Document:

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                                December 4, 2000

CONFIDENTIAL

John Hnanicek
eToys Inc.
12200 West Olympic Boulevard
Los Angeles, California  90064

         Re: RETENTION COMPENSATION

Dear John:

         The Board of Directors of eToys Inc. (including any successor or
assignee thereof, the "Company") has authorized the Company to obtain
indications of interest for a possible purchase of the Company by a third party.
While the Board has not at this time determined to sell the Company, the Board
today approved the engagement of an investment bank to act as the Company's
advisor in connection with any proposed sale transaction. The Board has
determined that, in light of prevailing market conditions, depending upon the
achievable valuation in a sale transaction, such a sale may be in the best
interests of the Company and its securityholders.

         The Board recognizes that these actions will create uncertainty for you
regarding your future employment. Moreover, as a key employee, your
participation in the Company's continuing operations during this process as well
as your contributions to the process itself will be necessary to enable the
Company to successfully consummate any proposed sale. Accordingly, the Company
desires to retain your services during this process and, in order to do so, has
been authorized by the Board to offer you the following benefit.

         Promptly following your execution of this letter agreement, the Company
will pay to you in cash a lump sum of Two Hundred Fifty Thousand Dollars
($250,000) (the "Retention Compensation"), less applicable withholdings. The net
payment received by you following deduction of applicable withholdings is
referred to herein as the "Net Retention Compensation."

         Your Retention Compensation will be deemed fully vested on the earliest
to occur of the following (the "Vesting Date"): (a) March 31, 2001, (b) the
consummation of a Change of Control of the Company, (c) the Company's
termination of your employment without Cause, or (d) your termination of your
employment for Good Reason. The definitions of the terms "Change of Control",
"Cause" and "Good Reason" are set forth on Exhibit A hereto. Once your

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Retention Compensation Letter
December 4, 2000
Page 2

Retention Compensation has vested, you will not be required to return it or
reimburse the Company for it under any circumstances whatsoever.

         In the event that, prior to the Vesting Date, either (i) you
voluntarily terminate your employment with the Company without Good Reason or
(ii) the Company terminates your employment for Cause, then, within 30 days
following such termination, you will be required to reimburse the Company an
amount equal to your Net Retention Compensation, without interest or other
penalty. You will not be required to reimburse the Company for any amount
greater than the Net Retention Compensation.

         Nothing contained in this letter agreement alters any of the other
terms of your employment. Thus, the Retention Compensation is in addition to
your current salary, stock options, employee benefits and/or other compensation,
all of which will continue to be provided by the Company in accordance with past
practice. Further, you will remain an "at-will" employee of the Company.
Accordingly, the Company will be free to terminate your employment at any time,
and you will be free to terminate your employment with the Company at any time.

         This letter agreement is governed by the laws of the State of
California. It may not be amended or modified except through a written amendment
signed by the Company and you.

         If this letter agreement is acceptable to you, please so indicate by
countersigning it in the place provided below, whereupon it will become a
binding agreement between the Company and you. Thank you for your continuing
efforts and contributions during this process.

                                       Sincerely,

                                       ETOYS INC.

                                       By: /s/ Edward C. Lenk
                                          -------------------
                                          Edward C. Lenk
                                          Chairman of the Board of Directors,
                                          Chief Executive Officer and President

         Accepted and agreed to on December 4, 2000.

         By: /s/ John Hnanicek
            ------------------
            John Hnanicek

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Retention Compensation Letter
December 4, 2000
Page 3

                                    EXHIBIT A

         As used in this letter agreement, the following terms have the
following meanings:

I.       "Cause" means (a) a willful and deliberate refusal to follow lawful
         directives of the Company's Chief Executive Officer or Board of
         Directors which are consistent with your customary duties and
         responsibilities, where such refusal has continued for more than 15
         days following written notice of such refusal; (b) embezzlement or
         misappropriation of funds or property of the Company; or (c) conviction
         of a felony involving moral turpitude.

II.      "Change of Control" shall mean the occurrence of any of the following:

                  (A) Any "Person" or "Group" (as such terms are defined in
         Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange
         Act") and the rules and regulations promulgated thereunder) is or
         becomes the "Beneficial Owner" (within the meaning of Rule 13d-3 under
         the Exchange Act), directly or indirectly, of securities of the
         Company, or of any entity resulting from a merger or consolidation
         involving the Company, representing more than fifty percent (50%) of
         the combined voting power of the then outstanding securities of the
         Company or such entity.

                  (B) The consummation of (x) a merger, consolidation,
         reorganization or comparable transaction to which the Company is a
         party, whether or not the Company is the Person surviving or resulting
         therefrom, or (y) a sale, assignment, lease, conveyance or other
         disposition of all or substantially all of the assets of the Company,
         in one transaction or a series of related transactions, to any Person
         other than the Company, where any such transaction or series of related
         transactions referred to in the preceding clause (x) or (y) (a
         "Transaction") does not otherwise result in a "Change of Control"
         pursuant to subparagraph (A) of this definition; PROVIDED, HOWEVER,
         that no such Transaction shall constitute a "Change of Control" under
         this subparagraph (B) if the Persons who were the stockholders of the
         Company immediately before the consummation of such Transaction are the
         Beneficial Owners, immediately following the consummation of such
         Transaction, of fifty percent (50%) or more of the combined voting
         power of the then outstanding voting securities of the Person surviving
         or resulting from any merger, consolidation or reorganization referred
         to in clause (x) above in this subparagraph (B) or the Person to whom
         the assets of the Company are sold, assigned, leased, conveyed or
         disposed of in any transaction or series of related transactions
         referred in clause (y) above in this subparagraph (B).

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Retention Compensation Letter
December 4, 2000
Page 4

III.     "Good Reason" means (a) any adverse change in your job title or the
         assignment to you of duties materially inconsistent with your position
         with the Company; (b) a reduction in your current salary; (c) any
         failure by the Company to continue to pay your current salary in
         accordance with past practice or to provide employee benefits
         reasonably comparable to those currently provided to you; (d) the
         relocation of your office to a location that is more than 50 miles from
         its current location; (e) the Company's failure to maintain Directors
         and Officers Insurance reasonably comparable to its existing policy;
         (f) any effort by the Company to rescind or recover from you the
         Retention Compensation provided by this letter agreement; (g) any
         disability suffered by you that prevents you from performing your
         duties generally in accordance with past practice; or (h) your death.<PAGE>

                              STANDSTILL AGREEMENT

         This Agreement is made as of this 16th day of January, 2001, between
eToys Inc. and all its domestic Subsidiaries and Affiliates ("eToys") and the
Informal Committee of Unsecured Creditors of eToys (the "Committee").

                               W I T N E S S E T H

         WHEREAS, on January 10, 2001 (the "Committee Organization Date"), the
Committee organized itself, at the request of eToys, and as initially organized
is comprised of the following companies: Mattel, Inc. (Chairperson) Hasbro, Lego
Systems, Inc., R.R. Donnelley & Sons Company, Staffmark Investments, LLC, Fir
Tree Capital, Pacific Asset Management; and

         WHEREAS, the Committee has advised eToys that it has retained the
services of Traub, Bonacquist & Fox LLP ("TB&F") as its counsel; and

         WHEREAS, eToys is desirous of entering into an out of court
composition, extension or other acceptable agreement providing for the treatment
of its outstanding claims (the "Composition Agreement') and further, eToys has
agreed to allow the Committee a reasonable period of time to conduct such due
diligence as it may require to determine the feasibility and advisability of
entering into such a Composition Agreement (the "Standstill Period"), and

         WHEREAS, other than as provided in paragraph 2 of this Agreement, eToys
has agreed that during the Standstill Period it shall make no payments,
transfers or returns of merchandise on account of any its debts or obligations
to anyone that arose or accrued prior to the date of this Agreement, without the
written consent of the Committee.

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         NOW THEREFORE, for valuable consideration, including the forbearance of
each Committee member, the parties hereby agree as follows:

         1. This Agreement shall remain in effect and shall terminate on the
earlier of: (a) 5:00 p.m. (Pacific Time) on January 31, 2001; (b) the Committee
and eToys agree, in a writing executed in the same manner as this Agreement, to
modify, replace or terminate this Agreement; (c) eToys defaults under or
otherwise violates the terms of this Agreement and the Committee terminates this
Agreement or an order for relief under the Bankruptcy Code is entered against
eToys or an assignment for the benefit of creditors is executed by eToys
(collectively, the "Termination Date").

         2. During the Standstill Period, eToys shall make no payments,
transfers or returns of merchandise on account of any of its past due debts as
of the date of this Agreement including, but not limited to, goods or
merchandise that were shipped or delivered prior to the date of this Agreement;
PROVIDED HOWEVER, during the Standstill Period, eToys shall use funds to
maintain its existing operations substantially in accordance with a budget to be
agreed upon.

         3. During the Standstill period, eToys shall conduct its business in
the ordinary course and shall take no action, without the prior written consent
of the Committee and sell or otherwise transfer its assets, including inventory,
via bulk sale(s) or otherwise, outside of the ordinary course of its business.

         4. Subject to the separate letter agreement, eToys will pay the
reasonable fees and expenses incurred by the Committee's professionals during
the period between the Committee Organization Date and the Termination Date.
Contemporaneously with the execution of this Agreement, eToys will wire transfer
$165,000 to TB&F. At the conclusion of the

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Standstill Period, TB&F shall provide eToys, and its counsel, with a billing
statement setting forth the identity of each TB&F professional who has performed
services for and on behalf of the Committee, the rate charged by each such
professional, and the aggregate time spent by each for the service provided.
TB&F acknowledges that during the Standstill Period no legal services shall be
provided for any individual Committee Member or on behalf of any other entity
other than the Committee in connection with eToys and/or this Agreement. TB&F
will also forward copies of the expenses incurred by the Committee member.

         5. During the Standstill Period, and so long as eToys has complied with
all of its obligations under the Standstill Agreement, the members of the
Committee will (a) forebear from exercising such rights as they may have against
eToys for payment or collection of sums that may be due to them, and (b) either
jointly or individually, forebear from participating in the filing of an
involuntary bankruptcy proceeding or state court receivership against eToys.
Such forbearance is not a waiver of any portion of the claims of any Committee
member.

         6. This Agreement does not create a joint venture or create a
partnership between the parties.

         7. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof. All prior agreements and
understandings are merged herein and there are no oral understandings apart form
the terms of this Agreement. This Agreement may be altered, amended or modified
only by a written instrument signed by all parties to this Agreement.

         8. This Agreement and any issues arising hereunder will be governed by
the laws of the State of California.

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         9. This Agreement may be executed in one or more counterparts,
including facsimile transmittals, each of which shall be deemed an original, and
all of which shall constitute one and the same agreement.

         IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
the day and year first above written.

                                       ETOYS INC.

                                       By: /s/ Peter Juzwiak

                                       Title: Vice President and General Counsel

                                       Printed Name: Peter Juzwiak

                                       THE INFORMAL COMMITTEE OF
                                       UNSECURED CREDITORS

                                       By: __________________________________

                                       Committee Member:_____________________

                                       Company: _____________________________

                                       Printed Name: __________________________

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