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 November 3, 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 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 December 11, 2001: 10,605,309 shares.


<PAGE>


                                        2

                              THE RIGHT START, INC.

                               INDEX TO FORM 10-Q
                  FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS
                             ENDED NOVEMBER 3, 2001




                         PART I - FINANCIAL INFORMATION


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


Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                 15


Item 3.   Quantitative and Qualitative Disclosures About Market Risk          27



                           PART II - OTHER INFORMATION


Item 6.   Exhibits and Reports on Form 8-K                                    28


SIGNATURES                                                                    29




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

                                                                            November 3, 2001        February 3, 2001
                                        ASSETS                                 (unaudited)

Current assets:
<S>                                                                         <C>                   <C>
     Cash and cash equivalents                                              $       3,859,000     $          254,000
     Accounts and other  receivables, net of allowance for doubtful                                                -
        accounts of $6,000 and $400,000, respectively                               5,607,000                552,000
     Merchandise inventories                                                      141,232,000              9,784,000
     Prepaid catalog costs                                                            322,000                      -
     Other current assets                                                          11,968,000              1,160,000
                                                                            ------------------    -------------------
         Total current assets                                                     162,988,000             11,750,000

Noncurrent assets:
     Property, plant and equipment, net                                            20,959,000              8,907,000
     Deferred income tax asset                                                      1,400,000              1,400,000
     Acquisition costs                                                                263,000                      -
     Goodwill, net                                                                  3,681,000                      -
     Deferred non-cash interest on junior
     subordinated pay-in-kind notes                                                 4,083,000                      -
     Other noncurrent assets                                                        1,908,000                177,000
                                                                            ------------------    -------------------

                                                                            $     195,282,000     $       22,234,000
                                                                            ==================    ===================


                         LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable                                                       $      31,897,000     $        3,534,000
     Accrued expenses                                                              12,638,000              1,624,000
     Accrued salaries and bonuses                                                   5,639,000                479,000
     Note payable                                                                   7,500,000                      -
     Current portion of long term debt                                              1,166,000                      -
     Mandatorily redeemable preferred stock Series A,
      $3,000,000 redemption value; due March 2002                                   2,740,000                      -
                                                                            ------------------    -------------------
         Total current liabilities                                                 61,580,000              5,637,000

Revolving lines of credit                                                         101,197,000              4,945,000
Senior subordinated convertible pay-in-kind notes                                                          3,000,000
Junior subordinated convertible pay-in-kind notes                                   4,900,000                      -
Deferred rent                                                                       1,513,000              1,489,000
Lease obligation                                                                    1,634,000                      -

Commitments and contingencies

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

Shareholders' equity:
  Convertible preferred stock, $0.01 par,
   25,000,000 authorized:
     Series B; 16,500 issued and outstanding, $100 liquidation preference           1,547,000              1,547,000
     Series C; 37,333 issued and outstanding, $100 liquidation preference           3,733,000              3,733,000
     Series D; 46,696 issued and outstanding, $100 liquidation preference           4,225,000              4,045,000
     Series E; 11,919 issued and outstanding, $1,000 liquidation preference        11,919,000                      -
     Series F; 1,800  issued and outstanding, $0.01 liquidation preference          3,996,000                      -
     Series G; 2,200  issued and outstanding, $2,500 liquidation preference         5,500,000                      -

     Common stock 25,000,000 shares authorized
         at no par value; 8,058,981  issued and outstanding                        22,730,000             22,730,000
     Paid in capital                                                               47,733,000             17,000,000
     Accumulated deficit                                                          (76,925,000)           (44,331,000)
                                                                            ------------------    -------------------

         Total shareholders' equity                                                24,458,000              4,724,000
                                                                            ------------------    -------------------

                                                                            $     195,282,000     $       22,234,000
                                                                            ==================    ===================

See accompanying notes to financial statements
</TABLE>

                                        3



<PAGE>
<TABLE>
<CAPTION>
                                           THE RIGHT START, INC. AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                                        (unaudited)



                                                                                      Thirteen weeks ended
                                                                      ------------------------------------------------------
                                                                             November 3, 2001              October 28, 2000
Net sales:
<S>                                                                   <C>                           <C>
       Retail                                                         $             57,150,000      $             9,865,000
       Direct to customer                                                            1,009,000                            -
       Shipping and handling revenues                                                  194,000                            -
       Sales to Targoff-RS, LLC                                                        265,000                            -
       Sales to RightStart.com Inc.                                                          -                    1,997,000
                                                                      ------------------------      -----------------------
                                                                                    58,618,000                   11,862,000
                                                                      ------------------------      -----------------------

Costs and expenses:
       Cost of goods sold                                                           33,421,000                    4,986,000
       Cost of shipping and handling                                                   263,000                            -
       Cost of goods sold to Targoff-RS, LLC                                           265,000                            -
       Cost of goods sold to RightStart.com                                                  -                    1,997,000
       Operating expense, includes non-cash compensation of
           $2,000, $66,000, $37,000 and $84,000 respectively                        26,039,000                    4,260,000
       Marketing and advertising expense                                               792,000                      194,000
       General and administrative expense                                            4,342,000                      956,000
       Pre-opening costs                                                                77,000                      117,000
       Depreciation and amortization expense                                         1,088,000                      541,000
       Store closing expense                                                            35,000                       46,000
                                                                      ------------------------      -----------------------
                                                                                    66,322,000                   13,097,000
                                                                      ------------------------      -----------------------
Operating loss                                                                      (7,704,000)                  (1,235,000)

Loss (gain) on investment in RightStart.com                                                  -                   (2,554,000)
Non-cash interest expense                                                              817,000                            -
Interest expense, net                                                                1,402,000                      293,000
                                                                      ------------------------      -----------------------

Income (loss) before income taxes                                                   (9,923,000)                   1,026,000
Income tax provision                                                                    12,000                       19,000
                                                                      ------------------------      -----------------------

Net income (loss)                                                     $             (9,935,000)     $             1,007,000
                                                                      =========================     ========================


Basic income (loss) per share:                                        $                  (4.07)     $                  0.16
                                                                      =========================     ========================

Basic weighted average number of shares
     outstanding                                                                     7,260,798                    5,615,435
                                                                      =========================     ========================

Diluted income (loss) per share:                                      $                  (4.07)     $                  0.15
                                                                      =========================     ========================

Diluted weighted average number of shares
     outstanding                                                                     7,260,798                    6,496,024
                                                                      =========================     ========================


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



                                                                                              Thirty-nine weeks ended
                                                                              ------------------------------------------------------
                                                                              November 3, 2001              October 28, 2000
Net sales:
       Retail                                                            $             80,187,000      $               30,951,000

       Direct to customer                                                               1,009,000                               -
       Shipping and handling revenues                                                     194,000                               -
       Sales to Targoff-RS, LLC                                                           265,000                               -
       Sales to RightStart.com Inc.                                                     3,207,000                       7,114,000
                                                                          ------------------------      --------------------------
                                                                                       84,862,000                      38,065,000
                                                                         ------------------------      --------------------------



Costs and expenses:
       Cost of goods sold                                                               45,261,000                     15,533,000
       Cost of shipping and handling                                                       263,000                              -
       Cost of goods sold to Targoff-RS, LLC                                               265,000                              -
       Cost of goods sold to RightStart.com                                              3,207,000                      7,114,000
       Operating expense, includes non-cash compensation of
           $2,000, $66,000, $37,000 and $84,000 respectively                            35,597,000                     12,512,000
       Marketing and advertising expense                                                 1,053,000                        673,000
       General and administrative expense                                                6,470,000                      2,867,000
       Pre-opening costs                                                                   260,000                        318,000
       Depreciation and amortization expense                                             2,378,000                      1,590,000
       Store closing expense                                                                35,000                        387,000
                                                                         ------------------------      --------------------------
                                                                                        94,789,000                     40,994,000
                                                                         ------------------------      --------------------------
Operating loss                                                                          (9,927,000)                    (2,929,000)

Loss (gain) on investment in RightStart.com                                                      -                      3,406,000
Non-cash interest expense                                                                  817,000                              -
Interest expense, net                                                                    1,820,000                        850,000
                                                                         ------------------------      --------------------------

Income (loss) before income taxes                                                       (12,564,000)                   (7,185,000)
Income tax provision                                                                         37,000                        58,000
                                                                         ------------------------      --------------------------

Net income (loss)                                                          $            (12,601,000)     $             (7,243,000)
                                                                            =========================     ==========================


Basic income (loss) per share:                                            $                  (5.29)     $                    (1.35)
                                                                            =========================     ==========================

Basic weighted average number of shares
     outstanding                                                                         6,165,116                       5,590,822
                                                                            =========================     ==========================

Diluted income (loss) per share:                                         $                  (5.29)     $                    (1.35)
                                                                            =========================     ==========================

Diluted weighted average number of shares
     outstanding                                                                          6,165,116                       5,590,822
                                                                            =========================     ==========================



See accompanying notes to financial statements


</TABLE>
                                       4
<PAGE>

<TABLE>
<CAPTION>
                                           THE RIGHT START, INC. AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                           Thirty-nine weeks ended
                                                                                  ------------------------------------------
                                                                                  November 3, 2001         October 28, 2000
                                                                                     (unaudited)             (unaudited)
Cash flows from operating activities:
<S>                                                                               <C>                       <C>
       Net loss                                                                   $      (12,601,000)       $    (7,243,000)
       Adjustments to reconcile net loss
         to net cash provided by (used in) operating activities:
           Depreciation and amortization                                                   2,378,000              1,590,000
           Amortization of debt issuance costs                                                     -                 75,000
           Non-cash compensation                                                              37,000                 84,000
           Non-cash interest related to junior subordinated pay-in-kind notes                817,000                      -
           Store closing expense                                                               8,000                205,000
           Loss on investment in RightStart.com                                                    -              3,406,000
           Change in assets and liabilities affecting operations, net                    (35,453,000)            (2,117,000)
                                                                                  -------------------      -----------------

               Net cash used in operating activities                                     (44,814,000)            (4,000,000)
                                                                                  -------------------      -----------------

Cash flows from investing activities:
       Additions to property, plant and equipment                                         (1,913,000)            (1,296,000)
       Investment in Zany Brainy, net of cash acquired                                   (14,678,000)                     -
       Contingent purchase price adjustment                                                 (200,000)                     -
       Loss on investment in RightStart.com                                                        -             (3,406,000)
                                                                                  -------------------      -----------------

               Net cash used in investing activities                                     (16,791,000)            (4,702,000)
                                                                                  -------------------      -----------------

Cash flows from financing activities:
       Net borrowings (payments) on revolving lines of credit and overdrafts              43,781,000             (2,259,000)
       Payments on term note payable                                                               -             (1,600,000)
       Payments on capital leases and notes payable                                         (200,000)
       Proceeds from sale of  senior subordinated convertible pay-in-kind notes                    -              3,000,000
       Proceeds from private placement of Series D preferred stock
          and warrants, net                                                                        -              4,484,000
       Proceeds from the issuance of Series E and G preferred stock                       17,419,000
       Proceeds from sale of  junior subordinated convertible pay-in-kind notes            4,900,000                      -
       Proceeds from common stock issued upon exercise of stock options                            -                137,000
       Payment on financing costs                                                           (690,000)
                                                                                  -------------------      -----------------

               Net cash provided by (used in) financing activities                        65,210,000              3,762,000
                                                                                  -------------------      -----------------


Net increase (decrease) in cash and cash equivalents                                       3,605,000             (4,940,000)
Cash and cash equivalents at beginning of period                                             254,000              5,199,000
                                                                                  -------------------      -----------------

Cash and cash equivalents at end of period                                        $        3,859,000        $       259,000
                                                                                  ===================      =================



See accompanying notes to financial statements
</TABLE>


                                       5
<PAGE>






                              THE RIGHT START, INC.
                   NOTES TO CONSOLIDATED 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  up to age 12 through the
purchase by its wholly-owned  subsidiary ZB Company,  Inc. ("ZBCI") on September
5, 2001 of substantially all of the assets and assumption of certain liabilities
of Zany Brainy, Inc. and its affiliates (the "ZB Acquisition"). In addition, the
Company has agreed to purchase (the "FAO Acquisition") certain assets and assume
certain  liabilities  of F.A.O.  Schwarz and its online and  catalog  affiliate,
Quality Fulfillment Services, Inc. (collectively,  "FAO") on or about January 6,
2002 but not later than January 31, 2002 (see Note 14).

     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  consolidated  financial  statements as of November 3,
2001 and for the thirteen and thirty-nine 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 consolidated 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  thirty-nine  week  periods  ended
November 3, 2001 are not  indicative of the results that may be expected for the
year ending February 2, 2002 ("Fiscal 2001") because they include the results of
only two  months of Zany  Brainy  store  operations  and Right  Start  direct to
customer operations  (acquisition to date) and no results for FAO. Further,  the
Zany  Brainy  business  is highly  seasonal  and its  fourth  quarter  typically
accounts for over 40% of its annual sales.


NOTE 2:  Investment in RightStart.com Inc.

     During   the  third   quarter   of   Fiscal   2000,   RightStart.com   Inc.
("RightStart.com"), the Company's direct-to-customer 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  thirty-nine
weeks ended October 28, 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  thirty-nine  weeks ended  October 28, 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  collateral  securing  their  notes.  This
foreclosure took place on August 3, 2001, and all assets of RightStart.com  were
sold to Targoff-RS, LLC, an entity newly-formed by the purchaser to acquire such
assets.  At the  time of the  foreclosure,  the  Company's  investment  had been
effectively  written off. As a result of the  foreclosure,  accounts  receivable
from RightStart.com in the amount of $655,000,  which were fully reserved,  were
deemed uncollectable and written off.

     As a  required  condition  to an  equity  investment  used to  fund  the ZB
Acquisition  (the "Athanor  Investment") in September 2001, the Company acquired
Targoff-RS,  LLC (the "Targoff  Acquisition")  in exchange for  preferred  stock
convertible into 1,800,000 shares of the Company's common stock,  subject to the
approval  of its  shareholders  (see Note  11-"Zany  Brainy  Acquisition").  The
Internet and catalog operations previously held by Targoff-RS,  LLC (the "Direct
to Customer  Operations")  are included in the  Company's  results of operations
from September 5, 2001 through November 3, 2001.


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
loss available to common  shareholders  plus proceeds  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.
<TABLE>
<CAPTION>

                                           Thirteen weeks ended                 Thirty-nine weeks ended
                                           --------------------                 -----------------------
                                    November 3, 2001    October 28, 2000   November 3, 2001    October 28, 2000
                                    ----------------    ----------------   ----------------    ----------------

<S>                                <C>                  <C>              <C>                  <C>
Net income (loss)                  $   (9,935,000)      $   1,007,000    $   (12,601,000)     $   (7,243,000)
Less:  Preferred stock
  accretion                              (104,000)            (89,000)          (301,000)           (258,000)
  Beneficial conversion
    feature on Series E, F
    and G preferred stock             (19,423,000)                  -        (19,423,000)                  -
  Series D preferred
   dividends                              (90,000)            (20,000)          (269,000)            (20,000)
                                   --------------       -------------    ---------------      --------------
Basic income (loss)
  applicable to common
  shareholders                    $   (29,552,000)      $     898,000     $  (32,594,000)     $   (7,521,000)
                                      ============            =======        ============         ===========
Weighted average shares,
  basic                                 7,260,798           5,615,435          6,165,116           5,590,822
Income (loss) per share,
      basic                       $         (4.07)      $        0.16     $        (5.29)     $        (1.35)
Basic income (loss)
  applicable to common
  shareholders                    $   (29,552,000)       $    898,000     $  (32,594,000)     $   (7,521,000)
Plus:  Interest on
      pay-in-kind notes                         -              28,000                  -                   -

  Preferred stock dividend                      -              20,000                  -                   -
                                   --------------       -------------    ---------------      --------------
Basic and diluted loss
  applicable to common
  shareholders                    $   (29,552,000)        $   946,000     $  (32,594,000)     $   (7,521,000)
                                      ============            =======        ============         ===========
Weighted average shares,
  basic                                 7,260,798           5,615,435          6,165,116           5,590,822
Plus incremental shares from
  assumed conversions:                          -                                      -                   -
    Options                                     -               5,530                  -                   -
    Series D Preferred Stock                    -             542,747                  -                   -
    Warrants                                    -              26,933                  -                   -
    Pay-in-kind notes                           -             305,379                  -                   -
                                   --------------       -------------    ---------------      --------------
Weighted average shares,
  diluted                               7,260,798          6,496,024           6,165,116           5,590,822
Loss per share, basic and
  diluted                          $        (4.07)      $       0.15       $       (5.29)     $        (1.35)

</TABLE>

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

                                -----------------------------------------------
                                         Common Stock Equivalents at:
                                --------------------- -------------------------
Securities                        November 3, 2001        October 28, 2000
----------                        ----------------        ----------------
Options                               5,183,125               1,050,442
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               1,702,253
Series E Preferred Stock              8,334,836                       -
Series F Preferred Stock              1,800,000                       -
Series G Preferred Stock              2,200,000                       -
Warrants                                479,000                 422,067
Convertible Senior Notes                      -                 957,779
Convertible Junior Notes              3,426,573                   -


NOTE 4:  Supplemental Disclosure of Cash Flow Information

         Interest paid amounted to $1,609,000 and $546,000 for the thirty-nine
weeks ended November 3, 2001 and October 28, 2000, respectively. Cash paid for
income taxes was $18,000 and $8,000 for the thirty-nine weeks ended November 3,
2001 and October 28, 2000, respectively.


Changes in assets and liabilities which increased (decreased) cash are as
follows:
<TABLE>
<CAPTION>

                                                                         Thirty-nine weeks ended
                                                              -----------------------------------------------
<S>                                                               <C>                      <C>
                                                                     November 3, 2001       October 28, 2000
Accounts and other receivables                                     $     (3,632,000)         $    (706,000)
Merchandise inventories                                                 (35,660,000)            (2,938,000)
Prepaid catalog costs                                                      (316,000)                     -
Other current assets                                                     (5,370,000)              (215,000)
Acquisition costs                                                          (263,000)                     -
Other noncurrent assets                                                    (339,000)               (38,000)
Accounts payable                                                          9,887,000              2,009,000
Accrued expenses                                                         (1,173,000)              (268,000)
Accrued salaries and bonuses                                              1,389,000                (31,000)
Deferred rent                                                                24,000                 70,000
                                                                    ---------------             ----------
                                                                    $   (35,453,000)        $   (2,117,000)

                                                                        ===========              ==========
</TABLE>

Non-cash investing and financing activities:
<TABLE>
<CAPTION>

                                                                          Thirty-nine weeks ended
                                                                   ---------------------------------------
<S>                                                                <C>                  <C>

                                                                     November 3, 2001    October 28, 2000
Conversion of Series B preferred stock to common stock                   $   -            $ 328,000
Conversion of Series C preferred stock to common stock                       -              117,000
Conversion of senior subordinated convertible pay-in-kind notes         3,187,000               -
Preferred dividend accretion                                              301,000           258,000
Issuance of warrants                                                         -               70,000
Issuance of common stock in connection with ZB Acquisition              3,245,000               -
Issuance of Series F preferred stock in connection with Targoff
Acquisition                                                             3,996,000               -
Accrued expenses for store closures                                          -               50,000
Deferred rent reduction for store closures                                   -               50,000
Dividends issued on Series D preferred stock                              180,000
Preferred dividend payable                                                 89,000           439,000
Notes issued for interest due on senior subordinated convertible
  pay-in-kind notes                                                       120,000              -

</TABLE>

See Note 11 for additional disclosure related to the ZB Acquisition and the
Targoff Acquisition.

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 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  adopted SFAS 141 effective July 1,
2001. The Company is currently  evaluating the impact of the adoption of SFS 142
and has not yet  determined  the effect,  if any, that its adoption will have on
its financial position or results of operations.

     In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets,"  which  is  effective  for the  fiscal  years
beginning after December 15, 2001 and interim periods within those fiscal years.
SFAS  144  establishes  an  accounting  model  for  impairment  or  disposal  of
long-lived assets to be disposed of by sale. The Company plans to adopt SFAS 144
on February 3, 2002. The Company believes the adoption of this standard will not
have a material impact 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 ZB  Acquisition
triggered  the  mandatory  redemption  provisions  related to the receipt of net
proceeds  from an equity  issuance.  The Company  informed  the holders  that it
disagreed with their position. In settlement of the disagreement between the two
parties, the Company has agreed to redeem the Series A preferred shares no later
than  March  31,  2002.  (See  Liquidity  and  Capital   Resources  for  further
discussion).


NOTE 7:  Segment Information

     At November  3, 2001,  the Company  operated  in two  reportable  segments;
Direct-to-customer,  which includes online and catalog  operations,  and Retail,
which includes  activities related to the Company's retail stores. Both segments
sell  products to meet the needs of the  parents of infants and small  children.
Through the ZB Acquisition  the Retail  segment also sells products  directed to
older  children  through age twelve.  Beginning in November 2001, ZBCI   will
also  engage  in  Direct-to-customer  sales  with  the  relaunch  of its  online
operations.  Prior to the Targoff Acquisition,  the Company operated in only one
reportable segment, Retail.

     The accounting  policies of the segments are the same as those described in
the  summary  of  significant   accounting   policies.   The  Company  evaluates
performance based on profit or loss from operations before income taxes.

     The Company  allocates  costs for certain  services  provided by the Retail
segment to the Direct-to-customer segment.

     The Company's  reportable  segments have  operations that offer the same or
similar products but have a different method of delivery to their customers.

     Segment  information  for the thirteen  weeks ended  November 3, 2001 is as
follows  (Direct-to-customer  operations  reflect  activity  for  September  and
October only):

                                   Total
                             Direct-to-Customers      Retail          Total

 Net sales                         $1,203,000        $57,150,000    $58,353,000
 Interest expense                           -          1,402,000      1,402,000
 Depreciation                          46,000          1,042,000      1,088,000
 Non-cash compensation                      -              2,000          2,000
 Pre-opening costs                          -             77,000         77,000
 Store Closing Expense                      -             35,000         35,000
 Pre-tax income (loss)                (37,000)        (9,886,000)    (9,923,000)
 Total assets                         820,000        194,462,000    195,282,000
 Fixed asset additions                      -          1,913,000      1,913,000



NOTE 8: Operating Results and Risks

     Historically,  the  Company  has  incurred  losses,  though it  expects  to
generate  sufficient  operating income in the fourth quarter to offset operating
losses  incurred  during the first three  quarters of Fiscal  2001.  The Company
believes  that its  current  cash on hand at  November  3, 2001,  cash flow from
operations,  its working  capital  facility and the $115 million credit facility
entered into by ZBCI (See NOTE 11-"Zany  Brainy  Acquisition")  will allow it to
maintain its operations,  fund working capital and capital  expenditures for the
current fiscal year and Fiscal 2002. The Company's needs for additional  funding
will depend upon  several  factors,  including,  but not limited to,  generating
sufficient cash flow from  operations,  the expenses or savings from integration
of Zany Brainy,  Inc. and its affiliates  (collectively,  "Zany Brainy") and FAO
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.
Assuming the FAO  Acquisition  is completed as planned,  the Company  expects to
enter into a  temporary  credit  facility  to provide  working  capital  for the
business of FAO and replace that facility with a new credit  facility to provide
working capital for the business of Right Start, FAO and Zany Brainy.  There can
be no assurance given that these credit facilities will be available as expected
or otherwise on acceptable terms.


NOTE 9:  Related Party Transactions

     Through July 2001, Kayne Anderson Investment Management, Inc. ("KAIM"), the
general partner of Kayne Anderson  Capital  Advisors L.P.  ("KACALP"),  provided
certain  management  services  to the  Company  and charged the Company for such
services.  Management  fees of  $75,000  and  $113,000  were paid to KAIM in the
thirty-nine  weeks ended  November 3, 2001 and October 28,  2000,  respectively.
KAIM and Mr. Fred Kayne are directly or  indirectly,  substantial  shareholders.
Mr. Ric Kayne,  who shares voting and  dispositive  power over the shares of the
Company held directly or indirectly by KAIM, and Mr. Fred Kayne are brothers and
directors of the Company.


     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 fees for Basic  Services  rendered
under this agreement for the  thirty-nine  weeks ended November 3, 2001 amounted
to  $592,000;  for the same  period in the Fiscal  2000 these fees  amounted  to
$289,000  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.  The fees for those services amounted to
$85,000  in the month of  August,  2001.  On  September  5,  2001,  the  Company
purchased Targoff-RS, LLC and recognized no further fees for these services.

     On November  13,  2001 KAIM  affiliates  and Mr.  Fred Kayne  provided a $5
million  letter of credit to Wells Fargo  Retail  Finance,  LLC (the  "Bank") in
connection  with the credit  facility the Bank, as agent,  provides to ZBCI. The
letter  of credit  may be drawn  upon only if ZBCI  defaults  under the  minimum
availability  requirements of the Loan and Security Agreement and must be drawn,
if at all, on or before December 27, 2001. In exchange,  such affiliates and Mr.
Kayne received  warrants  exercisable  for an aggregate of 100,000 shares of the
Company's common stock at a price of $3.50 per share. Such persons also received
notes in the aggregate  maximum principal amount of $5 million that pay interest
at 8% per annum and mature  one year  beginning,  in each case,  at such time as
Wells draws on the letter of credit.  The outstanding  principal  amount on such
notes at any time,  if any,  will equal the amount so drawn.  The  Company  will
record a one-time non cash interest  charge of $200,000 in the fourth quarter of
this fiscal year related to the warrants issued.


NOTE 10:  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. 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 ZB  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 was informed by the Nasdaq
in a letter dated October 17, 2001 that it had regained  compliance with each of
the listing  standards and the hearing file  regarding the Company's  compliance
with the continued listing requirements would be closed.


NOTE 11:  Acquisitions

Zany Brainy Acquisition

     On September 5, 2001, ZB Company, Inc. ("ZBCI"), a wholly-owned  subsidiary
of the Company,  completed the acquisition of substantially all of the assets of
Zany Brainy,  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 management and the Board of Directors  determined that there
was  a  good  fit  between  the  two  brands,   the   combination   would  allow
cross-promotion  throughout the childhood of our customers' children, the brands
attract similar  customers,  that there were  opportunities  for efficiencies in
operations and that the price was attractive.  As consideration,  ZBCI agreed to
pay the  following:  $7.5  million in cash and 1.1 million  shares of  Company's
common  stock  to the  Zany  Brainy  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);  $65.8  million  (excluding
renewed letters of credit) to the Zany Brainy, Inc. Debtor in Possession ("DIP")
lender paid at the closing from the  proceeds of a Loan and  Security  Agreement
between Wells Fargo Retail Finance,  LLC (the "Bank") and ZBCI,  dated September
5, 2001 (the "ZB Credit  Facility");  $4.2 million  which was offset by payments
due to investors;  $1.1 million in bankruptcy  related  professional  fees; $2.1
million paid into an escrow at the closing for Zany Brainy management  retention
bonuses;  and certain lesser amounts.  Additionally,  ZBCI assumed certain other
liabilities  estimated  at  $36.9  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.  The  Company  financed  the  ZB
Acquisition  with the proceeds  from the issuance of preferred and common stock,
notes and the ZB Credit Facility discussed below.

     The Company has also agreed to reimburse  the Zany Brainy  creditors for up
to $1  million  for  costs  the may be  incurred  by the  creditors  related  to
professional  services.  To the extent any amounts are paid by the Company, they
would represent additional purchase price.

     In order to fund  the ZB  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  affiliates of Kayne  Anderson
Investment  Management ("KAIM") and Mr. Fred Kayne (each of which are affiliates
of the Company), 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 Series E Preferred Stock and Junior Notes held by
Athanor (the  "Athanor  Investment"),  if and when  converted  to Common  Stock,
represent  approximately 34.4% of the fully diluted shares of the Company before
giving effect to employee and director stock options but assuming  conversion of
the  contingently  convertible  securities  issued  in the FAO  Acquisition.  In
November 2001, in connection with the consent to the FAO  transaction,  the $4.9
million  pay-in-kind  notes  became  convertible  upon  the  closing  of the FAO
transaction.  As a result,  the  Company  will  expense the  remaining  deferred
non-cash  interest of $4.1 million in its quarter ending February 2, 2002. Under
a  shareholders'  agreement  between  KAIM,  Mr.  Fred Kayne 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  shareholders'  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.  Upon such authorization and approval,  the
Company's  Series E  Preferred  Stock (to the  extent of the  conversion  of our
convertible  securities  (other than employee or director  options,  outstanding
warrants to purchase our Common Stock or the Series E Preferred Stock)),  Series
F Preferred Stock and Series G Preferred Stock will  automatically  convert into
Common Stock.

     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 by  RightStart.com's  senior secured lenders including the online
business and the Right Start catalog business. The Company purchased Targoff-RS,
LLC and its debt at an aggregate  price of $4.0 million  through the issuance of
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 remaining  amounts necessary to consummate the ZB Acquisition came from
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  14.5%  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 (except that,  in connection  with
the  provision of a $5 million  letter of credit,  ZBCI was permitted to have an
effective  advance rate of 50% in December  2001 and to increase  its  effective
advance rate for October and November  2001 by $5 million).  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 $5  million.  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  special subline advances
equal to or exceeding  $10 million  from May 1 through  December 24 of each year
until the special subline is terminated.


Purchase Allocation

     Our  acquisitions  have been  accounted  for under the  purchase  method of
accounting.  The financial statements reflect the preliminary  allocation of the
purchase  prices to the acquired net assets based on their estimated fair values
as of the  acquisition  date.  The  Company  is in  the  process  of  finalizing
valuations of the individual  assets.  The allocation of the purchase prices may
change based upon these  valuations.  The  Company's  preliminary  allocation of
purchase  price for the  acquisitions,  based upon  estimated  fair values is as
follows:

                                        Zany Brainy          Targoff-RS, LLC
Net current assets                       $   108,919,000      $     179,000
Property, plant and equipment                 11,448,000          1,192,000
Non-current assets                               286,000             34,000
Net current liabilities                      (33,857,000)        (1,090,000)
Non-current liabilities                       (3,000,000)                 -
                                              -----------    ---------------
Estimated   fair  value,   net  assets        83,796,000            315,000
acquired

Goodwill and other intangible assets             457,000          3,681,000
                                          --------------          ---------
Total purchase price                          84,253,000          3,996,000

Less:
  Common stock issued                         (3,245,000)                 -
  Notes payable issued                        (7,500,000)                 -
  Preferred stock issued                               -         (3,996,000)
  Amount refinanced                          (52,664,000)                 -
                                             ------------    ---------------
Cash paid                                     20,844,000                  -
Less cash acquired                            (6,166,000)                 -
                                            -------------    ---------------
Net cash paid                            $    14,678,000     $            -
                                             ===========       ===============



     Of the $0.5 million of acquired intangible assets $0.4 million was assigned
to registered trademarks that are not subject to amortization.

Supplemental unaudited pro forma information for the consolidated company:


<TABLE>
<CAPTION>
<S>                             <C>              <C>                  <C>                   <C>
                                      Thirteen weeks ended                    Thirty-nine weeks ended
                                      --------------------                    -----------------------
                                November 3, 2001    October 28, 2000    November 3,2001        October 28, 2000
                                ----------------    ----------------    ---------------        ----------------

Revenue                         $  78,996,000      $  85,417,000        $ 237,546,000          $ 235,329,000
Loss before extraordinary
  items and cumulative
  effect of accounting
  changes                         (32,883,000)      (14,816,000)          (72,370,000)           (92,811,000)
Net loss                          (32,883,000)      (14,816,000)          (72,370,000)           (92,811,000)
Basic and diluted loss per
  share                             $ (3.86)           $ (2.21)            $ (9.96)                $ (13.87)

</TABLE>

     The   supplemental   proforma   information   presented   includes  certain
non-recurring  items. In July 2000, Zany Brainy,  Inc. acquired Noodle Kidoodle,
Inc. in a pooling of interest  transaction.  The thirteen and thirty-nine  weeks
ended  October 28, 2000 include  approximately  $5.1  million and $28.8  million
respectively,  in expense for merger,  integration and restructuring and exclude
the results of operation of 15 stores  closed during the period from the date of
acquisition  through November 3, 2001. On May 15, 2001(the "Petition Date") Zany
Brainy, Inc. and its subsidiaries filed for voluntary petitions for relief under
Chapter 11 of the United States Code in the United States  Bankruptcy  Court for
the District of Delaware. From the Petition Date through September 5, 2001, Zany
Brainy,  Inc.  managed  their  business  as a  debtor-in-possession  pursuant to
Bankruptcy Court approval.  This resulted in significant  operational disruption
due to disruption of product flow, employee turnover and other factors which are
reflected in the operating  results for the thirteen and thirty-nine weeks ended
November 3, 2001.


NOTE 12:  Other developments

         Contingencies

     The Company was sued by Oxygen Media, LLC ("Oxygen") 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.
The Company has filed a motion to dismiss the  complaint in the New York Supreme
Court on the  basis  that the term  sheet  was  non-binding  by its terms and as
admitted by Oxygen and therefore may not be enforced under New York law.  Oxygen
has filed its answer but there is no hearing scheduled at this time.


Stock Options

     The Company  authorized an increase in the number of options issuable under
the Company's  1991 Employee  Stock Option Plan and a  newly-adopted  2001 Stock
Option  Plan  to  a  total  of   approximately   5.5  million  shares  of  which
approximately  5.0 million  shares  have been  granted,  subject to  shareholder
approval.


Debt and Preferred Stock

     On September 5, 2001 the holders of the Senior Subordinated Notes converted
their notes into an aggregate of 1,341,706 shares of Common Stock. Additionally,
on December 1, 2001 the Company  forced  conversion  of its Series D Pay-in-Kind
Convertible  Preferred  Stock into an aggregate  of  2,428,192  shares of Common
Stock.


NOTE 13:  Beneficial Conversion Feature

     Generally  accepted  accounting  principles  require that we recognize  the
difference  between the  negotiated  conversion  price of an instrument  and the
actual closing price of the underlying  common stock as a beneficial  conversion
feature and charge it to: a) additional paid in capital in the case of an equity
instrument; b) non-cash interest expense in the case of a debt instrument; or c)
non-cash compensation expense in the case of an employee stock option grant. The
interest  and  compensation  expense is amortized  over the period,  or periods,
prior to the related  instruments  becoming freely  convertible.  In the current
period the Company  recorded  the  following  amounts as  beneficial  conversion
features:

                                 Beneficial Conversion
         Instrument                 Feature Amount

Series E Preferred Stock            $   11,918,815
Series F Preferred Stock                 3,654,000
Series G Preferred Stock                 3,850,000
                                     -------------
    Total preferred                     19,422,815
Junior Notes                             4,900,000
                                    --------------
    Total                           $   24,322,815
                                     =============


     Non-cash  interest  expense on the Junior  Notes was $0.8  million  for the
third quarter.  It is expected that the Company will amortize the remaining $4.1
million of deferred interest in its fourth quarter of this year.


NOTE 14:  Subsequent Event

FAO Schwarz Acquisition

     Toy  Soldier,  Inc.  ("Toy  Soldier"),  a wholly  owned  subsidiary  of the
Company,  has  agreed to  purchase  certain  assets and  assume  liabilities  of
approximately  $9.0 million of FAO Schwarz,  including its Fifth Avenue store in
New York  and 21  other  stores  throughout  the  United  States.  The  purchase
transaction  is expected to close on or about  January 6, 2002,  but in no event
later than  January 31,  2002.  Toy Soldier will change its name to FAO Schwarz,
Inc.  after the  closing.  Toy Soldier has also agreed to purchase the assets of
Quality Fulfillment Services,  Inc.("QFS"),  an affiliate of FAO Schwarz,  which
runs the fulfillment  services for the FAO Internet and catalog operations.  QFS
also provides  fulfillment services for several third party catalog companies as
well.  The  transaction  is  subject to  antitrust  regulatory  and third  party
approvals.

     The  acquisition  is being  funded  through the  issuance of the  Company's
Series H  Contingent  Convertible  Preferred  Stock  (the  "Series  H  Preferred
Stock"),  which is  contingently  convertible  into 5  million  shares of Common
Stock,  and the  issuance of $18 million in  aggregate  principal  amount of Toy
Soldier's 8% Subordinated Notes due 2005 (the "FAO Notes").

     The Series H Preferred Stock is convertible, upon approval by the Company's
shareholders,  at a price of $4.00 per share.  The Series H Preferred  Stock, if
and when converted to Common Stock, represents  approximately 14.6% of the fully
diluted  shares of the Common Stock  (approximately  34 million  shares)  before
giving effect to employee and director stock options but assuming  conversion of
the contingently  convertible  securities issued in the ZB Acquisition.  Under a
shareholders' agreement with FAO and QFS, Mr. Fred Kayne and affiliates of Kayne
Anderson Investment  Management have agreed to vote their securities in favor of
all matters  necessary to permit the conversion of the Series H Preferred Stock.
Upon such authorization and approval, the Company's Series H Preferred Stock (to
the extent of the  conversion of the  Company's  other  convertible  securities,
other than employee or director options, outstanding warrants to purchase Common
Stock or the Series E Preferred Stock),  will automatically  convert into Common
Stock.

     The FAO Notes,  which rank pari-passu on liquidation  with  indebtedness of
the  Company  or Toy  Soldier  to its  vendors,  suppliers  and trade  creditors
incurred in the ordinary course of business  ("Trade Debt"),  will be guaranteed
by the Company and secured by a subordinated  security interest in substantially
all of the assets of the Company and Toy Soldier,  respectively. In the event of
a  liquidation,  insolvency  or  bankruptcy  of the Company or Toy Soldier,  the
holders of the FAO Notes are required to share the proceeds of any collateral on
a pro-rata basis with the holders of the Trade Debt. Toy Soldier must prepay 20%
of the aggregate principal amount of the FAO Notes if its consolidated  earnings
before interest,  taxes,  depreciation and amortization  ("EBITDA")  exceeds $25
million in either of fiscal 2003 or 2004 and must prepay  another 20% in 2004 if
the prepayment obligation is triggered in 2003. Toy Soldier also must prepay the
FAO  Notes  with the net cash  proceeds  from the  closing  of a sale of debt or
equity  securities of the Company or Toy Soldier in excess of $5 million  unless
the  proceeds  are  received  from  the  closing  of a sale of  debt  or  equity
securities on condition that they be, and within 30 days of receipt are, used to
accomplish a merger,  consolidation or asset acquisition.  Toy Soldier also must
prepay  the FAO Notes with the  proceeds  of asset  sales in excess of  $500,000
unless,  within 30 days of receipt of such  proceeds,  such proceeds are used to
repay  indebtedness  outstanding under its Loan and Security  Agreement with the
Bank. Finally,  no more than 30 days following a Change of Control,  Toy Soldier
must prepay the entire principal amount outstanding under the FAO Notes. "Change
of Control" means the occurrence of any of the following:  (i) the adoption of a
plan relating to the  liquidation  or dissolution of Toy Soldier or the Company,
(ii) any person or group (as such term is used in Section  13(d)(3) and 14(d)(2)
of the  Exchange  Act) is or becomes the  beneficial  owner (as defined in Rules
13d-3 and 13d-5 under the Exchange  Act (or any  successor  rules),  directly or
indirectly,  of more than 50% of the total  voting  stock of Toy  Soldier or the
Company, other than in connection with a merger, consolidation or acquisition of
assets in which Kayne  Anderson  Investment  Management  affiliates  do not sell
equity or (iii) the first day on which a majority of the members of the Board of
Directors of Toy Soldier are not Continuing  Directors  other than in connection
with a merger,  consolidation  or  acquisition of assets in which Kayne Anderson
Investment  Management  affiliates  do not sell  equity.  The  term  "Continuing
Director"  means,  as of any date of  determination,  any member of the Board of
Directors  of Toy Soldier who (i) was a member of such Board of Directors at the
closing or (ii) was nominated for election or elected to such Board of Directors
with the  affirmative  vote of a majority of the  Continuing  Directors who were
members of such Board at the time of such nomination or election.

     The Company  expects that Toy Soldier will become a party to the  Company's
existing  working capital line of credit with Wells for a temporary time period.
Toy Soldier is expected to maintain  approximately  $33 million in  inventory at
cost. The Company is currently  negotiating with Wells to include Toy Soldier as
a party to a longer term consolidated Loan and Security Agreement with Wells and
has no reason to believe that it will not reach agreement; however, there can be
no assurance that Wells will agree to include Toy Soldier on favorable terms or,
if it does not, that other lenders will offer favorable terms or otherwise agree
to enter into a line of credit with Toy Soldier.  Nor can there be any assurance
that,  once  the  temporary  period  has  ended,  a new  favorable  consolidated
agreement with Wells or other lenders can be reached.

     The  Company  expects to file a  preliminary  proxy  statement,  as soon as
possible  after  obtaining  the  appropriate   information   from  FAO,  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  Company's  various  recently-issued   contingently  convertible  securities
including  the Series H 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 ZB
Acquisition will amount to  approximately  34 million shares excluding  employee
and director option  exercises.  Each of the newly-issued  series of convertible
preferred stock entitles its holders to registration  rights with respect to the
underlying Common Stock.


     Under the terms of the Junior Notes,  the Board of  Directors'  approval of
the  FAO  Acquisition  would  have  resulted  in  those  notes  becoming  freely
convertible. On November 13, 2001 the Company obtained a waiver from the holders
of the Junior Notes which delayed  triggering the  convertibility of those notes
until the FAO Acquisition closes in January, 2002. As a result of these actions,
the Company must accelerate its recognition of $4.9 million in non-cash interest
from over the original twelve months  (September 2001 through September 2002) to
the date the conversion feature is exercisable.




<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,  the need to renegotiate
the Company's credit agreement in connection with the FAO transaction, potential
operational or integration challenges with respect to the ZB Acquisition and the
FAO 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.



Overview

     The Right Start,  Inc. sells  developmental,  educational and care products
for infants and  children  through  retail  stores  ("Right  Start  Retail Store
Operations"),  on the Internet and through a mail order  catalog  ("Right  Start
Direct to  Customer  Operations")  and has  recently  expanded  its  business to
include  educational  products,  toys, games, books and multimedia  products for
children up to age 12 through the ZB  Acquisition  ("Zany  Brainy  Retail  Store
Operations").  To facilitate the analysis of our historical results, each of the
three distinct operations is discussed separately below.
<TABLE>
<CAPTION>

                     Unaudited Consolidating Statement of Operations for the thirteen weeks ended November 3, 2001


                                                                                 Right Start
                                                                                  Direct to
                              Right Start Retail       Zany Brainy Retail          Customer
                               Store Operations         Store Operations          Operations          Totals
                            ------------------------ ------------------------ ------------------- ----------------
                               (Thirteen weeks)           (Eight weeks)         (Eight weeks)
Sales:
<S>                           <C>                        <C>                                     <C>
Retail                        $   10,937,000             $   46,213,000                       -  $  57,150,000
Direct to customer                         -                          -           $   1,009,000      1,009,000
Shipping and handling
  revenues                                 -                          -                 194,000        194,000
Cost of goods sold                 5,629,000                 27,266,000                 526,000     33,421,000
Cost of shipping and
  handling                                 -                          -                 263,000        263,000
Operating expense                  4,902,000                 20,881,000                 254,000     26,037,000
Non-cash compensation                  2,000                          -                       -          2,000
Marketing and advertising
  expense                            132,000                    651,000                   9,000        792,000
General and
  administrative expense           1,163,000                  3,037,000                 142,000      4,342,000
Pre-opening costs                     77,000                          -                       -         77,000
Store closing costs                   35,000                          -                       -         35,000
Depreciation and
  amortization expense               707,000                    335,000                  46,000      1,088,000
                              --------------            ---------------           -------------   ------------
Operating Loss                    (1,710,000)                (5,957,000)                (37,000)    (7,704,000)
Non-cash interest expense            817,000                          -                       -        817,000
Interest expense                     212,000                  1,190,000                       -      1,402,000
                              --------------           ----------------        ----------------    -----------
Income (loss) before
  provision for income
  taxes                        $  (2,739,000)             $  (7,147,000)            $   (37,000)  $   (9,923,000)
                               ==============             ==============            ============  ===============

</TABLE>




Right Start Retail Store Operations

     At November 3, 2001,  the Company  operated 70 Right Start 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  young  children  and  their
caregivers,   all  presented   within  a  store  designed  to  provide  a  safe,
child-friendly environment for the shopping ease of parents.


Thirteen weeks ended November 3, 2001 compared with October 28, 2000

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

<TABLE>
<CAPTION>
                                                                        Thirteen weeks ended
                                                     ------------------------------------------------------------

                                                            November 3, 2001                October 28, 2000
                                                            ----------------                ----------------
<S>                                                    <C>                    <C>          <C>              <C>
Retail net sales                                       $   10,937,000         100.0%       $   9,865,000    100.0%
Cost of goods sold                                          5,629,000          51.5%           4,986,000     50.5%
Operating expense                                           4,902,000          44.8%           4,194,000     42.5%
Non-cash compensation                                           2,000           0.0%              66,000      0.7%
Marketing & advertising expenses                              132,000           1.2%             194,000      2.0%
General & administrative expenses                           1,163,000          10.6%             956,000      9.7%
Pre-opening costs                                              77,000           0.7%             117,000      1.2%
Store closing expense                                          35,000           0.3%              46,000      0.5%
Depreciation & amortization expense                           707,000           6.5%             541,000      5.5%
                                                        -------------                      -------------
   Operating loss                                          (1,710,000)        -15.6%          (1,235,000)   -12.5%
Gain on investment                                                  -                          2,554,000     25.9%
Non-cash interest expense                                     817,000           7.5%
Interest expense                                              212,000           1.9%             293,000      3.0%
                                                        -------------                     --------------
   Income (loss) before provision for income taxes         (2,739,000)        -25.0%           1,026,000     10.4%
Provision for income taxes                                     12,000           0.1%              19,000      0.2%
                                                         ------------                      -------------
   Net income (loss)                                    $  (2,751,000)        -25.2%        $  1,007,000     10.2%
                                                           ===========                         =========
</TABLE>


     Net Sales. Retail net sales consist of gross product sales to customers net
of returns.  Retail net sales  increased by $1.0  million,  or 10.9%,  from $9.9
million for the thirteen  weeks ended  October 28, 2000 to $10.9 million for the
thirteen weeks ended November 3, 2001. The net sales growth reflects an increase
in the store  base from 53 stores  to 70  stores  offset by a 5.8%  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 10.9%  while  street  stores  were up 1.5%.  The effects of the
events that  occurred on  September  11,  2001 cannot be  precisely  determined,
however  same store sales in August were down 3.4% , whereas in  September  same
store sales were down 9.2%.

     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 48.5% from 49.5% in the prior year  period.  Approximately
half of this decrease is attributable  to timing  differences on vendor rebates.
The balance of the decrease is due to slightly  increased freight costs, a small
shift in the retail mix to lower margin items and a higher  inventory  shrinkage
provision.

     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
for the  current  period as  compared  to $4.2  million for the same period last
year. The $0.7 million or 16.9%  increase  reflects the addition of 17 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 third quarter of Fiscal 2000, the Company
recorded  $9,000  of  non-cash  compensation  expense  associated  with  certain
non-employee  director grants and $57,000 related to non-employee  options.  The
current year reflects $2,000 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 $194,000 for the  thirteen-week  period ended October 28,
2000 to $132,000 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 21.7%,  from $1.0
million for the thirteen  week period ended October 28, 2000 to $1.2 million for
the thirteen week period ended November 3, 2001. The net increase in general and
administrative   expense  is  primarily  attributable  to  the  acquisition  and
consolidation of Targoff-RS,  LLC. General and  administrative  expense includes
net credits in the amount of $279,000 and $66,000 for the current and prior year
period,  respectively.  $85,000 of the current year credits is the result of net
billings to Targoff-RS, LLC under the management services agreement. The balance
of the net  credits,  $194,000,  is the net general and  administrative  support
provided by the Company to Zany Brainy, which net to zero on consolidation.  The
entire  credit  amount  in the prior  year was the  result  of net  billings  to
RightStart.com under the management services agreement.

     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  $40,000 from $117,000 for the thirteen
weeks ended October 28, 2000 to $77,000 for the current year. The primary reason
for the decrease from last year is $38,000 of expense related to abandoned sites
recognized in the prior 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  $46,000 was  recognized in relation to two
store  closures;  in the current year there is $19,000 related to the closure of
one store and $16,000 primarily related to disposal of store fixtures.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
increased  $166,000 from $541,000 in the prior period to $707,000 in the current
period.  The increase is due to additional  assets placed in service  related to
new store openings.

     Loss  on   investment.   In   connection   with  the   deconsolidation   of
RightStart.com,  the  Company  recorded a net gain of $2.6  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.
On August 3, 2001, the senior debt holders foreclosed on RightStart.com and sold
its assets to Targoff-RS, LLC.

     Non-cash interest expense:  In connection with the Athanor  Investment,  we
issued  $4.9  million  of Junior  Notes  with a  conversion  price  equal to the
conversion  price we  negotiated  with  Athanor for its purchase of the Series E
Preferred  Stock.  Generally  accepted  accounting  principles  require  that we
recognize the  difference  between the  negotiated  price and the actual closing
price of the  underlying  common  stock as a beneficial  conversion  feature and
charge it to non-cash  interest expense over the time period prior to the Junior
Notes  becoming  convertible.  The  total  beneficial  conversion  amount,  $4.9
million,  will be  recognized  ratably over the period from issuance to the time
the  Junior  Notes  will  become  freely  convertible.  In  November  2001,  the
conversion  feature was amended so that the notes  become  convertible  upon the
acquisition of FAO. As a result, the $4.1 million unamortized  non-cash interest
is expected to be expensed in the Company's fourth quarter.

     Interest expense.  Interest expense decreased from $293,000 in the thirteen
weeks ended  October 28,  2000 to  $212,000  for the same period this year.  The
decrease reflects lower interest rates on our 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.


<PAGE>



Eight weeks and three days ended November 3, 2001 compared with October 28, 2000

The following table sets forth the Company's unaudited statements of operations
data:
<TABLE>
<CAPTION>

                                                                    Eight weeks and 3 days ended
                                                     ------------------------------------------------------------
<S>                                                 <C>                      <C>         <C>              <C>

                                                            November 3, 2001                October 28, 2000
                                                     -------------------------------    -------------------------
Retail net sales                                       $   46,213,000         100.0%       $  48,384,000    100.0%
Cost of goods sold                                         27,266,000          59.0%          27,225,000     56.3%
Operating expense                                          20,881,000          45.2%          21,135,000     43.7%
Non-cash compensation                                               -           0.0%                   -      0.0%
Marketing & advertising expenses                              651,000           1.4%           1,357,000      2.8%
General & administrative expenses                           2,938,000           6.6%           4,437,000      9.1%
Pre-opening costs                                                   -           0.0%             695,000      1.4%
Merger integration & acquisition costs                              -           0.0%           1,236,000      2.6%
Depreciation & amortization expense                           434,000           0.7%             460,000      0.9%
                                                        -------------                      -------------
   Operating loss                                          (5,957,000)        -12.9%          (8,161,000)   -16.9%
Interest expense                                            1,190,000           2.6%                          2.2%
                                                                                               1,078,000
Equity loss in joint venture                                        -           0.0%           1,300,000      2.7%
                                                                    -                          ---------
   Loss before provision for income taxes                  (7,147,000)        -15.5%       (10,539,000)     -21.8%
Provision for income taxes                                                      0.0%                          0.0%
                                                     ---------------------              -------------------
                                                                    -                                  -
   Net loss                                             $  (7,147,000)        -15.5%     $   (10,539,000)    -21.8%
                                                           ===========                       ============
</TABLE>


     Net Sales. Retail net sales consist of gross product sales to customers net
of returns.  Retail net sales  decreased by $2.2  million,  or 4.5%,  from $48.4
million for the eight weeks and 3 days ended  October 28, 2000 to $46.2  million
for the  eight  weeks and three  days  ended  November  3,  2001.  The net sales
decrease  reflects a 6.4% decrease in  same-store  sales  slightly  offset by an
non-comparable stores increase in sales. The primary reasons for the decrease in
same store sales is the general  weakness in retail toy industry and, though the
effects of the events that  occurred on  September  11, 2001 cannot be precisely
determined,  same store  sales were down 16.2% in August and in  September  same
store sales were down 25.2%,  whereas in October  same store sales  increased by
12.2%.

     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 41.0% from 43.7% in the prior year period.  Over one half of
the variance is related to higher inventory  shrinkage and damage  provisions in
the current  year than in the same period of the prior year.  The balance of the
decrease is the result of lower vendor  allowances in the current year period as
compared to the prior year period, slightly offset by higher selling margins due
to lower promotional activity in the current year period.

     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 $20.9
million for the current  period as compared to $21.1 million for the same period
last  year.  The $0.2  million  or 1.2%  decrease  is  primarily  the  result of
improvements in warehousing and distribution.

     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 $1.4  million  for the eight  week and three day period
ended  October  28, 2000 to $0.7  million  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  decreased  by $1.5  million,  or 33.9%,  from $4.4
million for the eight week and three day period  ended  October 28, 2000 to $2.9
million for eight week and three day period ended November 3, 2001. The decrease
in  general  and  administrative  expense  is due to lower  staffing  levels and
staffing related expenses.

     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 were $695,000 lower in this period as compared to
the same  period in the prior  year.  The lower  costs were the result of no new
store  locations  opened in the current year period  compared to 17 locations in
the prior year period.

     Merger,  integration  &  acquisitions.  In July  2000,  Zany  Brainy,  Inc.
acquired Noodle Kidoodle,  Inc. in a pooling of interests transaction.  The $1.2
million relate to merger,  integration and restructuring charges related to that
transaction.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
decreased  $26,000 from  $460,000 in the prior period to $434,000 in the current
period.

     Interest expense. Interest expense increased from $1.1 million in the eight
weeks and 3 days ended October 28, 2000 to $1.2 million for the same period this
year.  The increase  reflects  lower  interest  rates on our  borrowings  offset
slightly by a higher outstanding loan balance than in the prior year.

     Equity loss on joint venture.  In the prior year, Zany Brainy Brainy,  Inc.
dissolved their  e-commerce joint venture was dissolved at the end of last year.
Up until the dissolution,  Zany Brainy, Inc recorded an equity loss in the joint
venture of $1.3 million for the 8 weeks and three days ended October 28, 2000.

     Provision for income  taxes.  The provision for income taxes is reported at
the parent company.

Zany Brainy Closed Stores

     Included  in the eight  weeks and three  days  ended  November  3, 2001 and
October  28, 2000 are the  following  unaudited  amounts  related to the fifteen
stores closed between the date of acquisition and November 3, 2001:

<TABLE>
<CAPTION>
                                                               Eight weeks and 3 days ended
                                                       ---------------------------------------------
<S>                                                   <C>                       <C>

                                                        November 3, 2001         October 28, 2000
                                                       --------------------     --------------------

Retail net sales                                          $   2,064,000             $  4,264,000
Cost of goods sold                                            1,581,000                2,431,000
Operating expense                                             1,740,000                2,104,000
Non-cash compensation                                                 -                        -
Marketing & advertising expenses                                297,000                  111,000
General & administrative expenses                                     -                        -
Pre-opening costs                                                     -                        -
Store closing expense                                                 -                        -
Depreciation & amortization expense                               64,000                 226,000
                                                       -----------------           -------------
   Operating loss                                            (1,618,000)                (608,000)
Interest expense                                                                               -
                                                       ---------------------    -------------------

Loss before provision for income taxes                       (1,618,000)               (608,000)
Provision for income taxes
                                                       ---------------------    -------------------
Net loss                                                  $  (1,618,000)            $   (608,000)
                                                             ===========                =========

</TABLE>




<PAGE>



Right Start Direct to Customer Operations

     The Company  acquired  Targoff-RS,  LLC on  September 5, 2001 and with that
acquisition  is currently  engaged in sales over the Internet and through direct
mail catalogs.  The Right Start Direct to Customer Operation sells a product mix
that is similar to the product  carried in the Right Start  Retail  stores.  The
statement below consists of results for the eight weeks of operations  since the
acquisition. For comparative purposes, the same eight week period from the prior
year is shown.


     Eight weeks ended  November 3, 2001 compared with eight weeks ended October
28, 2000

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

<TABLE>
<CAPTION>

                                                                          Eight weeks ended

                                                     ------------------------------------------------------------
<S>                                                <C>                       <C>         <C>               <C>

                                                            November 3, 2001                October 28, 2000
                                                     -------------------------------    -------------------------
Direct to customer net sales                            $   1,009,000          83.9%       $   2,244,000     92.7%
Shipping and handling revenues                                194,000          16.1%             176,000      7.3%
Cost of goods sold                                            526,000          43.7%           1,370,000     56.6%
Cost of shipping and handling                                 263,000          21.9%             469,000     19.4%
Operating expense                                             254,000          21.1%             543,000     22.4%
Marketing & advertising expenses                                9,000           0.7%             247,000     10.2%
General & administrative expenses                             142,000          11.8%             440,000     18.2%
Depreciation & amortization expense                            46,000           3.8%             172,000      7.1%
                                                         ------------                      -------------
   Operating loss                                             (37,000)         -3.1%            (821,000)   -33.9%
Interest expense                                                    -           0.0%             136,000      5.6%
                                                      ---------------                      -------------
   Income (loss) before provision for income taxes            (37,000)         -3.1%            (957,000)   -39.5%
Provision for income taxes                                          -           0.0%                          0.0%
                                                       --------------                   ---------------
                                                                                                       -
   Net income (loss)                                     $    (37,000)         -3.1%        $   (957,000)   -39.5%
                                                               ======                            =======

</TABLE>

     Net Sales.  Direct to customer net sales  consist of gross product sales to
customers net of returns.  Net sales decreased by $1.2 million,  or 55.0%,  from
$2.2 million for the eight weeks ended  October 28, 2000 to $1.0 million for the
eight  weeks  ended  November  3,  2001.  The net sales  reflect a $1.3  million
decrease in online sales,  offset by a $0.1 million  increase in catalog  sales.
The decrease in online sales is primarily  due to the  curtailment  of extensive
price  discounting,  free shipping and handling on certain qualifying orders and
the discontinuation of product lines targeted to older children and educators.

     Shipping and handling revenues. Shipping and handling revenues increased by
$18,000,  or 10.2%,  for the current  period as compared to the same period last
year.  This  increase is due to higher  shipping and  handling  rates for online
orders,  and the elimination of free shipping and handling on certain qualifying
orders.

     Cost of goods sold.  Cost of goods sold  consists  primarily of the cost of
products sold,  inbound freight costs and inventory  shrinkage costs.  Direct to
customer  gross  margin  increased to 47.9% from 38.9% in the prior year period.
This increase is due to less price discounting of online product sales.

     Cost of goods sold- Shipping and handling.  Shipping and handling  expenses
include amounts paid to our third party distribution service, returns processing
costs,  shipping  supplies and actual shipping  charges.  These expenses for the
eight  weeks of the  current  year  were $0.3  million  or 21.9% of net sales as
compared  to $0.5  million or 19.4% of net sales in the same period of the prior
year. The decrease in shipping and handling cost is attributable to the decrease
in online  sales.  The  percentage  of these costs  covered by the  shipping and
handling  revenue  increased  from  37.5% in the  prior  period  to 73.8% in the
current  period,  reflecting  the  elimination  of free shipping and handling on
certain qualifying orders and higher shipping and handling rates overall.

     Operating  expense.  Operating  expenses  consist  primarily of credit card
processing  fees,  expenses  related to  catalog  production  and  distribution,
customer  service,  as well  as  related  personnel  costs.  Operating  expenses
decreased  by $0.3  million  to $0.3  million or 21.1% of net sales in the eight
weeks of this year from $0.6 million or 22.4% of net sales in the same period of
last year. The decrease is attributable to a reduction in staffing,  the savings
attributable to bringing  customer  service  in-house from a third party service
provider and decreased sales.

     Marketing  and  advertising  expense.  Marketing  and  advertising  expense
consists of magazines, direct mail, e-mail and on-line solicitations,  including
all  production  and  distribution,  incurred in connection  with  promoting our
online  store.  This  amounted to $9,000 or 0.7% of net sales during the current
eight weeks, as compared to $0.2 million or 10.2% of net sales in the prior year
period. This reflects a decrease in the use of costly print advertising in favor
of virtually no-cost email solicitations.

     General and administrative  expense.  General and  administrative  expenses
consist  primarily  of the costs  related to website  hosting  and  maintenance,
management  and support  personnel,  professional  service fees and office lease
expenses.  In the prior year period,  general and  administrative  expenses also
included direct fees paid to The Right Start, Inc. for accounting,  payroll, and
administrative  support services rendered under a management services agreement.
These fees amounted to $48,000 in the eight weeks  presented for the prior year.
General and administrative  expenses decreased $0.3 million from $0.4 million in
the prior year to $0.1 million in the current eight week period. As a percentage
of net sales,  general and  administrative  expenses  decreased  to 11.8% in the
current year from 18.2% in the comparable prior year period. The decrease is due
to the acquisition of operations by Right Start, Inc.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
decreased  $126,000  from $172,000 in the prior period to $46,000 in the current
period.  The  decrease  is due to a reduced  carrying  value of the  depreciable
assets acquired in the Targoff-RS, LLC acquisition.

     Interest  expense.  Interest expense of $136,000 was recorded for the eight
weeks in the prior year.  No interest is recorded for the current  year,  as the
interest expense is incurred and recorded at the parent level.

     Provision for income  taxes.  The provision for income taxes is reported at
the parent company.



<PAGE>



Right Start Retail Store Operations


Thirty-nine weeks ended November 3, 2001 compared with October 28, 2000

The following table sets forth the Company's unaudited statements of operations
data:
<TABLE>
<CAPTION>

                                                                       Thirty-nine weeks ended
                                                     ------------------------------------------------------------
<S>                                                <C>                       <C>        <C>                <C>

                                                            November 3, 2001                October 28, 2000
                                                     -------------------------------    -------------------------
                                                     -------------------- ----------
Retail net sales                                       $   33,974,000         100.0%      $   30,951,000    100.0%
Cost of goods sold                                         17,469,000          51.4%          15,533,000     50.2%
Operating expense                                          14,428,000          42.5%          12,427,000     40.2%
Non-cash compensation                                          34,000           0.1%              85,000      0.3%
Marketing & advertising expenses                              393,000           1.2%             673,000      2.2%
General & administrative expenses                           3,291,000           9.7%           2,867,000      9.3%
Pre-opening costs                                             260,000           0.8%             318,000      1.0%
Store closing expense                                          35,000           0.1%             387,000      1.3%
Depreciation & amortization expense                         1,997,000           5.9%           1,590,000      5.1%
                                                        -------------                      -------------
   Operating loss                                          (3,933,000)        -11.6%          (2,929,000)    -9.5%
Loss on investment                                                  -                          3,406,000     11.0%
Non-cash interest expense                                     817,000           2.4%                   -
Interest expense                                              630,000           1.9%             850,000      2.7%
                                                         ------------                     --------------
   Income (loss) before provision for income taxes         (5,380,000)        -15.8%          (7,185,000)   -23.2%
Provision for income taxes                                     37,000           0.1%              58,000      0.2%
                                                        -------------                      -------------
   Net income (loss)                                    $  (5,417,000)        -15.9%       $  (7,243,000)  --23.4%
                                                           ===========                        ===========
</TABLE>


     Net Sales. Retail net sales consist of gross product sales to customers net
of returns.  Retail net sales  increased by $3.0  million,  or 9.8%,  from $31.0
million for the  thirty-nine  weeks ended  October 28, 2000 to $34.0 million for
the  thirty-nine  weeks ended November 3, 2001. The net sales growth reflects an
increase in the store base from 53 stores to 69 stores offset by a 3.5% 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 9.5% while street stores were up 8.0%.

     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 48.6% from 49.8% in the prior year period.  This decrease is
due to a shift in retail sales mix from higher margin categories such as toys to
lower margin  travel  items,  higher  shrinkage  results in the current year and
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 $14.4
million  for the current  nine months as compared to $12.4  million for the same
period last year. The $2.0 million or 16.1% increase reflects the addition of 17
new store locations.  The increase as a percent of sales is primarily due to the
operating  costs-to-sales  ratio for new stores  which is expected to improve as
the new stores achieve their projected sales targets.

     Non-cash  compensation.  During the first nine months of Fiscal  2000,  the
Company  recorded  $28,000 of  non-cash  compensation  expense  associated  with
certain  non-employee  director  grants  and  $57,000  related  to  non-employee
options.  The current year reflects  $11,000  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 $673,000 for the  thirty-nine-week  period ended October
28, 2000 to $393,000 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 $0.4  million,  or 14.8%,  from $2.9
million for the  thirty-nine  week period ended October 28, 2000 to $3.3 million
for the  thirty-nine  week period  ended  November 3, 2001.  The current  period
includes $73,000 in severance charges recorded for a former  executive,  $55,000
for settlements related to disputed charges, a $25,000 signing bonus and $20,000
related to the corporate office move. Absent these amounts,  which we believe to
be non-recurring,  general and administrative expense, as a percentage of sales,
would be  relatively  flat at 9.2% for the current  period and 9.3% for the same
period last year. General and administrative expense includes net credits in the
amount  of  $871,000  and  $289,000  for the  current  and  prior  year  period,
respectively. $592,000 and $85,000 of the credits are the result of net billings
to  RightStart.com  and Targoff-RS,  LLC,  respectively,  under their respective
management services agreements. The prior year credits are related solely to net
billings  to  RightStart.com.  The  balance  of the net  current  year  credits,
$194,000, is the net general and administrative  support provided by the Company
to Zany Brainy, which nets to zero in consolidation.

     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 $58,000 from $318,000 for the thirty-nine
weeks  ended  October 28, 2000 to  $260,000  for the current  year.  The Company
recognized  costs for opening 9 stores in the current  year and 10 stores in the
comparable period last 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
$387,000.  In the current  year the amount  consists  of $19,000  related to the
closure  of one  store  and  $16,000  primarily  related  to  disposal  of store
fixtures.

     Depreciation  and  amortization.   Depreciation  and  amortization  expense
increased  $0.4 million from $1.6 million in the prior period to $2.0 million in
the current period.  The increase is due to additional  assets placed in service
related to new store openings.

     Loss  on   investment.   In   connection   with  the   deconsolidation   of
RightStart.com,  the  Company  recorded a net gain of $2.6  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.
On August 3, 2001,  the senior debt holders  foreclosed on  RightStart.com,  its
assets were sold and the Company's 40% equity interest was extinguished.

     Interest   expense.   Interest  expense  decreased  from  $850,000  in  the
thirty-nine  weeks ended  October 28, 2000 to $630,000  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 November 3, 2001, the Wells Fargo Bank base rate was 5.5%. 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 November 3, 2001, the date of our latest  measuring  period,  our
average availability is approximately 90.7% of budget amounts. As of November 3,
2001, we had approximately  $6,835,000  outstanding under the Right Start Credit
Facility and aggregate availability of approximately  $1,241,000. As a result of
the  anticipated  acquisition  of FAO by Toy  Soldier,  the Company is currently
negotiating  with the Bank to include  Toy Soldier as a party to the Right Start
Credit Facility. 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 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 14.5% 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
(except  that, in connection  with  provision of a $5 million  letter of credit,
ZBCI was permitted to have an effective advance rate of 50% in December 2001 and
to increase  its  effective  advance  rate for October and  November  2001 by $5
million).  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 $5 million.  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
special  subline  advances  equal to or exceeding $10 million from May 1 through
December 24 of each year until the special subline is terminated.

     The  Company  is  currently  in  discussions  with the Bank to enter into a
consolidated  credit  agreement which would be completed in the first quarter of
fiscal 2002.

     On November  13,  2001 KAIM  affiliates  and Mr.  Fred Kayne  provided a $5
million letter of credit to the Bank in connection with the credit facility that
the Bank,  as agent,  provides  to ZBCI.  The letter of credit may be drawn upon
only if ZBCI defaults under the minimum  availability  requirements  of the Loan
and Security  Agreement and must be drawn,  if at all, on or before December 27,
2001. In exchange,  such affiliates and Mr. Kayne received warrants  exercisable
for an aggregate of 100,000  shares of the Company's  common stock at a price of
$3.50 per share.  Such  persons also  received  notes in the  aggregate  maximum
principal  amount of $5 million  that pay interest at 8% per annum and mature in
one year  beginning,  in each case, at such time as the Bank draws on the letter
of credit.  The outstanding  principal amount on such notes at any time, if any,
will equal the amount so drawn.

     On September 5, 2001 the holders of the Senior Subordinated Notes converted
their notes into an aggregate of 1,341,706 shares of Common Stock. Additionally,
on December 1, 2001 the Company  forced  conversion  of its Series D Pay-in-Kind
Convertible  Preferred  Stock into an aggregate  of  2,428,192  shares of Common
Stock.


     During the first three quarters of Fiscal 2001,  operating  activities used
$44.8 million of cash compared to using $4.0 million in the comparable period of
Fiscal 2000. In the current year,  investing  activity consisted of $1.9 million
for fixed asset additions compared to $1.3 million for fixed asset additions for
the prior year.  Borrowings  on our  revolving  lines of credit,  as well as the
issuance of preferred stock and pay-in-kind  notes,  provided the primary source
of funds for the current period.


     Our ability to fund our operations and maintain compliance with both credit
facilities  is  dependent on our ability to generate  sufficient  cash flow from
operations.  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.  With
the recent  acquisition  of Zany Brainy and our planned  acquisition of FAO, the
upcoming fourth quarter operating results are extremely important in determining
the amount of liquidity and capital resources  available for the next 12 months.
We continually look for ways to improve operating  results,  increase  inventory
turnover and obtain better payment terms from suppliers.

     Our expansion  plans have changed with the  acquisition  of Zany Brainy and
our planned acquisition of FAO. We have currently suspended our search for stand
alone Right Start locations but will begin opening Right Start stores within the
four walls of our  existing  Zany  Brainy  stores.  We believe  that many of the
existing  Zany  Brainy  stores  have  excess  floor  space  which will be better
utilized by these  "store-in-a-store"  additions. We expect to open up to 120 of
these beginning in the second quarter of next year at a rate of approximately 10
per  month.  The  capital  outlay for these  additions  is  expected  to average
approximately  $35,000 per store, whereas the capital outlay for opening a stand
alone  Right  Start  store had  averaged  $125,000.  Our  ability to execute any
expansion will be dependent on future operating  results.  We will also consider
our  financing  alternatives  in  determining  the rate at which we execute  our
"store-in-a-store" growth strategy.

     Upon  completing the  "store-in-a-store"  expansion,  we expect to open new
"Combo  Stores" that will contain both a Zany Brainy and a Right Start.  No time
frame has yet been established for opening new "Combo Stores."

     According to its  certificate  of  determinations,  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. The holders of such stock have notified the Company that they believe
the  investments  received  by  the  Company  in  order  to  accomplish  the  ZB
Acquisition  require a mandatory  redemption.  The Company  informed the holders
that it disagreed with their position. In December 2001, the two parties settled
the  redemption  disagreement  by resolving,  among other  things,  to reset the
redemption  date to  March  31,  2002.  The  Company  anticipates  funding  this
redemption  under  the  consolidated  credit  agreement  that  it  is  currently
discussing with the Bank.


     We believe that cash flow from  operations and  borrowings  under the Right
Start  Credit  Facility  (as  it may be  amended  in  connection  with  the  FAO
Acquisition)  and the ZB Credit  Facility will provide  sufficient  liquidity to
fund  operations for the current fiscal year and Fiscal 2002.  If,  however,  we
were to experience a significant decrease in cash flow from operations we may be
required to obtain  additional  financing.  There can be no assurance,  however,
that such  additional  financing  would be available  on terms  favorable to the
Company at such time.

     On September 5, 2001, ZBCI completed the acquisition of  substantially  all
of the assets of Zany Brainy,  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 management and the Board of Directors  determined
that there was a good fit between the two brands,  the  combination  would allow
cross-promotion  throughout the childhood of our customers' children, the brands
attract similar  customers,  that there were  opportunities  for efficiencies in
operations and that the price was attractive.  As consideration,  ZBCI agreed to
pay the following:  $7.5 million in cash plus 1.1 million shares of Common Stock
to the Zany Brainy 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);  $65.8  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;  $4.2 million  which was offset by payments
due to  investors;  $2.1  million  paid at the  closing  into an escrow for Zany
Brainy management retention bonuses;  and certain lesser amounts.  Additionally,
ZBCI assumed certain other liabilities  estimated at $36.9 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 The
Company has also agreed to  reimburse  the Zany  Brainy  creditors  for up to $1
million for costs the may be incurred by the creditors  related to  professional
services.  To the  extent  any  amounts  are  paid by the  Company,  they  would
represent  additional purchase price.. In addition to the investments  discussed
below, the Company  financed the ZB Acquisition  through the ZB Credit Facility.
The  Company  plans to maintain  both the Zany Brainy 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 ZB  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 34.4% of the fully diluted shares of the
Company before giving effect to employee and director stock options but assuming
conversion  of the Series H Preferred  Stock.  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.

     The FAO  Acquisition  will be funded  through the issuance of the Company's
Series H Preferred Stock which is contingently convertible into 5 million shares
of the  Company's  common  stock,  and the  issuance of $18 million in aggregate
principal amount of 8% Subordinated Notes, due 2004 (the "FAO Notes").

     The  Series  H  Preferred  Stock  is  convertible,  upon  approval  by  our
shareholders,  at a price of $4.00 per share.  The Series H Preferred  Stock, if
and when converted to our common stock,  represents  approximately  14.6% of the
fully  diluted  shares of our common  stock  (approximately  34 million  shares)
before  giving  effect  to  employee  and  director  stock   options.   Under  a
shareholders'  agreement  with  FAO,  Mr.  Fred  Kayne and  affiliates  of Kayne
Anderson Investment  Management have agreed to vote their securities in favor of
all matters  necessary to permit the conversion of the Series H Preferred Stock.
Upon such  authorization  and  approval,  the Series H  Preferred  Stock (to the
extent of the conversion of our other convertible securities other than employee
or director  options,  outstanding  warrants to purchase our common stock or the
Series E Preferred Stock) will  automatically  convert into shares of our common
stock.

     The FAO Notes, which rank pari-passu on a liquidation with our indebtedness
and indebtedness of Toy Soldier to our respective  vendors,  suppliers and trade
creditors  incurred in the ordinary course of business,  is guaranteed by us and
secured by a subordinated  security  interest in substantially all of the assets
of Toy Soldier and us, respectively.  In the event of a liquidation,  insolvency
or bankruptcy of us or Toy Soldier, the holders of the FAO Notes are required to
share the proceeds of any collateral on a pro-rata basis with the holders of the
trade debt. Toy Soldier must prepay 20% of the aggregate principal amount of the
FAO Notes if its  consolidated  EBITDA  exceeds  $25 million in either of fiscal
2003 or 2004 and must prepay another 20% in 2004 if the prepayment obligation is
triggered in 2003.  Toy Soldier also must prepay the FAO Notes with the net cash
proceeds  from the closing of a sale of debt or equity  securities  of us or Toy
Soldier  in excess of $5 million  unless  the  proceeds  are  received  from the
closing of a sale of debt or equity  securities  on condition  that they be, and
within 30 days of receipt are,  used to  accomplish a merger,  consolidation  or
asset acquisition.  Toy Soldier also must prepay the FAO Notes with the proceeds
of asset sales in excess of $500,000  unless,  within 30 days of receipt of such
proceeds,  such proceeds are used to repay  indebtedness  outstanding  under its
Loan  and  Security  Agreement  with the  Bank.  Finally,  no more  than 30 days
following a Change of  Control,  Toy  Soldier  must prepay the entire  principal
amount outstanding under the FAO Notes. "Change of Control" means the occurrence
of any of the following:  (i) the adoption of a plan relating to the liquidation
or dissolution of Toy Soldier or the Company,  (ii) any person or group (as such
term is used in Section 13(d)(3) and 14(d)(2) of the Securities  Exchange Act of
1934, as amended) is or becomes the beneficial  owner (as defined in Rules 13d-3
and  13d-5  under  the  Securities  Exchange  Act of 1934,  as  amended  (or any
successor rules)),  directly or indirectly, of more than 50% of the total voting
stock  of  Toy  Soldier  or  us,  other  than  in  connection   with  a  merger,
consolidation  or  acquisition  of assets  in which  Kayne  Anderson  Investment
Management  affiliates  do not sell  equity  or (iii)  the  first day on which a
majority  of the  members  of the  Board of  Directors  of Toy  Soldier  are not
Continuing  Directors other than in connection with a merger,  consolidation  or
acquisition of assets in which Kayne Anderson Investment  Management  affiliates
do not sell equity.  The term  "Continuing  Director"  means,  as of any date of
determination,  any member of Toy  Soldier's  Board of  Directors  who (i) was a
member of Toy Soldier's  Board of Directors at the closing or (ii) was nominated
for election or elected to Toy Soldier's Board of Directors with the affirmative
vote of a majority of the Continuing Directors who were members of such Board at
the time of such nomination or election.


Impact of Inflation

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

Seasonality

     The Right Start Retail Store  Operations and Direct to Customer  Operations
are not  significantly  impacted by seasonal  fluctuations when compared to many
other specialty retail operations. The products sold in those operations are for
the most part need-driven and the customer is often the end user of the products
as opposed to a gift giver. These operations do, however,  experience  increased
sales during the Christmas holiday season, primarily in mall stores. As a result
of the ZB Acquisition  and the FAO  Acquisition we expect our business to become
more seasonal.  Each of those  businesses is highly seasonal and over 40% of the
associated  revenue can be expected to be received in the fourth  quarter.  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
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 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  adopted SFAS 141 effective July 1,
2001. The Company is currently  evaluating the impact of the adoption of SFS 142
and has not yet  determined  the effect,  if any, that its adoption will have on
its financial position or results of operations.

     In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets,"  which  is  effective  for the  fiscal  years
beginning after December 15, 2001 and interim periods within those fiscal years.
SFAS  144  establishes  an  accounting  model  for  impairment  or  disposal  of
long-lived assets to be disposed of by sale. The Company plans to adopt SFAS 144
on February 3, 2002. The Company believes the adoption of this standard will not
have a material impact 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
minimal  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.


<PAGE>


                                     PART II

                                OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K

              The Company filed two 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.






<PAGE>




                                   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:  December 18, 2001                            /s/ Jerry R. Welch
                                                        Jerry R. Welch
                                                        Chief Executive Officer


Date:  December 18, 2001                             /s/ Raymond P. Springer
                                                         Raymond P. Springer
                                                         Chief Financial Officer