONS.

    We may not realize the anticipated benefits from the BabyCenter merger.

    In February 2000, we announced that we were uniting our baby businesses,
which then consisted of BabyCenter and the Baby Store at eToys, under the
BabyCenter brand. As part of this initiative, we have directed all eToys
customers seeking baby-related content and commerce to the BabyCenter.com site.
In addition, we will move all BabyCenter commerce functions, such as
distribution and customer service, from San Francisco to Southern California.
The transition, which is expected to be completed during the summer of 2000,
will reduce overlapping positions at BabyCenter and relocate other positions to
eToys.

    We may not be able to successfully assimilate BabyCenter's additional
personnel, operations, acquired technology and products into our business. The
merger may further strain our existing

                                       32
<PAGE>
financial and managerial controls and reporting systems and procedures. In
addition, key BabyCenter personnel may decide not to work for us. These
difficulties could disrupt our ongoing business, distract management and
employees or increase our expenses. Further, the physical expansion in
facilities that has occurred as a result of this merger may result in
disruptions that seriously impair our business. In particular, we have
operations in multiple facilities in geographically distant areas. We are not
experienced in managing facilities or operations in geographically distant
areas.

    If we are presented with appropriate opportunities, we intend to make other
investments in complementary companies, products or technologies. We may not
realize the anticipated benefits of any other acquisition or investment. If we
buy another company, we will likely face the same risks, uncertainties and
disruptions as discussed above with respect to the BabyCenter merger.
Furthermore, we may have to incur debt or issue equity securities to pay for any
additional future acquisitions or investments, the issuance of which would be
dilutive to us or our existing securityholders and could affect the price of our
securities.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR SECURITYHOLDERS.

    Provisions of our amended and restated certificate of incorporation, our
amended and restated bylaws and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
securityholders.

    We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:

    - the board of directors approved the transaction in which such stockholder
      became an interested stockholder prior to the date the interested
      stockholder attained such status;

    - upon consummation of the transaction that resulted in the stockholder's
      becoming an interested stockholder, he or she owned at least 85% of the
      voting stock of the corporation outstanding at the time the transaction
      commenced, excluding shares owned by persons who are directors and also
      officers; or

    - on or subsequent to such date the business combination is approved by the
      board of directors and authorized at an annual or special meeting of
      stockholders.

    A "business combination" generally includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.

    Our amended and restated certificate of incorporation and amended and
restated bylaws do not provide for the right of stockholders to act by written
consent without a meeting or for cumulative voting in the election of directors.
In addition, our amended and restated certificate of incorporation permits the
board of directors to issue preferred stock with voting or other rights without
any stockholder action. Following our 2000 annual meeting of stockholders on
September 12, 2000, our amended and restated certificate of incorporation
provides for the board of directors to be divided into three classes, with
staggered three-year terms. As a result, only one class of directors will be
elected at each annual meeting of stockholders. Each of the two other classes of
directors will continue to serve for the remainder of its respective three-year
term. These provisions, which require the vote of stockholders holding at least
a majority of the outstanding common stock to amend, may have the effect of
deterring hostile takeovers or delaying changes in our management.

                                       33
<PAGE>
                         RISKS RELATED TO OUR INDUSTRY

IF WE ARE UNABLE TO ACQUIRE THE NECESSARY WEB DOMAIN NAMES, OUR BRAND AND
REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS.

    We may be unable to acquire or maintain Web domain names relating to our
brand in the United States and other countries in which we may conduct business.
As a result, we may be unable to prevent third parties from acquiring and using
domain names relating to our brand. Such use could damage our brand and
reputation and take customers away from our Web site. We currently hold various
relevant domain names, including the "eToys.com" and "BabyCenter.com" domain
names. The acquisition and maintenance of domain names generally is regulated by
governmental agencies and their designees. The regulation of domain names in the
United States and in foreign countries is subject to change in the near future.
Such changes in the United States are expected to include the creation of
additional top-level domains. Governing bodies may establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names.

WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES.

    The adoption or modification of laws or regulations relating to the Internet
could adversely affect the manner in which we currently conduct our business. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on us. Laws and regulations directly
applicable to communications or commerce over the Internet are becoming more
prevalent. The United States Congress recently enacted Internet laws regarding
children's privacy, copyrights, taxation and the transmission of sexually
explicit material, and the Federal Trade Commission's Children's Online Privacy
Protection Act became effective April 21, 2000. The European Union recently
enacted its own privacy regulations. In addition, we are subject to existing
federal, state and local regulations pertaining to consumer protection, such as
the Federal Trade Commission's Mail and Telephone Order Rule. The law of the
Internet, however, remains largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet. Any failure by us to comply with the rules and
regulations applicable to our business could result in action being taken
against us that could have a material adverse effect on our business and results
of operations.

    In order to comply with new or existing laws regulating online commerce, we
may need to modify the manner in which we do business, which may result in
additional expenses. For instance, we may need to spend time and money revising
the process by which we fulfill customers' orders to ensure that each shipment
complies with applicable laws. We may need to hire additional personnel to
monitor our compliance with applicable laws. We may also need to modify our
software to further protect our customers' personal information.

WE MAY BE SUBJECT TO LIABILITY FOR THE INTERNET CONTENT THAT WE PUBLISH.

    As a publisher of online content, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement, or other
claims based on the nature and content of materials that we publish or
distribute. In particular, our BabyCenter Web site offers a variety of content
for new and expectant parents, including content relating to pregnancy,
fertility and infertility, nutrition, child rearing and related subjects. If we
face liability, then our reputation and our business may suffer. In the past,
plaintiffs have brought these types of claims and sometimes successfully
litigated them against online services. Although we carry general liability
insurance to cover claims of these types, there can be no assurance that such
insurance will be adequate to indemnify us for all liability that may be imposed
on us.

                                       34
<PAGE>
OUR NET SALES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER TAXES.

    If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California. However, one or more local, state or foreign jurisdictions may seek
to impose sales tax collection obligations on us. In addition, any new operation
in states outside California could subject our shipments in such states to state
sales taxes under current or future laws. If we become obligated to collect
sales taxes, we will need to update our system that processes customers' orders
to calculate the appropriate sales tax for each customer order and to remit the
collected sales taxes to the appropriate authorities. These upgrades will
increase our operating expenses. In addition, our customers may be discouraged
from purchasing products from us because they have to pay sales tax, causing our
net sales to decrease. As a result, we may need to lower prices to retain these
customers.

                      RISKS RELATED TO SECURITIES MARKETS

WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.

    We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, such securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our stockholders will experience additional dilution. We
require substantial working capital to fund our business. Since our inception,
we have experienced negative cash flow from operations and expect to experience
significant negative cash flow from operations for the foreseeable future.
Significant volatility in the stock markets, particularly with respect to
Internet stocks, may increase the difficulty of raising additional capital.
Although we believe that current cash and cash equivalents and cash that may be
generated from operations will be sufficient to meet our anticipated cash needs
through June 30, 2001, there can be no assurance to that effect.

THE MARKET PRICE OF OUR SECURITIES MAY BE VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL SECURITYHOLDERS.

    The market price for our securities has been and is likely to continue to be
highly volatile and subject to wide fluctuations in response to factors
including the following, some of which are beyond our control:

    - actual or anticipated variations in our quarterly operating results;

    - announcements of technological innovations, increased cost of operations
      or new products or services by us or our competitors;

    - changes in financial estimates by securities analysts;

    - conditions or trends in the Internet and/or online commerce industries;

    - changes in the economic performance and/or market valuations of other
      Internet, online commerce or retail companies;

    - volatility in the stock markets, particularly with respect to Internet
      stocks, and decreases in the availability of capital for Internet-related
      businesses;

    - announcements by us or our competitors of significant acquisitions,
      strategic partnerships, joint ventures or capital commitments;

    - additions or departures of key personnel;

                                       35
<PAGE>
    - transfer restrictions on our outstanding shares of common stock or sales
      of additional shares of common stock; and

    - potential litigation.

    From May 20, 1999 (the first day of public trading of our common stock),
through August 11, 2000, the high and low sales prices for our common stock
fluctuated between $86.00 and $3.94. On August 11, 2000, the closing price of
our common stock was $4.25. In the past, following periods of volatility in the
market price of their securities, many companies have been the subject of
securities class action litigation. If we were sued in a securities class
action, it could result in substantial costs and a diversion of management's
attention and resources and would cause the prices of our common stock to fall.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We are subject to market risk related to changes in foreign currency
exchange rates and interest rates. We do not use derivative financial
instruments.

    FOREIGN CURRENCY RISK.  We currently have wholly-owned subsidiaries with
operations in the United Kingdom and Europe. All sales and expenses incurred by
the foreign subsidiaries are denominated in the British pound and Euro, which
are considered the functional currencies of the respective subsidiaries. As
such, we are exposed to foreign currency risk which arises in part from funding
denominated in British pounds and Euros provided to the foreign subsidiaries and
from the translation of the foreign subsidiaries' financial results into U.S.
dollars during consolidation. As exchange rates vary, our results from
operations and profitability may be adversely impacted. As of June 30, 2000, the
effect of the foreign currency exchange rate fluctuations has not been material.

    INTEREST RATE RISK.  We maintain a portfolio of highly liquid cash
equivalents maturing in three months or less as of the date of purchase. Given
the short-term nature of these investments, we believe we are not subject to
significant interest rate risk with respect to these investments. Additionally,
we are subject to interest rate risk related to the $150 million of convertible
notes, combined with our notes payable and capital lease obligations. Our notes
payable and capital lease obligations bear interest at fixed rates, and their
carrying amount approximates fair value based on borrowing rates currently
available to us. As such, we believe that market risk arising from our notes
payable and capital lease obligations is not material. The convertible notes,
issued in December 1999, are unsecured and are subordinated to our existing and
future senior debt as defined in the indenture pursuant to which the convertible
notes were issued. The principal amount of the convertible notes will be due on
December 1, 2004 and will bear interest at an annual rate of 6.25%, payable
twice a year, on June 1 and December 1, beginning June 1, 2000, until the
principal amount of the convertible notes is fully repaid. The convertible notes
may be converted into our common stock at the option of the holder at any time
prior to December 1, 2004, unless the convertible notes have been previously
redeemed or repurchased by us. The conversion rate, subject to adjustment in
certain circumstances, is 13.5323 shares of our common stock for each $1,000
principal amount of convertible notes, which is equivalent to a conversion price
of approximately $73.90 per share. As of June 30, 2000, the carrying value of
the convertible notes was $150 million. As of June 30, 2000, the fair value of
the convertible notes was $65.7 million based upon the closing market price as
of that date. The difference between the carrying value and the fair value of
the convertible notes as of June 30, 2000 is primarily due to declines in the
price of our common stock and the favorable interest rate of the convertible
notes as compared to current interest rates.

                                       36
<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    See Note 4, Commitments and Contingencies, in Part I, Item 1, Consolidated
Financial Statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    On June 12, 2000, the Company issued 10,000 shares of Series D Convertible
Preferred Stock, $10,000 stated value per share, and warrants to purchase
5,018,296 shares of common stock with a current warrant exercise price of
$7.17375 per share. The preferred stock is convertible into shares of the
Company's common stock in the manner described herein under "Note 3. Redeemable
Convertible Preferred Stock" in the Notes to Consolidated Financial Statements
set forth in Part I, Item 1 hereof. The securities were issued to
HFTP Investment, L.L.C., Leonardo, L.P., Wingate Capital Ltd. and Fisher Capital
Ltd. in exchange for aggregate consideration of $100.0 million, with a placement
fee payable by the Company to Promethean Capital Group LLC of $2.0 million. The
issuance of such securities was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.

ITEM 5. OTHER INFORMATION

    None.

                                       37
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

<TABLE>
<CAPTION>

<S>                     <C>        <C>
                           3.1     Amended and Restated Bylaws

                           3.2     Certificate of Designations, Preferences and Rights relating
                                   to Series D Convertible Preferred Stock (incorporated herein
                                   by reference to Exhibit 3.1 to the Company's Current Report
                                   on Form 8-K filed June 13, 2000)

                           4.1     Form of Warrant issued to holders of Series D Preferred
                                   Stock (incorporated herein by reference to Exhibit 4.1 to
                                   the Company's Current Report on Form 8-K filed June 13,
                                   2000)

                          10.1     Lease Agreement dated August 11, 1999 between The Fink and
                                   Schindler Company and BabyCenter, Inc.

                          10.2     Underlease dated September 29, 1999 between the Post Office
                                   and eToys UK Limited

                          10.3     Registration Rights Agreement, dated as of June 12, 2000, by
                                   and among the Company and certain investors (incorporated
                                   herein by reference to Exhibit 10.1 to the Company's Current
                                   Report on Form 8-K filed June 13, 2000)

                          10.4     Securities Purchase Agreement, dated as of June 12, 2000, by
                                   and among the Company and certain investors (incorporated
                                   herein by reference to Exhibit 10.2 to the Company's Current
                                   Report on Form 8-K filed June 13, 2000)

                          10.5     Lease agreement dated July 24, 2000 between Land Securities
                                   PLC and eToys UK Limited

                          10.6     Underlease dated July 26, 2000 between eToys UK Limited and
                                   Momentus Limited and Diamond Technology Partners Incorported

                          27.1     Financial Data Schedule
</TABLE>

    (b) Reports on Form 8-K

    Current Report on Form 8-K dated June 12, 2000 pertaining to the Company's
issuance of Series D Convertible Preferred Stock and related warrants.

    Current Reports on Form 8-K dated June 2, 2000 and June 23, 2000 for
purposes of making certain information regarding the Company generally available
in order to incorporate it by reference into other Company filings.

                                       38
<PAGE>
                                   SIGNATURES

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

<TABLE>
<S>                                                    <C>  <C>
                                                       ETOYS INC.

                                                       By:             /s/ STEVEN J. SCHOCH
                                                            -----------------------------------------
                                                                         Steven J. Schoch
                                                                   EXECUTIVE VICE PRESIDENT AND
                                                                     CHIEF FINANCIAL OFFICER
</TABLE>

Dated:  August 14, 2000

                                       39
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBITS
--------
<S>                     <C>
 3.1                    Amended and Restated Bylaws

 3.2                    Certificate of Designations, Preferences and Rights relating
                        to Series D Convertible Preferred Stock (incorporated herein
                        by reference to Exhibit 3.1 to the Company's Current Report
                        on Form 8-K filed June 13, 2000)

 4.1                    Form of Warrant issued to holders of Series D Preferred
                        Stock (incorporated herein by reference to Exhibit 4.1 to
                        the Company's Current Report on Form 8-K filed June 13,
                        2000)

 10.1                   Lease Agreement dated August 11, 1999 between The Fink and
                        Schindler Company and BabyCenter, Inc.

 10.2                   Underlease dated September 29, 1999 between the Post Office
                        and eToys UK Limited

 10.3                   Registration Rights Agreement, dated as of June 12, 2000, by
                        and among the Company and certain investors (incorporated
                        herein by reference to Exhibit 10.1 to the Company's Current
                        Report on Form 8-K filed June 13, 2000)

 10.4                   Securities Purchase Agreement, dated as of June 12, 2000, by
                        and among the Company and certain investors (incorporated
                        herein by reference to Exhibit 10.2 to the Company's Current
                        Report on Form 8-K filed June 13, 2000)

 10.5                   Lease agreement dated July 24, 2000 between Land Securities
                        PLC and eToys UK Limited

 10.6                   Underlease dated July 26, 2000 between eToys UK Limited and
                        Momentus Limited and Diamond Technology Partners Incorported

 27.1                   Financial Data Schedule
</TABLE>

                                       40