SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    Form 10-Q


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


(Mark one)
    [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                 For the quarterly period ended August 04, 2001

                                       OR

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

For the transition period from  ________________    to  _______________



                         Commission File Number 0-19536

                              THE RIGHT START, INC.
                              ---------------------
             (Exact name of registrant as specified by its charter)


     California                                       95-3971414
     ----------                                       ----------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                        Identification No.)


                26610 Agoura Road, Suite 250, Calabasas, CA 91302 (Address of
               principal executive offices) (Zip Code)

                                 (818) 707-7100
                                 --------------
              (Registrant's telephone number, including area code)

     Former address: 5388 Sterling Center Drive, Westlake Village, CA 91361
--------------------------------------------------------------------------------
   (Former name, former address and former fiscal year, if changed
      since last report.)

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_______


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

Common Stock Outstanding as of September 4, 2001:  5,617,275 shares.


<PAGE>



                              THE RIGHT START, INC.

                               INDEX TO FORM 10-Q
                  FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
                              ENDED AUGUST 04, 2001




                         PART I - FINANCIAL INFORMATION


Item 1.  Financial Statements (unaudited):
         Balance Sheets                                                  3
         Statements of Operations                                        4
         Statements of Cash Flows                                        5
         Notes to Financial Statements                                   6


Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                            11


Item 3.  Quantitative and Qualitative Disclosures About Market Risk     17



                           PART II - OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K                               18


SIGNATURES                                                              19




<PAGE>
<TABLE>
<CAPTION>
                                      THE RIGHT START, INC.
                                          BALANCE SHEETS

                                                         August 4, 2001            February 3, 2001
                               ASSETS                       (unaudited)
                                                         -------------------    -------------------

Current assets:

<S>                                                      <C>                    <C>
     Cash and cash equivalents                           $          229,000     $          254,000
     Accounts and other  receivables, net of allowance
      for doubtful accounts of $0 and $400,000,
      respectively                                                  891,000                552,000
     Merchandise inventories                                      8,638,000              9,784,000
     Other current assets                                         1,335,000              1,160,000
                                                         -------------------    -------------------
         Total current assets                                    11,093,000             11,750,000

Noncurrent assets:
     Property, plant and equipment, net                           8,948,000              8,907,000
     Deferred income tax asset                                    1,400,000              1,400,000
     Other noncurrent assets                                        181,000                177,000
                                                         -------------------    -------------------

                                                         $       21,622,000     $       22,234,000
                                                         ===================    ===================


                LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses               $        8,361,000     $        5,637,000
                                                         -------------------    -------------------
         Total current liabilities                                8,361,000              5,637,000

Revolving line of credit, due January 2006                        4,171,000              4,945,000
Senior subordinated convertible pay-in-kind notes                 3,120,000              3,000,000
Deferred rent                                                     1,497,000              1,489,000

Commitments and contingencies

Mandatorily redeemable preferred stock Series A,
     $3,000,000 redemption value; due May 2002                    2,636,000              2,439,000

Shareholders' equity:
     Convertible preferred stock, $100 liquidation preference,
         $0.01 par, 25,000,000 authorized
     Series B; 16,500 issued and outstanding                      1,547,000              1,547,000
     Series C; 37,333 issued and outstanding                      3,733,000              3,733,000
     Series D; 46,696 issued and outstanding                      4,225,000              4,045,000
     Common stock 25,000,000 shares authorized
         at no par value; 5,617,275  issued and outstanding      22,730,000             22,730,000
     Paid in capital                                             16,977,000             17,000,000
     Accumulated deficit                                        (47,375,000)           (44,331,000)
                                                         -------------------    -------------------
         Total shareholders' equity                               1,837,000              4,724,000
                                                         -------------------    -------------------

                                                         $       21,622,000     $       22,234,000
                                                         ===================    ===================


                       See accompanying notes to financial statements

</TABLE>

                                       3
<PAGE>
<TABLE>
<CAPTION>

                                           THE RIGHT START, INC.
                                          STATEMENTS OF OPERATIONS
                                                (unaudited)



                                                Thirteen weeks ended              Twenty-six weeks ended
                                            ------------------------------     ------------------------------
                                            August 4, 2001   July 29, 2000     August 4, 2001  July 29, 2000
<S>                                         <C>              <C>               <C>             <C>
Net sales:
     Retail                                 $  12,034,000    $  10,757,000     $  23,037,000   $   21,086,000
     Sales to RightStart.com                    1,489,000        2,191,000         3,207,000        5,117,000
                                            --------------   -------------     -------------   --------------
                                               13,523,000       12,948,000        26,244,000       26,203,000
                                            --------------   -------------     -------------   --------------

Costs and expenses:
     Cost of goods sold                         6,250,000        5,420,000        11,793,000       10,481,000
     Cost of goods sold to RightStart.com       1,489,000        2,191,000         3,207,000        5,117,000
     Operating expense, includes non-cash
         compensation of $1,000, $8,000,
         $32,000 and $19,000 respectively       4,859,000        4,209,000         9,559,000        8,253,000
     Marketing and advertising expense            163,000          296,000           308,000          545,000
     General and administrative expense         1,077,000          954,000         2,129,000        1,910,000
     Pre-opening costs                            100,000           45,000           183,000          201,000
     Depreciation and amortization expense        655,000          509,000         1,290,000        1,049,000
     Store closing expense                           -             341,000              -             341,000
                                            --------------   -------------     -------------   --------------

                                               14,593,000       13,965,000        28,469,000       27,897,000
                                            --------------   -------------     -------------   --------------
Operating loss                                 (1,070,000)      (1,017,000)       (2,225,000)      (1,694,000)

Loss on investment in RightStart.com                 -           2,247,000              -           5,996,000
Interest expense, net                             198,000          316,000           418,000          557,000
                                            --------------   -------------     -------------   --------------


Loss before income taxes                       (1,268,000)      (3,580,000)       (2,643,000)      (8,247,000)
Income tax provision                               13,000           19,000            25,000           39,000
                                            --------------   -------------     -------------   --------------

Net loss                                    $  (1,281,000)   $  (3,599,000)    $  (2,668,000)  $   (8,286,000)
                                            ==============   =============     =============   ==============


Basic and diluted loss per share:           $       (0.26)   $      (0.66)     $      (0.54)   $       (1.51)
                                            ==============   =============     =============   ==============

Weighted average number of shares
     outstanding                                5,617,275       5,614,175         5,617,275        5,614,175
                                            ==============   =============     =============   ==============


                       See accompanying notes to financial statements

</TABLE>


                                       4
<PAGE>
<TABLE>
<CAPTION>
                                THE RIGHT START, INC.
                              STATEMENTS OF CASH FLOWS

                                                            Twenty-six weeks ended
                                                          ----------------------------
                                                        August 4, 2001     July 29, 2000
                                                          (unaudited)       (unaudited)
                                                          -----------       -----------
<S>                                                       <C>               <C>
Cash flows from operating activities:
   Net loss                                               $(2,668,000)      $(8,286,000)
   Adjustments to reconcile net loss
      to net cash provided by (used in)
      operating activities:
    Depreciation and amortization                          1,290,000         1,049,000
    Non-cash compensation                                     32,000            19,000
    Store closing expense                                       -              251,000
    Loss on investment in RightStart.com                        -            5,996,000
    Change in assets and liabilities affecting
     operations                                            3,416,000           552,000
                                                          -----------       -----------

      Net cash provided by (used in)
       operating activities                                2,070,000          (419,000)
                                                          -----------       -----------

Cash flows from investing activities:
   Additions to property, plant and equipment              (1,321,000)       (1,138,000)
                                                          -----------       -----------

      Net cash used in investing activities                (1,321,000)       (1,138,000)
                                                          -----------       -----------

Cash flows from financing activities:
   Net borrowings (payments) on revolving line of credit    (774,000)          966,000
   Payments on term note payable                                -             (300,000)
   Proceeds from common stock issued
      upon exercise of stock options                            -              129,000
                                                          -----------       -----------

      Net cash provided by (used in) financing activities   (774,000)          795,000
                                                          -----------       -----------


Net decrease in cash and cash equivalents                    (25,000)         (762,000)
Cash and cash equivalents at beginning of period             254,000         1,189,000
                                                          -----------       -----------

Cash and cash equivalents at end of period                  $229,000          $427,000
                                                          ===========       ===========



                       See accompanying notes to financial statements

</TABLE>


                                       5
<PAGE>


                              THE RIGHT START, INC.
                          NOTES TO FINANCIAL STATEMENTS


NOTE 1:  Description of Business and Significant Accounting Policies

     The Right  Start,  Inc.  (the  "Company")  is a specialty  retailer of high
quality  developmental,  educational  and care products for infants and children
and has recently expanded its business to include  educational  products,  toys,
games,  books and  multimedia  products for children  through age 12 through the
purchase by its wholly-owned  subsidiary ZB Company,  Inc. ("ZBCI") on September
5,  2001 of  substantially  all of the  assets  of  Zany  Brainy,  Inc.  and its
affiliates (the "Zany Acquisition").

     There have been no changes in the Company's significant accounting policies
as set forth in the Company's  financial  statements for the year ended February
3, 2001. These unaudited  financial  statements as of August 4, 2001 and for the
thirteen and twenty-six  weeks then ended have been prepared in accordance  with
generally accepted accounting  principles for interim financial  information and
the  rules  and   regulations  of  the   Securities  and  Exchange   Commission.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
These  interim  financial  statements  should  be read in  conjunction  with the
Company's  Annual  Report  on Form  10-K for the year  ended  February  3,  2001
("Fiscal 2000").  In the opinion of management,  all adjustments  (consisting of
normal recurring adjustments)  considered necessary for a fair presentation have
been included.  Certain  reclassifications  have been made to conform prior year
amounts to the current year presentation.

     Operating results for the thirteen and twenty-six week periods ended August
4, 2001 are not  indicative  of the results  that may be  expected  for the year
ending  February 2, 2002 ("Fiscal  2001") because the Zany  Acquisition  will be
included  in the  Fiscal  2001  results  and  because  there may be  changes  in
operating  results in the  business  conducted  by the  Company  from  period to
period.


NOTE 2:  Investment in RightStart.com Inc.

     During   the  third   quarter   of   Fiscal   2000,   RightStart.com   Inc.
("RightStart.com"), the Company's direct-to-consumer affiliate, issued 2 million
shares of common  stock  which  reduced  the  Company's  ownership  interest  in
RightStart.com  to 49.4%.  The sale of common  stock  and  associated  corporate
actions resulted in  RightStart.com  being accounted for under the equity method
of accounting  and no longer  consolidated  with the Company.  Accordingly,  the
Company has restated Fiscal 2000 financial  statements to present its results of
operations and its statement of cash flows for the thirteen and twenty-six weeks
ended July 29, 2000 on an unconsolidated basis.

     The  operating  losses  of  RightStart.com  have  been  shown  as a loss on
investment  in a  non-consolidated  subsidiary  in the  Company's  statement  of
operations  for the  thirteen  and  twenty-six  weeks  ended July 29,  2000.  In
connection with the  deconsolidation of  RightStart.com,  the Company recorded a
gain of $3.3  million  in the  third  quarter  of  Fiscal  2000  which  reversed
previously  recorded  losses in  excess  of its  investment  and  increased  the
Company's investment in RightStart.com to zero.

     Under the equity  method,  the carrying  value of an investment is normally
adjusted on a periodic basis to recognize the  investor's  share of earnings and
losses of the  investee;  however the  carrying  value  generally is not reduced
below zero and in that situation the equity method is, in effect, suspended.

     In July 2001,  RightStart.com  was notified by its senior lenders that they
intended to foreclose and sell the underlying collateral.  This foreclosure took
place on August 3, 2001,  with the  assets  being sold to  Targoff-RS,  LLC,  an
entity newly-formed to purchase such assets. At the time of the foreclosure, the
Company's  investment had been carried at zero and accounts  receivable due from
RightStart.com of $755,000, of which $90,000 was subsequently collected, leaving
$665,000 as  uncollectable  (which  uncollectable  amount,  which had been fully
reserved,  was written  off).  As a condition to an  investment  received by the
Company  at the time of the Zany  Acquisition,  in  September  2001 the  Company
acquired  Targoff-RS,  LLC in exchange  for  preferred  stock  convertible  into
1,800,000 shares of the Company's  common stock,  subject to the approval of its
shareholders.


NOTE 3:  Per Share Data

     Basic per share data is computed by dividing the Company's  loss  available
to common  shareholders by the weighted  average number of the Company's  common
shares outstanding. Diluted per share data is computed by dividing the Company's

                                       6
<PAGE>

loss  available to common  shareholders  plus income  associated  with  dilutive
securities  by the  weighted  average  number  of  shares  outstanding  plus any
potential  dilution that could occur if  securities or other  contracts to issue
common stock were exercised or converted into common stock in each period.

                               Thirteen weeks ended    Twenty-six weeks ended
                              ----------------------   ----------------------
                               August 4,    July 29,   August 4,     July 29,
                                2001          2000       2001          2000
                              ---------    ---------  ---------   ---------

Loss before extraordinary
 item                         $1,281,000   $3,599,000  $2,668,000   $8,286,000
Plus:  Preferred stock
        accretion                100,000       86,000     197,000      169,000
       Series D preferred
        dividends                 90,000         -        180,000        -
                               ---------    ---------   ---------   ---------

Basic and diluted loss
  applicable to common
  shareholders                $1,471,000   $3,685,000  $3,045,000   $8,455,000
                               =========    =========   =========    =========
Weighted average shares        5,617,275    5,614,175   5,617,275    5,614,175
Loss per share, basic and
 diluted                      $     0.26    $   0.66    $    0.54    $    1.51


     Certain  securities of the Company were not included in the  computation of
diluted  per share loss  because to do so would have been  antidilutive  for the
periods presented. Such securities include:

                        --------------------------------
                         Common Stock Equivalents at:
                        --------------------------------
Securities              August 4, 2001  July 29, 2000
----------              --------------  -------------
Options                   1,595,144        992,232
Series B preferred stock    550,000        550,000
Series C preferred stock  1,866,650      1,866,650
Series D preferred stock  2,334,800             -
Warrants                    479,000         30,000


NOTE 4:  Supplemental Disclosure of Cash Flow Information

     Interest  paid amounted to $263,000 and $352,000 for the  twenty-six  weeks
ended August 4, 2001 and July 29, 2000, respectively. Cash paid for income taxes
was $17,000 and $8,000 for the  twenty-six  weeks ended  August 4, 2001 and July
29, 2000, respectively.


     Changes in assets and liabilities  which increased  (decreased) cash are as
follows:

                                               Twenty-six weeks ended
                                          ---------------------------------
                                            August 4, 2001   July 29, 2000
                                              ----------      ------------

Accounts and other receivables            $     (504,000)     $   254,000
Merchandise inventories                        1,146,000         (765,000)
Other current assets                            (185,000)          63,000
Other noncurrent assets                           (4,000)           7,000
Accounts payable and accrued expenses          2,955,000        1,034,000
Deferred rent                                      8,000          (41,000)
                                              ----------      ------------
                                           $   3,416,000      $   552,000
                                           =============      ===========


Non-cash investing and financing activities:

                                                Twenty-six weeks ended
                                              ---------------------------
                                              August 4, 2001   July 29, 2000
                                              ----------      ------------

Conversion of Series B preferred stock to
 common stock                                      -             $ 328,000
Conversion of Series C preferred stock to
 common stock                                      -               117,000
Preferred dividend accretion                  $  197,000           169,000
Issuance of warrants                               -                70,000
Preferred dividend payable                       180,000              -
Notes issued for interest due on senior
 subordinated convertible pay-in-kind notes      120,000              -


                                       7
<PAGE>

NOTE 5:  New Accounting Pronouncements

     In June 1998, the Financial  Accounting Standards Board (the "FASB") issued
Statement  of Financial  Accounting  Standards  ("SFAS")  133,  "Accounting  for
Derivative Instruments and Hedging Activities," effective beginning in the first
quarter of 2000.  SFAS 133  establishes  accounting and reporting  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts, and for hedging activities.  It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those  instruments at fair value.  SFAS 133 was amended by SFAS 137 which defers
the  effective  date of the SFAS 133 to all  fiscal  quarters  of  fiscal  years
beginning  after June 15, 2000.  SFAS 133 became  effective for our first fiscal
quarter  in the year 2001 and did not have a  material  effect on the  Company's
financial position.

     In April 2001,  the  Emerging  Issues  Task Force (the  "EITF") of the FASB
reached  a  consensus  on  issue  No.  00-14,   "Accounting  for  Certain  Sales
Incentives,"  which  requires  the cost of  certain  sales  incentives,  such as
coupons,  to be classified as a reduction of revenue.  The Company's policy with
respect to coupons  complies  with EITF No.  00-14 and,  therefore,  it does not
anticipate any impact on its financial statements.

     In June 2001, the FASB issued two new  pronouncements:  SFAS 141, "Business
Combinations"  and SFAS 142,  "Goodwill and Other  Intangible  Assets." SFAS 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations   initiated   after  June  30,   2001  and  that  the  use  of  the
pooling-of-interests  method is no longer permitted. SFAS 142 requires that upon
adoption,  amortization of goodwill will cease and instead the carrying value of
goodwill will be evaluated for  impairment at least  annually using a fair value
test. Other  identifiable  intangible  assets will continue to be amortized over
their useful lives and reviewed at least annually for impairment  using a method
appropriate to the nature of the intangible  asset.  The Company was required to
implement  SFAS 141 on July 1,  2001 and SFAS 142 at the  beginning  of its next
fiscal year, February 3, 2002. The Company is currently evaluating the impact of
the adoption of these  standards and has not yet determined the effect,  if any,
that  their  adoption  will  have  on  its  financial  position  or  results  of
operations.


NOTE 6:  Mandatorily Redeemable Preferred Stock

     The  Company  issued  30,000  shares  of  mandatorily  redeemable  Series A
preferred  stock in December  1998.  The stock has a par value of $.01 per share
and a liquidation  preference of $100 per share; it is mandatorily redeemable at
the option of the  holders  on May 31,  2002 at a  redemption  price of $100 per
share or $3,000,000  (subject to the legal  availability of funds). The Series A
preferred  stock must also be  redeemed  by the  Company  (subject  to the legal
availability  of funds) upon a change of control or upon the  issuance of equity
securities  for cash by the Company  resulting in net proceeds to the Company in
excess of $15,000,000, both as set forth in the Certificate of Determination for
the Series A preferred  stock.  The company has received  notice from holders of
the Series A preferred  stock that such  holders  believe  the Zany  Acquisition
triggered  the  mandatory  redemption  provisions  related to the receipt of net
proceeds  from an equity  issuance.  (See  Liquidity  and Capital  Resources for
further discussion).


NOTE 7:  Segment Information

     The Company  currently  operates in one segment,  which is the retail store
segment.


NOTE 8: Operating Results and Risks

     Historically,  the Company has incurred losses and may incur losses for the
remainder of Fiscal 2001. The Company  believes that its current cash on hand at
August 4, 2001, cash flow from operations,  its working capital facility and the
new $115 million credit  facility  entered into by ZBCI (See Note 10-Zany Brainy
Acquisition) will allow it to maintain its operations,  fund working capital and
capital  expenditures  for the current  fiscal  year.  The  Company's  needs for
additional funding will depend upon several factors,  including, but not limited
to,  generating  sufficient  cash flow from  operations  and the  opening of new
stores,  the expenses or savings from integration of Zany Brainy,  Inc. ("Zany")
into the  Company's  operations  and the  Company's  dependence  on  independent
manufacturers  and suppliers and their credit  terms.  If additional  capital is
required to grow its business or execute its business plan, the Company may seek
to raise  additional  equity or incur additional debt. There can be no assurance
given that adequate funds will be available to the Company on acceptable terms.


                                       8
<PAGE>

NOTE 9:  Related Party Transactions

     Kayne Anderson Investment Management, Inc. ("KAIM"), the general partner of
KA Capital,  provides certain management services to the Company and charges the
Company for such services.  Management fees of $75,000 were paid to KAIM in both
the first half of Fiscal 2001 and Fiscal 2000.

     Prior to the foreclosure on RightStart.com,  the Company and RightStart.com
were parties to a management  services  agreement.  This agreement provided that
the Company will supply  inventory at cost plus five percent and provide certain
Basic  Services at cost plus five  percent.  Basic  Services  consist of various
services,  including,  among  others,  services for  personnel/human  resources,
benefits administration,  payroll processing,  insurance,  tax, cash management,
financial,    legal,    order    fulfillment   and    collection,    accounting,
telecommunications,  catalog  production  assistance and credit card processing.
The sale of inventory to RightStart.com  and the related cost of those sales are
shown on the  statements of operations.  The income for Basic Services  rendered
under this  agreement for the first half of Fiscal 2001 amounted to $592,000 and
for the first half of Fiscal  2000  amounted  to  $223,000  and is  included  in
general and administrative expense in the accompanying statements of operations.
After the foreclosure,  the Company provided  management services to Targoff-RS,
LLC on  terms  similar  to  those  previously  provided  to  RightStart.com.  On
September 5, 2001, the Company purchased Targoff-RS, LLC.


NOTE 10: Recent Developments

      Nasdaq Compliance

     In May 2001, the Company  received notice from Nasdaq that it had failed to
evidence  a market  value of public  float of at least $5.0  million  for thirty
consecutive  trading days.  Nasdaq informed the Company that it had until August
15, 2001, to regain  compliance for not less than ten consecutive  trading days.
Given the Company's  current  public float,  the closing bid price of its common
stock was  required to remain above  approximately  $1.68 per share to meet this
compliance  standard.  Failure  would  result  in a  transfer  of the  Company's
securities to the Nasdaq SmallCap Market or delisting.


     In June 2001, the Company received notice from Nasdaq that it had failed to
maintain the minimum listing  standard of $4.0 million in net worth. The Company
then informed Nasdaq of the Zany Acquisition (see Zany Brainy Acquisition below)
and  that a  potential  combination  would  result  in a  combined  entity  with
substantially  more net worth than the requisite  minimum listing  standard.  In
August 2001,  the Company  received  notice from Nasdaq that its stock was to be
delisted  as a result  of not  meeting  each of the two  aforementioned  minimum
listing standards.  The Company has appealed the Nasdaq staff's determination by
requesting  a hearing.  As a result of such appeal,  the  delisting of Company's
securities is stayed pending a decision by a Nasdaq Listing Qualifications Panel
at or after a hearing  scheduled for October 5, 2001.  There can be no assurance
the Panel  will grant the  Company's  request  for  continued  listing,  but the
Company will inform the Panel of the completion of the Zany  Acquisition and the
positive  effect on the  Company's  net worth.  Additionally,  the  Company  has
informed the Panel that it regained  compliance with the minimum market value of
public float on July 11, 2001,  and that its stock price has continued to remain
above the minimum bid price throughout the month of August.


      Zany Brainy Acquisition

     On September 5, 2001,  ZBCI, a wholly-owned  subsidiary of The Right Start,
Inc.,  completed  the  acquisition  of  substantially  all of the assets of Zany
Brainy,  Inc. and its affiliates  (collectively,  "Zany"),  including 187 retail
stores in 34 states,  through a sale of assets  and  assignment  of  liabilities
pursuant to sections 363 and 365 of the U.S.  Bankruptcy Code. As consideration,
ZBCI agreed to pay the following: $7.5 million in cash and 1.1 million shares of
Common Stock to the Zany estate for the benefit of the unsecured  creditors (the
cash  portion to be paid in three  equal  installments  on  December  15,  2001,
February 15, 2002 and April 15, 2002);  $63.8 million (excluding renewed letters
of credit) to the Zany  Brainy,  Inc.  DIP lender paid at the  closing  from the
proceeds  of the ZB Credit  Facility;  $2.1  million  paid into an escrow at the
closing for Zany management  retention  bonuses;  and certain lesser amounts and
$4.2 million which was offset by payments due to investors.  Additionally,  ZBCI
assumed  certain  other  liabilities  estimated at $26.0  million  consisting of
post-petition   trade   payables,    settlement   amounts,    bankruptcy-related
professional  fees,  sales and payroll  taxes,  accrued  salaries  and  employee
benefit  obligations and customer gift certificates and merchandise  credits. In
addition  to  the  investments   discussed  below,  the  Company  financed  this
acquisition through a new loan and security agreement allowing ZBCI to borrow up
to $115  million  (the "ZB  Credit  Facility");  which  facility  is  secured by
substantially all the assets of ZBCI and a guarantee by the Company,  secured by
a pledge of the stock of ZBCI held by the Company. The Company plans to maintain
both the Zany and Right Start stores as separate and  distinct  brands  although
the two brands are expected to share  physical  space where  appropriate  and as
permitted under the relevant leases.

                                       9
<PAGE>

     In order to fund the Zany  Acquisition,  the Company  issued  approximately
11,919 shares of its Series E Convertible  Preferred  Stock,  par value $.01 per
share ("Series E Preferred  Stock") to Athanor  Holdings,  LLC  ("Athanor")  and
2,200 shares of its Series G  Convertible  Preferred  Stock,  par value $.01 per
share  ("Series G Preferred  Stock") to certain KAIM  investment  affiliates for
approximately  $11.9  million  and  $5.5  million,  respectively.  The  Series E
Preferred  Stock is  convertible,  upon approval by the Company's  shareholders,
into  8,334,836  shares of the  Company's  common stock,  no par value  ("Common
Stock"),  at an  imputed  price of $1.43 per share,  and the Series G  Preferred
Stock  is  convertible,  upon  approval  by  the  Company's  shareholders,  into
2,200,000  shares  of  Common  Stock at an  imputed  price of $2.50  per  share.
Additionally,  Athanor  purchased $4.9 million in aggregate  principal amount of
the Company's 4%  Subordinated  Convertible  Pay-in-Kind  Notes due September 4,
2004 (the "Junior  Notes").  The Athanor  investment,  if and when  converted to
Common Stock, represents  approximately 40.5% of the fully diluted shares of the
Company  before giving effect to employee and director  stock  options.  Under a
stockholders'  agreement between KAIM investment  affiliates and Athanor and the
investment  agreement between the Company and Athanor,  Athanor has the right to
name three  members to the Company's  Board of  Directors,  one of whom is to be
"independent."  The  stockholders'  agreement also requires the KAIM  investment
affiliates  and Mr. Fred Kayne to convert all of their holdings in the Company's
Senior Subordinated  Convertible Pay-in-Kind Notes ("Senior Subordinated Notes")
and the Company's  Series B Convertible  Preferred  Stock,  Series C Convertible
Preferred Stock and Series D Pay-in-Kind  Convertible  Preferred Stock to Common
Stock at the time that sufficient  common shares have been  authorized,  and the
conversion feature on the newly-issued preferred stock and Junior Notes has been
approved  by  vote  of the  Company's  common  shareholders  and to  vote  their
securities in favor of such matters.

     In addition,  the Athanor  investment  agreement  required that the Company
acquire  from  Targoff-RS,  LLC the assets it  acquired  in the  foreclosure  on
RightStart.com  including  the  online  business  and the  Right  Start  catalog
business (See Note 2). These assets were acquired at a price of $4.0 million for
1,800 shares of Series F Convertible  Preferred Stock, no par value (the "Series
F Preferred Stock").  The Series F Preferred Stock is convertible into 1,800,000
shares of Common Stock at an imputed price of $2.22 per share.

     The Company  expects to file a  preliminary  proxy  statement  on or before
November  15,  2001,  seeking  shareholder  approval to  increase  the number of
authorized shares of Common Stock from 25 million shares to 75 million shares to
accommodate  the  conversions  of the Junior Notes and the various  newly-issued
convertible preferred stock. The number of shares of Common Stock expected to be
outstanding upon conversion of the Junior Notes and such  convertible  preferred
stock and the issuance of shares in connection  with the Zany  Acquisition  will
amount to  approximately 29 million shares.  Each of the newly-issued  series of
convertible  preferred  stock entitles its holders to  registration  rights with
respect to the underlying Common Stock.

     At August 4, 2001 the Company had not met the annualized inventory turnover
rate  covenant  as  specified  in  the  Right  Start  Credit  Facility  and  has
subsequently received a waiver letter from its lender.

     The Company  has  learned  that it will likely be made a party to a suit by
Oxygen Media,  LLC  ("Oxygen")  that seeks to recover the alleged value of cable
television and internet  media time allegedly  provided or to be provided to the
Company and  RightStart.com,  Inc.. The basis for the claim is a term sheet that
Oxygen admits was non-binding and the actual provision of services under written
orders.  Oxygen asserts that the Company and RightStart.com  breached an express
contractual  obligation  to negotiate  in good faith to reach an agreement  that
would have provided Oxygen with cash and in-kind marketing services equal to $13
million. Oxygen asserts, in the alternative, that the Company and RightStart.com
owe Oxygen $720,000 under an implied-in-fact  contract or for services provided.
The Company  believes that the breach of contract claims are without merit as to
it and that the  specific  allegations  needed to support  the claims are false.
Furthermore,  the Company believes that the value of services provided to Oxygen
exceeds the value of the services  provided by Oxygen.  The Company has directed
legal  counsel to prepare a  counter-claim  to recover  the excess  value of the
services provided to Oxygen.

     Finally,  the  Company  authorized  an  increase  in the  number of options
issuable  under the  Company's  1991  Employee  Stock  Option Plan to a total of
approximately 5.5 million shares of which  approximately 3.7 million shares have
been granted, subject to shareholder approval.


                                       10
<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

     When used in this report and elsewhere by management from time to time, the
words  "believes,"  "anticipates,"  and  "expects" and similar  expressions  are
intended to identify  forward-looking  statements  with respect to our financial
condition,  results of operations and business.  Certain important factors could
cause  actual  results  to  differ   materially  from  those  expressed  in  our
forward-looking  statements,  including,  but  not  limited  to,  the  need  for
shareholder  approval of certain features of the  investments,  competition from
other retailers and potential product liability claims, potential operational or
integration challenges with respect to the Zany Acquisition, changes in consumer
spending and the Company's dependence on independent manufacturers and suppliers
and their  credit  terms.  We caution  readers  not to place  undue  reliance on
forward-looking  statements,  which speak only as of the date of this filing. We
undertake   no   obligation   to  publicly   release  any   revisions  to  these
forward-looking statements to reflect events or circumstances after that date.

Retail Store Operations

     At August 4,  2001,  the  Company  operated  67 retail  stores in 19 states
throughout the United States. The stores' product mix includes a wide variety of
items to meet the needs of infants,  small  children and their care givers,  all
presented within a store designed to provide a safe,  baby-friendly  environment
for the shopping ease of new parents.


Thirteen weeks ended August 4, 2001 compared with July 29, 2000

     The  following  table  sets forth the  Company's  unaudited  statements  of
operations data:

                                              Thirteen weeks ended
                                    ------------------------------------------
                                       August 4, 2001         July 29, 2000
                                    ----------------------  ------------------
Retail net sales                    $12,034,000     100.0%  $10,757,000  100.0%
Cost of goods sold                    6,250,000      51.9%    5,420,000   50.4%
Operating expense                     4,858,000      40.4%    4,201,000   39.1%
Non-cash compensation                     1,000       0.0%        8,000    0.1%
Marketing & advertising expenses        163,000       1.4%      296,000    2.8%
General & administrative expenses     1,077,000       8.9%      954,000    8.9%
Pre-opening costs                       100,000       0.8%       45,000    0.4%
Store closing expense                         -                 341,000    3.2%
Depreciation & amortization expense     655,000       5.4%      509,000    4.7%
                                    -----------             -----------
   Operating loss                    (1,070,000)     -8.9%   (1,017,000)  -9.5%
Loss on investment                            -               2,247,000   20.9%
Interest expense                        198,000       1.6%      316,000    2.9%
                                    -----------             -----------

   Income (loss) before provision
    for income taxes                 (1,268,000)    -10.5%   (3,580,000) -33.3%
Provision for income taxes               13,000       0.1%       19,000    0.2%
                                    -----------             -----------
   Net income (loss)                $(1,281,000)    -10.6%  $(3,599,000) -33.5%
                                     ===========             ===========


     Net Sales. Retail net sales consist of gross product sales to customers net
of returns.  Retail net sales  increased by $1.2 million,  or 11.9%,  from $10.8
million for the  thirteen  weeks  ended July 29,  2000 to $12.0  million for the
thirteen weeks ended August 4, 2001.  The net sales growth  reflects an increase
in the store  base from 53 stores  to 67  stores  offset by a 1.0%  decrease  in
same-store  sales.  The primary  reason for the  decrease in same store sales is
attributable to weak sales in our mall-based stores. On a same-store basis, mall
stores were down 8.1% while street stores were up 10.3%.

     Cost of goods sold.  Cost of goods sold  consists  primarily of the cost of
products sold, inbound freight costs and inventory shrinkage costs. Retail gross
margin decreased to 48.1% from 49.6% in the prior year period.  This decrease is
attributable  to slightly  increased  freight costs, a small shift in the retail
mix to lower margin items and markdowns of swimwear.

     Operating  expense.  Retail operating expense consists of store operational
expenses,  retail  personnel  costs,  and costs related to the  distribution and
warehousing of our retail merchandise. Retail operating expense was $4.9 million

                                       11
<PAGE>

for the  current  period as  compared  to $4.2  million for the same period last
year. The $0.7 million or 15.6%  increase  reflects the addition of 14 new store
locations.  The increase as a percent of sales is primarily due to the operating
costs-to-sales ratio for new stores.

     Non-cash  compensation.  During the  second  quarter  of Fiscal  2000,  the
Company recorded $8,000 of non-cash compensation expense associated with certain
non-employee  director  grants.  The current  year  reflects  $1,000  related to
non-employee director grants.

     Marketing and advertising expense. Retail marketing and advertising expense
generally  consists of print advertising in national and regional  publications,
as well as  promotional  mailings to our  customers.  Marketing and  advertising
expense decreased from $296,000 for the thirteen-week period ended July 29, 2000
to $163,000 for the same period this year.  This  decrease is primarily due to a
decrease in print advertising expense.

     General and  administrative  expense.  General and  administrative  expense
consists primarily of the costs related to management, financial, merchandising,
inventory,  professional service fees and other administrative support.  General
and  administrative  expense  increased  by $0.1  million,  or 12.9%,  from $1.0
million for the thirteen week period ended July 29, 2000 to $1.1 million for the
thirteen week period ended August 4, 2001. The current period includes a $50,000
settlement related to disputed charges,  $20,000 related to the corporate office
move,  and $3,000 in severance  charges  recorded for a former  executive.  As a
percent of sales, general and administrative  expense remained constant at 8.9%.
General  and  administrative  expense  includes  net  credits  in the  amount of
$281,000 and $99,000 for the current and prior year period, respectively.  These
credits are the result of net billings to  RightStart.com  under the  management
services  agreement.  During  the  second  half of Fiscal  2000,  RightStart.com
significantly  reduced  its  staffing  levels  and  requested  that the  Company
increase the level of services  provided.  The Company added staffing to respond
to this request and,  consequently,  has been reimbursed at a greater level than
the previous year.

     Pre-opening  costs.  Pre-opening  costs consist  primarily of non-recurring
marketing,  advertising,  and other expenses related to the opening of new store
locations.  Pre-opening  costs  increased  $55,000 from $45,000 for the thirteen
weeks ended July 29, 2000 to $100,000 for the current year.

     Store closing  expense.  Store closing  expense  consists  primarily of the
write-off  of  non-recoverable  assets and costs  incurred  in closing the store
locations. In the prior year period there were two store closures for a total of
$341,000.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
increased  $146,000 from $509,000 in the prior period to $655,000 in the current
period.  The increase is due to additional  assets placed in service  related to
new store openings.

     Loss on investment.  Under the equity method of  accounting,  the Company's
loss on its investment in RightStart.com  was $2.2 million in the second quarter
of Fiscal 2000. Since the third quarter of Fiscal 2000, the Company's investment
in  RightStart.com  has been  carried  at zero and the  equity  method  has been
suspended.   On  August  3,  2001,   the  senior  debt  holders   foreclosed  on
RightStart.com,  its assets  were sold and the  Company's  equity  interest  was
extinguished.

     Interest expense.  Interest expense decreased from $316,000 in the thirteen
weeks  ended July 29,  2000 to  $198,000  for the same  period  this  year.  The
decrease  reflects a decrease  in our  average  outstanding  borrowings  for the
current  period  over  the  prior  period  and  lower  interest  rates  on those
borrowings.

     Provision  for income  taxes.  The provision for income taxes is related to
state  income  taxes.  No federal or state  income tax benefit was  recorded for
either the current or prior period due to the uncertainty  surrounding realizing
any further tax benefits in future years.


                                       12
<PAGE>




Twenty-six weeks ended August 4, 2001 compared with July 29, 2000

     The  following  table  sets forth the  Company's  unaudited  statements  of
operations data:

                                             Twenty-six weeks ended
                                    ------------------------------------------
                                       August 4, 2001         July 29, 2000
                                    ----------------------  ------------------
Retail net sales                    $23,037,000     100.0%  $21,086,000  100.0%
Cost of goods sold                   11,793,000      51.2%   10,481,000   49.7%
Operating expense                     9,527,000      41.4%    8,234,000   39.1%
Non-cash compensation                    32,000       0.1%       19,000    0.1%
Marketing & advertising expenses        308,000       1.3%      545,000    2.6%
General & administrative expenses     2,129,000       9.3%    1,910,000    9.1%
Pre-opening costs                       183,000       0.8%      201,000    1.0%
Store closing expense                         -                 341,000    1.6%
Depreciation & amortization expense   1,290,000       5.6%    1,049,000    5.0%
                                     -----------             -----------
   Operating loss                    (2,225,000)     -9.7%   (1,694,000)  -8.0%
Loss on investment                            -               5,996,000   28.5%
Interest expense                        418,000       1.8%      557,000    2.6%
                                     -----------             -----------
   Income (loss) before provision
    for income taxes                 (2,643,000)    -11.5%   (8,247,000) -39.1%
Provision for income taxes               25,000       0.1%       39,000    0.2%
                                     -----------             -----------
   Net income (loss)                $(2,668,000)    -11.6%  $(8,286,000) -39.3%
                                     ===========             ===========


     Net Sales. Retail net sales consist of gross product sales to customers net
of returns.  Retail net sales  increased by $2.0  million,  or 9.3%,  from $21.0
million for the  twenty-six  weeks ended July 29, 2000 to $23.0  million for the
twenty-six weeks ended August 4, 2001. The net sales growth reflects an increase
in the store  base from 53 stores  to 67  stores  offset by a 2.7%  decrease  in
same-store  sales.  The primary  reason for the  decrease in same store sales is
attributable to weak sales in our mall-based stores. On a same-store basis, mall
stores were down 9.1% while street stores were up 10.1%.

     Cost of goods sold.  Cost of goods sold  consists  primarily of the cost of
products sold, inbound freight costs and inventory shrinkage costs. Retail gross
margin decreased to 48.8% from 50.3% in the prior year period.  This decrease is
due primarily to increased freight costs.

     Operating  expense.  Retail operating expense consists of store operational
expenses,  retail  personnel  costs,  and costs related to the  distribution and
warehousing of our retail merchandise. Retail operating expense was $9.5 million
for the current  half as compared to $8.2 million for the same period last year.
The $1.3  million  or 15.7%  increase  reflects  the  addition  of 14 new  store
locations.  The increase as a percent of sales is primarily due to the operating
costs-to-sales ratio for new stores.

     Non-cash  compensation.  During the first half of Fiscal 2000,  the Company
recorded  $19,000 of  non-cash  compensation  expense  associated  with  certain
non-employee  director  grants.  The current  year  reflects  $9,000  related to
non-employee  director  grants as well as $23,000  related to former  employees'
options.

     Marketing and advertising expense. Retail marketing and advertising expense
generally  consists of print advertising in national and regional  publications,
as well as  promotional  mailings to our  customers.  Marketing and  advertising
expense  decreased from $545,000 for the  twenty-six-week  period ended July 29,
2000 to $308,000 for the same period this year.  This  decrease is primarily due
to a decrease in print advertising expense.

     General and  administrative  expense.  General and  administrative  expense
consists primarily of the costs related to management, financial, merchandising,
inventory,  professional service fees and other administrative support.  General
and  administrative  expense  increased  by $0.2  million,  or 11.5%,  from $1.9
million for the  twenty-six  week period ended July 29, 2000 to $2.1 million for
the twenty-six  week period ended August 4, 2001.  The current  period  includes
$81,000  in  severance  charges  recorded  for a  former  executive,  a  $50,000
settlement  related to disputed  charges and  $20,000  related to the  corporate
office  move.  As a  percentage  of sales,  general and  administrative  expense
remained  relatively  flat  at  9.2%  and  9.1%  for  current  and  prior  year,
respectively.  General and  administrative  expense  includes net credits in the
amount  of  $592,000  and  $223,000  for the  current  and  prior  year  period,
respectively.  These  credits are the result of net  billings to  RightStart.com
under the management services agreement.  During the second half of Fiscal 2000,
RightStart.com  significantly reduced its staffing levels and requested that the
Company increase the level of services  provided.  The Company added staffing to
respond to this  request and,  consequently,  has been  reimbursed  at a greater
level than the previous year.

                                       13
<PAGE>

     Pre-opening  costs.  Pre-opening  costs consist  primarily of non-recurring
marketing,  advertising,  and other expenses related to the opening of new store
locations.  Pre-opening costs decreased $18,000 from $201,000 for the twenty-six
weeks ended July 29, 2000 to $183,000 for the current year.

     Store closing  expense.  Store closing  expense  consists  primarily of the
write-off  of  non-recoverable  assets and costs  incurred  in closing the store
locations. In the prior year period there were two store closures for a total of
$341,000.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
increased  $0.3 million from $1.0 million in the prior period to $1.3 million in
the current period.  The increase is due to additional  assets placed in service
related to new store openings.

     Loss on investment.  Under the equity method of  accounting,  the Company's
loss on its investment in  RightStart.com  was $6.0 million in the first half of
Fiscal 2000. Since the third quarter of Fiscal 2000, the Company's investment in
RightStart.com  has  been  carried  at  zero  and the  equity  method  has  been
suspended.   On  August  3,  2001,   the  senior  debt  holders   foreclosed  on
RightStart.com,  the assets  were sold and the  Company's  equity  interest  was
extinguished.

     Interest   expense.   Interest  expense  decreased  from  $557,000  in  the
twenty-six  weeks ended July 29, 2000 to $418,000 for the same period this year.
The decrease reflects a decrease in our average  outstanding  borrowings for the
current  period  over  the  prior  period  and  lower  interest  rates  on those
borrowings.

     Provision  for income  taxes.  The provision for income taxes is related to
state  income  taxes.  No federal or state  income tax benefit was  recorded for
either the current or prior period due to the uncertainty  surrounding realizing
any further tax benefits in future years.


Liquidity and Capital Resources

General

     We entered  into a Loan and  Security  Agreement  with Wells  Fargo  Retail
Finance  LLC (the  "Bank") as of  January  23,  2001 (the  "Right  Start  Credit
Facility").  The Right Start Credit  Facility  consists of a standard  revolving
line of up to $7,000,000  under which  borrowings bear interest at a rate of the
greater of either 8% or 0.75%  over a base rate  announced  by Wells  Fargo Bank
from time to time, and a special line of up to $3,000,000 under which borrowings
bear  interest at a rate of the greater of either 8% or 1.5% over the base rate.
As of August 29, 2001, the Wells Fargo Bank base rate was 6.50%. We are required
to maintain  average  availability  under the Right Start Credit  Facility of at
least 85% of amounts in our budget  (calculated on a rolling  two-month  average
basis).  As of August 4, 2001,  the date of our  latest  measuring  period,  our
average  availability is approximately  90.7% of budget amounts. As of August 4,
2001, we had approximately  $4,171,000  outstanding under the Right Start Credit
Facility and aggregate availability of approximately $2,828,000. The Right Start
Credit Facility matures on January 23, 2006.

     The  Company's  wholly-owned  subsidiary,  ZBCI,  entered  into a Loan  and
Security  Agreement  with  the  Bank  on  September  5,  2001  (the  "ZB  Credit
Facility").  The ZB Credit Facility is secured by a pledge of substantially  all
of the assets of ZBCI. The Company has guaranteed  ZBCI's  obligations under the
ZB Credit Facility and secured its guarantee with a pledge of the stock of ZBCI.
The ZB Credit  Facility  consists  of a  standard  revolving  line of up to $100
million under which borrowings bear interest,  at ZBCI's election, at an initial
rate of 3.5% over the London  Interbank  Offered Rate  ("LIBOR") or 1.75% over a
base rate announced by Wells Fargo Bank from time to time, and a special subline
of up to $15 million under which  borrowings  bear interest at a rate of 14% per
annum.  The interest  rate on the standard  revolving  line adjusts based on the
average  quarterly  availability  under the ZB Credit Facility to a low of 2.25%
over LIBOR and 0.25% over the base rate, in each case, when availability exceeds
$25  million.  ZBCI is required to maintain a tangible net worth of at least $26
million as of February 2, 2002 and 85% of amounts projected in ZBCI's budget for
each calendar  month on or after  February 28, 2002. In addition,  the ZB Credit
Facility limits capital expenditures for the fiscal year ending February 2, 2002
in excess of $5 million or $2.5  million in any fiscal  quarter of such year and
amounts approved by the Bank thereafter.  ZBCI is required to keep its effective
advance rate under the ZB Credit  Facility  (tested at month end and on December
24) below 50% from January through March of each year, 65% from April to July of
each year, 70% from August through  November of each year and 35% in December of
each year. ZBCI may not permit the ratio of purchases to costs of goods sold (on
a trailing three month basis tested at month end beginning November 30, 2001) to
be less than 0.30:1.00 from January through May of each year, 0.70:1.00 for June
of each year, 1.00:1.00 for July and November of each year, 1.25:1.00 for August
and September of each year, 1.35:1.00 for October of each year and 0.50:1.00 for
December  of each  year.  ZBCI must  maintain a minimum  availability  under the
standard revolving line of not less than $3 million while the special subline is
in  effect  and $5  million  thereafter.  ZBCI  must  maintain  a cost  value of
inventory  that is within  15% of ZBCI's  business  plan at all  times.  ZBCI is
required  to reduce  outstanding  advances  under the  special  subline  to $7.5
million from December 26 through April 30 of the following  year and to maintain

                                       14
<PAGE>

special  subline  advances  equal to or exceeding $10 million from May 1 through
December 24 of each year until the special subline is terminated.

     During the first half of Fiscal 2001,  operating  activities generated $2.1
million of cash  compared  to using $0.4  million  in the  comparable  period of
Fiscal 2000. In the current year,  investing  activity consisted of $1.3 million
for fixed asset additions compared to $1.1 million for fixed asset additions for
the prior year.  Operations provided the primary source of funds for the current
period.

     Since  Fiscal  1997,  our retail  store  operating  strategy has focused on
opening and operating new retail stores at street locations,  while closing less
profitable  retail stores at mall locations.  We will make capital  expenditures
during the  upcoming  fiscal year  primarily  in order to  continue  our plan of
opening  street-location  stores.  We  currently  plan to open a total of 10 new
stores in Fiscal  2001 (of which we have  already  opened  eight)  and to expend
approximately  $125,000 on fixed  assets,  $25,000 on  pre-opening  expenses and
$50,000,  net of payables,  on inventory for each new store. Our ability to fund
our  operations,  open new stores and maintain  compliance  with the Right Start
Credit  Facility is  dependent on our ability to generate  sufficient  cash flow
from operations and secure other  financing such as capital leases.  We reported
operating  losses  related to retail  store  operations  for Fiscal 2000 of $3.0
million,  for Fiscal 1999 of $3.3  million and for Fiscal 1998 of $2.3  million.
During an  economic  downturn  we expect to see  reduced  sales at our  existing
stores with our mall stores  experiencing the largest impact.  As a result,  the
rate at which we can  execute our growth plan will depend on the extent to which
we can improve  operating  results in the existing retail  environment and bring
our new stores up to  expected  sales  rates.  We  continually  look for ways to
increase  inventory  turnover,  obtain better  payment terms from  suppliers and
otherwise  improve our operations to accomplish these goals. We also continually
consider our  financing  alternatives  and monitor the success of our efforts to
improve operating results in determining the rate at which we execute our growth
strategy.

     We do not plan to open new Zany Brainy stores until next year. In addition,
we expect to put Right Start  boutiques in ZBCI stores,  but not until next year
at which time we will evaluate the availability of funds for these activities.

     The  Company's   Series  A  Mandatorily   Redeemable   Preferred  Stock  is
mandatorily  redeemable  at its $3.0 million  liquidation  preference on May 31,
2002,  to the extent funds are legally  available.  In addition,  the holders of
such stock have notified the Company that they believe the investments  received
by the Company in order to accomplish the Zany  Acquisition  require a mandatory
redemption.  The Company does not believe that mandatory redemption currently is
required  and  believes  that it would be able,  if  required,  to  accomplish a
redemption without impacting its liquidity by raising additional capital.  There
can be no assurance, however, that such additional capital would be available on
terms favorable to the Company at such time.

     We believe that cash flow from  operations and  borrowings  under the Right
Start  Credit  Facility  and the ZB  Credit  Facility  will  provide  sufficient
liquidity to fund  operations for at least the next twelve months.  If, however,
we were to pursue our growth strategy too aggressively, experience a significant
decrease in cash flow from  operations or be unable to obtain  expected  capital
lease financings, we may be required to obtain additional financing.

     In May 2001, the Company  received notice from Nasdaq that it had failed to
evidence  a market  value of public  float of at least $5.0  million  for thirty
consecutive  trading days.  Nasdaq informed the Company that it had until August
15, 2001, to regain  compliance for not less than ten consecutive  trading days.
Given the Company's  current  public float,  the closing bid price of its common
stock was  required to remain above  approximately  $1.68 per share to meet this
compliance  standard.  Failure  would  result  in a  transfer  of the  Company's
securities to the Nasdaq SmallCap Market or delisting.

     In June 2001, the Company received notice from Nasdaq that it had failed to
maintain the minimum  listing  standard of $4.0 million in net worth for issuers
listed as of May 1, 2001 and would be required to have  shareholders'  equity of
$10.0  million  by  November  2002.  The  Company  informed  Nasdaq  of the Zany
Acquisition and that a potential  combination  would result in a combined entity
with  substantially  more net worth than the requisite minimum listing standard.
In August 2001, the Company received notice from Nasdaq that its stock was to be
delisted  as a result  of not  meeting  each of the two  aforementioned  minimum
listing standards.  The Company has appealed the Nasdaq staff's determination by
requesting  a hearing.  As a result of such appeal,  the  delisting of Company's
securities is stayed pending a decision by a Nasdaq Listing Qualifications Panel
at or after a hearing  scheduled for October 5, 2001.  There can be no assurance
the Panel  will grant the  Company's  request  for  continued  listing,  but the
Company will inform the Panel of the completion of the Zany  Acquisition and the
positive   effect  on  the  Company's  net  worth  and   shareholders'   equity.
Additionally,  the Company has  informed  the Panel that it regained  compliance
with the minimum  market value of public  float on July 11,  2001,  and that its
stock price has continued to remain above the minimum bid price  throughout  the
month of August.

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     Should the Common Stock be delisted by Nasdaq,  it could be more  difficult
or more expensive to raise additional capital.

     On September 5, 2001, ZBCI completed the acquisition of  substantially  all
of the assets of Zany, including 187 retail stores in 34 states,  through a sale
of assets and assignment of liabilities  pursuant to sections 363 and 365 of the
U.S. Bankruptcy Code. As consideration,  ZBCI agreed to pay the following:  $7.5
million in cash plus 1.1 million  shares of Common  Stock to the Zany estate for
the benefit of the  unsecured  creditors  (the cash  portion to be paid in three
equal installments on December 15, 2001,  February 15, 2002 and April 15, 2002);
$63.8 million (excluding renewed letters of credit) to the Zany Brainy, Inc. DIP
lender paid at the closing  from the  proceeds of the ZB Credit  Facility;  $2.1
million  paid at the  closing  into an  escrow  for  Zany  management  retention
bonuses;  and  certain  lesser  amounts  and $4.2  million  which was  offset by
payments due to investors.  Additionally, ZBCI assumed certain other liabilities
estimated at $26 million consisting of post-petition trade payables,  settlement
amounts,  bankruptcy-related professional fees, sales and payroll taxes, accrued
salaries and employee  benefit  obligations and customer gift  certificates  and
merchandise credits. In addition to the investments discussed below, the Company
financed the Zany Acquisition through the ZB Credit Facility.  The Company plans
to maintain both the Zany and Right Start stores as separate and distinct brands
although the two brands are expected to share physical  space where  appropriate
and as permitted by the relevant leases.

     In order to fund the Zany  Acquisition,  the Company  issued  approximately
11,919 shares of its Series E Preferred Stock to Athanor and 2,200 shares of its
Series G Preferred Stock to certain KAIM investment affiliates for approximately
$11.9 million and $5.5 million,  respectively.  The Series E Preferred  Stock is
convertible, upon approval by the Company's shareholders,  into 8,334,836 shares
of the Company's  Common Stock, at an imputed price of $1.43 per share,  and the
Series  G  Preferred  Stock  is  convertible,  upon  approval  by the  Company's
shareholders, into 2,200,000 shares of Common Stock at an imputed price of $2.50
per share.  Additionally,  Athanor purchased $4.9 million in aggregate principal
amount of the Junior Notes.  The Athanor  investment,  if and when  converted to
Common Stock, represents  approximately 40.5% of the fully diluted shares of the
Company  before giving effect to employee and director  stock  options.  Under a
stockholders'  agreement between KAIM investment  affiliates and Athanor and the
investment  agreement between the Company and Athanor,  Athanor has the right to
name three  members to the Company's  Board of  Directors,  one of whom is to be
considered  "independent."  The  stockholders'  agreement also requires the KAIM
investment  affiliates  and Mr. Fred Kayne convert all of their  holdings in the
Company's  Senior  Subordinated  Notes and the  Company's  Series B  Convertible
Preferred Stock,  Series C Convertible  Preferred Stock and Series D Pay-in-Kind
Convertible  Preferred Stock to Common Stock at the time that sufficient  common
shares have been  authorized,  and the  conversion  feature on the  newly-issued
preferred  stock and Junior  Notes has been  approved  by vote of the  Company's
common shareholders and to vote their securities in favor of such matters.

     In addition,  the Athanor  investment  agreement  required that the Company
acquire  from  Targoff-RS,  LLC the assets it  acquired  in the  foreclosure  on
RightStart.com  including  the  online  business  and the  Right  Start  catalog
business (See Note 2). These assets were acquired at a price of $4.0 million for
1,800 shares of Series F  Convertible  Preferred  Stock.  The Series F Preferred
Stock is convertible  into 1,800,000  shares of Common Stock at an imputed price
of $2.22 per share.

Impact of Inflation

     The  impact  of  inflation  on the  results  of  operations  has  not  been
significant during our last three fiscal years.

Seasonality

     Our business is not  significantly  impacted by seasonal  fluctuations when
compared to many other  specialty  retail  operations.  Our products are for the
most part  need-driven and our customer is often the end user of the products we
sell as opposed to a gift giver.  We do,  however,  experience  increased  sales
during the Christmas  holiday season,  primarily in our mall stores. As a result
of the Zany  Acquisition  we expect our  business to become  seasonal.  The Zany
business  is  highly  seasonal  and over 40% of the  associated  revenue  can be
expected to be received in the fourth  quarter of Fiscal 2001.  As a result,  we
expect to increase levels of inventory through the month of November in order to
meet seasonal requirements.

Other Matters

New Accounting Requirements

     In June 1998, the Financial  Accounting Standards Board (the "FASB") issued
Statement  of Financial  Accounting  Standards  ("SFAS")  133,  "Accounting  for
Derivative Instruments and Hedging Activities," effective beginning in the first
quarter of 2000.  SFAS 133  establishes  accounting and reporting  standards for

                                       16
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derivative  instruments,  including certain derivative  instruments  embedded in
other contracts, and for hedging activities.  It requires companies to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those  instruments at fair value.  SFAS 133 was amended by SFAS 137 which defers
the  effective  date of the SFAS 133 to all  fiscal  quarters  of  fiscal  years
beginning  after June 15, 2000.  SFAS 133 became  effective for our first fiscal
quarter  in the year 2001 and did not have a  material  effect on the  Company's
financial position.

     In April 2001,  the  Emerging  Issues  Task Force (the  "EITF") of the FASB
reached  a  consensus  on  issue  No.  00-14,   "Accounting  for  Certain  Sales
Incentives,"  which  requires  the cost of  certain  sales  incentives,  such as
coupons,  to be classified as a reduction of revenue.  The Company's policy with
respect to coupons  complies  with EITF No.  00-14 and,  therefore,  it does not
anticipate any impact on its financial statements.

     In June 2001, the FASB issued two new  pronouncements:  SFAS 141, "Business
Combinations"  and SFAS 142,  "Goodwill and Other  Intangible  Assets." SFAS 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations   initiated   after  June  30,   2001  and  that  the  use  of  the
pooling-of-interests  method is no longer permitted. SFAS 142 requires that upon
adoption,  amortization of goodwill will cease and instead the carrying value of
goodwill will be evaluated for  impairment at least  annually using a fair value
test. Other  identifiable  intangible  assets will continue to be amortized over
their useful lives and reviewed at least annually for impairment  using a method
appropriate to the nature of the intangible  asset.  The Company was required to
implement  SFAS 141 on July 1,  2001 and SFAS 142 at the  beginning  of its next
fiscal year, February 3, 2002. The Company is currently evaluating the impact of
the adoption of these  standards and has not yet determined the effect,  if any,
that  their  adoption  will  have  on  its  financial  position  or  results  of
operations.


           Quantitative and Qualitative Disclosures About Market Risk

     In the ordinary  course of operations,  we face no significant  market risk
from derivative instruments.  Our purchase of imported products subjects us to a
minimum  amount of foreign  currency  risk.  Foreign  currency risk is that risk
associated with recurring transactions with foreign companies, such as purchases
of goods from foreign vendors.  If the strength of foreign currencies  increases
compared  to the United  States  dollar,  the price of imported  products  could
increase.  We have no commitments,  however,  for future  purchases with foreign
vendors  and,  additionally,  we  have  the  ability  to  source  many  products
domestically in the event of significant import price increases.

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations -- Liquidity and Capital Resources" above for a discussion
of our debt  obligations,  the  interest  rates of which are linked to the prime
rate.  For every $1 million in debt  outstanding  under the Right  Start  Credit
Facility or the ZB Credit  Facility,  an increase of 0.25% in our interest would
cost us an additional  $25,000 per year. We have not entered into any derivative
financial  instruments  to  manage  interest  rate  risk,  currency  risk or for
speculative purposes and we are currently not evaluating the future use of these
instruments.


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                                     PART II

                                OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

         The Company filed no reports on Form 8-K in the quarter.


The following exhibits of The Right Start, Inc. are included herein:


Exhibit Number

         No exhibits to be filed.






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                                   SIGNATURES

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


                              THE RIGHT START, INC.



Date:  September 14, 2001                      /s/ Jerry R. Welch
                                               -------------------
                                                       Jerry Welch
                                           Chief Executive Officer


Date:  September 14, 2001                  /s/ Raymond P. Springer
                                           -----------------------
                                               Raymond P. Springer
                                           Chief Financial Officer




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