SECURITY AGREEMENT

         THIS SECURITY  AGREEMENT  ("Agreement") is made this 5th day of January
1998, by Vermont Pure Holdings,  Ltd., a Delaware corporation with its principal
place of business at Route 66,  Randolph,  Vermont 05061 (the "Debtor") in favor
of Vermont Coffee Time,  Inc.,a Vermont  corporation with its principal place of
business at P.O. Box 876, 36 Shunpike  Road,  Williston,  VT 05495 (the "Secured
Party").

         To secure the repayment of that certain  Promissory Note from Debtor to
Secured Party,  dated January 5, 1998, in the principal  amount of $250,000 (the
"Note"), the Debtor hereby agrees as follows:

         Section 1.  Definitions.  All  capitalized  terms used herein or in any
schedule,  exhibit,  certificate,  report or other document  delivered  pursuant
hereto  shall  have  the  meanings  assigned  to them  below  (unless  otherwise
defined).  Except as otherwise defined,  terms defined in the Uniform Commercial
Code shall have the meanings set forth therein.

         Collateral.      See Section 2.

         Encumbrance. Any mortgage, pledge, security interest, lien or other
charge or encumbrance of any kind or nature upon or with respect to any 
property.

         Event of Default.       See Section 7.

         Uniform Commercial Code.  The Uniform Commercial Code as in effect in
the State of Vermont.

         Section 2. Grant.  To secure the payment and  performance  of the Note,
the Debtor  hereby  assigns and pledges to the Secured  Party all of its rights,
title and  interest in, and grants to the Secured  Party a  continuing  security
interest in, the property  described in Schedule A attached hereto,  whether now
owned or existing or hereafter arising or acquired,  any and all  substitutions,
replacements and accessions thereto, and all proceeds and products of any of the
foregoing (collectively, the "Collateral")

         Section 3. Representations,  Warranties and Covenants. The Debtor makes
the  following  representations  and  warranties,  and  agrees to the  following
covenants,  each of which  representations,  warranties  and covenants  shall be
continuing and in force so long as this Agreement is in effect:

                  3.1      Name, Debtor/Collateral Location, Changes.








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         (a) The name of the Debtor  set forth on the first  page  hereof is the
true and correct legal name of the Debtor,  and the Debtor has not done business
as or used any other name.

         (b) The address of the Debtor set forth on the first page hereof is the
Debtor's  chief  executive  office and the place where its business  records are
kept.

         (C) The Debtor  will not change its name,  identity  or  organizational
structure  or chief  executive  office or place where its  business  records are
kept,  or merge into or  consolidate  with any other  entity,  unless the Debtor
shall  have  given the  Secured  Party at least 30 days'  prior  written  notice
thereof  and  shall  have  delivered  to the  Secured  Party  such  new  Uniform
Commercial Code financing  statements or other documentation as may be necessary
or required by the Secured Party to ensure the continued perfection and priority
of the security interests granted by this Agreement.

         3.2 Organization;  Good Standing. The Debtor is duly organized, validly
existing and in good  standing  under the laws of the state of its  organization
and duly qualified and in good standing in every other state in which the nature
of its business or properties requires such qualification.

         3.3  Authorization  of  Agreement,  No  Consents;  No  Conflicts.   The
execution,  delivery and  performance of this Agreement has been duly authorized
by all necessary action,  corporate or otherwise,  and does not and will not (I)
require any consent or approval of the stockholders of the Debtor,  if any; (ii)
contravene the terms of the charter,  by-laws or other organizational  papers of
the  Debtor;  (iii)  violate  any  applicable  law,  rule or  regulation  of any
governmental a-ency; (iv) contravene any provision of any agreement, instrument,
order or undertaking binding on the Debtor or by which any of its properties are
bound or affected;  (v) other than as contemplated hereby,  result in or require
the imposition of any  Encumbrance  on any of the  properties of the Debtor;  or
(vi) other than filings  required by the Uniform  Commercial  Code,  require the
approval or consent of, or filing or  registration  with,  any  governmental  or
other agency or authority, or any other party.

         3.4 O,ownership of Collateral;  Absence of Liens and Restrictions. The
Debtor is, and in the case of property acquired after the date hereof,  will be,
the  sole  legal  and  equitable  owner  of the  Collateral,  holding  good  and
marketable title to the same free and clear of all  Encumbrances  except for the
security interests granted hereunder or permitted hereby, and has good right and
legal  authority  to assign,  deliver,  and create a  security  interest  in the
Collateral in the manner herein  contemplated.  The Collateral is genuine and is
what it is purported  to be. The  Collateral  is not subject to any  restriction
that would  prohibit or  restrict  the  assignment,  delivery or creation of the
security interests contemplated hereunder.

3.5 Priority of Security Interest.  This Agreement, together with the filing of
Uniform Commercial Code financing statements in the appropriate offices of the 
Vermont Secretary of State, creates a valid and continuing lien on and perfected
security interest in the Collateral

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(except for property  located in the United States in which a security  interest
may not be perfected by filing under the Uniform  Commercial Code), prior to all
other Encumbrances,  except a security interest in favor Chittenden Bank, and is
enforceable  as such  against  creditors  of the  Debtor,  any owner of the real
property  where any of the  Collateral  is located,  any  purchaser of such real
property  and any  present  or  future  creditor  obtaining  a lien on such real
property.


         3.6 Further Assurances.  Upon the written request of the Secured Party,
and at the sole  expense of the  Debtor,  the Debtor will  promptly  execute and
deliver such further  instruments and documents and take such further actions as
the  Secured  Party may deem  desirable  to  obtain  the full  benefits  of this
Agreement  and of the rights  and  powers  herein  granted,  including,  without
limitation, filing of any financing statement under the Uniform Commercial Code.

         Section 4. Defaults.  An event of default ("Event of Default") shall 
exist hereunder if any of the following events or conditions occur:

                  (a) failure to pay the Note when due or perform any  covenant,
                agreement or obligation  contained  herein or in any  agreement,
                instrument or other document  evidencing,  securing or otherwise
                delivered in connection  with the Note  (hereinafter,  the "Loan
                Documents");

         (b) failure of any representation or warranty, statement or information
herein or in any documents or financial statements delivered or disclosed to the
Secured  Party in  connection  with  this  Agreement  or the Note to be true and
correct;

         (C) loss, theft or substantial  damage of or to the Collateral,  or the
issuance of an injunction  against the Debtor  affecting any of the  Collateral,
which impairment of Collateral remains uncured for more than 90 days;

         (d)      default under any instrument constituting, or under any 
agreement (including without limitation any insurance policy) relating to, any 
Collateral;

         (e)  dissolution,  termination  of  existence,  insolvency  or business
failure of, appointment of a receiver or any other custodian for any part of the
property of,  assignment for the benefit of creditors by, or the commencement of
any proceeding under any bankruptcy or insolvency laws by or against, the Debtor
or any indorser, guarantor or surety of or for any Obligation.

         Section 5.     Secured Party's Rights and Remedies.

                (a)        So long as any Event of Default shall have occurred 
                           and is continuing:

         the Secured Party may, at its option,  without notice or demand,  cause
         all the Note to become immediately due and payable and take immediate

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         possession  of the  Collateral,  and for that purpose the Secured Party
         may, so far as the Debtor can give authority  therefor,  enter upon any
         premises on which any of the,  Collateral  is  situated  and remove the
         same  therefrom or remain on such  premises and in  possession  of such
         Collateral for purposes of conducting a sale or enforcing the rights of
         the Secured Party;

                  (ii) the Debtor will, upon demand, assemble the Collateral and
         make it available to the Secured  Party at a place and time  designated
         by the Secured Party that is reasonably convenient to both parties;

                  (iii) the Secured Party may collect and receive all income and
         proceeds in respect of the  Collateral  and  exercise all rights of the
         Debtor with respect  thereto,  all without  liability except to account
         for property  actually  received  (but the Secured  Party shall have no
         duty to exercise any of the aforesaid rights, privileges or options and
         shall  not be  responsible  for any  failure  to do so or  delay  in so
         doing);

                  (iv) the Secured Party may sell, lease or otherwise dispose of
         the Collateral at a public or private sale,  with or without having the
         Collateral at the place of sale, and upon such terms and in such manner
         as the Secured Party may determine,  and the Secured Party may purchase
         any  Collateral at any such sale.  Unless the  Collateral  threatens to
         decline  rapidly  in  value  or is of the  type  customarily  sold on a
         recognized  market,  the Secured  Party shall send to the Debtor  prior
         written notice (which,  is given within five days of any sale, shall be
         deemed to be  reasonable)  of the time and place of any public  sale of
         the  Collateral  or of the time after which any  private  sale or other
         disposition thereof is to be made. The Debtor agrees that upon any such
         sale the Collateral shall be held by the purchaser free from all claims
         or rights of every kind and nature,  including any equity of redemption
         or similar rights, and all such equity of redemption and similar rights
         are hereby  expressly  waived and released by the Debtor.  In the event
         any consent,  approval or authorization  of any governmental  agency is
         necessary to  effectuate  any such sale,  the Debtor shall  execute all
         applications or other instruments as may be required; and

                  (v)      in any jurisdiction where the enforcement of its 
         rights hereunder is sought, the Secured Party shall have, in addition 
         to all other rights and remedies, (a) the rights and remedies of a 
         secured party under the Uniform Commercial Code and (b) all of the
         rights and remedies described in the Loan Documents.

         (b) Prior to any disposition of Collateral  pursuant to this Agreement,
the Secured Party may, at its option, cause any of the Collateral to be repaired
or reconditioned (but not upgraded unless mutually agreed) in such manner and to
such extent as to make it saleable.


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         (C) The  Secured  Party  shall be  entitled  to retain and to apply the
proceeds of any disposition of the Collateral, first, to its reasonable expenses
of retaking, holding, protecting and maintaining,  and preparing for disposition
and  disposing of, the  Collateral,  including  attorneys'  fees and other legal
expenses incurred by it in connection  therewith;  and second, to the payment of
the Note in such order of  priority as the Secured  Party shall  determine.  Any
surplus  remaining  after  such  application  shall be paid to the  Debtor or to
whomever may be legally  entitled  thereto,  provided that in no event shall the
Debtor be  credited  with any part of the  proceeds  of the  disposition  of the
Collateral  until such proceeds have been received in cash by the Secured Party.
The Debtor shall remain liable for any deficiency.

         Section 6. Waivers.  The Debtor  waives  presentment,  demand,  notice,
protest,  notice of  acceptance  of this  Agreement,  notice of any loans  made,
credit or other  extensions  granted,  collateral  received or  delivered or any
other action taken in reliance  hereon and all other  demands and notices of any
description, except for such demands and notices as are expressly required to be
provided to the Debtor under this Agreement or any other document evidencing the
Note.  With respect to both the Note and the  Collateral,  the Debtor assents to
any extension or postponement of the time of payment or any other forgiveness or
indulgence,  to any  substitution,  exchange  or release of  Collateral,  to the
addition or release of any party or person primarily or secondarily  liable,  to
the  acceptance of partial  payment  thereon and the  settlement,  compromise or
adjustment  of any thereof,  all in such manner and at such time or times as the
Secured Party may deem advisable. The Secured Party may exercise its rights with
respect to the Collateral without  resorting,  or regard, to other collateral or
sources of reimbursement for Note. The Secured Party shall not be deemed to have
waived any of its rights with respect to the Note or the Collateral  unless such
waiver is in writing  and signed by the Secured  Party.  No delay or omission on
the part of the Secured Party in exercising  any right shall operate as a waiver
of such  right or any other  right.  A waiver on any one  occasion  shall not be
construed as a bar to or waiver of, any right on any future occasion. All rights
and  remedies  of the  Secured  Party  in the  Note or the  Collateral,  whether
evidenced  hereby or by any other  instrument or papers,  are cumulative and not
exclusive of any  remedies  provided by law or any other  agreement,  and may be
exercised separately or concurrently.


Section 7.  Expenses.  The Debtor shall, on demand, pay or reimburse the Secured
Party for all reasonable expenses (including attorneys' fees) incurred or paid 
by the Secured Party in connection with the enforcement of this Agreement, and
any other amounts permitted to, be expended by the Secured  Party  hereunder, 
including  without  limitation  such expenses  as are  incurred  to  preserve  
the  value of the  Collateral  and the validity,  perfection,  priority  and 
value of any  security  interest  created hereby,  the collection,  sale or 
other  disposition of any of the Collateral or the  exercise  by the  Secured 
Party  of any of the  rights  conferred  upon it hereunder.

Section 8. Notices. Any demand upon or notice to the Debtor that the Secured 
Party may give shall be effective when delivered by hand, properly deposited in 
the mails postage prepaid, or sent by telex, answer back received, or electronic
facsimile transmission, receipt

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acknowledged,  or delivered to a telegraph company or overnight courier, in each
case  addressed  to the Debtor at the  address  shown at the  beginning  of this
Agreement.  Demands  or  notices  addressed  to any other  address  at which the
Secured Party customarily  communicates with the Debtor also shall be effective.
Any  notice by the  Debtor to the  Secured  Party  shall be given as  aforesaid,
addressed  to the Secured  Party at the address  shown at the  beginning of this
Agreement  or such other  address as the Secured  Party may advise the Debtor in
writing.

         Section 9. Successors and Assigns. This Agreement shall be binding upon
the Debtor,  and its successors  and assigns,  and shall inure to the benefit of
and be enforceable by the Secured Party and its successors and assigns.

         Section  10.  General.  This  Agreement  may not be amended or modified
except by a writing  signed by the Debtor  and the  Secured  Party,  nor may the
Debtor  assign  any of its  rights  hereunder.  This  Agreement  and the  terms,
covenants  and  conditions  hereof shall be construed in  accordance  with,  and
governed  by, the laws of the State of  Vermont  (without  giving  effect to any
conflicts of law provisions contained therein).

         Section 11. Section Headings.  Section headings are for convenience of 
reference only and are not a part of this Agreement.

         Section 12. Partial Invalidity.  The invalidity . or unenforceability 
of any one or more phrases, clauses or sections of this Agreement shall not
affect the validity or enforceability of the remaining portions of it.








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                 IN WITNESS WHEREOF,  the Debtor has caused this Agreement to be
        duly executed as an  instrument  under seal as of the date first written
        above.

        IN THE PRESENCE OF:                          VERMONT COFFEE TIME, INC.


                  Witness:  Amy Berger, President

                  

        STATE OF VERMONT
        CHITTENDEN COUNTY, SS.

                 At Burlington in said County, this 5th day  of  January,  1998,
        personally  appeared Amy Berger, the President and duly authorized agent
        of Vermont Coffee Time, Inc. and she acknowledged  this  instrument,  by
        her subscribed, to be her free act and deed and the free act and deed of
        Vermont Coffee Time, Inc.



                                At Burlington in said County, this 5th  day  of
                                        January,  1998, personally appeared duly
                                        authorized   agent   of   Vermont   Pure
                                        Holdings, Ltd., and he
        acknowledged this instrument,  by him subscribed, to be his free act and
        deed and the free act and deed of said Vermont Pure Holdings, Ltd.

                         Before me:\S\
                                       Notary Public
                          My commission expires: 2/1/99

In the Presence of:                 Vermont Pure Holdings, Ltd.
\S\Bruce MacDonald                     By:\S\Timothy Fallon 
   Witness                             Timothy G. Fallon, President

State of Vermont
Chitterden County, SS.

     At Burlington, in said County, this 5th day of January, 1998, personally 
appeared ___________, duly authorized agent of Vermont Pure Holdings, Ltd., and
he acknowledged this instrument, by him subscribed, to be his free act and deed
and the free act and deed of said Vermont Pure Holdings, Ltd.

                    Before me:
                              Notary Public
                    My commission expires: 2/1/99

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                                   SCHEDULE A

                                       to
                               SECURITY AGREEMENT
                              dated January 5, 1998
                         of VERMONT PURE HOLDINGS, LTD.
The items listed below constitute "Collateral" under the Security Agreement:

All tangible and intangible  personal property,  including,  without limitation,
all Inventory, General Intangibles,  Equipment,  Machinery, Accounts, Furniture,
Furnishings, Fixtures and Vehicles now owned or hereafter


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acquired  by Secured  Party in  connection  with the  business  of  selling  and
distributing  coffee,  water  and  related  products,  and  renting  cooler  and
dispenser equipment for home and office customers, including all assets acquired
by Secured  Party from Debtor under the Asset  Purchase  Agreement,  dated as of
December 19, 1997 and all products and proceeds thereof and accessions thereto.








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