<PAGE>

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").

          WHEREAS, the Company desires to employ the Employee in the position of
President and Acting C.E.O.; and

          WHEREAS, the Board of Directors intends to elect the Employee to the
Board of Directors; and

          WHEREAS, the Company and Employee wish to replace and supersede the
Employment Agreement entered into between the Employee and the Company on June 5
and/or 6, 2000.

          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 Acting Chief Executive Officer ("Acting 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 and the Board of Directors of the Company shall
     determine prior to February 15, 2001 whether Employee shall be named Chief
     Executive Officer ("C.E.O.") of the Company.

               (c) 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

                                       1
<PAGE>

     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.

               (d) 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.

               (e) 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 may provide services as a volunteer or director to
charitable, educational or civic organizations, act as a member, director or
officer of any industry trade association or group, and he may serve as a
trustee, director or advisor to any family companies or trusts, provided that
such service does not materially interfere with the performance of his duties to
the Company as required under this Agreement.

          1.3. Salary.  For all of the services rendered by the Employee
               ------
hereunder, the Company shall pay Employee, for the fiscal year ended February 3,
2001, an annual salary of $ 338,250.12, less withholdings required by law or
agreed to by Employee, payable in installments at such times as the Company
customarily pays its other senior officers (but in any event no less often than
monthly).  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 Company.
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.

                                       2
<PAGE>

          1.5. Incentive Compensation.  In addition to the Employee's base
               ----------------------
salary, the Employee shall be entitled to an annual incentive bonus (the
"Incentive Bonus") during the term of his employment based upon the provisions
set forth herein.

               For the fiscal year ending February 3, 2001, the Incentive Bonus
     shall be determined as follows:  The Incentive Bonus shall be paid only if
     (a) margin levels meet the levels set forth in the budget approved by the
     Board of Directors at its July 2000 meeting for the quarter ending February
     3, 2001, (b) inventory levels meet the levels set forth in the budget
     approved by the Board of Directors at its July 2000 meeting for the year
     ending February 3, 2001 and (c) same store comparable sales for the fourth
     quarter ending February 3, 2001 meet or exceed the same store comparable
     sales for the fourth quarter ending January 31, 2000, calculated on a
     percentage basis.  If all of the foregoing are achieved, the amount of the
     Incentive Bonus shall be two hundred thousand dollars ($200,000).  Further,
     for each one percent increase in same store comparable sales for the fourth
     quarter ending February 3, 2001 as compared to the fourth quarter ending
     January 31, 2000, the amount of the Incentive Bonus shall be an additional
     fifty thousand dollars ($50,000).

          After the fiscal year ending February 3, 2001, the Company agrees that
     the Employee's Incentive Bonus and performance will thereafter be reviewed
     at least annually by the Company to determine the amount, if any, Incentive
     Bonus shall be paid to Employee, which Incentive Bonus shall be in the sole
     discretion of the Company.

          The Incentive Bonus determined pursuant to this Section will be due
     and payable not later than April 1 after the end of each calendar year,
     provided that the Employee was actively employed by the Company on the last
     day of the calendar year.  In the event that Employee's employment is
     terminated by the Company without cause or by the Employee for Good Reason
     before the end of any calendar year, then the Incentive Bonus shall be pro
     rated for such year, and paid not later than April 1 after the end of the
     year in which termination occurs.  If the Employee's employment is
     terminated by the Company for Cause before the end of any calendar year,
     then the Employee shall not be entitled to any Incentive Bonus amount for
     the year in which his employment was terminated.

          1.6. 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.

          1.7. 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

                                       3
<PAGE>

Directors, by approval of this Agreement, hereby agrees only to 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, 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 award 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 future equity incentive plans corresponding 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.

          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.

          3.  Confidential Information.  The Employee acknowledges that he will
              ------------------------
have access to confidential information of the Company and its affiliates,
including, without

                                       4
<PAGE>

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, 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
(1) 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, independent
contractor or otherwise, with or without compensation) or hold a financial
interest in any retailing business that constitutes a competing business
operating in the North American continent as defined below.  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 Section 4, 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 the following
children's merchandise: multimedia/educational merchandise, books,
----------
educationally-oriented or specialty market games and toys, audio tapes,
videotapes, computer software products and/or arts and crafts supplies (the
"Company's Merchandise Assortment") or (ii) 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 the Company's Merchandise Assortment in any
one store.  The 7,500 square foot calculation in subparagraph (ii) of this
Section 4.2 shall exclude mass merchant products of a type not sold by

                                       5
<PAGE>

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 directly 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.

          5.   No Solicitation.  The Employee agrees that during the term of
               ---------------
this Agreement and for a period ending two (2) 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; 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 agree that any (i) suit, action or other legal proceeding
arising out of this Agreement, including, without limitation, any action
commenced by the Company for

                                       6
<PAGE>

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, and Employee's employment, may be
               ---------
     terminated at the will of either party at any time and for any reason with
     or without cause, except that the Employee agrees to give the Company at
     least ninety (90) days written notice of termination prior to the last date
     on which he performs services for the Company and except as provided in
     paragraph 7.1(b). herein;

               (a) If both the Employee and the Company determine by February
     15, 2001 that Employee should be named C.E.O. of the Company, then the
     Employee and the Company will try to reach a new employment agreement with
     a term of three years.

               (b) If either the Company or the Employee determine by February
     15, 2001 that Employee should not be named C.E.O. of the Company, or if
     either the Company or the Employee fail by February 15, 2001 to make a
     determination whether or not Employee should not be named C.E.O. of the
     Company, or if the Company and the Employee are unable to reach a new
     employment agreement under paragraph 7.1(a) herein, then Employee shall
     continue as President and Acting C.E.O. of the Company until the earlier of
     (1) June 30, 2001 or (2) the date Employee's employment is terminated by
     the Board of Directors in its sole discretion.

          7.2. Death or Disability of Employee.  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, 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.
               --------------------------------

                                       7
<PAGE>

          (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 willful and continued failure of the Employee to
                      substantially perform his duties, or to comply with any of
                      the lawful directives of the Board of Directors of the
                      Company, or to observe any material terms or provisions 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 observed
                      material terms or provisions 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

               (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

                                       8
<PAGE>

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
               -------------------------
immediately 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, Acting C.E.O. or 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 following a Change of Control the 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 and
                      maintaining, at least, his then current salary, bonus and
                      benefits.

               (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

                                       9
<PAGE>

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 (i) and
(iii) 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 and file the requisite fees 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(i) and (iii)
hereof.

          7.5. Severance.  If this Agreement is terminated (a) by the Employee
               ---------
for Good Reason, pursuant to Section 7.4; or (b) 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 "Severance Benefit") upon his execution of the Severance Agreement
and General Release attached hereto as addendum 1:

          (i)     two times his annual base salary in effect at the time of the
                  termination of his employment, less applicable withholdings.
                  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;

          (ii)    payment of any prorated Incentive Bonus for the year in which
                  termination occurs, which payments shall be made in accordance
                  with the provisions of Section 1.5 of this Agreement;

          (iii)   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

                                       10
<PAGE>

                  Severance Benefit Period shall be twenty-four (24) months from
                  the date of termination;

          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.

          8.   Survival.  Notwithstanding the termination of this Agreement
               --------
pursuant to Section 7 or otherwise, the Employee's obligations under Sections 3,
4 and 5 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
section 7.5 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

                                       11
<PAGE>

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:

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

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,
including, without limitation, the employment agreement dated June 5 and/or 6,
2000 between the Company and Employee, and sets forth the entire understanding
between the parties hereto with respect to the subject matter hereof except that
this Agreement may not be changed, modified,

                                       12
<PAGE>

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.

          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 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,

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<PAGE>

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.

          17.  The Board of Directors will elect Employee to the Board of
Directors and 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.  However, Employee agrees to resign from the Board of
Directors should he no longer be the Acting C.E.O or the C.E.O of the Company.

          18.  The Company represents that is has the power and authority to
enter into this Employment Agreement and the Amendment To Incentive Stock Option
Grants.

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<PAGE>

          19.  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(s) written below.

Attest                              ZANY BRAINY, INC.

_________________, Secretary        By: ____________________

Date: ___________                   Date: ____________

Witness:                            EMPLOYEE

_____________________               ________________________
                                    Thomas G. Vellios

Date:  _______________              Date: ____________

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