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                                                                    EXHIBIT 10.1

                   AMENDED AND RESTATED EMPLOYMENT AGREEMENT
                   -----------------------------------------

     EMPLOYMENT AGREEMENT (the "Employment Agreement" or "Agreement") between
Zany Brainy, Inc., a Pennsylvania corporation formerly known as Children's
Concept, Inc. (the "Company"), and Thomas G. Vellios (the "Employee") dated May
1, 2001.

     WHEREAS, the Company desires to employ the Employee in the position of
President and Chief Executive Officer;

     WHEREAS, the Company desires to have continuity of its leadership for the
fiscal year ending February 1, 2003 to give the Company credibility and
stability through its current financial difficulties; and

     WHEREAS, the Company and Employee wish to replace and supersede all
previous employment agreements entered into between the Employee and the
Company.

     NOW, THEREFORE, the parties to this Agreement, intending to be legally
bound, agree as follows:

     1.  Employment.  The Company hereby employs the Employee, and the Employee
         ----------
accepts such employment and agrees to perform his duties and responsibilities
under this Agreement, in accordance with the following terms and conditions.

     1.1.  Duties and Responsibilities.
           ---------------------------

           (a) Beginning as of the date the Employee executes this Agreement,
and thereafter until this Employment Agreement or Employee's employment
terminates, the Employee shall be employed by the Company as President and Chief
Executive Officer ("C.E.O."), and he shall perform all duties and accept all
responsibilities reasonably related to and consistent with such positions as may
be assigned to him by the Board of Directors, and he shall cooperate fully with
the Board of Directors and other executive officers of the Company.

           (b) The Employee represents to the Company that he is not subject to
or a party to any employment agreement, non-competition covenant, understanding
or restriction which would prohibit the Employee from executing this Agreement
and performing fully his duties and responsibilities hereunder, or which would
in any manner, directly or indirectly, limit or affect the duties and
responsibilities which may now or in the future be assigned to the Employee by
the Company or the scope of assistance to which he may now or in the future
provide to affiliates of the Company.

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           (c) The Employee shall at all times comply with policies and
procedures adopted by the Company for its employees, not inconsistent with the
terms of this Agreement, including, without limitation, any procedures and
policies adopted by the Company regarding conflicts of interest.

           (d) The duties and responsibilities and reporting relationship set
forth in this Agreement shall not be substantially changed without the mutual
agreement of the parties.

     1.2.  Extent of Service.  The Employee agrees to use his best efforts to
           -----------------
carry out his duties and responsibilities under Section 1.1 of this Agreement
and to devote his full business time, attention and energy thereto.  Except as
provided in Section 4 below, the foregoing shall not be construed as preventing
Employee from making investments in other businesses or enterprises, provided
that Employee agrees not to serve as a director, officer or advisor of, or to
work either on a part-time or independent contracting basis for, any other
business or enterprise during his employment with the Company without the prior
written approval of the Board of Directors of the Company.  Notwithstanding the
foregoing, the Employee (a) may provide services as a volunteer or director to
charitable, educational or civic organizations; (b) act as a member, director or
officer of any industry trade association or group; (c) may serve as a member of
the board of directors of one company other than the Company, provided that the
company is not a competing business as defined in this Agreement; and (d) may
serve as a trustee, director or advisor to any family companies or trusts;
provided in all cases that the aggregate of such service does not materially
interfere with the performance of Employee's duties to the Company as required
under this Agreement.

     1.3.  Salary.  For all of the services rendered by the Employee hereunder,
           ------
Employee's annual base salary shall be $500,000.00, payable in installments at
such times as the Company customarily pays its other senior officers (but in any
event no less often than monthly), such base salary to be effective as of March
26, 2001.  The Company agrees that the Employee's base salary and performance
will thereafter be reviewed at least annually by the Company on the same basis
as other senior level executives to determine if an increase in compensation is
appropriate, which increase shall be in the sole discretion of the Compensation
Committee of the Board of Directors of the Company (the "Compensation
Committee").  Except as otherwise provided in this Agreement, and except for the
Company's tax withholding obligations required by applicable law, the Employee
alone and not the Company shall be responsible for the payment of all federal,
state and local taxes in respect of the payments to be made and benefits to be
provided under this Agreement or otherwise.

     1.4.  Benefits.  During the term of employment the Employee shall be
           --------
provided such benefits and be permitted to participate in all fringe benefit
plans made available to employees of the Company generally and to executives of
the Company which, from time to time at the Company's discretion may be
provided.

     1.5.  Stay Bonus. To incent Employee to remain employed with the Company
           ----------
through the fiscal year ending February 2, 2002, Employee shall be entitled to a
stay bonus (the

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"Stay Bonus") in addition to the Employee's base salary in accordance with the
provisions set forth herein.

           (a) The Company shall pay Employee $150,000.00 on the date of the
closing of (i) a new credit facility which completely replaces and refinances
the Company's existing credit facility (the "Existing Facility") with Congress
Financial Corporation, as Agent and First Union National Bank, as Lender, or
(ii) an amendment to the Company's Existing Facility and under which, in either
case, the Company is afforded a borrowing availability sufficient to satisfy the
working capital needs of the Company and all of its subsidiaries for the
foreseeable future and at least until December 31, 2002, provided that (i)
Employee is actively employed by the Company as an employee in good standing on
that date and Employee has not given notice of his intent to terminate this
Agreement pursuant to Section 7.4 or otherwise materially breached the terms of
this Agreement and (ii) the consummation occurs before October 15, 2001.

           (b) The Company shall pay Employee $350,000.00 on October 15, 2001 if
Employee is actively employed by the Company as an employee in good standing on
that date and Employee has not given notice of his intent to terminate this
Agreement or his employment by that date or otherwise materially breached the
terms of this Agreement.  Furthermore, if the consummation of the credit
facility described in subsection (a) does not occur before October 15, 2001,
then the Company shall pay Employee an additional $150,000.00 on October 15,
2001 in lieu of the payment set forth in subsection (a) above if Employee is
actively employed by the Company as an employee in good standing on that date
and has not given notice of his intent to terminate this Agreement pursuant to
Section 7.4 or otherwise materially breached the terms of this Agreement.

           (c) The Company shall pay Employee $500,000.00 on December 31, 2001
if Employee is actively employed by the Company as an employee in good standing
on that date and has not given notice of his intent to terminate this Agreement
pursuant to Section 7.4 or otherwise materially breached the terms of this
Agreement.

     1.6   Incentive Bonus and Equity Grant.
           --------------------------------

           (a) Employee shall be entitled to participate in the Company's 2001
Management Incentive Plan.

           (b) The Company granted Employee an option (the "Option") to purchase
500,000 shares of Company Common Stock on March 26, 2001.  Notwithstanding the
vesting schedules set forth in Paragraph 2(a) of the Option, if the Employee
provides written notice to the Company under Section 7.1 of this Agreement, then
the vesting of the 201,250 shares scheduled to vest on March 26, 2002 pursuant
to Paragraph 2(a) of the Option shall be accelerated so that such shares vest on
December 31, 2001.

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     1.7.  Vacation.  The Employee shall be entitled to up to four (4) weeks of
           --------
vacation per year, to be taken in accordance with the Company's vacation policy
as it may be established or amended by the Company from time to time.

     1.8.  Stock Incentive Plan and Incentive Stock Option Agreements. The
           ----------------------------------------------------------
Employee shall be entitled to participate in the Company's Equity Incentive
Plan, as modified by this Agreement.  In the event of any conflict between the
provisions of this Agreement and any existing or future stock option plan or
agreement which is applicable to the Employee, the provisions of this Agreement
shall control but only as to the Employee, and the Board of Directors, by
approval of this Agreement, hereby agrees only with the Employee that the
provisions of this Agreement regarding stock options and other equity awards or
interests granted to the Employee shall supersede any conflicting provisions of
the Company's 1993 Stock Incentive Plan, the Company's 1998 Equity Incentive
Plan and future plans or agreements under which any options or other equity
incentives are granted or awarded to the Employee, and the Company will take any
and all actions necessary to adopt, confirm and ratify the foregoing.
Accordingly, for purposes of the 1993 Stock Incentive Plan, the 1998 Equity
Incentive Plan, the agreements and grants under those plans, and future plans
and agreements under which stock options or other equity incentives are granted
or awarded by the Company to the Employee:

  a.  a termination for "Cause" shall be deemed to have occurred only if the
      Employee is terminated for "Cause" as set forth in Section 7.3 of this
      Agreement;

  b.  a "Change of Control" shall be deemed to have occurred only upon the
      occurrence of any of the events defined as a Change of Control under
      Section 7.6 of this Agreement;

  c.  the provisions of Sections 3, 4, 5 and 6 of this Agreement are the
      only restrictive covenants binding upon the Employee and shall
      supersede any other restrictive covenant provisions;

  d.  all determinations made by the Board of Directors of the Company or
      any option committee designated by the Board relating to questions of
      interpretation and application of the Company's 1993 Stock Incentive
      Plan, the 1998 Equity Incentive Plan and agreements or grants under
      those plans and any corresponding future equity incentive plans and
      agreements and grants shall be made reasonably, in good faith, and
      consistent with the requirements and provisions of this Agreement; and

  e.  any controversy, dispute or claim between the Employee and the Company
      arising out of or related to the 1993 Stock Incentive Plan, the 1998
      Equity Incentive Plan,  any agreements or grants under those plans
      and/or any future equity incentive plans and corresponding agreements
      and grants shall be resolved in accordance with the dispute resolution
      provisions set forth in Section 13 of this Agreement.

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          2.   Expenses.  The Company shall reimburse the Employee on a timely
               ---------
basis for all ordinary and necessary business expenses incurred in the discharge
of his duties and responsibilities under this Agreement, in line with Company
policy and in accordance with the Company's expense approval procedures then in
effect upon presentation to the Company of an itemized account and appropriate
written proof of such expenses.  The Company also shall reimburse the Employee
for legal expenses incurred in negotiating this Agreement and the previous
Amended and Restated Employment Agreement up to an aggregate maximum of
$13,500.00.  Up to $6,000 of said legal expenses shall be paid within two (2)
days of Employee's execution of this Agreement, and any remaining balance shall
be paid within two (2) days of receipt by the Company of an invoice from
Employee's legal counsel.

          3.   Confidential Information.  The Employee acknowledges that he will
               ------------------------
have access to confidential information of the Company and its affiliates,
including, without limitation, information and knowledge pertaining to research
activities, products and services offered, inventions, innovations, designs,
ideas, plans, trade secrets, proprietary information, advertising, sales methods
and systems, sales and profit figures, customer lists, and relationships between
the Company and its customers, suppliers and others who have had or will have
business dealings with the Company ("Confidential Information").  Employee
acknowledges that such Confidential Information is a valuable and unique asset
of the Company and covenants that he will not, either during or after his
employment with the Company, disclose any such Confidential Information to, or
use of any such Confidential Information for the benefit of, any person or
entity other than the Company and/or its affiliates for any reason whatsoever
(except as may be required or appropriate for the proper discharge of his duties
and responsibilities under this Agreement) without the prior written
authorization of the Company's Board of Directors, except as may be required by
law.  In the event that the Employee is subject to a subpoena or other order of
any governmental entity which might seek disclosure of Confidential Information,
the Employee shall furnish a copy of such subpoena or order to the Company's
General Counsel, or in the General Counsel's absence, to Stephen Goodman,
Esquire, whose address is contained in Section 10 hereof, as soon as practicable
but in no event no later than forty-eight (48) hours after his receipt of such
subpoena or order.  Confidential Information shall not include (i) information
known to Employee before he became employed by the Company, (ii) information in
the public domain or known generally in the industry through no fault of
Employee, and (iii) information that is not treated by the Company as
confidential or is disclosed by the Company to third parties without a duty of
confidentiality imposed on such third parties.


          4.   Non-Competition.
               ----------------

          4.1. During his employment by the Company and for a period ending one
year after the last date on which Employee last performs services for the
Company (whether or not such services are rendered pursuant to this Agreement),
the Employee shall not, directly or indirectly, engage in (as principal,
partner, director, officer, agent, employee, consultant, owner,

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independent contractor or otherwise, with or without compensation) or hold a
financial interest in any business that constitutes a competing business
operating in the North American continent as defined below, subject to Section
1.2. The restrictive period referred to in this paragraph 4.1 shall in no event
exceed the length of the Severance Benefit Period (defined below) if the
Employee is terminated by the Company without cause or resigns for Good Reason.

          4.2. As used in this Agreement, a "competing business" shall be (i)
any business that, at the time of the termination, primarily engages in, or
plans to engage primarily in, the sale of any combination of at least two of the
following children's merchandise categories: (a) multimedia/educational
merchandise, (b) video games and/or related hardware and software, (c) books,
(d) educationally-oriented or specialty market games and/or toys, (e)
educationally-oriented or specialty market audio tapes and/or videotapes, (f)
educationally-oriented or specialty market computer software products and (g)
educationally-oriented or specialty market arts and crafts supplies (the
"Company's Merchandise Assortment"); (ii) Lakeshore Learning Materials, K.B
Toys, Toys "R" Us, Inc., FAO Schwartz, SOK Operations, Inc. (d/b/a Store of
Knowledge), Learningsmith, Inc., The Right Start, Inc., Learning Express, Inc.,
Babies "R" Us, or any subsidiaries, affiliates or Internet ventures of the
aforementioned companies; or (iii) any retailing business that, at the time of
the termination, dedicates more than 7,500 square feet of its retail selling
space to any combination of at least two of  the Company's Merchandise
Assortment in any one store.  The 7,500 square foot calculation in subparagraph
(iii) of this Section 4.2 shall exclude mass merchant products of a type not
sold by the Company at the time of the determination.  The phrase "primarily
engages in" used in subparagraph (i) of this Section 4.2 shall mean that sixty-
six and two-thirds percent (66.67%) of the merchandise sold by the entity
engaged, or to be engaged, in such business is substantially similar to and
competitive with the children's merchandise sold by the Company.

          4.3. Notwithstanding the restrictions contained in this Section 4, the
Employee shall be permitted to own no more than five percent (5%) of the shares
of any class of equity securities of a company whose securities are traded on a
national securities exchange or The NASDAQ Stock Market.

          4.4  Notwithstanding any other provision in this Agreement, the
provisions set forth in Sections 4.1, 4.2, 4.3 and 5 of this Agreement shall be
binding on Employee, and shall inure to the benefit of the Company, of any
purchaser of substantially all of the assets of the Company, of any successor of
the Company, of any entity formed by the merger or consolidation of the Company
with another entity, or of any entity that acquires the Company.


          5.   No Solicitation.  The Employee agrees that during the term of
               ---------------
this Agreement and for a period ending two years after the Employee last
performs services for the Company (whether or not such services are rendered
pursuant to this Agreement), he will not, either directly or indirectly, solicit
the employment of any person who was employed by the Company on a full or part-
time basis at the time the Employee last was employed by the Company unless such
person (i) was involuntarily discharged by the Company or such affiliate;

                                       6
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or (ii) voluntarily terminated his or her relationship with the Company or such
affiliate prior to the Employee's termination of employment.

          6.   Equitable Relief.
               ----------------

          6.1. Employee acknowledges that the restrictions contained in Sections
3, 4 and 5 of this Agreement, individually and collectively, are reasonable and
necessary to protect the legitimate interests of the Company, that the Company
would not have entered into this Agreement in the absence of such restrictions,
and that any material violation of any provision of those Sections will result
in irreparable injury to the Company.  The Employee further represents and
acknowledges that (i) he has been advised by the Company to consult his own
legal counsel in respect to this Agreement; and (ii) that he has, prior to
execution of this Agreement, reviewed thoroughly this Agreement with his
counsel.

          6.2. The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 3, 4 or 5 above, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled.  In the event that any of the provisions of
Sections 3, 4 or 5 above should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.

          6.3. Subject to Section 13 of this Agreement, the parties irrevocably
and unconditionally (i) agree that any suit, action or other legal proceeding
arising out of this Agreement, including, without limitation, any action
commenced by the Company for preliminary and/or permanent injunctive relief
and/or other equitable relief, may be brought in any court of competent
jurisdiction in Pennsylvania; (ii) consent to the jurisdiction of any such court
in any such suit, action or proceeding; and (iii) waive any objection which such
party may have to the laying of venue of any such suit, action or proceeding in
any such court. The parties also irrevocably and unconditionally consent to the
service of any process, pleadings, notices or other papers in a manner permitted
by the notice provisions of Section 10 of this Agreement.


          7.   Term and Termination.
               --------------------

          7.1. Generally.  This Agreement shall expire on February 1, 2003.
               ---------
Notwithstanding the foregoing, this Agreement, and Employee's employment, may be
terminated (1) at the will of the Company at any time and for any reason with or
without Cause or (2) commencing on December 3, 2001 by the Employee upon sixty
(60) days written notice to the Company.  If both the Employee and the Company
desire that the Employee continue his

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employment with the Company after the expiration of this Agreement, then the
Employee and the Company shall endeavor to reach a new employment agreement.

          7.2. Death or Disability of Employee.  Notwithstanding any other
               -------------------------------
provision in this Agreement, this Agreement and the Employee's employment
hereunder shall automatically terminate upon the Employee's death or, at the
option of the Company by written notice to the Employee, upon the Employee's
Disability.  "Disability" shall mean the disability of the Employee, within the
meaning of subsection 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), and where the Employee is unable to work for a period of one
hundred and eighty (180) days in any 12 month period.  Such termination shall
take effect the last day of the month following the date of death or the date
such notice of termination for Employee's Disability is given.  Employee's
compensation and other benefits shall continue during the term of the disability
through the effective date of termination as set forth above, except that such
compensation and benefits shall be reduced by any amounts the Employee receives
through any Company-provided disability insurance policy applicable to him.

          7.3. Termination by Company for Cause.
               --------------------------------

               (a)   Definition of Cause.  The Company shall have the right to
                     -------------------
terminate the Employee's employment for Cause.  For purposes of this paragraph
"Cause" shall be limited to the following:

               (i)   The Employee's indictment, or conviction for, or plea of
                     nolo contendere to a felony or other crime involving moral
                     turpitude (excluding traffic offenses);

               (ii)  The Employee's dishonesty or misappropriation of funds;

               (iii) A continued failure of the Employee to substantially
                     perform his duties, comply with any of the lawful
                     directives of the Board of Directors of the Company, or
                     observe any material term of this Agreement if such failure
                     is not corrected within twenty (20) days after written
                     notice from the Board to the Employee. Any notice given
                     under this subsection shall specifically state the manner
                     in which the Employee has not substantially performed his
                     duties, complied with lawful directives of the Board of
                     Directors, or observe any material term of this Agreement
                     that the notice is given under this subsection, and that
                     failure to correct such breach will result in termination
                     of employment under this Agreement; and/or

               (iv)  A willful breach by the Employee of any of the material
                     terms of this Agreement, or of his fiduciary duty to the
                     Company; and/or

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               (v)  The Employee's unlawful and habitual use or abuse of
                    substances.

     For the purpose of the above definition of Cause, no act, or failure to
     act, on Employee's part shall be deemed "willful" unless done, or omitted
     to be done, by the Employee not in good faith and without reasonable belief
     that his action or omission was in the best interest of the Company.

               (b)  Procedure Upon Termination by Company for Cause.
                    -----------------------------------------------
Notwithstanding the foregoing, termination by the Company for Cause shall not be
effective until and unless (i) notice of intention to terminate for Cause has
been given by the Company within 90 days after the Company learns of the act,
failure or event constituting "Cause" under this Section 7.3 (which is not cured
by the Employee within any time period permitted for such cure above), and (ii)
the Board of Directors has voted (at a meeting of the Board duly called and held
as to which termination of Employee is an agenda item) by a majority vote to
terminate Employee for Cause, and (iii) if Employee has commenced arbitration in
the manner prescribed in this Agreement within 15 days after receipt of such
notice of termination disputing the Company's right under this Agreement to
terminate for Cause, the Arbitrator shall thereafter have determined that the
Employee was terminated for Cause. If the Arbitrator rules that the Employee was
not terminated for Cause, the Employee shall be treated as having been
terminated without Cause and the Employee shall be entitled to receive the
Severance Benefit pursuant to Section 7.6.

          7.4. Termination by Employee for Good Reason.
               ---------------------------------------

          (a)  Definition of Good Reason.  The Employee shall have the right to
               -------------------------
terminate his employment for Good Reason.  For purposes of this Section 7.4
"Good Reason" shall be limited to the following (unless the Employee and the
Company shall execute a written agreement specifically stating that the
occurrence of such event shall not constitute "Good Reason" under this
Agreement):

               (i)   If the scope of Employee's duties and responsibilities as
                     President and C.E.O. of the Company are in the aggregate
                     materially reduced.

               (ii)  A requirement by the Company or the Board that the Employee
                     be relocated to a Company office more than fifty (50) miles
                     from the current executive offices of the Company, or the
                     Company requiring the Employee to be based anywhere other
                     than the principal executive offices of the Company, other
                     than on travel reasonably required to carry out Employee's
                     obligations under this Agreement.

               (iii) A Change of Control as defined in this Section 7 occurs,
                     unless within fifteen (15) days following a Change of
                     Control

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<PAGE>

                    successor organization offers to continue this Agreement for
                    two (2) years following such Change of Control or offers the
                    Employee a two (2) year contract incorporating substantially
                    all of the terms of this Agreement as they would apply as of
                    the date of the Change of Control, including, at least,
                    Employee's then current base salary, incentive bonus, and
                    benefits, but excluding the Stay Bonuses set forth in
                    Section 1.5 to the extent the Change of Control occurs after
                    the date any such Stay Bonus has been paid.

               (iv) A material breach by the Company of any of the terms of this
                    Agreement if the breach is not corrected within twenty (20)
                    days after written notice of such breach is given to the
                    Company.  Any notice provided under this subsection shall be
                    in writing and shall specifically describe the Company's
                    alleged material breach, that such notice is given under
                    this subsection, and that failure to correct such breach
                    will result in the Employee's resignation for Good Reason
                    under this Agreement.

          (b)  Procedure Upon Termination by Employee for Good Reason.
               ------------------------------------------------------

          Notwithstanding the foregoing, termination by the Employee for Good
Reason shall not be effective until and unless (i) notice of intention to
terminate for Good Reason has been given by the Employee within 90 days after
the Employee learns of the act, failure or event constituting "Good Reason"
under this Section 7.4 (which was not cured by the Company within any time
period permitted for such cure above), and (ii) if the Company has commenced an
arbitration in the manner prescribed below within 15 days after receipt of the
Employee's notice of termination, such termination shall be effective as a
termination of employment and shall be deemed a termination by Employee for
"Good Reason" and Employee shall immediately be eligible to receive the payments
and benefits set forth in Section 7.5(a) in accordance with the conditions
established in Section 7.5, unless and until the arbitrator shall have
determined that the termination was not for Good Reason.  If the Company fails
to file a demand for arbitration with the American Arbitration Association
within fifteen (15) days after receipt of Employee's notice of termination for
Good Reason, Employee's termination of employment from the Company shall be
deemed to have been a termination by the Employee for Good Reason.  If the
Company files a demand for arbitration and the arbitrator rules that the
Employee's termination was not for Good Reason, then Employee shall, within
thirty (30) days of the issuance of such ruling, reimburse the Company for any
and all monetary payments made to or on behalf of the Employee by the Company
pursuant to Section 7.5(a) hereof.

          7.5. Severance.  (a)  If the Employee's employment under this
               ---------
Agreement is terminated (i) by the Employee for Good Reason, pursuant to Section
7.4; or (ii) by the Company without Cause (other than by reason of the
Employee's death or Disability under Section 7.2), the Employee shall be
entitled to receive the following severance payments and benefits (the

                                       10
<PAGE>

"Severance Benefit") set forth in subparagraphs (A) through (D) below, upon his
execution of the Severance Agreement and General Release attached hereto as
addendum 1.

                    (A)  2.99 times his annual base salary in effect at the time
                         of the termination of his employment.  One half of this
                         amount shall be payable within thirty (30) days of the
                         termination of Employee's employment, and the other
                         half shall be payable eighteen (18) months after the
                         termination of Employee's employment;

                    (B)  Any unpaid Stay Bonus described in Section 1.5 without
                         regard to the Employee's date of termination;

                    (C)  If the Employee's employment terminates during the
                         fiscal year beginning February 3, 2002 and if the
                         Employee is entitled to receive an incentive bonus
                         under the terms of the applicable incentive plan for
                         that year, payment of a prorated incentive bonus for
                         the year in which the Employee's  termination occurs;
                         and

                    (D)  Continuation for the Severance Benefit Period of all
                         health insurance, life insurance and disability
                         insurance fringe benefits (or until such earlier date
                         that substantially equivalent or better benefits are
                         provided by a subsequent employer of the Employee);
                         and, if such benefits cannot be continued for
                         Employee's benefit under the benefit plan provisions
                         because of the termination of Employee's employment
                         with the Company, then Employee will be paid an amount
                         sufficient to enable him to purchase at least
                         equivalent benefits from the same or other insurers.
                         The Severance Benefit Period shall be twenty-four (24)
                         months from the date of termination.

               (b)  Notwithstanding anything in this Agreement to the contrary,
in the event that it shall be determined that any payment or distribution by the
Company or any other entity or person to or for the benefit of the Employee,
whether paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), the aggregate present value of the Payments
payable or distributable to or for the benefit of the Employee pursuant to this
Agreement or otherwise shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value which
maximizes the aggregate present value of Payments without causing any Payment to
be subject to the limitation of deduction under Section 280G of the Code. For
purposes of this subparagraph (b), "present value" shall be

                                       11
<PAGE>

determined in accordance with Section 280G(d)(4) of the Code. All determinations
to be made under this subparagraph (b) shall be made by the Company's
independent public accountant immediately prior to the change of control
transaction (the "Accounting Firm"), which firm shall provide its determinations
and any supporting calculations both to the Company and the Employee within ten
days of the Employee's termination of employment. Any such determination by the
Accounting Firm shall be binding upon the Company and the Employee. Within
fifteen (15) days after receiving the Accounting Firm's determination, the
Company shall pay (or cause to be paid) or distribute (or cause to be
distributed) to or for the benefit of the Employee such amounts as are then due
to the Employee under this Agreement, after taking into account the provisions
of this subparagraph (b). All of the fees and expenses of the Accounting Firm in
performing the determinations referred to above shall be borne solely by the
Company. The Company agrees to indemnify and hold harmless the Accounting Firm
of and from any and all claims, damages and expenses resulting from or relating
to its determinations pursuant to this subparagraph, except for claims, damages
or expenses resulting from the gross negligence or willful misconduct of the
Accounting Firm.

          7.6. Definition of Change of Control.  A "Change of Control" with
               -------------------------------
respect to the Company shall be deemed to have occurred at the time of the
earliest to occur of the following:

               (a)  Any "person" as such term is used in Sections 13(d) and
14(d) of Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the share owners of the company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;

               (b)  The share owners of the Company approve a merger or
consolidation of the Company with any other company, other than (1) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the company or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as defined in subsection (a) above) acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or

               (c)  The share owners of the Company approve a plan of
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.

                                       12
<PAGE>

          8.   Survival.  Notwithstanding the termination or expiration of this
               --------
Agreement pursuant to Section 7 or otherwise, the Employee's obligations under
Sections 3, 4, 5 and 16 hereof shall survive and remain in full force and effect
for the periods therein provided, and the provisions for equitable relief
against Employee in Section 6 hereof shall continue in force.  The Company's
obligations under Sections 7.5, 15, 16 and 17 hereof also shall remain in full
force and effect for the periods therein provided.

          9.   Governing Law.  This Agreement shall be governed by and
               -------------
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of laws thereof.

          10.  Notices.  All notices and other communications required or
               -------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand-delivered, mailed by
registered or certified mail (three days after deposited), faxed (with
confirmation received) or sent by a nationally recognized courier service, as
follows (provided that notice of change of address shall be deemed given only
when received):

                    If to the Company, to:

                    Board of Directors
                    Zany Brainy, Inc.
                    2520 Renaissance Blvd.
                    King of Prussia, PA 19406

                    With a required copy to:

                    Morgan, Lewis & Bockius LLP
                    1701 Market Street
                    Philadelphia, PA 19103-6993
                    Attention: Stephen M. Goodman, Esquire

                    If to Employee, to:

                    Thomas G. Vellios
                    737 Braeburn Lane
                    Penn Valley, PA 19072

                    With a required copy to:

                    Ballard Spahr Andrews & Ingersoll, LLP
                    1735 Market Street, 51st Floor
                    Philadelphia, PA 19103
                    Attention: Justin P. Klein, Esquire

                                       13
<PAGE>

or to such other names and addresses as the Company or the Employee, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.

          11.    Contents of Agreement.
                 ----------------------

          11.1.  This Agreement supersedes all prior employment agreements
between the Company and Employee, and sets forth the entire understanding
between the parties hereto with respect to the subject matter hereof.  This
Agreement may not be changed, modified, extended or terminated except upon
written amendment executed by the Employee and by the duly appointed
representative of the Board of Directors of the Company.

          11.2.  Employee acknowledges that from time to time the Company or its
affiliates may establish, maintain and distribute employee manuals or handbooks
or personnel policy manuals, and officers or other representatives of the
Company may make written or oral statements relating to personnel policies and
procedures.  Such manuals, handbooks and statements are intended only for
general guidance.  No policies, procedures or statements of any nature by or on
behalf of the Company (whether written or oral, and whether or not contained in
any employee manual or handbook, including the Company's Associate Handbook, as
the same may exist from time to time, or personnel policy manual), and no acts
or practices of any nature, shall be construed to modify this Agreement or to
create express or implied obligations of any nature to the Employee or to impose
any such obligations on the Employee in conflict with or in any manner
inconsistent with the provisions of this Agreement.

          11.3.  All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of the
Employee hereunder are of a personal nature and shall not be assignable or
delegable in whole or in part by the Employee, and the Company may not transfer
or convey its rights hereunder to any third party other than an affiliate of the
Company without the prior express written consent of the Employee except as
provided herein.

          11.4.  The language of this Agreement shall be construed in accordance
with its fair meaning and not for or against any party.  The parties acknowledge
that each party and its counsel have reviewed and had the opportunity to
participate in the drafting of this Agreement and, accordingly, that the rule of
construction that would resolve ambiguities in favor of non-drafting parties
shall not apply to the interpretation of this Agreement or any portion of this
Agreement.

          12.    Severability. If any provision of this Agreement or application
                 ------------
thereof to any person or circumstance is held invalid or unenforceable in any
jurisdiction, the remainder of this Agreement, and the application of such
provision to such person or circumstances in any

                                       14
<PAGE>

jurisdiction, shall not be affected thereby, and to this end the provisions of
this Agreement shall be severable.

          13.  Arbitration. In the event of any controversy, dispute or claim
               -----------
arising out of or related to this Agreement or the Employee's employment by the
Company, the parties shall negotiate in good faith in an attempt to reach a
mutually acceptable settlement of such dispute.  If negotiations in good faith
do not result in a settlement of any such controversy, dispute or claim, it
shall be finally resolved by expedited binding arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the National Rules of the
American Arbitration Association governing employment disputes.  Nothing is this
Section 13 shall be deemed to limit, compromise or affect the Company's right to
seek and/or obtain injunctive and/or other equitable relief from a court of
competent jurisdiction pursuant to Section 6 above.

          14.  Remedies Cumulative; No Waiver.  No remedy conferred upon the
               ------------------------------
Company or the Employee by this Agreement is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to any other remedy given hereunder or now or hereafter existing at law
or in equity.  Except as specifically provided in this Agreement, no delay or
omission by the Company in exercising any right, remedy or power hereunder or
existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by the Company from time to time
and as often as may be deemed expedient or necessary by the Company in its sole
discretion.

          15.  Insurance and Indemnity.  The Company shall, to the extent
               -----------------------
permitted by law, indemnify the Employee in connection with his status as set
forth herein.  The Company shall also provide the Employee with coverage as a
named insured under any directors and officers liability insurance policy
maintained for the Company's directors and officers, and the Company shall
continue to maintain directors and officers liability insurance for the benefit
of Employee during the term of this Agreement and for at least three (3) years
following the termination of Employee's employment with the Company, provided
that such insurance is available commercially.  This obligation to provide
insurance and indemnify the Employee shall survive expiration or termination of
this Agreement with respect to proceedings or threatened proceedings based on
acts or omissions of the Employee occurring during the Employee's employment
with the Company or with any affiliated company.  Such obligations shall be
binding upon the Company's successors and assigns and shall inure to the benefit
of the Employee's heirs and personal representatives.

          16.  Mutual Non-Disparagement.  During the term of this Agreement and
               ------------------------
thereafter, the Employee agrees: (A) not to participate or engage in any trade
or commercial disparagement of the business or operations of  the Company and/or
any other related entity; and/or (B) not to disparage the professional and/or
personal lives of any individual officer, director, or employee of the Company
and/or its related entities.  During the term of this Agreement and thereafter,
the Company agrees: (A) not to participate or engage in any trade or commercial
disparagement of the business or operations of the Employee; and/or (B) not to
disparage the professional and/or personal life of the Employee.

                                       15
<PAGE>

          17.  Director Benefits.  While Employee is on the Board of Directors,
               -----------------
the Board of Directors will provide Employee all of the benefits,
indemnifications, insurance protection and such other rights as are enjoyed by
all other employee-directors of the Company.  Employee agrees to resign from the
Board of Directors should he no longer be the C.E.O. of the Company.

          18.  Power and Authority.  The Company represents that is has the
               -------------------
power and authority to enter into this Agreement.

          19.  Repayment of Stay Bonus.  The parties recognize that the
               -----------------------
termination of Employee's employment without Good Reason or for Cause prior to
February 2, 2002, may cause immeasurable damage to the Company's reputation,
credibility and good will, as well as immeasurable damage to the ongoing
business operations of the Company during the search for, and training of, a new
C.E.O.  Therefore, the Company and the Employee agree that should Employee
terminate his employment without Good Reason prior to February 2, 2002, or
should the Company terminate his employment for Cause prior to February 2, 2002,
Employee shall immediately repay to the Company all Stay Bonuses he received
pursuant to Section 1.5 of this Agreement, and shall forfeit his entitlement to
any Stay Bonuses to which he had become entitled but had not yet received, all
of which monies the parties agree may be reasonably necessary to hire
consultants to manage the Company until a new C.E.O. is found, and as a signing
bonus to hire a new C.E.O. to rebuild the Company's reputation, credibility, and
good will.

          20.  Withholding.  All payments under this Agreement shall be made
               -----------
subject to applicable tax withholding, and the Company shall withhold from all
payments under this Agreement all federal, state and local taxes that the
Company is required to withhold pursuant to any law or governmental rule or
regulation.

          21.  Miscellaneous.  All section headings are for convenience only.
               -------------
This Agreement may be executed in several counterparts, each of which is an
original.

          IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Employment Agreement as of the date set forth above.

Attest                              ZANY BRAINY, INC.

                , Secretary         By:______________________
                                    Robert A. Helpert


Witness:                            EMPLOYEE

                                       16
<PAGE>

                                    Thomas G. Vellios

Acknowledged


By:_______________________
   C. Donald Dorsey
   Member Compensation Committee
   of the Board of Directors

                                       17