U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-KSB

Check the appropriate box:

[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934

[Fee Required]

For the fiscal year ended June 30, 2001.

[ ] Transition report under Section 13 or 15(d) of the Exchange Act

[No Fee Required]

For the transition period from _______________ to _______________.

Commission file number 1-12580.

THE VERMONT TEDDY BEAR CO., INC.

(Exact name of small business issuer as specified in its charter)

New York					03-0291679

(State or other jurisdiction (I.R.S. Employer

of incorporation or organization) Identification No.)

6655 Shelburne Road, Post Office Box 965

Shelburne, Vermont 05482

(802) 985-3001

(Address of principal executive offices)

Securities registered under Section 12(b) of the Exchange Act:

Title of each class					Name of each exchange on which registered

Common Stock, par value $.05 per share		NASDAQ Smallcap Market



Securities registered under Section 12(g) of the Exchange Act:

Common Stock, per value $.05 per share

(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 .

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

The issuer's revenues for its most recent fiscal year ended June 30, 2001 were $37,255,267

The aggregate market value of the voting stock held by non-affiliates of the issuer, based on the average high and low prices of such stock on September 18, 2000, as reported on NASDAQ, was $14,717,652.

As of September 18, 2001, there were 6,859,171 shares of the issuer's common stock issued and 6,836,151 shares outstanding.

Documents Incorporated By Reference

The following documents, in whole or in part, are specifically incorporated by reference in the indicated part of this Annual Report on Form 10-KSB:

Proxy Statement for 2001 Annual Meeting of the issuer's stockholders: Part III, Items 9, 10, 11 and 12.

Transitional Small Business Disclosure Format (check one): Yes ; No X .











The Vermont Teddy Bear Co., Inc.

2001 Form 10-KSB Annual Report



Table of Contents



|         |                                                                                                                 | Page
|-------- | --------------------------------------------------------------------------------------------------------------- | ----
|Part I   |                                                                                                                 |     
|Item 1.  | Description of Business                                                                                         | 3   
|Item 2.  | Description of Property                                                                                         | 10  
|Item 3.  | Legal Proceedings                                                                                               | 11  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                             | 11  
|         |                                                                                                                 |     
|Part II  |                                                                                                                 |     
|Item 5.  | Market for Common Equity and Related Stockholder Matters                                                        | 11  
|Item 6.  | Management's Discussion and Analysis or Plan
of Operation                                                       | 14  
|Item 7.  | Financial Statements                                                                                            | 17  
|Item 8.  | Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure                            | 18  
|         |                                                                                                                 |     
|Part III |                                                                                                                 |     
|Item 9.  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act | 18  
|Item 10. | Executive Compensation                                                                                          | 18  
|Item 11. | Security Ownership of Certain Beneficial Owners
and Management                                                  | 18  
|Item 12. | Certain Relationships and Related Transactions                                                                  | 18  
|Item 13. | Exhibits and Reports on Form 8-K                                                                                | 18  
|         |                                                                                                                 |     
|         | Signatures                                                                                                      | 25  
|         |                                                                                                                 |     
|         | Index to Financial Statements                                                                                   | 26  









Part I.

Item 1. Description of Business

Founded in 1981 and incorporated in 1984, The Vermont Teddy Bear Co., Inc. (the "Company"), with its principal offices located at 6655 Shelburne Road, Shelburne, Vermont, is a designer, manufacturer, and direct marketer of teddy bears and related products.



Principal Business Segments and Distribution Methods

In accordance with certain accounting rules adopted for the fiscal year ended June 30, 1999, the Company has identified the following segments within its business on which it will separately report certain financial results. The largest of the Company's business segments is the Bear-Gram gift delivery service comprising 90.5 percent of the Company's net revenue for the fiscal year ended June 30, 2001. The Company's retail store operations represented 8.3 percent of net revenues, and wholesale, corporate affinity, and licensing programs together were 1.1 of net revenues for the fiscal year ended June 30, 2001. SendAMERICA, a new wholly owned subsidiary is a new business segment begun in fiscal 2001 and represents 0.1% of net revenues for fiscal year ended June 30, 2001.

Primary Business Segments

(12 months ended June 30)



|                        | 2001  | 2000  | 1999  | 1998  | 1997 
|----------------------- | ----- | ----- | ----- | ----- | -----
|Bear-Gram Service*      | 90.5% | 85.3% | 84.0% | 81.2% | 80.9%
|Retail Store Operations | 8.3%  | 8.4%  | 11.2% | 18.0% | 17.7%
|Wholesale/Corporate     | 1.1%  | 6.3%  | 4.8%  | 0.8%  | 1.4% 
|SendAmerica             | .1%   | -     | -     | -     | -    



* Excludes Bear-Gram revenues from retail operations.

The Bear-Gram delivery service involves sending personalized teddy bears directly to recipients for special occasions such as birthdays, anniversaries, weddings, and new births, as well as holidays such as Valentine's Day, Christmas, and Mother's Day. The Company positions its Bear-Gram gift delivery service as a "creative alternative to flowers."

The Company uses primarily direct response radio advertising, supported visually by the Internet to market its Bear-Gram gift delivery service. Every radio advertisement is tagged with the Company's website address in addition to its toll free telephone number. The combination of direct response radio and the Internet represent 91.4 percent of net revenues in the Bear-Gram segment for the fiscal year ended June 30, 2001. Other avenues of marketing the Bear-Gram delivery service are direct mail catalogs and print advertisements primarily in magazines which together represent 8.6 percent of net revenues for the same twelve-month period.

Primary Distribution Methods for the Bear-Gram Segment

(12 months ended June 30)

|                  | 2001  | 2000  | 1999  | 1998  | 1997 
|----------------- | ----- | ----- | ----- | ----- | -----
|Radio/Internet    | 91.4% | 90.2% | 87.6% | 88.7% | 86.5%
|Direct Mail/Print | 8.6%  | 9.8%  | 12.4% | 11.3% | 13.5%



The Bear-Gram delivery service was first introduced on a small scale in 1985. Throughout the 1980's, however, the Company's marketing efforts focused primarily on wholesaling teddy bears to specialty stores and direct retail through its own outlets. Shortly before Valentine's Day in 1990, the Company introduced radio advertising of its Bear-Gram delivery service on radio station WHTZ ("Z-100") in New York City, positioning it as a novel gift for Valentine's Day, and offering listeners a toll-free number for customers to order from the Company's facility in Vermont. This test proved to be successful, and the service was expanded to other major radio markets across the country. Primarily through the Bear-Gram delivery service, the Company has increased its net revenues from approximately $351,000 in 1989 (the year prior to the initial New York City Bear-Gram campaign) to a peak of $37,255,000 in 2001.

Since 1990, the Company has expanded the radio advertising of its Bear-Gram delivery service beyond New York City, to include other metropolitan areas and syndicated radio programs carried by stations across the United States, with significant expansion occurring in the past three years. During its fiscal year ended June 30, 2001, the Company regularly placed advertising on 398 radio stations in ninety-eight radio market areas in the United States. For Valentine's Day in fiscal years ended June 30, 2001, the Company advertised on approximately 580 radio stations in 125 different markets as well as 10 syndicated programs, as compared to 513 radio stations in 119 different markets in the year ended June 30, 2000. The Company plans to expand into more new radio markets and new stations in existing markets during peak and non-peak times.

The Company began taking orders on its website in March of 1997 recognizing that the website provided visual support to the Company's radio advertising campaign across the country and a convenient way for customers to place orders. In December 1997, online orders presented seven percent of total Bear-Gram orders. The percentage has trended upward reaching fifty percent of total Bear-Gram orders in June 2001.

The Company includes the sales from orders placed on its Internet website, www.vermontteddybear.com, with sales generated by direct response radio as it believes that the majority of traffic to the website is generated by radio advertising. All radio advertisements are tagged once with the website address in addition to three mentions of its toll-free number. A total of 3,540,338 unique visitors were recorded during the twelve months ended June 30, 2001, up 61 percent from the 2,205,000 unique visitors recorded during the twelve months ended June 30, 2000.

In May 2000 the Company launched a new online PreFUR'd Member program to stimulate loyalty among its existing customers, increase repeat purchases and average down its advertising costs. The PreFUR'd Member program offers customers special promotions, previews of product and a newsletter via e-mail. In June 2000, the Company had approximately 188,000 PreFUR'd Members. By June 2001, that number grew to approximately 350,000. The Company will seek to expand this program and in the year ahead will offer similar benefits to its offline customers in addition to online customers.

In February 2001 the Company also initiated an online affiliate marketing program. The Company worked with several affiliate partners, including existing radio stations and charities, to advertise to new prospects via e-mail and paid these partners a percentage of sales generated. In the year ahead, the Company will seek to expand this program.

The Company also generates Bear-Gram revenues from direct mail initiatives and print advertising. The Company introduced its first catalog for Christmas of 1992, and currently has an in-house mailing list in excess of 1,700,000 unique names. During the twelve months ended June 30, 2001, more than 31.8 million circulated pages were mailed to prospective customers. The Company intends to increase the number of circulated pages in the year ahead by mailing larger catalogs to the increasing number of customers on its in-house mailing list.

The retail operations business segment was second only to the Bear-Gram delivery service segment in its contribution to the Company's net revenues in the fiscal year ended June 30, 2001, at 8.3 percent of net revenues. The contribution from retail operations was 8.4 percent of net revenues for the fiscal year ended June 30, 2000.

The Company's very successful factory retail store actively promotes family tours of its teddy bear factory and store at the factory location in Shelburne, located ten miles south of Burlington, Vermont. In May, 2001 the Company completed expansion of its retail store from 3,000 square feet to 5,000 square feet. The factory tour drew over 117,000 visitors in the twelve-month period ended June 30, 2001, and has drawn more than 727,000 tours visitors since moving to its new location in July 1995. The Company believes its factory tour is now the second most popular factory tour attraction, based on number of tours taken, in Vermont. In an effort to make a visit to the factory more entertaining and draw additional traffic, the Company has implemented the Make-A-Friend-For-Life bear assembly area, where visitors can participate in the creation of their own teddy bear. Customers made 29,800 Make-A-Friend-For-Life bears during fiscal 2001.

As the Company expands its radio advertising campaign nationally, it is increasingly diversifying its geographic markets and becoming less dependent on a few metropolitan locations. The following table shows the Company's largest markets and most frequent reasons given by customers for purchasing the Company's Bear-Gram gifts:

Percentage of Bear-Gram revenues

(12 months ended June 30)



|Markets       | 2001  | 2000  | 1999  | 1998  | 1997 
|------------- | ----- | ----- | ----- | ----- | -----
|New York City | 25.8% | 28.4% | 37.6% | 37.8% | 40.8%
|Boston        | 10.6% | 11.0% | 12.1% | 13.4% | 13.2%
|Philadelphia  | 7.7%  | 8.7%  | 9.4%  | 8.9%  | 11.6%
|Chicago       | 7.1%  | 6.8%  | 6.0%  | 6.5%  | 8.9% 
|Detroit       | 5.1%  | 6.2%  | 5.1%  | 4.0%  | 3.3% 
|Los Angeles   | 4.0%  | 4.4%  | 4.8%  | 6.3%  | 5.8% 



Percentage of Bear-Gram orders

(12 months ended June 30)



|Reasons for Purchases | 2001  | 2000  | 1999  | 1998  | 1997 
|--------------------- | ----- | ----- | ----- | ----- | -----
|Valentine's Day       | 31.1% | 26.2% | 25.2% | 27.7% | 22.1%
|Mother's Day          | 12.2% | 14.5% | 12.7% | 9.3%  | 6.0% 
|Birthdays             | 10.8% | 11.1% | 11.5% | 11.8% | 11.6%
|New Births            | 8.7%  | 9.0%  | 10.4% | 11.6% | 10.3%
|Get Wells             | 9.0%  | 9.6%  | 10.4% | 11.0% | 9.7% 
|Christmas             | 7.3%  | 7.0%  | 8.7%  | 8.4%  | 5.6% 



The Company's Bear-Gram segment sales are heavily seasonal, with Valentine's Day, Mother's Day, Christmas, and Sweetest Day as the Company's largest sales seasons.

During its fiscal year 1998, the Company began pro-actively developing opportunities in the corporate affinity market and certain wholesale markets as a business segment. The Wholesale/Corporate business segment accounted for 1.1% of net revenues for fiscal year ended June 30, 2001. While some corporate affinity programs involve the Company's Vermont Teddy Bear brand bear, manufactured in its Vermont factories, the largest orders involve teddy bear products designed by the Company and manufactured off shore.

Each corporate and wholesale program is tailored to meet the needs of its customers and every teddy bear whether, imported or domestically made, carries a lifetime guarantee. The Company has partnered with several factories in China that meet the Company's stringent quality and fair labor standards. All imported teddy bears are identified with a co-branded label and a tag that reads "vtbc design! An import division of The Vermont Teddy Bear Company."

During the fiscal year ended June 30, 2000, the Company sold at wholesale its Make-A-Friend-For-Life products to Zany Brainy, Inc., an educational toy store chain based in King of Prussia, Pennsylvania. The Company terminated this arrangement in September 2000 due to Zany Brainy's inability to achieve certain minimum purchases called for under an agreement with the Company. The Company is actively pursuing new retail partners to adopt this "store within a store" make your own teddy bear concept.

SendAMERICA, Inc., a new wholly owned subsidiary, is a new business segment begun in fiscal 2001 for the purposes of extending the Company's product offerings in the gift delivery service industry to include other American made gift products in addition to teddy bears. SendAMERICA, which is still in the start up phase, generated immaterial revenues during the year ended June 30, 2001. SendAMERICA offers customers American made gift items for many occasions made by artisans across the country. Featured artisans are selected based on the quality of their products and their ability to drop-ship merchandise directly to the customer. Orders are placed online at www.sendamerica.com or by calling a toll free number (1-877-592-6374). Through proprietary technology managed by SendAMERICA, customer orders are processed by SendAMERICA and forwarded electronically via the Internet to the artisan supplier. A personalized card, picking instructions, and a prepared shipping label are printed by the supplier from the order information received. The suppliers prepare their handcrafted products for shipping with packaging that incorporates SendAMERICA labeling. SendAMERICA coordinates pickup and delivery of the gift item at the artisan's location by Federal Express.



Competitive Business Conditions

The Company competes with a number of sellers of flowers, balloons, candy, cakes, and other gift items, which can be ordered by telephone for special occasions and delivered by express service in a manner similar to Bear-Gram gifts. The Company positions its Bear-Gram gifts as a "creative alternative" to these products and competes with these products by providing convenient customer service and reliable expedited delivery options. The Company also competes to a lesser degree with a number of companies that sell teddy bears in the United States, including, but not limited to, Steiff of Germany, Dakin, North American Bear, and Gund. Many of these competitors have greater financial, sales, and marketing resources than the Company. The Company also competes with businesses that market and sell teddy bears and other stuffed animals in a manner similar to Bear-Grams, including "Pooh-Grams" marketed by certain subsidiaries of Disney Enterprises, Inc.

With the advent of the Internet, many small companies have started web-sites that allow customers to order bears and have them delivered in a manner similar to Bear-Gram gifts. The Company vigorously defends trademark infringement when it appears on these web-sites, and continues to police the Internet for such infringement. However, the Company anticipates that there will continue to be other companies that compete directly with the Company's Bear-Gram gift business, including those with greater financial resources than the Company.



Principal Products

From its inception, the Company's primary focus has been to design, manufacture and market the best teddy bears made in America. Until recently, the Company manufactured its bears exclusively in the United States. Beginning in its fiscal year 1998, the Company began importing certain of its products from China for its corporate and wholesale business segment. However, convinced that its identity as an American manufacturer of teddy bears is a key element of its brand positioning, the Company remains committed to preserving and growing its Vermont based manufacturing operations to make the classic Vermont Teddy Bear brand bear for the Bear-Gram gift delivery service. In addition to the Shelburne, Vermont manufacturing facility, on November 1, 1999, the Company opened a manufacturing facility in Newport, Vermont, which on June 30, 2001 employed 82 people in all aspects of teddy bear manufacturing. The Company sources plush fabric and other materials from China and other countries for its Vermont-based teddy bear manufacturing operations, in an effort to lower the Company's cost of goods sold and to broaden its available sources of supply. Previously the Company has relied on a single domestic source of supply for plush fabric.

The move offshore represents a significant departure from the Company's historical position as an American manufacturer using almost exclusively American materials. The Company's strategic repositioning involves a commitment to ensuring that our partners adhere to stringent quality standards and provide decent, lawful working environments for their employees. The Company obtains a written statement to that effect from each offshore vendor prior to any transaction. Company management has visited the factories of its established partners in China and will continue to visit its offshore partners periodically. With this repositioning, the Company also commits to differentiate imported product from its Vermont-made bears to preserve the Company's Vermont Teddy Bear brand identity and to clearly label its imported products so as not to deceive or confuse customers. The "butt tag" of each imported teddy bear clearly specifies that it is "made in China" and identifies the bear as a product of "vtbc design! An import division of The Vermont Teddy Bear Company."

The Company produces many different sizes of its Vermont Teddy Bear brand bears, ranging from 11" to 36" tall, in six standard colors. In addition, the Company produces certain limited edition bears which vary in size. Virtually all of the Company's Vermont Teddy Bear brand bears have moveable joints and faux-suede paw pads, which are features associated with traditional, high-quality teddy bears.

Approximately 100 different bear outfits are manufactured, including ballerina bears, birthday bears, bride and groom bears, business bears, nurse bears, and sports bears. Ninety percent of the outfits were out-sourced to overseas contractors during the twelve months ended June 30, 2001.

In addition to its own manufactured product, the Company sells items related to teddy bears, as well as merchandise from other manufacturers featuring the logo of The Vermont Teddy Bear Company available primarily in the Company's factory retail store.

The Company's wholly owned subsidiary, SendAMERICA, Inc. offers a variety of products, in categories including home décor, artwork or crafts, jewelry and traditional American gourmet foods. Each product incorporates the tradition of excellence associated with American craftsmanship and is positioned with the unique story of its maker. Through drop ship arrangements with its artisan suppliers, SendAMERICA takes title to each product at the point when Federal Express manifests the packaged item for delivery. All SendAMERICA products are accompanied by SendAMERICA's 100% satisfaction guarantee.



Sources and Availability of Materials, Supplies, and Production

Raw materials for the Company's bears and outfits are obtained from several suppliers. The Company presently purchases certain of its raw materials from single suppliers, but believes that alternate sources of supply are available at competitive prices, should conditions warrant.

Fabric for all teddy bears is cut at the Company's Shelburne and Newport factories prior to being sewn. Sewing of bear parts (arms, legs, bodies, and heads) is done by employees in both locations, as well as by homeworkers and other domestic subcontractors. Once individual parts are sewn, they are returned to the factory for mechanical stuffing. The bears are assembled by attaching the stuffed parts to the bears with plastic joints, mechanically stuffing the bodies, and hand-stitching the backs. Each bear is finally outfitted and accessorized in Shelburne by the Company's Bear Dressers to meet customer requests.



Patents, Trademarks, and Licenses

The Company's name and its various logos, are in combination registered trademarks and servicemarks in the United States. In addition, the Company also owns the registered trademarks in the United States for "The Vermont Teddy Bear Company," "Make-A-Friend-For-Life," "Teddy Grams," "Racer Ted," "BearAnimal," and "The All-American Teddy Bear." The Company also owns the registered service marks "Bear-Gram", "Bear Counselor," "Vermont Bear-Gram", "Teddy Bear-Gram," and has applications pending to register "Coffee Cub," "The Great American Teddy Bear," "Ted Ex," and "Teddy Express," "Love is in the Bear," "Making the world a better place one bear at a time," "Nothing says you care like a bear," "The creative alternative to flowers," "Bears to Business," "Bears Say it Best," "SendAMERICA," "SendVERMONT," and "Send(all 49 other states)". The Company also owns the registered trademark "Vermont Teddy Bear" in Japan and "Bear-Gram" and "Teddy Bear-Gram" in Great Britain.

The Company also claims copyright, service mark or trademark protection for its teddy bear designs, its marketing slogans, and its advertising copy, web-site pages and promotional literature.



Employees

As of June 30, 2001, the Company employed 338 individuals, of whom 167 were employed in production-related functions, 142 were employed in sales and marketing positions, and 29 were employed in general and administrative positions. As of June 30, 2001, 241 of the Company's employees were full time. No employees are members of a union, and the Company believes it enjoys favorable relations with its employees.

The Company supplements its regular in-house work force with homeworkers who perform production functions at their homes. The level of outsourced work fluctuates with Company production targets; at June 30, 2001, there were 12 homeworkers producing products for the Company. Homeworkers are treated by the Company as independent contractors for all purposes, except for withholding of federal employment taxes. As independent contractors, homeworkers are free to accept or reject work offered by the Company. This working relationship allows the Company to adapt to short term fluctuations in production requirements.



Item 2. Description of Property

In July 1995, to consolidate the Company's disparate locations and improve manufacturing flow, the Company moved its principal offices, along with its factory retail store, manufacturing, sales, and fulfillment operations to its newly-constructed 62,000 square foot building, located on a 57-acre site along U.S. Route 7 in Shelburne, Vermont. The new site is two miles south of the Company's former location, and ten miles south of Burlington, Vermont. The Company purchased the site for approximately $817,000, and the cost of improving the site and constructing the new facility totaled approximately $7.1 million. On September 26, 1995, the Company entered into a $3.5 million commercial loan with the Vermont National Bank, secured by a first mortgage on the new facility, as well as general business assets. Repayment of the mortgage loan was based on a thirty-year fixed principal payment schedule, with a balloon payment due on September 26, 1997.

On July 18, 1997, the Company completed a sale-leaseback transaction involving its factory headquarters and a portion of its property located in Shelburne, Vermont. This financing replaced the Company's mortgage and line of credit agreement with the Vermont National Bank (now the Chittenden Bank). The Company received approximately $5.9 million in cash, of which approximately $3.3 million was used to pay off the existing mortgage with the Vermont National Bank. The balance, approximately $2.6 million, was used for general working capital purposes, to pay down a $600,000 balance on the Company's line of credit (which was retired as the result of the termination of the original mortgage loan), and for associated transaction costs of $679,000, which have been capitalized and recorded as a component of other assets as of June 30, 2001. The lease obligation, secured by the business assets of the Company, is payable on a twenty-year amortization schedule through July 2017with three additional five year renewal options.

On September 29, 1999 the Company entered into a one year lease with four one year renewal options for a new manufacturing facility in Newport, Vermont for 12,000 square feet. In April, 2001 the Company expanded it's Newport operation to occupy an additional 12,000 square feet in this facility. Annual lease payments are $113,536. On November 1, 1999, the Company began operation of the facility with 25 skilled sewers stitching teddy bear parts. As of June 30, 2001 there were 82 full time employees in the Newport facility manufacturing complete teddy bears, from cutting to stitching, to stuffing, pinning and assembly, and back sealing. The bears are then shipped back to the Shelburne plant for order fulfillment.

On July 19, 2000, to consolidate remote warehouse locations, the Company entered into a ten year lease with three five year renewal options for a new 60,400 square foot warehouse and fulfillment center in Shelburne, Vermont. This facility is on property that is contiguous to the property on which the Company's factory headquarters are located. Annual lease payments are $402,936. The lease began on September 1, 2000 and replaced a lease for 20,000 square feet of off-site space in Williston, Vermont and a lease for 4,000 square feet in Shelburne, Vermont. The Company is accounting for this lease as an operating lease in its financial statements.

Item 3. Legal Proceedings

On October 24, 1996, the company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obligated to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, the lease, itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgement on its claims and dismissing the landlord's claims. That motion was granted by order dated July 25, 2001 and judgement was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord noticed its appeal of that judgement and, as settlement discussions have been unsuccessful, will put a bond to stay enforcement of the judgement pending its appeal. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlement is reached and the judgement is ultimately reversed on appeal and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.



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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.



Part II.

Item 5. Market for Common Equity and Related Stockholder Matters

Market Information

At the time of the initial public offering of 1,172,500 shares of the Company's Common Stock in November 1993, the Company's Common Stock had been approved for quotation on NASDAQ and the Pacific Stock Exchange under the symbols "BEAR" and "VTB," respectively. To date, NASDAQ has been the principal market for the exchange of the freely tradable shares of the Company's Common Stock. On July 31, 1996, the Company voluntarily de-listed from the Pacific Stock Exchange as a result of minimal trading volume. Between July 1, 1998 and June 30, 2001, the high and low closing bid and closing sales prices for a share of the Company's Common Stock as quoted on NASDAQ were as follows:



|Quarter Ended      | High Bid | Low Bid | High Sales | Low Sales
|------------------ | -------- | ------- | ---------- | ---------
|June 30, 2001      | $4.00    | $3.31   | $4.00      | $3.50    
|March 31, 2001     | $4.19    | $2.63   | $4.13      | $2.63    
|December 31, 2000  | $4.81    | $0.56   | $4.66      | $3.66    
|September 30, 2000 | $3.97    | $2.81   | $3.88      | $2.88    
|June 30, 2000      | $3.75    | $2.50   | $3.75      | $2.56    
|March 31, 2000     | $4.75    | $3.00   | $4.81      | $3.13    
|December 31, 1999  | $5.09    | $3.75   | $5.22      | $3.69    
|September 30, 1999 | $4.88    | $3.13   | $5.00      | $3.25    
|June 30, 1999      | $3.97    | $1.88   | $3.97      | $1.94    
|March 31, 1999     | $3.81    | $1.50   | $3.81      | $1.44    
|December 31, 1998  | $3.25    | $0.50   | $3.25      | $ .50    
|September 30, 1998 | $1.28    | $0.75   | $1.44      | $.69     



Description of Securities

Immediately prior to the Company's initial public offering, there were 4,000,000 shares of the Company's Common Stock outstanding, held of record by nine shareholders. As a result of the 1,000,000 share initial public offering and the Underwriters' purchase of 172,500 additional shares to cover over-allotments in connection therewith, there were 5,172,500 shares of the Company's Common Stock outstanding immediately following the offering. On March 8, 1995, the Company purchased 12,000 common shares in the open market and continues to hold these shares as treasury stock. On November 4, 1998, the company purchased 11,020 additional common shares from dissenting shareholders and continues to hold these shares as treasury stock. From March 1, 1996 to June 30, 2001, 512,046 shares of the Company's Common Stock were issued pursuant to the exercise of employee Incentive Stock Options. On February 3, 1999, 10 holders of Series B Preferred Stock exercised conversion rights of 176,970 preferred shares into 474,989 shares of common stock. On July 19, 1999, the remaining 27,942 shares of Series B Preferred Convertible Stock were converted into 74,996 shares of the Company's Common Stock. On July 29, 1999, 215,157 warrants associated with the Series B Preferred Stock were exercised and converted into 519,715 shares of the Company's Common Stock. On December 20, 1999 warrants associated with a loan from Green Mountain Capital were exercised and converted into 100,000 shares of the Company's Common Stock. As a result of these activities, there were 6,831,226 shares of the Company's Common Stock outstanding, held of record by 1,744shareholders as of June 30, 2001.

There are 90 shares of non-voting Series A Preferred Stock, held of record by one shareholder, with a liquidation value of $10,000 per share plus cumulative dividends of eight percent per annum. There has been no change in the number of Series A Preferred shares and the original shareholder remains the sole shareholder of Series A Preferred Stock. There were $72,000 in dividends accrued during each of the fiscal years ended June 30, 2001 and June 30, 2000.

On July 12, 1996, the Company privately placed $550,000 of Series B convertible Preferred Stock. The 204,912 shares, $.05 par value, of Series B Convertible Preferred Stock were issued to twelve individuals. Series B stockholders are not entitled to any dividends or voting rights, but each share was originally convertible into one share of the Company's Common Stock at any time on or after July 14, 1997, subject to certain anti-dilution rights. As the result of subsequent financing transactions, the anti-dilution provisions of the Series B agreement were activated, and on February 3, 1999, 176,970 shares of Series B Convertible Preferred Stock was converted into 474,989 shares of the Company's Common Stock. On July 19, 1999, the remaining 27,942 shares of Series B Preferred Convertible Stock were converted into 74,996 shares of the Company's Common Stock.

On November 3, 1998, the Company closed on a private placement of $600,000 of its Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") to an investor group lead by The Shepherd Group LLC. Accompanying the Series C Preferred Stock are warrants to purchase 495,868 shares of the Company's Common Stock at an exercise price of $1.05 per share, which will expire seven years from the date of issuance. In connection with the issuance of the Series C Preferred Stock, a warrant to purchase 42,500 shares of the Company's Common Stock was issued at an exercise price of $1.05 to the Company's lessor in the sale-leaseback transaction. Because of the mandatory redemption provision, the Series C Preferred Stock net of the value of the warrants has been classified as long term debt in the accompanying balance sheet. The Company has valued the warrants using the Black Scholes valuation model. The aggregate value of $272,449 was applied as a discount to the face value of the Series C Preferred Stock on the Company's balance sheet. The Company will accrete this discount, with charges to retained earnings over a five-year period.

Each of the shares of Series C Preferred Stock has a liquidation value of $10,000 per share, and is convertible into 9,523 shares of the Company's Common Stock. The Series C Preferred Stock requires redemption upon the tenth anniversary of its issuance, with both the Company and the Series C Preferred stockholders having call and put rights, respectively, beginning on the fifth anniversary of issuance. The Series C Preferred stock carries voting rights on an as-converted basis, and, as a class, has the right to elect two members to the Company's Board of Directors. Both the Series C Preferred Stock and the accompanying warrants carry certain anti-dilution provisions. The Series C Preferred Stock has a cumulative preferred dividend of six percent per annum, payable quarterly. For the fiscal year ended June 30, 2001 $30,000 of dividends were accrued and for the fiscal year June 30, 2000 $36,000 of dividends were accrued. The dividends are required to be paid in additional shares of Series C Preferred Stock for the first two and one-half years after issuance. As of April 30, 2001, the Company was no longer required to pay the dividends in stock and exercised their option to pay them in cash. As of June 30, 2001, $6,017 had been paid in cash dividends.



Dividends

The Company has never paid cash dividends on any shares of its Common Stock, and the Company's Board of Directors intends to continue this policy for the foreseeable future. Earnings, if any, will be used to finance the development and expansion of the Company's business. The Company's ability to pay dividends on its Common Stock is limited by the preferences of certain classes of Preferred Stock, as well as certain indebtedness, and may be further limited by the terms of Preferred Stock issued or other indebtedness incurred by the Company in the future. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Company's Board of Directors.

The Series A Preferred Stock is entitled to receive cumulative dividends of eight percent per annum, which are payable before any dividend may be paid upon, or set apart for, the Common Stock outstanding. The Series B Preferred Stock was not entitled to receive dividends. The Series C Preferred Stock is entitled to a six percent dividend, to be paid in additional shares of Series C Preferred Stock for the first two and one-half years and thereafter either in cash or Series C Preferred Stock, at the Company's discretion. As of April 30, 2001 the Company elected to pay remaining Series C dividends in cash.



Item 6. Management's Discussion and Analysis or Plan of Operation

The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. The discussion should be read in conjunction with the financial statements and footnotes that appear elsewhere in this report, as well as the 10-KSB filing for the fiscal year ending June 30, 2000. This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "intend," "estimate," and other expressions that predict or indicate future events and trends, and that do not relate to historical matters, identify forward-looking statements. Such statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Results of Operations

Comparison of Fiscal Year 2001 and Fiscal Year 2000

Net revenues for the fiscal year ended June 30, 2001 totaled $37,255,000, an increase of $3,923,000 from net revenues of $33,332,000 for the fiscal year ended June 30, 2000. By business segment, Bear-Gram gift delivery service revenues, which include radio, Internet, and direct mail revenues, increased $5,280,000 attributable to increased sales from the expansion of the Company's direct response radio advertising campaign in to new markets around the country and www.vermontteddybear.com web-site, including sales from new loyalty marketing initiatives and Internet affiliate marketing. Net revenues from retail store operations increased by $264,000. Net revenues from the Wholesale/Corporate segment, which includes licensing revenues, decreased $1,668,000 primarily due to the termination of the Company's agreement with Zany Brainy, Inc. effective September 30, 2000. Additionally, large corporate orders in the fiscal year ended June 30, 2000 were not replaced by any significant order in the fiscal year ended June 30, 2001. SendAMERICA, a wholly owned subsidiary which is still in the start up phase generated revenues of $47,000 for the fiscal year ended June 30, 2001.

Gross margin increased by $2,792,000 to $23,808,000 for the fiscal year ended June 30, 2001, from $21,016,000 for the fiscal year ended June 30, 2000. As a percentage of net revenues, gross margin increased to 63.9 percent for the fiscal year ended June 30, 2001, from 63.1 percent for the fiscal year ended June 30, 2000. Increases in gross profit margin percent resulted from the increased revenues in both the Bear-gram and Retail segments and a decrease in the effect of the Corporate/Wholesale segment, which traditionally has lower unit margins due to lower revenues in this segment as a percentage of the Company's total revenues. Corporate/Wholesale margins increased during this fiscal year due to a reduction in lower margin wholesale programs as compared to the fiscal year ended June 30, 2000. Retail margins decreased as a result of a factory seconds and materials clearance sale during this period.

Selling expenses increased to $14,807,000, or 39.7 percent of net revenues, for the fiscal year ended June 30, 2001, from $12,759,000, or 38.3 percent of net revenues, for the comparable period ending June 30, 2000. This $2,048,000 increase was primarily due to increased Bear-Gram advertising costs, which includes radio, catalog, Internet and print costs of $1,588,000, increases to call center and customer service costs of $190,000, and marketing and merchandising costs associated with the Company's new wholly owned subsidiary SendAMERICA, Inc. of $304,000. These increases were offset by decreases in Retail expenses of $23,000 and decreases of $11,000 in Corporate/Wholesale expenses.

General and administrative expenses were $4,668,000 for the fiscal year ended June 30, 2001, compared to $3,966,000 for the fiscal year ended June 30, 2000. This increase to general and administrative costs was primarily due to increased information technology support costs of $321,000, increased legal and financial advisory fees of $168,000, increased order processing fees from higher Bear-Gram net revenues of $115,000, increased employee health insurance costs of $96,000, and administration costs related to SendAMERICA, Inc. of $86,000. These costs were partially offset by decreases in severance costs of $57,000 which were recorded in the fiscal year ended June 30, 2000, associated with the departure of Spencer Putnam, former Vice President of Operations. As a percentage of net revenues, general and administrative expenses were 12.5 percent and 11.9 percent for the fiscal years ended June 30, 2001 and June 30, 2000 respectively.

Interest expense increased to $575,000 for fiscal year ended June 30, 2001, compared to $553,000 for the comparable period ending June 30, 2000. Interest income increased to $341,000 as a result of larger average cash balances in the fiscal year ended June 30, 2001, compared to $206,000 for fiscal year ended June 30, 2000.

The company has recorded a tax provision of approximately $1,611,000 for income taxes for the fiscal year ended June 30, 2001. The Company utilized substantially all of the remainder of its net operating loss carryforward (NOL), when it recorded a tax provision of approximately $125,000 for the fiscal year ended June 30, 2000.

As a result of the foregoing factors, the net income to Common Stockholders for the fiscal year ended June 30, 2001 was $2,432,000, compared to a net income to Common Stockholders of $3,678,000 for the fiscal year ended June 30, 2000.



Liquidity and Capital Resources

As of June 30, 2001, the Company's cash position increased to $9,524,000, from $8,737,000 at June 30, 2000. Of the $9,524,000, $579,000 is classified as restricted cash; there was $366,000 of restricted cash at June 30, 2000. The largest component of the restricted cash is $302,000 restricted by a debt service reserve, which was required as part of the Company's loan agreement with the Chittenden Bank (formerly Vermont National Bank) and was required to be maintained as part of the Company's sale-leaseback transaction. An additional $200,000 certificate of deposit was required in the quarter ended September 30, 2000 for collateral substitution under the Company's lease obligation to URSA (VT) QRS-30, Inc. upon sale of the property. Cash increases provided by net income were offset by increases in inventories and purchases of equipment.

On November 3, 1998, the Company closed on a private placement of $600,000 of its Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") to an investor group lead by The Shepherd Group LLC. Accompanying the Series C Preferred Stock are warrants to purchase 495,868 shares of the Company's Common Stock at an exercise price of $1.05 per share, which will expire seven years from the date of issuance. In connection with the issuance of the Series C Preferred Stock, a warrant to purchase 42,500 shares of the Company's Common Stock was issued at an exercise price of $1.05 to the Company's lessor in the sale-leaseback transaction. Because of the mandatory redemption provision, the Series C Preferred Stock net of the value of the warrants has been classified as long term debt in the accompanying balance sheet. The Company has valued the warrants using the Black Scholes valuation model. The value of $272,449 was applied as a discount to the face value of the Series C Preferred Stock on the Company's balance sheet. The Company will accrete this discount, with charges to retained earnings over a five year period.

The following table shows the shares and dollar amounts of changes to the Series C Preferred Stock Account:

|                                                        | Shares | Amount   
|------------------------------------------------------- | ------ | ---------
|Balance Series C, Preferred Stock as of June 30, 2000   | 66.0   | $ 478,371
|Add:	Series C Preferred Stock Dividend                  | 3.0    | 30,000   
|Add: 	Accretion of Discount Related to
Warrant Issuance |        | 54,492   
|Balance Series C, Preferred Stock as of June 30, 2001   | 69.0   | $ 562,863



Each of the shares of Series C Preferred Stock has a liquidation value of $10,000 per share, and is convertible into 9,523 shares of the Company's Common Stock. The Series C Preferred Stock requires redemption upon the tenth anniversary of its issuance, with both the Company and the Series C Preferred stockholders having call and put rights, respectively, beginning on the fifth anniversary of issuance. The Series C Preferred stock carries voting rights on an as-converted basis, and, as a class, has the right to elect two members to the Company's Board of Directors. Both the Series C Preferred Stock and the accompanying warrants carry certain anti-dilution provisions. The Series C Preferred Stock has a cumulative preferred dividend of six percent per annum, payable quarterly. As of June 30, 2001, $30,000 of dividends were accrued and for the fiscal year ended June 30, 2000, $36,000 of dividends were accrued. The dividends are required to be paid in additional shares of Series C Preferred Stock for the first two and one-half years after issuance, and thereafter may be paid in cash or additional shares of Series C Preferred Stock, at the Company's option. As of April 30, 2001 the Company elected to pay remaining Series C dividends in cash. As of June 30, 2001 $6,017 had been paid in cash dividends.

The Company believes that its existing cash and cash equivalent balances, together with funds generated from operations, will be sufficient to finance the Company's operations for at least the next twelve months.



Contingencies

On October 24, 1996, the company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obligated to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, the lease, itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgement on its claims and dismissing the landlord's claims. That motion was granted by order dated July 25, 2001 and judgement was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord noticed its appeal of that judgement and, as settlement discussions have been unsuccessful, will put a bond to stay enforcement of the judgement pending its appeal. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlement is reached and the judgement is ultimately reversed on appeal and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.



Item 7. Financial Statements

The list of financial statements set forth under the caption "Index to Financial Statements" on page 26 below is incorporated herein by reference.



Item 8. Changes In and Disagreements With Accountants on

Accounting and Financial Disclosure

Not applicable.



Part III.

Item 9. Directors, Executive Officers, Promoters and Control Persons;

Compliance With Section 16(a) of the Exchange Act

Information concerning the directors and executive officers of the Company, their terms of office, the periods during which they have served, and their personal business experiences is included in the Company's definitive Proxy Statement for its 2001 Annual Meeting and is specifically incorporated herein by reference.



Item 10. Executive Compensation

Information regarding compensation of the Company's directors and officers is included in the Company's definitive Proxy Statement for its 2001 Annual Meeting and is specifically incorporated herein by reference.



Item 11. Security Ownership of Certain Beneficial Owners and Management

Information with respect to the beneficial ownership of the outstanding shares of the Company's Common Stock by (i) all persons owning of record, or beneficially to the knowledge of the Company, more than five percent of the outstanding shares, (ii) each director and executive officer of the Company individually, and (iii) all directors and officers of the Company as a group, is included in the Company's definitive Proxy Statement for its 2001 Annual Meeting and is specifically incorporated herein by reference.



Item 12. Certain Relationships and Related Transactions

Information regarding certain relationships and transactions between the Company and its directors, director-nominees, executive officers, and the family members of these individuals is included in the Company's definitive Proxy Statement for its 2001 Annual Meeting and is specifically incorporated herein by reference.



Item 13. Exhibits and Reports on Form 8-K

Exhibits

3.3	Restated Certificate of Incorporation of the Company (filed with the Securities and Exchange Commission as exhibit 3.3 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

3.4	Amended and Restated By-Laws of the Company (filed with the Securities and Exchange Commission as exhibit 3.4 to the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated herein by reference).

3.5	Restated Certificate of Incorporation of the Company (filed with the Securities and Exchange Commission as exhibit 3.5 to the Company's 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference).

3.6	Amended and Restated By-Laws of the Company (filed with the Securities and Exchange Commission as exhibit 3.6 to the Company's 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference).

4.1	Representative's Warrant issued to Barington Capital Group, L.P. upon the consummation of the initial public offering of the Company's Common Stock in November 1993 (filed with the Securities and Exchange Commission as exhibit 4.1 to the Company's 1993 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.2	Form of Common Stock Certificate (filed with the Securities and Exchange Commission as exhibit 4.2 to the Company's Registration Statement on Form SB-2 (File No. 33-69898) and incorporated herein by reference).

4.3	Form of Warrant, issued in connection with the private placement of 204,912 shares of the Company's Series B Convertible Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.3 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.4	Form of Subscription Agreement issued in connection with the private placement of 204,912 shares of the Company's Series B Convertible Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.4 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.5	Waiver of Joan H. Martin, dated April 12, 1996, issued in connection with waiver of accrued dividends on Series A Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.5 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.6	Warrant to purchase 43,826.087 shares of the Company's Common Stock, dated April 12, 1996, issued in connection with Joan H. Martin's waiver of accrued dividends on Series A Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.6 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.7	Stock Purchase Warrant Agreement, dated July 10, 1997, between the Company and	URSA (VT) QRS-30, Inc., in conjunction with the sale-leaseback of the Company's headquarters in Shelburne, Vermont (filed with the Securities and Exchange Commission as exhibit 4.7 to the Company's 1998 Annual Report 10-KSB (File No. 33-69898 and incorporated herein by reference).

4.8	Stock Purchase Warrant Agreement, dated December 31, 1997, in connection with the $200,000 Term Loan of Green Mountain Capital (filed with the Securities and Exchange Commission as exhibit 4.8 to the Company's 10-QSB for the quarter ended December 31, 1997, and incorporated herein by reference.)

4.9	Securities Purchase Agreement, dated September 25, 1998, between the Company and The Shepherd Group LLC, in connection with the Company's private placement of sixty shares of Series C Convertible Redeemable Preferred Stock (filed with the Securities and Exchange Commission as exhibit 10.47 to the Company's 1998 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

4.10	Amendment, dated November 3, 1998, between the Company and The Shepherd Group LLC, to the Securities Purchase Agreement dated September 25, 1998 (filed with the Securities and Exchange Commission as exhibit 4.10 to the Company's 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference).

4.11	Form of Warrant, issued in connection with the private placement of the Company's Series C Convertible Redeemable Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.11 to the Company's 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference).

4.12	Warrant to purchase 42,500 shares of the Company's Common Stock, issued to URSA (VT) QRS 12-30, Inc., dated November 3, 1998, in connection with the issuance of the Company's Series C Convertible Redeemable Preferred Stock (filed with the Securities and Exchange Commission as exhibit 4.12 to the Company's 10-QSB for the quarter ended December 31, 1998 and incorporated herein by reference).

10.2	Stock warrants issued to Edmund H. Shea, Jr. IRA, Allan Lyons and William Maines in connection with the bridge financing prior to the initial public offering of the Company's Common Stock in November 1993 (a form of which was filed with the Securities and Exchange Commission as exhibit 10.2 to the Company's Registration Statement on Form SB-2 (File No. 33-69898) and incorporated herein by reference).

10.10	Incentive Stock Option Plan adopted by the Company on August 16, 1993, with form of Incentive Stock Option Agreement (filed with the Securities and Exchange Commission as exhibit 10.10 to the Company's Registration Statement on Form SB-2 (File No. 33-69898) and incorporated herein by reference).

10.11	Securities Purchase Agreement, dated June 10, 1987 between the Company and VTB Investment Group and Joan Hixon Martin (filed with the Securities and Exchange Commission as exhibit 10.11 to the Company's Registration Statement on Form SB-2 (File No. 33- 69898) and incorporated herein by reference).

10.12	Agreement, dated as of June 19, 1995, between the Company and John N. Sortino, providing the terms of Mr. Sortino's separation agreement with the Company (filed with the Securities and Exchange Commission as exhibit 10.12 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.13	Employment Agreement and Loan Arrangement, dated July 31, 1995, between the Company and R. Patrick Burns providing the terms of Mr. Burns' employment with the Company as Chief Executive Officer (filed with the Securities and Exchange Commission as exhibit 10.13 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.14	Employment Agreement, dated November 1, 1993, between the Company and Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit 10.14 to the Company's Registration Statement on Form SB-2 (File No.33-69898) and incorporated herein by reference).

10.17	Commitment Letter issued by Vermont National Bank, Burlington, Vermont, dated September 18, 1995, in connection with a Commercial Mortgage Loan and a Line of Credit Loan (filed with the Securities and Exchange Commission as exhibit 10.17 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.18	Loan Agreement, dated September 26, 1995, between the Company and Vermont National Bank regarding $3,500,000 Term Loan and $1,000,000 Line of Credit Loan (filed with the Securities and Exchange Commission as exhibit 10.18 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.19	Commercial Term Note, dated September 26, 1995, issued in connection with the $3,500,000 Term Loan of Vermont National Bank (filed with the Securities and Exchange Commission as exhibit 10.19 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.20	Commercial Time Note, dated September 26, 1995, issued in connection with the $1,000,000 Line of Credit Loan of Vermont National Bank (filed with the Securities and Exchange Commission as exhibit 10.20 to the Company's 10-KSB for the transition period ended June 30, 1995 and incorporated herein by reference).

10.24	Amended 1993 Incentive Stock Option Plan of the Company, amended as of November 28, 1995 (filed with the Securities and Exchange Commission as exhibit 10.24 to the Company's 10-QSB for the quarter ended March 31, 1995 and incorporated herein by reference).

10.25	Loan Agreement, dated December 26, 1995, between Green Mountain Capital, L.P. and the Company, in connection with a $500,000 Term Loan (filed with the Securities and Exchange Commission as exhibit 10.25 to the Company's 10-QSB for the quarter ended December 31, 1995 and incorporated herein by reference).

10.26	Convertible Note, dated December 26, 1995, in the principal amount of $200,000, issued in connection with the $500,000 Term Loan of Green Mountain Capital (filed with the Securities and Exchange Commission as exhibit 10.26 to the Company's 10-QSB for the quarter ended December 31, 1995 and incorporated herein by reference).

10.27	Stock Purchase Warrant Agreement, dated December 26, 1995, in connection with the $500,000 Term Loan of Green Mountain Capital (filed with the Securities and Exchange Commission as exhibit 10.27 to the Company's 10-QSB for the quarter ended December 31, 1995 and incorporated herein by reference).

10.28	Employment and Loan Agreements, dated June 30, 1996, between the Company and R. Patrick Burns (filed with the Securities and Exchange Commission as exhibit 10.28 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.29	Employment Agreement, dated July 1, 1996, between the Company and Elisabeth B. Robert (filed with the Securities and Exchange Commission as exhibit 10.29 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.30	Amended 1993 Incentive Stock Option Plan of the Company, amended as of November 22, 1996 (filed with the Securities and Exchange Commission as exhibit 10.30 to the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated herein by reference).

10.31	Non-Employee Directors Stock Option Plan adopted by the Company on November 22, 1996 (filed with the Securities and Exchange Commission as exhibit 10.31 to the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated herein by reference).

10.32	Employment Agreement, dated as of July 1, 1996, between the Company and Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit 10.32 to the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated herein by reference).

10.33	Convertible Note, dated November 19, 1996, in the principal amount of $300,000, issued in connection with the $500,000 Term Loan of Green Mountain Capital (filed with the Securities and Exchange Commission as exhibit 10.33 to the Company's 10-QSB for the quarter ended December 31, 1996 and incorporated herein by reference).

10.34	Lease Agreement, dated October 24, 1996, in connection with the Company's lease of 2,600 square feet at 538 Madison Avenue in New York, New York (filed with the Securities and Exchange Commission as exhibit 10.34 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.35	Consulting Agreement, dated December 31, 1996, between the Company and Venture Management Group, Inc., regarding the provision of consulting services to the Company (filed with the Securities and Exchange Commission as exhibit 10.35 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.36	Lease Agreement, dated January 17, 1997, in connection with the Company's lease of 6,000 square feet at 55 Main Street in Freeport, Maine (filed with the Securities and Exchange Commission as exhibit 10.36 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.37	Lease Agreement, dated July 10, between the Company and URSA (VT) QRS-30, Inc., regarding the sale-leaseback of the Company's headquarters in Shelburne, Vermont (filed with the Securities and Exchange Commission as exhibit 10.37 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.38	Binding commitment letter, dated October 10, 1997, from Green Mountain Capital LP, in connection with a $200,000 term loan (filed with the Securities and Exchange Commission as exhibit 10.38 to the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.39 	Agreement, dated as of October 10, 1997, between the Company and R. Patrick Burns, providing the terms of Mr. Burns' separation and consulting agreement with the Company (filed with the Securities and Exchange Commission as exhibit 10.39 to the Company's 10-QSB for the quarter ended September 30, 1997 and incorporated herein by reference).

10.40	Employment Agreement, dated December 3, 1997, between the Company and Elisabeth B. Robert (filed with the Securities and Exchange Commission as exhibit 10.40 to the Company's 10-QSB for the quarter ended December 31, 1997 and incorporated herein by reference).

10.41	Loan Agreement, dated December 31, 1997, between Green Mountain Capital, L.P. and the Company, in connection with a $200,000 Term Loan (filed with the Securities and Exchange Commission as exhibit 10.41 to the Company's 10-QSB for the quarter ended December 31, 1997 and incorporated herein by reference).

10.42	Convertible Note, dated December 31, 1997, in the principal amount of $200,000, issued in connection with the $200,000 Term Loan of Green Mountain Capital (filed with the Securities and Exchange Commission as exhibit 10.42 to the Company's 10-QSB for the quarter ended December 31, 1997 and incorporated herein by reference).

10.43	Employment Agreement, dated March 13, 1998, between the Company and Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit 10.43 to the Company's 10-QSB for the quarter ended March 31, 1998 and incorporated herein by reference).

10.44	Employment Agreement, dated April 30, 1998, between the Company and Robert D. Delsandro, Jr. (filed with the Securities and Exchange Commission as exhibit 10.44 to the Company's 10-QSB for the quarter ended March 31, 1998 and incorporated herein by reference).

10.45	Non-Binding Proposal and Management Agreement, dated May 21, 1998, between the Company and The Shepherd Group LLC, in connection with the Company's private placement of sixty shares of Series C Convertible Redeemable Preferred Stock (filed with the Securities and Exchange Commission as Exhibits A and B to the Company's definitive proxy statement for its Special Meeting of Stockholders held September 11, 1998 and incorporated herein by reference).

10.46	Amendment to Employment Agreement, dated June 1, 1998, between the Company and Elisabeth B. Robert (filed with the Securities and Exchange Commission as exhibit 10.46 to the Company's 1998 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

10.47	Securities Purchase Agreement, dated September 25, 1998, between the Company and The Shepherd Group LLC, in connection with the Company's private placement of sixty shares of Series C Convertible Redeemable Preferred Stock (filed with the Securities and Exchange Commission as exhibit 10.47 to the Company's 10-QSB for the quarter ended September 30, 1998 and incorporated herein by reference).

10.48	Amendment to Employment Agreement, dated June 11, 1999, between the Company and Elisabeth B. Robert (filed with the Securities and Exchange Commission as Exhibit 10.48 to the Company's 1999 Annual Report 10-KSB (File No. 33-69898) and incorporated herein by reference).

23.1	Consent of Arthur Andersen, LLP, dated September 28, 2001 (filed herein)

24	Power of Attorney (filed with the Securities and Exchange Commission as exhibit 24 to the Company's Registration Statement on Form SB-2 (File No. 33-69898) and incorporated herein by reference).



Reports on Form 8-K



There were no reports filed on form 8 K during fourth quarter ended June 30, 2001.





Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



THE VERMONT TEDDY BEAR CO., INC.

Dated: September 28, 2001	By:	/s/ Elisabeth B. Robert ,

Elisabeth B. Robert, President



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.



Dated: September 28, 2001	By:	/s/ Jason Bacon	,

Jason Bacon, Director

Dated: September 28, 2001	By:	/s/ Maxine Brandenburg	,

Maxine Brandenburg, Director

Dated: September 28, 2001	By:	/s/ Robert Hamilton	,

Robert Hamilton, Director

Dated: September 28, 2001	By:	/s/ Fred Marks	,

Fred Marks, Director and Chairman of the Board

Dated: September 28, 2001	By:	/s/ Barbara Johnson	,

Barbara Johnson, Director



Dated: September 28, 2001	By:	/s/ Spencer C. Putnam	,

Spencer C. Putnam, Director



Dated: September 28, 2001	By:	/s/ Elisabeth B. Robert	,

Elisabeth B. Robert, Director,

President, Treasurer,

Chief Executive Officer and Chief

Financial Officer

Dated: September 28, 2001	By:	/s/ Thomas R. Shepherd	,

Thomas R. Shepherd, Director

Dated: September 28, 2001 	By:	/s/ T. Nathanael Shepherd	,

T. Nathanael Shepherd, Director









The Vermont Teddy Bear Co., Inc.

2001 Form 10-KSB Annual Report





Index To The Consolidated Financial Statements





|                                                                                           | Page
|------------------------------------------------------------------------------------------ | ----
|Report of Independent Public Accountants                                                   | 27  
|Consolidated Balance Sheets as of June 30, 2001 and 2000                                   | 28  
|Consolidated Statements of Income for the Years Ended
June 30, 2001 and 2000               | 29  
|Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2001 and 2000 | 30  
|Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001 and 2000           | 31  
|Notes to Consolidated Financial Statements                                                 | 32  

























































Report of Independent Public Accountants



To the Stockholders and Board of Directors of

The Vermont Teddy Bear Co., Inc.:



We have audited the accompanying consolidated balance sheets of The Vermont Teddy Bear Co., Inc. (a New York corporation) as of June 30, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Vermont Teddy Bear Co., Inc. as of June 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.









Boston, Massachusetts

August 22, 2001































THE VERMONT TEDDY BEAR CO., INC

Consolidated Balance Sheets

June 30, 2001



|ASSETS                                                                                                                                                                                                                                       | 2001         | 2000        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------------
|                                                                                                                                                                                                                                             |              |             
|Cash and cash equivalents (includes restricted cash of $579,000)                                                                                                                                                                             | $ 9,523,652  | $ 8,737,397 
|Accounts receivable, trade                                                                                                                                                                                                                   | 121,424      | 90,901      
|Inventories                                                                                                                                                                                                                                  | 5,571,189    | 3,619,836   
|Prepaid expenses and other current assets                                                                                                                                                                                                    | 193,015      | 600,420     
|Deferred income taxes                                                                                                                                                                                                                        | 273,068      | 165,363     
|Total Current Assets                                                                                                                                                                                                                         | 15,682,348   | 13,213,917  
|                                                                                                                                                                                                                                             |              |             
|Property and equipment, net                                                                                                                                                                                                                  | 8,307,975    | 8,192,839   
|Deposits and other assets                                                                                                                                                                                                                    | 927,377      | 913,589     
|Note receivable                                                                                                                                                                                                                              | 44,086       | 27,500      
|Total Assets                                                                                                                                                                                                                                 | $24,961,786  | $ 22,347,845
|                                                                                                                                                                                                                                             |              |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                         |              |             
|                                                                                                                                                                                                                                             |              |             
|Current portion of capital lease obligations                                                                                                                                                                                                 | 140,626      | 133,019     
|Accounts payable                                                                                                                                                                                                                             | 3,120,926    | 3,181,921   
|Accrued expenses                                                                                                                                                                                                                             | 1,204,694    | 1,192,801   
|Income taxes payable                                                                                                                                                                                                                         | 268,558      | 103,356     
|Total Current Liabilities                                                                                                                                                                                                                    | 4,734,804    | 4,611,097   
|                                                                                                                                                                                                                                             |              |             
|Capital lease obligations, net of current portion                                                                                                                                                                                            | 5,269,594    | 5,410,220   
|Deferred income taxes                                                                                                                                                                                                                        | 40,796       | 95,363      
|Total Liabilities                                                                                                                                                                                                                            | 10,045,194   | 10,116,680  
|                                                                                                                                                                                                                                             |              |             
|Commitments and Contingencies (Note 6)                                                                                                                                                                                                       |              |             
|                                                                                                                                                                                                                                             |              |             
|Series C Convertible Redeemable Preferred Stock
Authorized 110 shares; 69 shares issued and outstanding,
$690,000 liquidation value as of June 30, 2001 and 66 shares
issued and outstanding, $660,000 liquidation vale as of June 30,
2000. | 562,863      | 478,371     
|                                                                                                                                                                                                                                             |              |             
|Stockholders' Equity:                                                                                                                                                                                                                        |              |             
|Preferred stock, $.05 par value:
Authorized 1,000,000 shares Series A; issued and outstanding,
90 shares at June 30, 2001 and June 30, 2000.                                                                                                 | 1,260,000    | 1,188,000   
|Common stock, $.05 par value:
Authorized 20,000,000 shares; issued 6,854,246 shares,
outstanding 6,831,226 shares and issued 6,780,746 shares,
outstanding 6,757,726 shares at June 30, 2001 and June 30, 2000
respectively                  | 342,712      | 339,037     
|Additional paid-in capital                                                                                                                                                                                                                   | 11,939,720   | 11,846,363  
|Treasury stock at cost: 23,020 shares                                                                                                                                                                                                        | (117,500)    | (117,500)   
|Retained Earnings (Deficit)                                                                                                                                                                                                                  | 928,797      | (1,503,106) 
|Total Stockholders' Equity                                                                                                                                                                                                                   | $ 14,353,729 | $ 11,752,794
|                                                                                                                                                                                                                                             |              |             
|Total Liabilities and Stockholders' Equity                                                                                                                                                                                                   | $ 24,961,786 | $ 22,347,845

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





THE VERMONT TEDDY BEAR CO., INC.

Consolidated Statements of Income

For the Twelve Months Ended June 30, 2001 and 2000





|                                                                                          | 2001        | 2000       
|----------------------------------------------------------------------------------------- | ----------- | -----------
|Net Revenues                                                                              | $37,255,267 | $33,332,473
|Cost of Goods Sold                                                                        | 13,446,970  | 12,316,569 
|Gross Profit                                                                              | 23,808,297  | 21,015,904 
|                                                                                          |             |            
|Operating Expenses:                                                                       |             |            
|Selling Expenses                                                                          | 14,806,972  | 12,759,338 
|General and Administrative Expenses                                                       | 4,667,875   | 3,965,585  
|                                                                                          | 19,474,847  | 16,724,923 
|Operating Income                                                                          | 4,333,450   | 4,290,981  
|Interest Income                                                                           | 340,634     | 206,289    
|Interest Expense                                                                          | (574,709)   | (553,456)  
|Other Income                                                                              | 105,958     | 21,361     
|Income Before Income Taxes                                                                | 4,205,333   | 3,965,175  
|Income Tax Provision                                                                      | (1,610,921) | (125,000)  
|Net Income                                                                                | 2,594,412   | 3,840,175  
|Series A Preferred Stock Dividends                                                        | (72,000)    | (72,000)   
|Series C Preferred Stock Dividends                                                        | (36,017)    | (36,000)   
|Accretion of Original Issue Discount in connection with Series C preferred stock warrants | (54,492)    | (54,492)   
|Net Income-Common Stockholders                                                            | 2,431,903   | 3,677,683  
|                                                                                          |             |            
|Basic Net Income Per Common Share                                                         | $0.36       | $0.57      
|                                                                                          |             |            
|Diluted Net Income Per Common Share                                                       | $0.29       | $0.45      
|                                                                                          |             |            
|Weighted Average Number of Common Shares Outstanding                                      | 6,786,121   | 6,415,825  
|                                                                                          |             |            
|Weighted Average Number of Diluted Common Shares Outstanding                              | 8,667,192   | 8,395,463  

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





















THE VERMONT TEDDY BEAR CO., INC.

Consolidated Statements of Stockholders' Equity

Years Ended June 30, 2001 and 2000

|                                                   |                     |              |                     |                 |           
|-------------------------------------------------- | ------------------- | ------------ | ------------------- | --------------- | ----------
|                                                   | Preferred Stock "A" |              | Preferred Stock "B"
|                                                   | Shares              | Amount       |                     | Shares          | Amount    
|Balance at June 30, 1999                           | 90                  | $1,116,000   |                     | 27,942          | $1,397    
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   | --                  | --           |                     | --              | --        
|Series B Conversion to Common                      | --                  | --           |                     | (27,942)        | ($1,397)  
|Exercise of Common Stock Warrants                  | --                  | --           |                     | --              | --        
|Original Issue Discount-Series C Pref              | --                  | --           |                     | --              | --        
|Accretion of Original Issue Discount Series C Pref | --                  | --           |                     | --              | --        
|Preferred Stock Dividends                          | --                  | $72,000      |                     | --              | --        
|Net Income                                         | --                  | --           |                     | --              | --        
|Balance at June 30, 2000                           | 90                  | $1,188,000   |                     | 0               | $0        
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   | --                  | --           |                     | --              | --        
|Accretion of Original Issue Discount Series C Pref | --                  | --           |                     | --              | --        
|Preferred Stock Dividends                          | --                  | $72,000      |                     | --              | --        
|Net Income                                         | --                  | --           |                     | --              | --        
|Balance at June 30, 2001                           | 90                  | $1,260,000   |                     | 0               | $0        
|                                                   |                     |              |                     |                 |           
|                                                   | Common Stock        |              | Additional          | Treasury       
|                                                   | Shares              | Amount       |                     | Paid-in Capital | Stock     
|Balance at June 30, 1999                           | 5,719,638           | $285,982     |                     | $10,891,616     | ($117,500)
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   | 366,397             | $18,319      |                     | $363,922        | --        
|Series B Conversion to Common                      | 74,996              | $3,750       |                     | ($2,353)        | --        
|Exercise of Common Stock Warrants                  | 619,715             | $30,986      |                     | $593,178        | --        
|Original Issue Discount-Series C Pref              | --                  | --           |                     | --              | --        
|Accretion of Original Issue Discount Series C Pref | --                  | --           |                     | --              | --        
|Preferred Stock Dividends                          | --                  | --           |                     | --              | --        
|Net Income                                         | --                  | --           |                     | --              | --        
|Balance at June 30, 2000                           | 6,780,746           | $339,037     |                     | $11,846,363     | ($117,500)
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   | 73,500              | $3,675       |                     | $93,357         | --        
|Accretion of Original Issue Discount Series C Pref | --                  | --           |                     | --              | --        
|Preferred Stock Dividends                          | --                  | --           |                     | --              | --        
|Net Income                                         | --                  | --           |                     | --              | --        
|Balance at June 30, 2001                           | 6,854,246           | $342,712     |                     | $11,939,720     | ($117,500)
|                                                   |                     |              |                     |                 |           
|                                                   |                     | Retained     |                     |                 |           
|                                                   |                     | Earnings     |                     | Stockholders'   |           
|                                                   |                     | (Deficit)    |                     | Equity          |           
|Balance at June 30, 1999                           |                     | ($5,180,789) |                     | $6,996,706      |           
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   |                     | --           |                     | $382,241        |           
|Series B Conversion to Common                      |                     | --           |                     | $0              |           
|Exercise of Common Stock Warrants                  |                     | --           |                     | $624,164        |           
|Original Issue Discount-Series C Pref              |                     | --           |                     | $0              |           
|Accretion of Original Issue Discount Series C Pref |                     | ($54,492)    |                     | ($54,492)       |           
|Preferred Stock Dividends                          |                     | ($108,000)   |                     | ($36,000)       |           
|Net Income                                         |                     | $3,840,175   |                     | $3,840,175      |           
|Balance at June 30, 2000                           |                     | ($1,503,106) |                     | $11,752,794     |           
|                                                   |                     |              |                     |                 |           
|Exercise of Common Stock Options                   |                     | --           |                     | $97,032         |           
|Accretion of Original Issue Discount Series C Pref |                     | ($54,492)    |                     | ($54,492)       |           
|Preferred Stock Dividends                          |                     | ($108,017)   |                     | ($36,017)       |           
|Net Income                                         |                     | $2,594,412   |                     | $2,594,412      |           
|Balance at June 30, 2001                           |                     | $928,797     |                     | $14,353,729     |           

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







THE VERMONT TEDDY BEAR CO., INC.

Consolidated Statements of Cash Flows

For the Twelve Months Ended June 30, 2001 and 2000





|                                                                                 | 2001        | 2000       
|-------------------------------------------------------------------------------- | ----------- | -----------
|Cash flows from operating activities                                             |             |            
|Net Income                                                                       | $2,594,412  | $3,840,175 
|Adjustments to reconcile net income to net cash used for operating activities:   |             |            
|Depreciation and amoritzation                                                    | 826,462     | 795,836    
|(Gain)/Loss on disposal of fixed assets                                          | 17,451      | (957)      
|Changes in assets and liabilities:                                               |             |            
|Accounts receivable, trade                                                       | (30,523)    | 247,384    
|Inventories                                                                      | (1,951,353) | (1,583,762)
|Prepaid and other current assets                                                 | 407,405     | (130,492)  
|Deposits and other assets                                                        | (65,510)    | 37,646     
|Accounts payable                                                                 | (60,995)    | 578,812    
|Accrued expenses and other liabilities                                           | 11,893      | 382,308    
|Income taxes Payable                                                             | 165,202     | 68,356     
|Deferred Income Taxes                                                            | (162,272)   | (70,000)   
|Net cash provided by operating activities                                        | 1,752,172   | 4,165,306  
|Cash flows from investing activities:                                            |             |            
|Purchases of property and equipment                                              | (1,034,868) | (802,600)  
|Proceeds from sale of fixed assets                                               | 127,541     | 24,200     
|Note receivable                                                                  | (16,586)    | 30,000     
|Net cash used for investing activities                                           | (923,913)   | (748,400)  
|Cash flows from financing activities:                                            |             |            
|Payments of long-term debt                                                       | -           | (329,946)  
|Additions to capital lease obligations                                           | -           | 13,975     
|Principal payments on capital lease obligations                                  | (133,019)   | (218,918)  
|Issuance of common stock, exercise of stock options                              | 97,032      | 382,241    
|Issuance of common stock, exercise of warrants                                   | -           | 100,000    
|Issuance of common stock, Series B warrants exercise                             | -           | 30,656     
|Issuance of preferred stock dividends                                            | (6,017)     | -          
|                                                                                 |             |            
|Net cash used in financing activities                                            | (42,004)    | (21,992)   
|                                                                                 |             |            
|Net increase in cash and cash equivalents                                        | 786,255     | 3,394,914  
|                                                                                 |             |            
|Cash and cash equivalents, beginning of year                                     | 8,737,397   | 5,342,483  
|                                                                                 |             |            
|Cash and cash equivalents, end of year                                           | $9,523,652  | $8,737,397 
|                                                                                 |             |            
|Supplemental Disclosures of Cash Flow Information:                               |             |            
|Cash paid for interest                                                           | 574,709     | 545,955    
|Cash paid for income taxes                                                       | 1,606,458   | 127,900    
|                                                                                 |             |            
|Supplemental Disclosures of Non-cash Investing and Financing Activities:         |             |            
|Other capital leases                                                             | -           | 13,975     
|Series C preferred stock dividends                                               | 36,017      | 36,000     
|Accretion of original issue discount in connection with
Series C preferred stock | 54,492      | 54,492     
|Conversion of preferred stock to common stock                                    | -           | 1,397      
|Series B Warrant exercise for common stock                                       | -           | 493,508    



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





The Vermont Teddy Bear Co., Inc.

Notes to the Consolidated Financial Statements

June 30, 2001



(1)	Summary of Significant Accounting Policies

Description of Business and Operations



The Vermont Teddy Bear Co., Inc. (the Company), which was incorporated under the laws of the State of New York in 1984, is a designer, manufacturer and direct marketer of teddy bears and related products. Principal geographic markets include New York, Boston, Philadelphia, Detroit, Los Angeles, and Chicago. The Company's sales are heavily seasonal, with Valentine's Day, Mother's Day, and Christmas as the Company's largest sales seasons.



Basis of Consolidation



The consolidated financial statements include the accounts of The Vermont Teddy Bear Co., Inc. and it's wholly owned subsidiary, SendAMERICA, Inc. All material intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As discussed in Note 6, the Company has accrued the estimated loss under a lease obligation as of June 30, 2001. Actual results could differ from those estimates.





Product sales are recorded at the time of shipment and when collectability is reasonably assured. The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition, including both broad conceptual discussions as well as certain industry-specific guidance. The adoption of this SAB did not have a material effect on the Company's results of operations or financial position for the year ended June 30, 2001.

Cash and Cash Equivalents



All highly liquid investments with initial maturities of three months or less are considered cash equivalents. At June 30, 2001 and 2000, approximately $579,000 and $366,000 of the Company's cash was restricted, respectively. The largest component of the restricted cash is $302,000 restricted by a debt service reserve, which was required as part of the Company's loan agreement with Chittenden Bank (formerly the Vermont National Bank) and was required to be maintained as part of the Company's sale-leaseback transaction.



An additional $200,000 certificate of deposit was required in September, 2000 for collateral substitution under the Company's lease obligation to URSA(VT) QRS-30 Inc. upon sale of property.



Inventories



Inventories are stated at the lower of cost or market using the first-in, first-out method.

Property and Equipment



Property and equipment is stated at cost, less accumulated depreciation. Buildings and equipment acquired under capital leases are stated at the lower of the present value of future minimum lease payments or fair value at the inception of the lease.



Depreciation, including amortization of assets covered by capital leases, is calculated using both the straight-line and accelerated methods over the estimated useful lives of the assets, as follows:



|Building               | 35 years 
|---------------------- | ---------
|Equipment              | 3-7 years
|Furniture and fixtures | 3-7 years
|Vehicles               | 5 years  



Amortization of leasehold improvements is provided over their estimated useful lives or the remaining lease term, whichever is shorter. Renewals and improvements that extend the useful lives of the assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.



Income Taxes

The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires the use of the liability method. This standard determines deferred income taxes based on the estimated future tax effects of any differences between the financial statement and the tax basis of assets and liabilities, given the provisions of the enacted tax laws.

Advertising



The Company accounts for advertising costs in accordance with SOP 93-7 Reporting on Advertising Costs. The Company expenses the production costs of radio and print advertising the first time the advertising takes place. Catalog advertising, consisting primarily of catalogs for the Company's products, is capitalized and amortized over its expected period of future benefits, usually over the four-month period following the initial mailing of the catalog.



At June 30, 2001 and June 30, 2000, capitalized advertising costs were approximately $65,000 and $49,000, respectively, consisting primarily of trade credits and unamortized direct-response catalogs. Advertising expenses were $8,933,000 and $7,791,000 for the twelve months ended June 30, 2001 and 2000, respectively. Of these costs, $82,000 related to commissions paid to affiliate programs for the year ended June 30, 2001. The Company worked with several affiliate partners, including existing radio stations and charities, to advertise to new prospects via e-mail and paid these partners a percentage of sales generated.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The Company continually reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of assets by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. At June 30, 2001, no such impairment of assets was indicated.



Fair Value of Financial Instruments



In accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the Company has determined the estimated fair value of its financial instruments using appropriate market information and valuation methodologies. Considerable judgment is required to develop the estimates of fair value; thus, the estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. The carrying value of these assets and liabilities is a reasonable estimate of their fair market value at June 30, 2001 and 2000.



Earnings Per Share

In accordance with SFAS No. 128, Earnings Per Share, basic and diluted

net income per common share is calculated by dividing net income by the weighted number of common shares outstanding for all periods presented. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock.

The following table reconciles the weighted average common shares outstanding to the shares used in the computation of basic and weighted average common shares outstanding:



Years Ended



|                                                                   | 6/30/01   | 6/30/00    
|------------------------------------------------------------------ | --------- | -----------
|Weighted average number of shares
used in basic EPS calculation    | 6,786,121 | 6,415,825  
|Add: Common Shares Issuable Upon
Exercise of:                      |           |            
|Stock Options                                                      | 1,370,883 | 1,630,663  
|Warrants                                                           | 688,979   | 738,109    
|Convertible Preferred Stock                                        | 657,087   | 628,518    
|Total Common Shares Issuable                                       | 2,716,949 | 2,997,290  
|Less: Shares assumed to be repurchased
under treasury Stock method | (835,878) | (1,017,652)
|Weighted average number of shares
used in diluted EPS calculation  | 8,667,192 | 8,395,463  

Diluted weighted average shares outstanding for 2001 and 2000 exclude 27,170 and 12,440 potential common shares, respectively, because the price of the potential common shares was greater than the average market price of the common stock for that period.

Comprehensive Income

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The comprehensive income and loss is the same as net income and loss for each period presented.

Segments and Related Information

During fiscal year 1999, the Company adopted the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The statement establishes standards for the way that public business enterprises report information and operating segments in annual financial statements and requires reporting of selected information in interim financial reports.



New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued a Statement of Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments and Hedging Activities." This statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. In July 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 (FAS 137), which deferred the effective date of FAS 133 for one year. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment for FASB Statement No 133." This statement amended certain provisions of FAS 133. Accordingly, we have adopted FAS 133, as amended by FAS 138, effective the first quarter of fiscal 2001. This statement did not have a material effect on the Company's financial statements.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations, and No. 142, Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. The adoption of SFAS Nos. 141 and 142 will not have a material effect on the Company's financial statements.

Also, in June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." FASB 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The statement requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The adoption of SFAS No. 143 will not have a material effect on the Company's financial statements.

(2)	Inventories

Inventories consist of the following at June 30, 2001 and 2000:



|                | 2001       | 2000       
|--------------- | ---------- | -----------
|Raw materials   | $ 670,262  | $ 483,086  
|Work-in-process | 325,459    | 189,480    
|Finished goods  | 4,575,468  | 2,947,270  
|                | $5,571,189 | $ 3,619,836



Inventories include material, labor, and overhead.

(3)	Property and Equipment

Property and equipment consist of the following at June 30, 2001 and 2000:



|                                                 | 2001        | 2000       
|------------------------------------------------ | ----------- | -----------
|Land and land improvements                       | $1,244,532  | $1,398,528 
|Building                                         | 6,668,134   | 6,668,134  
|Equipment                                        | 5,014,852   | 4,191,065  
|Furniture and fixtures                           | 451,372     | 421,270    
|Vehicles                                         | 84,230      | 84,230     
|Leasehold improvements                           | 374,101     | 195,904    
|                                                 | $13,837,221 | $12,959,131
|Less - Accumulated depreciation
and amortization | 5,529,246   | 4,766,292  
|                                                 | $ 8,307,975 | $ 8,192,839

Depreciation and amortization expense for the years ended June 30, 2001, and 2000 was $826,462 and $795,836 respectively.



(4) Related Party Transactions

Included in Notes Receivable at June 30, 2001 is a note from one of the Company's directors, who is also an officer of the Company.



(5)	Indebtedness

On December 31, 1997, the Company borrowed $200,000 from Green Mountain Capital L.P. in the form of a five-year term note. The note bears interest at 12 percent per annum, is repayable in monthly installments through December 31, 2002, and is secured by a security interest in the Company's real and personal property. In conjunction with the issuance of the notes, Green Mountain Capital received warrants to purchase 100,000 shares of Common Stock at an exercise price of $1.00 per share, subject to certain anti-dilution provisions. On November 5, 1999, the Company settled in full, all outstanding notes payable with Green Mountain Capital through a combination of a cash and stock transaction. All 100,000 warrants were exercised in a cashless transaction valued at $100,000 and the remainder of $159,393 of outstanding notes payable was paid in cash.

On November 3, 1998, the Company closed on a private placement of $600,000 of its Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") to an investor group lead by The Shepherd Group LLC. Accompanying the Series C Preferred Stock are warrants to purchase 495,868 shares of the Company's Common Stock at an exercise price of $1.05 per share, which will expire seven years from the date of issuance. In connection with the issuance of the Series C Preferred Stock, a warrant to purchase 42,500 shares of the Company's Common Stock was issued at an exercise price of $1.05 to the Company's lessor in the sale-leaseback transaction. The Company has valued the warrants using the Black Scholes valuation model. The aggregate value of $272,449 was applied as a discount to the face value of the Series C Preferred Stock on the Company's balance sheet. The Company will accrete this discount, with charges to retained earnings over a five-year period ending on the redemption date.

As of June 30, 2001 and 2000, the Company had no outstanding letters of credit.



(6)	Commitments and Contingencies

Leases



On October 24, 1996, the company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obligated to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, the lease, itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgement on its claims and dismissing the landlord's claims. That motion was granted by order dated July 25, 2001 and judgement was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord noticed its appeal of that judgement and, as settlement discussions have been unsuccessful, will put a bond to stay enforcement of the judgement pending its appeal. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlement is reached and the judgement is ultimately reversed on appeal and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.



On July 18, 1997, the Company completed a sale-leaseback transaction involving its factory headquarters and a portion of its property located in Shelburne, Vermont. This financing replaced the Company's mortgage and line of credit agreement with the Vermont National Bank (now the Chittenden Bank). The Company received approximately $5.9 million in cash, of which approximately $3.3 million was used to pay off the existing mortgage with the Vermont National Bank. The balance, approximately $2.6 million, was used for general working capital purposes, to pay down a $600,000 balance on the Company's line of credit (which was retired as the result of the termination of the original mortgage loan), and for associated transaction costs of $679,000, which have been capitalized and recorded as a component of other assets as of June 30, 2001. The lease obligation, secured by the business assets of the Company, is payable on a twenty-year amortization schedule through July 2017 with three additional five year renewal options. The transaction was accounted for as a sale with a Capital Leaseback. The book value of the building and apportioned land and land improvements was $5,963,322 as of June 30, 2001 and $6,147,221 as of June 30, 2000.

On September 29, 1999 the Company entered into a one year lease with four one year renewal options for a new manufacturing facility in Newport, Vermont for 12,000 square feet. In April, 2001 the Company expanded it's Newport operation to occupy an additional 12,000 square feet in this facility. Annual lease payments are $113,536. On November 1, 1999, the Company began operation of the facility with 25 skilled sewers stitching teddy bear parts. As of June 30, 2001 there were 82 full time employees in the Newport facility manufacturing complete teddy bears, from cutting to stitching, to stuffing, pinning and assembly, and back sealing. The bears are then shipped back to the Shelburne plant for order fulfillment.



On August 3, 1999 the Company entered into a twelve month lease for 4,000 square feet of warehouse space in Shelburne, Vermont. Lease payments over the term of the lease totaled $28,000.

On July 19, 2000, to consolidate remote warehouse locations, the Company entered into a ten year lease with three five year renewal options for a new 60,400 square foot warehouse and fulfillment center in Shelburne, Vermont. This facility is on property that is contiguous to the property on which the Company's factory headquarters are located. Annual lease payments are $402,936. The lease began on September 1, 2000 and replaced the lease for 20,000 square feet of off-site space in Williston, Vermont and the lease for 4,000 square feet in Shelburne, Vermont.

In addition, the Company leases various equipment under noncancelable capital lease agreements. Capital leases and noncancelable operating leases at June 30, 2001 require the following annual minimum lease payments:



|                                   | Capital Leases | Operating Leases
|---------------------------------- | -------------- | ----------------
|2002                               | $ 702,924      | $1,364,293      
|2003                               | 701,601        | 1,138,520       
|2004                               | 697,632        | 1,144,192       
|2005                               | 697,632        | 1,101,398       
|2006                               | 697,632        | 1,126,667       
|Thereafter                         | 7,732,088      | 1,637,950       
|Total minimum lease payments       | $ 11,229,509   | $7,513,020      
|Less-Amounts representing interest | $ 5,819,289    |                 
|Present value of lease payments    | $ 5,410,220    |                 
|Less-Current installments          | 140,626        |                 
|Long-term portion                  | $ 5,269,594    |                 



The original cost and net book value of assets under capital lease at June 30, 2001 and 2000 was $7,050,917 and $5,971,925 and $7,073,686 and $6,163,017, respectively. Rental expense under operating leases for the years ended June 30, 2001 and 2000 was $406,704 and $158,816, respectively.



Contingencies



On July 15, 1998, the Company filed a lawsuit against Tyco Industries, Inc., entitled The Vermont Teddy Bear Co., Inc. vs. Tyco Industries, Inc., in the United States District Court for the Northern District of New York, alleging that Tyco failed to make minimum royalty payments totaling $300,000 as required by its contract with the Company dated September 11, 1995. Tyco denied liability for the minimum royalties in its answer to the Company's complaint and filed a counter claim for unspecified relief. The Company has denied any liability on the counter claim. On June 14, 2000 a settlement was reached for $225,000. The Company recognized a gain of $100,000 as other income in the first quarter of fiscal year 2001 when the cash settlement was received.



On October 24, 1996, the company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obligated to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, the lease, itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgement on its claims and dismissing the landlord's claims. That motion was granted by order dated July 25, 2001 and judgement was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord noticed its appeal of that judgement and, as settlement discussions have been unsuccessful, will put a bond to stay enforcement of the judgement pending its appeal. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlement is reached and the judgement is ultimately reversed on appeal and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.



(7)	Income Taxes

The provision for income taxes for the years ended June 30, 2001 and 2000 was comprised of the following:



|                     | Year Ended
June 30, 2001 | Year Ended
June 30, 2000
|-------------------- | ------------------------ | ------------------------
|Current -            |                          |                         
|Federal              | $1,357,125               | $150,000                
|State                | 416,068                  | 45,000                  
|                     | $1,773,193               | $195,000                
|                     |                          |                         
|Deferred -           |                          |                         
|Federal              | $(126,833)               | $(59,500)               
|State                | (35,439                  | (10,500)                
|                     | $(162,272)               | $(70,000)               
|                     |                          |                         
|Income tax provision | $1,610,921               | $125,000                



The components of the net deferred tax asset as of June 30, 2001 and 2000 are presented below:



|Deferred tax assets -            |          |          
|-------------------------------- | -------- | ---------
|AMT Credit                       | $ 2,314  | $ 29,136 
|Vacation accrual                 | 95,373   | 80,498   
|Net operating loss carryforwards | -        | 110,592  
|Inventories                      | 49,222   | 48,892   
|Contribution carryforwards       | -        | 6,874    
|Deferred rent                    | 38,147   | 37,891   
|Other                            | 88,012   | 58,978   
|Valuation Allowance              | -        | (207,498)
|                                 |          |          
|Total deferred tax assets        | 273,068  | 165,363  
|                                 |          |          
|Deferred income taxes -          |          |          
|Depreciation                     | (14,493) | (75,827) 
|Prepaid Expenses                 | (26,303) | (19,536) 
|                                 |          |          
|Total deferred tax liabilities   | (40,796) | (95,363) 
|Net deferred tax asset           | $232,272 | $ 70,000 

The provision for income taxes varies from the amounts computed by applying the U.S. federal income tax rate of 34% as follows for the years ended June 30, 2001 and 2000:

|                                                   | Year Ended
June 30, 2001 | Year Ended
June 30, 2000
|-------------------------------------------------- | ------------------------ | ------------------------
|Computed "expected tax expense                     | 34%                      | 34 %                    
|Increase (reduction) resulting from:               |                          |                         
|NOL Utilization                                    | 0%                       | (30 %)                  
|State taxes - net of Federal benefits              | 6.3%                     | .7%                     
|Other                                              | 2.6%                     | 0%                      
|Decrease in deferred tax asset valuation allowance | (4.9%)                   | (1.8%)                  
|Meals and Penalties                                | .3%                      | .1%                     
|                                                   |                          |                         
|Income tax provision                               | 38.3%                    | 3.2%                    

The Company has been limited in its utilization of the Net Operating Loss (NOL) as a result of the change in tax reporting year-end to June 30, 1995. Because of the change in the year-end approximately $1.7 million of the NOL carryforwards were available to use ratably over a six year period beginning June 30, 1996. At June 30, 2001, the Company had no remaining Federal Income Tax NOL carryforwards. The deferred tax asset valuation allowance was reduced to zero in 2001 as a result of continued improvement in operating results in 2000 and 2001.

(8)	Preferred Stock

Series A



The Company has issued 90 shares, $.05 par value, of Series A Cumulative Preferred Stock to one individual. The Series A stockholder is entitled to accrued dividends on the stated values of the shares at a rate of 8% per annum. The dividends accrue regardless of whether dividends have been declared, profits exist, or funds are legally available for payment. Dividends are payable quarterly, in arrears. For each of the fiscal years ended June 30, 2001 and 2000, $72,000 of dividends were accrued. The Series A Preferred Stock carries a liquidation preference value equal to the stated value per share plus all accrued and unpaid dividends. The stated value is equal to $10,000 per share.

Series B

On July 12, 1996, the Company privately placed $550,000 of Series B convertible Preferred Stock. The 204,912 shares, $.05 par value, of Series B Convertible Preferred Stock were issued to twelve individuals. Series B stockholders are not entitled to any dividends or voting rights, but each share was originally convertible into one share of the Company's Common Stock at any time on or after July 14, 1997, subject to certain anti-dilution rights. As the result of subsequent financing transactions, the anti-dilution provisions of the Series B agreement were activated, and on February 3, 1999, 176,970 shares of Series B Convertible Preferred Stock was converted into 474,989 shares of the Company's Common Stock. On July 19, 1999, the remaining 27,942 shares of Series B Preferred Convertible Stock were converted into 74,996 shares of the Company's Common Stock. On or about July 3, 1999, 215,157 warrants associated with the Series B Preferred Stock were exercised and converted into 519,715 shares of the Company's Common Stock. The Company received $524,164 in consideration for these shares and $493,508 was received in cash and classified as advances from Series B Stockholders in the Company's balance sheet for the year ending June 30, 1999 and is classified as equity in common stock in the year ending June 30, 2000.



Series C

On November 3, 1998, the Company closed on a private placement of $600,000 of its Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock") to an investor group lead by The Shepherd Group LLC. Accompanying the Series C Preferred Stock are warrants to purchase 495,868 shares of the Company's Common Stock at an exercise price of $1.05 per share, which will expire seven years from the date of issuance. In connection with the issuance of the Series C Preferred Stock, a warrant to purchase 42,500 shares of the Company's Common Stock was issued at an exercise price of $1.05 to the Company's lessor in the sale-leaseback transaction. The Company has valued the warrants using the Black Scholes valuation model. The aggregate value of $272,449 was applied as a discount to the face value of the Series C Preferred Stock on the Company's balance sheet. The Company will accrete this discount, with charges to retained earnings over a five-year period ending on the redemption date described below.

The following table shows the shares and dollar amounts of changes to the Series C Preferred Stock Account during fiscal year 2001.



|                                                        | Shares | Amount   
|------------------------------------------------------- | ------ | ---------
|Balance Series C, Preferred Stock as of June 30, 2000   | 66.0   | $ 478,371
|                                                        |        |          
|Add:	Series C Preferred Stock Dividend                  | 3.0    | 30,000   
|                                                        |        |          
|Add: 	Accretion of Discount Related to
Warrant Issuance | -      | 54,492   
|                                                        |        |          
|Balance Series C, Preferred Stock as of June 30, 2001   | 69.0   | $ 562,863

Each of the shares of Series C Preferred Stock has a liquidation value of $10,000 per share, and is convertible into 9,523 shares of the Company's Common Stock. The Series C Preferred Stock requires redemption upon the tenth anniversary of its issuance, with both the Company and the Series C Preferred stockholders having call and put rights, respectively, beginning on the fifth anniversary of issuance. The Series C Preferred stock carries voting rights on an as-converted basis, and, as a class, has the right to elect two members to the Company's Board of Directors. Both the Series C Preferred Stock and the accompanying warrants carry certain anti-dilution provisions. The Series C Preferred Stock has a cumulative preferred dividend of six percent per annum, payable quarterly. For the fiscal year ended June 30, 2001 $30,000 of dividends were accrued and for the fiscal year ended June 30, 2000 $36,000 of dividends were accrued. The dividends are required to be paid in additional shares of Series C Preferred Stock for the first two and one-half years after issuance. As of April 30, 2001, the Company was no longer required to pay the dividends in stock and exercised their option to pay them in cash. As of June 30, 2001 $6,017 had been paid in cash dividends.



(9) Warrants

At June 30, 2001, there were several warrants outstanding for shares of the Company's Common Stock. Substantially all of the warrant agreements contain certain anti-dilution provisions which, if triggered, can result in additional shares being available to the warrant holder and/or a reduction in the exercise price for each share. Certain anti-dilution provisions were triggered in fiscal 1999 as the result of the issuance of warrants and employee stock options. The following table summarizes the Company's outstanding warrants at June 30, 2001 and 2000, inclusive of the effects of anti-dilution provisions:



|        | June 30, 2001 |            |         | June 30,2000 |           
|------- | ------------- | ---------- | ------- | ------------ | ----------
|Warrant | Exercise      | Expiration | Warrant | Exercise     | Expiration
|Shares  | Price         | Date       | Shares  | Price        | Date      
|150,611 | 1.310         | 7/18/2004  | 49,130  | 2.565        | 4/21/2001 
|495,868 | 1.050         | 11/3/2005  | 150,611 | 1.310        | 7/18/2004 
|42,500  | 1.050         | 11/3/2005  | 495,868 | 1.050        | 11/3/2005 
|        |               |            | 42,500  | 1.050        | 11/3/2005 





(10)	Stock Options

1993 Incentive Stock Option Plan



On August 16, 1993, the stockholders approved a 1993 incentive stock option plan ("1993 Plan"), which provided for the granting of 200,000 stock options to employees. Options granted may be either incentive stock options within the meaning of Section 422 of the Internal Revenue Code, or non-qualified options.

Under the 1993 Plan, the Option Committee of the Board of Directors is authorized to grant both non-qualified and incentive stock options to full-time employees of the Company only, including officers of the Company. The Committee will determine the provisions and terms of any stock option grant. No option may terminate later than ten years from the date the option is granted. The Committee may provide for termination of the option in the case of termination of employment with the Company or any other reason. No stock option can be transferred except by will or by the laws of descent and distribution. The 1993 Plan terminates on August 16, 2003, however, the 1993 Plan may be terminated earlier by decision of the Board. The Board may amend the 1993 Plan; however, any amendment that would (1) materially increase the benefits accruing to participants under the 1993 Plan, (2) materially increase the number of securities that may be issued under the 1993 Plan, or (3) materially modify the requirements of eligibility for participation in the 1993 Plan must be approved by the Stockholders of the Company.

The majority of options under the 1993 Plan vest ratably over a five-year period. A minority of the options vest based on performance of the market price of the Company's Common Stock, with a seven year cliff vest. All stock options are granted at an exercise price equal to the fair market value of the common stock on the date of grant and expire ten years after the date they are granted. At various intervals, the stockholders of the Company have ratified changes to the 1993 Plan, which have increased the number of shares available under the plan to 2,000,000.

|                          | Number of
Shares | Price
Range   | Weighted
Average | Average
Remaining
Contractual
Life
|------------------------- | ---------------- | ------------- | ---------------- | ----------------------------------
|Outstanding June 30, 1999 | 1,931,224        | $1.00 - $3.56 | 1.10             | 7.5 years                         
|Granted                   | 94,000           | $1.00 - $4.31 | 3.52             |                                   
|Exercised                 | (336,397)        | $1.00 - $1.53 | 1.04             |                                   
|Cancelled                 | (334,988)        | $1.00 - $1.25 | 1.00             |                                   
|Outstanding June 30, 2000 | 1,323,839        | $1.00 - $4.31 | 1.31             | 6.9 years                         
|Granted                   | -                | -             | -                | -                                 
|Exercised                 | 73,500           | $1.00 - $3.50 | 1.32             |                                   
|Cancelled                 | 5,625            | $1.25 - $3.50 | 3.07             |                                   
|Outstanding June 30, 2001 | 1,244,714        | $1.00 - $4.31 | 1.31             | 5.9 years                         















The following table summarizes information for options outstanding and exercisable at June 30, 2001:

| |                 | Options Outstanding |                          |                          |                  | Options Exercisable     
| | --------------- | ------------------- | ------------------------ | ------------------------ | ---------------- | ------------------------
| | Range of Prices | Number of Shares    | Wtd. Avg. remaining life | Wtd. Avg. exercise price | Number of Shares | Wtd. Avg.
exercise price
| | 1.00 - 1.38     | 1,064,714           | 5.5                      | 1.02                     | 1,058,964        | 1.02                    
| | 1.66 - 1.75     | 37,000              | 7.7                      | 1.66                     | 5,375            | 1.67                    
| | 3.19 - 4.31     | 143,000             | 8.1                      | 3.40                     | 74,375           | 3.29                    
| | 1.00 - 4.31     | 1,244,714           | 5.9                      | 1.31                     | 1,138,714        | 1.17                    

On June 3, 1997, the Company offered to grant options with an exercise price of $1.00 per share (the fair market value of the Company's Common Stock on that date) in exchange for the surrender of all outstanding qualified employee incentive stock options at that date. The re-priced options had original exercise prices ranging from $1.50 to $3.13 per share.

As of June 30, 2001, options to purchase 1,138,714 shares of the Company's Common Stock were exercisable under the 1993 Plan with an average weighted average exercise price of $1.17, and options to purchase 243,490 shares of the Company's Common Stock were available for grant under the 1993 Plan. As of June 30, 2000, options to purchase 1,071,589 shares of the Company's Common Stock were exercisable under the 1993 Plan with an average weighted average exercise price of $1.05, and options to purchase 237,865 shares of the Company's Common Stock were available for grant under the 1993 Plan.

Non-Employee Director Stock Option Plan

On November 22, 1996, the stockholders approved the Non-Employee Director Stock Option Plan ("NEDSO Plan"), which provides for the grant of options to purchase 400,000 shares of the Common Stock of the Company in exchange for their participation as a Director of the Company. Pursuant to the NEDSO Plan, amended on January 22, 1998, each participating Director will receive an option to purchase 2,000 shares of Common Stock as an annual retainer. The Chairman of the Board of Directors, if eligible, is also entitled to receive an additional annual retainer to purchase 8,000 shares of the Company's Common Stock. In addition to the annual retainer options, each participating director shall receive an option to purchase up to 1,500 shares of Common Stock per quarter for actual attendance at each regular meeting of the Board of Directors. Directors are eligible to participate in the plan only if they receive no other cash compensation from the Company. All options have an exercise price equal to the fair market value of the Common Stock on the date of grant, vest immediately, and are exercisable for a period of ten years.





|                          |           | Weighted
|------------------------- | --------- | --------
|                          | Number of | Average 
|                          | Shares    | Price   
|Outstanding June 30, 1999 | 63,333    | 1.64    
|Granted                   | 29,500    | 3.98    
|Exercised                 | -         | -       
|Cancelled                 | -         | -       
|Outstanding June 30, 2000 | 92,833    | 2.38    
|Granted                   | 35,167    | 3.83    
|Exercised                 | -         | -       
|Cancelled                 | -         | -       
|Outstanding June 30, 2001 | 128,000   | 3.04    

As of June 30, 2001, options to purchase 128,000 shares of the Company's Common Stock were exercisable under the NEDSO Plan, and options to purchase 272,000 shares of the Company's Common Stock were available for grant under the NEDSO Plan. As of June 30, 2000, options to purchase 92,833 shares of the Company's Common Stock were exercisable under the NEDSO Plan, and options to purchase 307,167 shares of the Company's Common Stock were available for grant under the NEDSO Plan.



Statement of Financial Accounting Standards No. 123

During 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock Based Compensation, which defines a fair value based method of accounting for an employee stock option or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans.

The Company has elected to account for its stock based compensation plans for employees under APB Opinion No. 25, under which no compensation cost has been recognized. However, the Company has computed for pro-forma disclosure purposes the value of all options granted, using the Black-Scholes option pricing model as prescribed by SFAS No. 123 and the following weighted average assumptions used for grants:

|                        | 2001     | 2000    
|----------------------- | -------- | --------
|Risk-free interest rate | 5.3%     | 6.4%    
|Expected dividend yield | 0%       | 0%      
|Expected volatility     | 143%     | 153%    
|Expected lives          | 10 years | 10 years
|                        |          |         



Adjustments are made for options forfeited prior to vesting. The total value of options granted was computed and would be amortized on a straight-line basis over the vesting period of the options. The weighted average fair value of options granted during fiscal years 2001 and 2000 was $3.76 and $3.59, respectively. If the Company had accounted with these plans in accordance with SFAS No. 123, the Company's net income and earnings per share would have been reported as follows:





|                  |             | 2001       | 2000      
|----------------- | ----------- | ---------- | ----------
|Net Income (Loss) | As Reported | $2,431,903 | $3,677,683
|                  | Pro Forma   | 2,170,595  | 3,026,165 
|Basic EPS         | As Reported | .36        | .57       
|                  | Pro Forma   | .32        | .47       
|Diluted EPS       | As Reported | .29        | .44       
|                  | Pro Forma   | .26        | .37       



(11)	Segment Information

Operating segments represent components of the Company's business that are evaluated regularly by key management in assessing performance and resource allocation. The Company has determined that its reportable segments consist of Bear-Gram Gift Delivery Service, Retail Operations, Wholesale/ Corporate (including licensing) and SendAMERICA.

The Bear-Gram delivery service involves sending personalized teddy bears directly to recipients for special occasions such as birthdays, anniversaries, weddings, and new births, as well as holidays such as Valentine's Day, Christmas, and Mother's Day. Bear-Gram orders are placed through the toll free number, on-line, or through the catalog.

The retail operation segment involves one retail location and family tours of its teddy bear factory and store at the factory location in Shelburne, located ten miles south of Burlington, Vermont. In an effort to make a visit to the factory more entertaining and draw additional traffic, the Company has implemented the Make-A-Friend-For-Life bear assembly area, where visitors can participate in the creation of their own teddy bear.

The Wholesale/Corporate segment was begun during the Company's fiscal year 1998. The Company began pro-actively developing opportunities in the corporate affinity market and certain wholesale markets as a business segment.

SendAMERICA, Inc., a new wholly owned subsidiary, is a new business segment begun in fiscal 2001 for the purposes of extending the Company's product offerings in the gift delivery service industry to include other American made gift products in addition to teddy bears. SendAMERICA, which is still in the start up phase, generated immaterial revenues during the year ended June 30, 2001.

The reporting segments follow the same accounting policies used for the Company's consolidated financial statements and described in the summary of significant accounting policies. Management evaluates a segment's performance based upon gross margin and gross margin percentage.

|                   | Bear-Gram
Service | Retail
Operations | Wholesale/
Corporate | Send
AMERICA
|------------------ | ----------------- | ----------------- | -------------------- | ------------
|FY 2001            |                   |                   |                      |             
|Net Revenues       | $33,706,841       | $3,076,569        | $424,840             | $47,017     
|Cost of Goods Sold | 11,982,208        | 1,206,099         | 203,029              | 55,634      
|Gross Margin       | 21,724,633        | 1,870,470         | 221,811              | (8,617)     
|Gross Margin %     | 64.5%             | 60.8%             | 52.2%                | -           



|                   | Bear-Gram
Service | Retail
Operations | Wholesale/
Corporate | Send
AMERICA
|------------------ | ----------------- | ----------------- | -------------------- | ------------
|FY 2000            |                   |                   |                      |             
|Net Revenues       | $28,427,337       | $2,812,151        | $2,092,985           | -           
|Cost of Goods Sold | 10,106,377        | 1,070,807         | 1,139,385            | -           
|Gross Margin       | 18,320,960        | 1,741,344         | 953,600              | -           
|Gross Margin %     | 64.5%             | 61.9%             | 45.6%                | -           

The Company believes that there is no discernable basis to identify assets by segment. Revenues from individual customers, revenues between business segments, and revenues, operating profit and identifiable assets of foreign operations are not significant.























Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement S3/A File No. 333-91115 (filed February 11, 2000) and Registration Statement S-8 File No. 333-74493 (filed March 16, 1999).



Arthur Andersen, LLP



Boston, Massachusetts

September 28, 2001