<PAGE>
                                                                   3

                  VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES

                                      INDEX

         Part I - Financial Information                              Page Number

         Item 1.  Financial Statements

                    Consolidated Balance Sheets as of
                    April 30, 2000 (unaudited) and
                    October 30, 1999                                           3

                    Consolidated Statements of Operations (unaudited) for
                    the Three Months and Six Months ended April 30, 2000
                    and May 1, 1999                                            4

                    Consolidated Statements of Cash Flow
                    (unaudited) for the Six Months ended
                    April 30, 2000 and May 1, 1999                             5

                    Notes to Consolidated Financial Statements
                    (unaudited)                                            6 - 8

         Item 2.    Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operation                                             9 - 12

         Item 3.    Quantitive and Qualitative Disclosures about
                    Market Risk                                               13

         Part II - Other Information                                     14 - 17

         Item 1.  Legal Proceedings

         Item 2.  Changes in Securities

         Item 3.  Defaults upon Senior Securities

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

         Item 5.  Other Information

         Item 6.  Exhibits and Reports on Form 8-K

         Signature                                                            18
<PAGE>

                  VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                    April 30,       October 30,
                                                      2000             1999
                                                 ------------       ------------
                                                 (unaudited)

                                     ASSETS

CURRENT ASSETS:

       Cash                                     $  1,562,762        $   367,018
       Investments - Money Market Fund
        (restricted building funds)                2,941,397             -
       Accounts receivable                         4,074,523          3,525,238
       Notes Receivable                               -                 975,000
       Inventory                                   2,802,611          2,711,709
       Current portion of deferred tax asset         601,922            601,922
       Other current assets                          866,948            781,968
                                                -------------       ------------
         TOTAL CURRENT ASSETS                     12,850,163          8,962,855
                                                -------------       ------------
PROPERTY AND EQUIPMENT
        net of accumulated depreciation           13,980,077         11,122,258
OTHER ASSETS:                                   -------------       ------------

       Intangible assets
        net of accumulated amortization           10,957,215         10,443,207
       Deferred tax asset                          3,182,914          3,182,914
       Other assets                                  138,662            122,996
                                                -------------       ------------
         TOTAL OTHER ASSETS                       14,278,791         13,749,117
                                                -------------       ------------
TOTAL ASSETS                                    $ 41,109,031        $33,834,230
                                                =============       ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:

       Accounts payable                         $  2,829,843        $ 3,443,208
       Current portion of customer deposits           41,624             45,033
       Accrued expenses                            1,784,782            851,371
       Current portion of long term debt           1,711,999          1,414,930
       Current portion of obligations
          under capital leases                       181,904            180,589
                                                -------------       ------------

         TOTAL CURRENT LIABILITIES                 6,550,152          5,935,131

       Long term debt                              5,421,757          1,663,893
       Long term obligations under capital leases    294,498            379,583
       Line of credit                             14,750,000         11,689,792
       Long term portion of customer deposits        790,861            684,334
                                                -------------       ------------
         TOTAL LIABILITIES                        27,807,268         20,352,733
                                                -------------       ------------
STOCKHOLDERS' EQUITY:

       Preferred stock - $.001 par value, 500,000
       authorized shares, none issued
       and outstanding shares at April 30, 2000

       Common stock - $.001 par value, 50,000,000     10,340             10,340
       authorized shares, 10,339,758 issued
       and outstanding shares at April 30, 2000
       and 10,339,758 at October 30, 1999
       Paid in capital                            23,197,724         23,197,724
       Accumulated deficit                        (9,737,551)        (9,557,817)
       Treasury stock, at cost, 50,000 shares       (168,750)          (168,750)
                                                -------------       ------------
         TOTAL STOCKHOLDERS' EQUITY               13,301,763         13,481,497
                                                -------------       ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $ 41,109,031        $33,834,230
                                                =============       ============





                 see notes to consolidated financial statements


                                       3
<PAGE>

                  VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>




                                                      Three months ended                           Six months ended
                                                     ---------------------------------     ----------------------------------
                                                         April 30,           May 1,           April 30,            May 1,
                                                           2000               1999              2000                1999
                                                     --------------      -------------     -------------      ---------------
                                                        (unaudited)        (unaudited)       (unaudited)         (unaudited)
<S>                                                <C>                 <C>               <C>                <C>


SALES                                                $    8,224,666      $   7,799,473     $  14,648,435      $    13,680,319

COST OF GOODS SOLD                                        3,255,754          2,952,859         5,544,124            4,983,873
                                                     --------------      -------------     -------------      ---------------
GROSS PROFIT                                              4,968,912          4,846,614         9,104,311            8,696,446
                                                     --------------      -------------     -------------      ---------------
OPERATING EXPENSES:

            Selling, general and administrative expenses  3,805,661          3,136,067         7,350,293            5,853,057
            Advertising expenses                            621,567            859,310         1,131,028            1,547,851
            Amortization                                    174,702            151,812           341,336              303,426
                                                     --------------      -------------     -------------      ---------------
TOTAL OPERATING EXPENSES                                  4,601,930          4,147,189         8,822,657            7,704,334
                                                     --------------      -------------     -------------      ---------------
INCOME FROM OPERATIONS                                      366,982            699,425           281,654              992,112
                                                     --------------      -------------     -------------      ---------------
OTHER INCOME (EXPENSE):

            Interest                                       (455,562)          (259,759)         (734,274)            (481,316)
            Miscellaneous                                    -                       0           272,886              -
                                                     --------------      -------------     -------------      ---------------
TOTAL OTHER INCOME (EXPENSE)                               (455,562)          (259,759)         (461,388)            (481,316)
                                                     --------------      -------------     -------------      ---------------
NET INCOME (LOSS)                                    $      (88,580)     $     439,666     $    (179,734)     $       510,796
                                                     --------------      -------------     -------------      ---------------

                                                     ===============     ==============    ==============     ================
NET INCOME (LOSS) PER SHARE - BASIC                  $        (0.01)     $        0.04     $       (0.02)     $          0.05
                                                     ===============     ==============    ==============     ================
NET INCOME (LOSS) PER SHARE - DILUTED                $        (0.01)     $        0.04     $       (0.02)     $          0.05
                                                     ===============     ==============    ==============     ================

Weighted Average Shares Used in Computation - Basic      10,289,758         10,257,091        10,289,758           10,254,996
                                                     ===============     ==============    ==============     ================
Weighted Average Shares Used in Computation - Diluted    10,744,750         10,766,484        10,606,218           10,875,518
                                                     ===============     ==============    ==============     ================

</TABLE>

                 see notes to consolidated financial statements

                                       4
<PAGE>

                   VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>



                                                                                                        Six Months Ended
                                                                                               ----------------------------------
                                                                                                  April 30,             May 1,
                                                                                                     2000                1999
                                                                                               ---------------     --------------
                                                                                                 (unaudited)         (unaudited)
<S>                                                                                          <C>                 <C>


CASH FLOWS FROM OPERATING ACTIVITIES:

         Net (loss) income                                                                     $     (179,734)     $      510,796
         Adjustments  to  reconcile  net income  (loss) to net cash  provided by
operating activities:


           Depreciation                                                                               909,700             666,778
           Amortization                                                                               341,336             303,426
           Gain on settlement of note receivable                                                     (295,000)            -
           (Gain) loss on disposal of property and equipment                                          (84,512)              6,883

         Changes in assets and liabilities (net of effect of acquisitions):

           (Increase)  Decrease in accounts receivable                                               (549,285)           (723,441)
           (Increase) Decrease in inventory                                                           (90,902)             60,794
           Increase in other current assets                                                        (3,026,377)           (296,949)
           (Increase) Decrease in other  assets                                                      (871,011)            146,270
           Decrease in accounts payable                                                              (613,365)           (309,215)
           Increase in customer deposits                                                              103,119              46,966
           (Decrease) Increase in accrued expenses                                                    933,409            (189,590)
                                                                                               ---------------     --------------
NET CASH USED IN OPERATING ACTIVITIES                                                              (3,422,622)            222,717
                                                                                               ---------------     --------------
CASH FLOWS FROM INVESTING ACTIVITIES:

         Purchase of property, plant and equipment                                                 (3,556,032)         (1,117,160)
         Proceeds from sale of fixed assets                                                            92,310             -
         Collection of note receivable                                                              1,270,000             -
         Cash used for acquistions                                                                   (219,283)           (294,665)
                                                                                               ---------------     --------------
NET CASH PROVIDED (USED IN) INVESTING ACTIVITIES                                                   (2,413,005)         (1,411,825)
                                                                                               ---------------     --------------
CASH FLOWS FROM FINANCING ACTIVITIES:

         Proceeds from line of credit                                                               3,060,208           2,201,000
         Proceeds from debt                                                                         4,254,422             -
         Principal payment of debt                                                                   (283,259)           (558,939)
         Sale of common stock                                                                         -                    12,720
                                                                                               ---------------     --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                           7,031,371           1,654,781
                                                                                               ---------------     --------------
NET INCREASE  IN CASH                                                                               1,195,744             465,673

CASH - Beginning of period                                                                            367,018             161,271
                                                                                               ---------------     --------------

CASH  - End of period                                                                          $    1,562,762      $      626,944
                                                                                               ===============     ===============

Cash paid for interest                                                                         $      509,274      $      481,316
                                                                                               ===============     ===============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
         Equipment acquired under capital leases                                               $      102,202      $      102,913
                                                                                               ===============     ===============

                 see notes to consolidated financial statements
</TABLE>

                                       5
<PAGE>


                                       18

                  VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying  unaudited consolidated financial statements have been
         prepared in accordance with Form 10-Q  instructions  and in the opinion
         of  management  contain  all  adjustments  (consisting  of only  normal
         recurring accruals) necessary to present fairly the financial position,
         results of operations,  and cash flows for the periods  presented.  The
         results  have  been  determined  on the  basis  of  generally  accepted
         accounting  principles and practices applied consistently with the Form
         10-K for the year ended October 30, 1999.

         Certain  information  and  footnote  disclosures  normally  included in
         financial  statements  presented in accordance with generally  accepted
         accounting  principles have been condensed or omitted. The accompanying
         consolidated  financial  statements  should be read in conjunction with
         the financial  statements and notes thereto  incorporated  by reference
         from the  Company's  Form 10-K and  Annual  Report  for the year  ended
         October 30, 1999.

2.       FISCAL YEAR/QUARTER END

         Since 1994, the Company has used "4-4-5" method to determine its fiscal
         months,  quarters and years.  Effective April 30, 2000, it will use the
         regular  calendar to determine  the  financial  cut-off times for these
         periods.  The  reason  for  this  change  is to  accommodate  a  future
         significant acquisition and to be more compatible with software used in
         the operation of the business.

3.       INVESTMENT - MONEY MARKET

         This  money  market  account  has  been  set up for  undisbursed  funds
         relating to the Vermont  Economic  Development  Authority Bond issuance
         (discussed in note four). The funds have been invested in First Union's
         Evergreen  Money Market account and  administered  by First Union,  the
         Bond trustee.  These funds are restricted for the expenditures  related
         to the purchase of building and equipment.

4.       LONG TERM DEBT

         The  Company  amended  and  restated  its  five-year  revolving  credit
         agreement  with  First  Union   National  Bank  and  KeyBank   National
         Association  on January 28, 2000.  The  facility  was  increased to $25

                                       6
<PAGE>

         million  from  $15  million  under  the  terms  and  conditions  of the
         agreement.  The interest rate on funds  borrowed under the agreement is
         LIBOR plus 2.5%.  As of the end of the  quarter,  the Company had fixed
         the rate of interest on $7,500,000 of its outstanding debt at 8.43%. In
         conjunction  with the  facility,  the Company  entered into a Letter of
         Credit with First Union for  $4,300,000  to secure bonds issued for the
         same amount by the Vermont Economic Development Authority. It pays a 2%
         annual  fee of the  Letter of  Credit  amount.  As of April  30,  2000,
         exclusive of the Letter of Credit, the Company had borrowed $14,500,000
         pursuant to this  agreement and  $1,359,000 had been disbursed from the
         bond  proceeds.  The Bonds  were  issued as two  series  designated  as
         Variable Rate  Demand/Fixed  Rate Revenue Bonds  (Vermont Pure Springs,
         Inc.   Project)   1999  Series  A  20  year  bonds  and  Variable  Rate
         Demand/Fixed  Rate Revenue Bonds (Vermont Pure Springs,  Inc.  Project)
         1999 Series A-T (Taxable) 10 year bonds. The Series A Bonds were issued
         for  $3,195,000  and mature on January 1, 2020 and the Series A-T Bonds
         were issued for $1,105,000 and mature on January 1, 2011. The "Floating
         Rate" is a  variable  rate of  interest  equal to the  minimum  rate of
         interest  necessary,  in the sole  judgment  of the  Remarketing  Agent
         (First Union  Securities,  Inc.), to sell the Bonds on any Business Day
         at a price equal to the principal amount thereof,  exclusive of accrued
         interest, if any, thereon. Interest is determined on a weekly basis and
         is payable on the first of every month.

5.       LEGAL PROCEEDINGS

         The Company  reached a settlement  with its largest spring water source
         on December 1, 1999. As part of the settlement, the owner of the spring
         and its affiliate paid $1,270,000 to the Company and  acknowledged  the
         Company's  rights under the amended water supply  contract and right of
         first  refusal  to  purchase  the spring  site.  In order to obtain the
         rights to the supply  contract,  the  Company had  previously  issued a
         $975,000  non-interest  bearing  convertible  debenture to the original
         creditor of the owner of the spring and its affiliate.

6.       INTEREST RATE HEDGE

         On May 2, 2000, the Company signed a three-year  "swap"  agreement with
         the KeyBank National Association to fix the interest rate on $5,000,000
         of the  Company's  debt.  The agreement  fixes the variable  LIBOR rate
         portion of the debt at 7.13%.  As of April 30, 2000 the Company's total
         interest rate spread was 2.5% over LIBOR.  Consequently,  the agreement
         currently fixes the portion of the debt at 9.63%.

7.       COMMITMENTS

         In March 1999,  Vermont Pure Holdings,  Ltd. entered into  distribution
         agreements  with  several  Snapple  distributors  in order to replace a
         major  customer.  Effective  March 1, 2000,  the Company  modified  its
         distribution agreements with three of these distributors. Consequently,
         Vermont  Pure  is the  exclusive  spring  water  brand  carried  by Mr.
         Natural,  Inc., Millrose  Distributors and Snapple of Long Island, Inc.
         The  distribution  area  served  by  these  businesses  is the  greater
         metropolitan New York City area.
                                       7
<PAGE>

8.       SUBSEQUENT EVENT

         On May 8, 2000 Vermont Pure  Holdings,  Ltd.  entered into an Agreement
         and Plan of Merger and  Contribution  with  Crystal  Rock Spring  Water
         Company.  Crystal  Rock is a  privately  held  company.  The  agreement
         provides for the formation of a new publicly held holding company, also
         to be known as  Vermont  Pure  Holdings,  Ltd.,  that  will own the two
         businesses. Existing shareholders of Vermont Pure will receive stock of
         the new holding company on a 1-for-1 basis.

         The consideration to be paid is approximately $64.9 million, consisting
         of not less than $9.5 million in cash,  stock of Vermont Pure valued at
         $31.1 million for purposes of the transaction,  12% subordinated  notes
         due 2007 of  Vermont  Pure in the  original  principal  amount of $22.6
         million,  and the  assumption  by Vermont Pure of $1.7 million in debt.
         The stock  price of Vermont  Pure for  purposes  of the merger  will be
         determined  prior to the  closing  and has a collar  of from  $2.80 per
         share to $3.15 per share.  As a result,  the number of shares that will
         be issued will be from  approximately 11.1 million to approximately 9.9
         million shares, depending on the price.

         The  transaction  requires the approval of the  stockholders of Vermont
         Pure and is subject to bank financing.  In conjunction  with the merger
         agreement,  the Company executed a commitment  letter with Webster Bank
         of  Waterbury,  CT that provides for up to $36 million in financing for
         the cash portion of the purchase  price,  consolidate the existing debt
         of both companies, and post-merger working capital.

                                       8
<PAGE>

PART I - ITEM 2.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and notes thereto as filed in the Company's Form 10-K for
the year ended October 30, 1999.

                           FORWARD-LOOKING STATEMENTS

When  used in the Form  10-Q  and in  future  filings  by the  Company  with the
Securities  and Exchange  Commission,  the words or phrases "will likely result"
and "the Company  expects,"  "will  continue,"  "is  anticipated,"  "estimated,"
"project,"  or  "outlook"  or  similar  expressions  are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place  undue  reliance  on any such  forward-looking  statements,  each of which
speaks only as of the date made.  Such  statements  are subject to certain risks
and  uncertainties  that could cause actual  results to differ  materially  from
historical  earnings and those presently  anticipated or projected.  Among these
risks  are  water  supply  and  bottling  capacity  constraints  in the  face of
significant  growth,  dependence  on  outside  distributors,   and  reliance  on
commodity price fluctuations as they influence raw material pricing. The Company
has no obligation to publicly  release the result of any revisions  which may be
made to any  forward-looking  statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.

                              RESULTS OF OPERATIONS

SALES - Sales for the first six months of fiscal year 2000 were $14,648,000,  an
increase of $968,000 or 7% over the sales of $13,680,000  for the  corresponding
period  last  year.  Sales  for the  second  quarter  of  fiscal  year 2000 were
$8,225,000,  an  increase of  $426,000  or 5% over sales of  $7,799,000  for the
corresponding period last year.

Sales for retail-size  products decreased  $1,076,000 or 16%, for the six months
of fiscal  year 2000  compared  to the  corresponding  period a year ago.  Sales
decreased $592,000 or 14%, for the second quarter of fiscal 2000 compared to the
corresponding  period a year ago.  For the first half of the year,  the  Vermont
Pure brand sales were down 47% while Hidden Spring and Private Label brands were
up 60% and 16% respectively.  The decrease for both the quarter and year to date
are  attributable  to a  reduction  in case  volume  due to a change  in a major
distributor relationship in April, 1999 and lower average selling prices related
to  competitiveness  of the marketplace.  Average selling prices for the six and
three months ending April 30, 2000 were down 21%, and 20%,  respectively for the
corresponding  periods  from  the  previous  year.  This  is  indicative  of the
competitive marketplace as well as the increase in private and secondary labels.
Decreases in average selling prices were partially  offset by lower  promotional
spending as described in further detail below.

                                       9

<PAGE>

Sales for the home and office  category  increased  $2,044,000  or 30%,  for the
first six months of fiscal year 2000 compared to the corresponding period of the
prior year. Sales increased  $1,018,000 or 29%, for the second quarter of fiscal
year 2000 compared to the corresponding period of the prior year. The respective
sales  increases in this category for the first half and second  quarter of 2000
were attributable to market growth and expansion and  acquisitions.  The Company
has continued its acquisition  strategy during the period.  Acquisitions made in
the  last  twelve  months  have  been  relatively  small  in  sales  volume  but
geographically important.

COST OF GOODS SOLD - For the first six months of fiscal 2000, Cost of Goods Sold
was  $5,544,000  compared to $4,984,000 for the same period in fiscal year 1999.
Resulting gross profits were  $9,104,000,  or 62% of sales,  and $8,696,000,  or
64%of sales,  for the two  respective  periods.  For the second quarter of 2000,
Cost of Goods Sold was $3,256,000  compared to $2,953,000 for the same period in
fiscal 1999  resulting  in gross  profits of  $4,968,000,  or 61% of sales,  and
$4,846,000 or 62% of sales.  The increase in gross profit for the respective six
and three month periods was due to the increase in sales.  The increase in sales
can be attributed  solely to the delivery of home and office  products which, in
general,  is Company's  highest  margin line.  The decrease in gross margin as a
percentage  of sales is a result of lower  average  sales prices  combined  with
higher raw material pricing of the retail-size  product.  Raw material  pricing,
particularly  for the Company's  retail-size  line of products,  has  fluctuated
since mid-1999 as a result of commodity  pricing.  Over this period, the Company
has been successful at mitigating these increases by modifying its packaging and
increasing production efficiencies but average cost per case has still increased
about  3%.  However,   the  stability  of  these  costs  cannot  be  guaranteed.
Significant  price  fluctuations  in the future  could  result in  corresponding
positive or negative effects on cost of goods sold and gross profit.

OPERATING  EXPENSES - For the first six months of fiscal  year 2000  compared to
the  corresponding  period in fiscal year 1999,  total  operating  expenses were
$8,823,000  and  $7,704,000,  an increase of  $1,119,000  or 15%. For the second
quarter,  operating  expenses were  $4,601,000 in 2000 compared to $4,147,000 in
1999,  an increase of  $454,000,  or 11%.  Selling,  general and  administrative
expenses increased by $1,497,000 or 27%, for the first six months of fiscal 2000
and  $670,000  or 22% for the second  quarter  of fiscal  2000  compared  to the
corresponding  periods a year ago. The increase in these costs was primarily due
to the  addition  of the  operating  costs to grow the home and office  delivery
business and build  inventory for the  retail-size  products to supply  customer
demand  throughout  the peak summer sales season.  Advertising  and  promotional
expense decreased $417,000,  or 27%, and $237,000,  or 28%, during the six month
and second quarter periods of 2000, respectively,  compared to the corresponding
periods last year.  The Company's  advertising  and  promotion is  predominantly
associated with the sales of the retail-size  packages.  As mentioned above, the
pricing  environment  for these  products  has changed  such that the  Company's
distributors seek price discounts instead of advertising and promotion  support.
During the first half and second  quarter of 2000 the  Company's  aggregate  per
case expense decreased $.50 and $.32 per case for the comparable  periods in the
prior year.  Nevertheless,  due to the competitive  nature of the industry,  the
Company  anticipates that it will continue to spend  significant  amounts in the
future  for   advertising  and  promotion  as  it  continues  to  develop  brand
recognition  and increase  market  penetration  but can give no assurances  that
increases in spending will result in higher sales. For the first half and second
quarter  of  fiscal  year  2000,  amortization  increased  $38,000  and  $23,000
respectively, from the same periods a year ago as a result of increased goodwill
from new acquisitions.

                                       10
<PAGE>

PROFIT  FROM  OPERATIONS  - Profit from  operations  for the first six months of
fiscal 2000 was  $282,000 as compared to $992,000 for the  corresponding  period
last year, a decrease of $710,000. Profit from operations for the second quarter
of fiscal 2000 was $367,000  compared to $699,000 for the  corresponding  period
last year, a decrease of $332,000.  The decrease is  attributable to lower sales
in the retail-size  category combined with an increase in raw material costs and
logistics  costs of storing  product.  The  Company  plans to continue to create
brand awareness and to find alternate  distribution channels for its retail-size
product and expand its less seasonal home and office distribution business.

OTHER  INCOME/EXPENSE  - Net  interest  expense  increased  $253,000  or 53% and
$195,000 or 75% for the first six months and second quarter of fiscal year 2000,
respectively,  compared to the  corresponding  periods in fiscal year 1999.  The
increase  in  interest  expense  was a result  of  increased  borrowing  to fund
operations as a result of lower operating  profits,  to build inventory,  to add
additional  plant and equipment,  to finance  acquisitions,  and higher interest
rates.

NET  INCOME/LOSS- The Company's net loss for the first six months of fiscal year
2000 was  $180,000  compared to a net profit of $511,000  for the  corresponding
period last year. The net loss for the second quarter of fiscal 2000 was $89,000
compared to a net profit of $440,000 for the same quarter in 1999.  The net loss
for the quarter and the year to date are attributable to lower operating results
combined with higher interest costs.

                         LIQUIDITY AND CAPITAL RESOURCES

The net  increase  in cash for the six months  ended  April 30, 2000 was largely
generated  by receipt of payment of a note owed to the company  the  proceeds of
which are being held on a restricted  basis as described  below. On an operating
basis,  the Company used cash for seasonal needs - to fund operating  losses and
build  inventory  for an  anticipated  increase in summer  sales.  A significant
amount of cash has been expended for capital  improvements.  $3,556,000 has been
used  primarily for  expansion of the building  that houses the  Company's  main
bottling  facility,  new  production  equipment,  and  hardware  and software to
support the home and office delivery system.

As of April 30, 2000, the Company had working capital of $6,300,000  compared to
$3,028,000  on October 30, 1999.  The increase in working  capital of $3,272,000
reflects,  primarily, an increase in cash of $3,916,000 for specified restricted
uses. Of this total,  $2,941,000 is being held as proceeds from the bonds issued
for new building and equipment  and $975,000 is being held as  collateral  for a
mandatory convertible debenture scheduled for conversion by September,  2001. As
of April 30, 2000, the Company had disbursed  $1,359,000 of the total $4,300,000
in bond proceeds and borrowed  $14,500,000 under its credit agreement with First
Union and Key Banks  compared to $844,000  of the line at the  beginning  of the
fiscal year. As of October 30, 1999, $11,690,000 was outstanding under the First
Union agreement. Proceeds from the increased debt were used for new building and
equipment,  acquisitions,  seasonal  inventory build,  and working capital.  The

                                       11
<PAGE>

maximum amount available to borrow under the First Union facility is $25,000,000
subject to certain  conditions and covenants.  The facility is secured by all of
the assets of the Company and expires January 2004.

The Company has  increased  its debt  significantly  in the  current  year.  The
purpose has  largely  been to put  infrastructure  in place to  accommodate  its
future growth - building, equipment, and computer hardware and software systems.
The Company has also been  transforming  its  distribution  channels and, in the
process, required more working capital to fund operations. While past trends and
future  expectations  warrant these  investments and efforts no assurance can be
given that future growth will occur. In this case, the Company may be restricted
to its access to working  capital by covenants  and  conditions in the agreement
with its primary lender and no assurance can be given that other  financing will
be available.

On May 8, 2000,  Vermont Pure Holdings,  Ltd. entered into an Agreement and Plan
of Merger and Contribution  with Crystal Rock Spring Water Company of Watertown,
CT.  More  details  are  provided  in  footnote 8 to the  financials  statements
included herewith. In conjunction with the potential merger the Company signed a
letter of intent with Webster Bank of Waterbury,  CT. The letter provides for up
to $36 million of  financing  for the cash  portion of the  purchase  price,  to
consolidate  the  existing  debt  of both  companies,  and  post-merger  working
capital.

                                       12
<PAGE>

PART I - ITEM 3

            QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company's  operations result primarily from changes
in interest rates and commodity prices related to packaging materials.

INTEREST RATE RISKS - On April 30, 2000, the Company had $14,500,000 outstanding
on its credit  facility with First Union and Key Banks at LIBOR plus 2.5%. As of
June 7, 2000,  LIBOR was 6.63%.  The Company pays a stepped fixed interest rate,
subject to changes in the LIBOR spread pursuant to the agreement,  on $7,500,000
of the facility. This interest rate was 8.43% on April 30, 2000 and increased to
8.53% on June 1, 2000.  On May 2, 2000 the Company  entered into an agreement to
fix  $5,000,000 of debt at 9.63%,  subject to changes in the LIBOR  spread,  for
three years. In addition,  it had committed to repay  $4,300,000 of bonds issued
by the Vermont Economic Development  Authority at variable rates for taxable and
non-taxable  issues.  Bond  interest  rates are  variable  based on weekly rates
established  for the taxable and  non-taxable  issues which on June 7, 2000 were
6.7% and 4.2%, respectively.  The Company pays an annual letter of credit fee of
2% to secure the bonds.  The company also has  miscellaneous  loans  totaling at
variable  interest rates.  Consequently,  after  considering the Company's fixed
rate instruments,  a hypothetical 100 basis point increase in market rates would
result in approximately $70,000of interest expense on an annualized basis.

COMMODITY  PRICE  RISKS - Although  the Company  has yearly  contracts  with its
vendors  that set the  purchase  price of its PET  bottles  used to  bottle  its
retail-size product, the vendors are entitled to pass on increases in the market
price of the resin used as the raw material  for the  bottles.  These prices are
related to supply and demand market  factors for PET and, to a lesser extent the
price of  petroleum,  from which PET is  derived.  A  hypothetical  resin  price
increase of $.05 per pound would  result in an  approximate  price  increase per
bottle of $.005. During the 2000 fiscal year pricing has increased.  To a lesser
extent  the  Company  is  similarly  dependant  on resin  for caps and paper for
corrugated boxes and labels.  The potential  impact is not material  compared to
bottles.

The  Company is  planning to  mitigate  the effect of these  commodity  risks by
working with  suppliers to reduce the amount of material that it uses to package
its products while maintaining and improving quality

                                       13
<PAGE>

PART II - OTHER INFORMATION

ITEM 1 - Legal Proceedings
         None

ITEM 2 - Changes in Securities
(a)      None
(b)      None
(c)      None

ITEM 3 - Defaults upon Senior Securities
         None

ITEM 4 - Submission of Matters to a Vote of Security Holders
         None

ITEM 5 - Other Information
         None

ITEM 6 - Exhibits and Reports on Form 8-K

(a)    Exhibit
       NUMBER       DESCRIPTION

      2.1           Agreement  and Plan of Merger and  Contribution  dated as of
                    May 5, 2000 among the Registrant, VP Merger Parent, Inc., VP
                    Acquisition Corp., Crystal Rock Spring Water Company and its
                    stockholders.

      3.1           Amended  and  Restated   Certificate  of   Incorporation  of
                    Registrant   dated  January  12,  1994.   (Incorporated   by
                    reference  from  exhibit  3.3 of Form 10-KSB for fiscal year
                    ended October 30, 1993- File No. 1-11254.)

      3.2           Amendment of  Certificate  of  Incorporation  of  Registrant
                    dated June 15, 1999.

      3.3           By-Laws  of  Registrant.  (Incorporated  by  reference  from
                    Exhibit 3.4 of Registration Statement 33-46382)

      3.4           Amendment to By-Laws of  Registrant  Adopted March 26, 1997.
                    (Incorporated  by reference  from exhibit 3.3 of Form 10-KSB
                    for fiscal year ended October 25, 1997-File No. 1-11254)

     10.1*          Employment  Agreement  between the Registrant and Timothy G.
                    Fallon  dated  as  of  November  1, 1996.  (Incorporated  by
                    reference  from  exhibit 10.1 of form 10-KSB for fiscal year
                    ended October 25, 1997-File No. 1-11254.)

     10.2*          Amendment  to the  November  1,  1996  Employment  Agreement
                    between the  Registrant and Timothy G. Fallon dated November
                    1, 1999.

     10.3*          Employment  Agreement  between the  Registrant  and Bruce S.
                    MacDonald dated as of November 1, 1997.  (Incorporated  from
                    Exhibit  10.2 of form 10-KSB for fiscal  year ended  October
                    25,1999-File No. 1-11254)

    10.4*           Stock Option  Agreement  between  Registrant and Mr. Fallon.
                    (Incorporated  by  reference  from Exhibit 10.7 of form 10-K
                    for fiscal year ended October 28, 1994, File No. 1-11254.)

    10.5            1993  Performance  Equity Plan.  (Incorporated  by reference
                    from Exhibit 10.9 of Registration Statement 33-72940.)

    10.6            Stock Purchase  Agreement between the Registrant and Carolyn
                    Howard  relating to the  acquisition of A.M.  Fridays,  Inc.
                    dated July 16, 1997. (Incorporated by reference from Exhibit
                    10.1 of the report on Form 8-K dated September 11, 1997.)

    10.7            Stock  Purchase  Agreement  between the Registrant and David
                    Eger dated  August 27,  1997  relating to  Excelsior  Spring
                    Water Co.  ("Excelsior").  (Incorporated  by reference  from
                    exhibit  10.1 of the report on from 8-K dated  September  1,
                    1997.)

    10.8            Promissory  Note  from  the  Registrant  to Mr.  Eger in the
                    principal  amount of  $503,000.  (Incorporated  by reference
                    form Exhibit 10.2 of the report on Form 8-K dated  September
                    11, 1997.)

    10.9            Form of Note Purchase  Agreement  between the Registrant and
                    certain  note holders of  Excelsior  dated  August  27,1997.
                    (Incorporated  by reference  from Exhibit 10.4 of the Report
                    on form 8-K dated September 11, 1997.)
                                       15
<PAGE>

   10.10            Form of Stock  Purchase  Agreement  between  Registrant  and
                    certain  Stockholders  of  Excelsior  dated August 27, 1997.
                    (Incorporated  by reference  from Exhibit 10.4 of the Report
                    on Form 8-K dated September 11, 1997.)

   10.11            Schedule of Stock and Note  Purchase  Agreement  information
                    dated  August 27, 1997  regarding  the  Excelsior  purchase.
                    (Incorporated  by reference  from Exhibit 10.7 of the Report
                    on Form 8-K dated September 1, 1997.)

   10.12            Consulting  Agreement  between the  Registrant and Corporate
                    Investors   Network,    Inc.   dated   December   1,   1996.
                    (Incorporated  by reference  from Exhibit 10.1 of the report
                    on Form 10-QSB for the quarter ended January 25, 1997.)

   10.13            1998   Incentive   and   Non-Statutory   Stock  Option  Plan
                    (Incorporated by reference to Appendix A of the Registrant's
                    1998 Proxy Statement)

   10.14            Asset Purchase  Agreement between the Registrant and Vermont
                    Coffee Time,  Inc.  relating to the purchase  certain assets
                    and Liabilities  dated December 19, 1997.  (Incorporated  by
                    reference from Exhibit 10.1 of the report on Form 10-QSB for
                    the quarter ended January 24, 1998.)

   10.15            Promissory  Note from the Registrant to Vermont Coffee Time,
                    Inc. dated January 5, 1998.  (Incorporated by reference from
                    Exhibit  10.3 of the Report of Form  10-QSB for the  quarter
                    ended January 24, 1998.)

   10.16            Security Agreement between the Registrant and Vermont Coffee
                    Time, Inc. dated January 5, 1998. (Incorporated by reference
                    from  Exhibit  10.3 of the  report  of Form  10-QSB  for the
                    quarter ended January 24, 1998.)

   10.17            Consulting  Agreement  between Amy Berger and the Registrant
                    dated January 5, 1998.  (Incorporated  by the reference form
                    Exhibit  10.4 of the report on form  10-QSB for the  quarter
                    ended January 24, 1998.)

   10.18            Non  Compete  Agreement  of Fred  Beauchamp  and  Jim  Creed
                    between the  Registrant  and  Sagamon  Springs,  Inc.  dated
                    January 6 1998.  (Incorporated by the reference form Exhibit
                    10.5 of the  report on form  10-QSB  for the  quarter  ended
                    April 25, 1998.)

   10.19            1999 Employee Stock Purchase Plan (Incorporated by reference
                    to the Exhibit A of the Registrant's 1999 Proxy Statement)

   10.20            Stock Purchase Agreement between Registrant,  Paul Hayes and
                    Michael  Hayes date July 27,  1999  relating  to  Adirondack
                    Coffee Service, Inc. (Incorporated by reference from Exhibit
                    10.23 of form 10-K for fiscal year ended  October 30,  1999,
                    File No.1-11254).

   10.21            Promissory  Note dated July 27,1999 from the  registrant  to
                    the Hayes in the Principal amount of $303,734. (Incorporated
                    by reference from Exhibit 10.24 of form 10-K for fiscal year
                    ended October 30, 1999, File No.1-11254).

   10.22            Loan Purchase Agreement to spring source dated September 30,
                    999 between the Registrant  and Marcon Capital  Corporation.
                    (Incorporated  by reference  from Exhibit 10.26 of form 10-K
                    for fiscal year ended October 30, 1999, File No.1-11254).

   10.23            Convertible  Debenture  Agreement  dated  September  30,1999
                    between the Registrant and Marcon Capital Corporation in the
                    amount of $975,000.  (Incorporated by reference from Exhibit
                    10.27 of form 10-K for fiscal year ended  October 30,  1999,
                    File No.1-11254).

   10.24            Amended and Restated Security  Agreement between  Registrant
                    and First Union Bank dated  January 28, 2000.  (Incorporated
                    by reference  from  Exhibit  10.27 of the report on form 10Q
                    fourth quarter ended January 29, 2000).

   10.25            Loan  Agreement  between  Registrant  and  Vermont  Economic
                    Development Authority dated December 1, 1999.  (Incorporated
                    by reference  from  Exhibit  10.28 of the report on form 10Q
                    fourth quarter ended January 29, 2000).

   10.26            Trust  Indenture  Between  Registrant  and Vermont  Economic
                    Development  authority  and First Union  National  Bank,  as
                    trustee, dated December1,  1999.  (Incorporated by reference
                    from Exhibit 10.29 of the report on form 10Q fourth  quarter
                    ended January 29, 2000).

   10.27            Settlement   Agreement   between   Registrant  and  Pristine
                    Mountain  Springs,  Amsource  LLC,  Barton  Lord and  Ronald
                    Colton  dated  December , 1999.  (Incorporated  by reference
                    from Exhibit 10.31 of the report on form 10Q fourth  quarter
                    ended January 29, 2000).

   10.28            Amended  and  Restated   Spring  Water  License  and  Supply
                    Agreement between Registrant and Mountain Springs,  Amsource
                    LLC,  Barton Lord and Ronald Colton dated  December 5, 1999.
                    (Incorporated  by reference from Exhibit 10.31 of the report
                    on form 10Q fourth quarter ended January 29, 2000).

                                       17
<PAGE>

   27.1             Financial Data Schedule

(b) No reports on Form 8-K were filed for the quarter ended April 30, 2000.

                                    *  Relates to Compensation


                                    SIGNATURE

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

Dated:            June 14, 2000
                  Randolph, Vermont

                                  VERMONT PURE HOLDINGS, LTD.

                                  BY: /S/ BRUCE S. MACDONALD
                                         ----------------------
                                         Bruce S. MacDonald
                                         Vice President, Chief Financial Officer
                                        (Principal Accounting Officer and
                                         Principal Financial Officer)







                                       18
<PAGE>
                                 EXECUTION COPY

                               AGREEMENT AND PLAN
                                       OF
                             MERGER AND CONTRIBUTION

     AGREEMENT AND PLAN OF MERGER AND CONTRIBUTION, dated as of May 5, 2000 (the
"Agreement"), by and among

     o VERMONT PURE  HOLDINGS,  LTD.,  a publicly  traded  Delaware  corporation
     ("Holdings"),

     o VP MERGER  PARENT,  INC.,  a  Delaware  corporation  with no  outstanding
     capital stock ("Parent"),

     o VP ACQUISITION CORP., a Delaware corporation and wholly-owned  subsidiary
     of "Parent" ("Merger Sub"),

     o CRYSTAL  ROCK  SPRING  WATER  COMPANY,  a  Connecticut  corporation  (the
     "Company"), and

     o Henry E. Baker, John B. Baker,  Peter K. Baker and the other stockholders
of the Company listed on Exhibit D hereto,  being all of the stockholders of the
Company (the "Stockholders").

                                    RECITALS

         The respective  boards of directors of Holdings,  Parent and Merger Sub
have  approved  this  Agreement and have  determined  that it is advisable  that
Merger Sub be merged  with and into  Holdings  (the  "Merger")  on the terms and
conditions  set  forth  herein  and in  accordance  with the  provisions  of the
Delaware  General  Corporation  Law  (the  "DGCL"),  and  Parent,  as  the  sole
stockholder of Merger Sub, has approved this Agreement.

         The  board  of  directors  of the  Company  and the  Stockholders  have
approved this  Agreement and have  determined  that  contemporaneously  with the
Merger the Stockholders  will contribute all of the issued and outstanding stock
of the Company to Parent (the "Contribution").

         Holdings,  Parent,  Merger Sub, the Company and the Stockholders desire
to  make  certain   representations  and  warranties  and  other  agreements  in
connection with the Merger and Contribution.

                                       1
<PAGE>

         The parties intend that the Merger and Contribution, taken together, be
treated as a transaction  described in Section 351 of the Internal  Revenue Code
of 1986, as amended (the "Code").

To effect these transactions,  Holdings, Parent, Merger Sub, the Company and the
Stockholders hereby agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

         1.1.  Certain  Matters of  Construction.  A  reference  to an  Article,
Section,  Exhibit or Schedule shall mean an Article of, a Section in, or Exhibit
or Schedule to, this Agreement unless otherwise expressly stated. The titles and
headings  herein  are for  reference  purposes  only and shall not in any manner
limit the  construction  of this Agreement which shall be considered as a whole.
The words "include," "includes" and "including" when used herein shall be deemed
in each case to be followed by the words "without limitation."

         1.2. CROSS  REFERENCES.  The following terms defined  elsewhere in this
Agreement  in the Sections  set forth below shall have the  respective  meanings
therein defined:
<TABLE>
<CAPTION>
       <S>                                                         <C>

         TERM                                                         DEFINITION

         Affiliate                                               Section 1.3.1.
         Affiliated Group                                        Section 3.10.1.
         Agreement                                               Preamble
         Benefit Plans                                           Section 3.11.1.
         Certificate of Merger                                   Section 2.1.
         Closing                                                 Section 2.6.
         Closing Date                                            Section 2.6.
         Code                                                    Recitals
         Company                                                 Preamble
         Company Common Stock                                    Section 2.5.1.
         Contribution                                            Recitals
         Certificate of Merger                                   Section 2.1.
         DGCL                                                    Recitals
         Effective Date                                          Section 2.1.
         Effective Time                                          Section 2.1.
         Employee List                                           Section 3.12.2.
         Encumbrances                                            Section 3.15.1.
         Environmental Claim                                     Section 1.3.2.
         Environmental Laws                                      Section 1.3.3.
         ERISA                                                   Section 1.3.4.
         ERISA Affiliate                                         Section 1.3.5.
         Exchange Act                                            Section 1.3.6.
         Exchange Ratio                                          Section 2.5.2.
         Exclusivity Period                                      Section 7.6.
         Financial Advisor                                       Section 3.27.
         Financial Statements                                    Section 3.6.
         GAAP                                                    Section 3.6.
         Governmental Entity                                     Section 3.5.2.
         Holdings                                                Preamble
         Holdings Public Filings                                 Section 3.26.

                                       2
<PAGE>



         Holdings Stock                                          Section 2.4.1.
         Insurance Contracts                                     Section 3.19.
         Interim Balance Sheet                                   Section 3.6.
         Interim Balance Sheet Date                              Section 3.6.
         Interim Financial Statements                            Section 3.6.
         Liabilities                                             Section 3.7.2.
         Material Adverse Effect                                 Section 1.3.7.
         Materials of Environmental Concern                      Section 1.3.8.
         Merger                                                  Recitals
         Merger Sub                                              Preamble
         Parent                                                  Preamble
         Parent Share Amount                                     Section 2.5.2.
         Parent Stock                                            Section 2.4.1.
         Permits                                                 Section 3.8.
         Permitted Encumbrances                                  Section 1.3.9.
         Person                                                  Section 1.3.10.
         Proprietary Rights                                      Section 3.17.1.
         Real Property                                           Section 3.16.1.
         Real Property Leases                                    Section 1.3.11.
         Registration Statement                                  Section 7.1.
         SEC                                                     Section 1.3.12.
         Securities Act                                          Section 1.3.13.
         Share Price                                             Section 2.5.2.
         Share Price Calculation                                 Section 2.5.2.
         Stockholder Approval                                    Section 7.1.
         Stockholders                                            Preamble
         Subordinated Notes                                      Section 2.5.2.
         Subsidiary                                              Section 1.3.14.
         Surviving Corporation                                   Section 2.1.
         Tax                                                     Section 3.10.1.
         Tax Returns                                             Section 3.10.1.
         Treasury Regulation                                     Section 3.10.1.
         Year 2000 Compliant                                     Section 3.17.3.
</TABLE>

                                       3
<PAGE>

     1.3. CERTAIN  DEFINITIONS.  As used herein,  the following terms shall have
the following meanings:

                    1.3.1.  AFFILIATE:  with  respect to any Person,  any Person
                    which,  directly or indirectly,  controls, is controlled by,
                    or is under common  control with,  such Person where control
                    (including with correlative meaning, controlled by and under
                    common  control  with) as used with  respect to any  Person,
                    means the possession,  directly or indirectly,  of the power
                    to direct  or cause  the  direction  of the  management  and
                    policies of such Person,  whether  through the  ownership of
                    voting securities, by contract or otherwise.




                    1.3.2.  ENVIRONMENTAL  CLAIM: any notice alleging  potential
                    liability  (including  potential liability for investigatory
                    costs, cleanup costs, response or remediation costs, natural
                    resources  damages,  property  damages,  personal  injuries,
                    fines or  penalties)  arising out of,  based on or resulting
                    from  (a)  the  presence,  or  release  of any  Material  of
                    Environmental Concern at any location,  whether or not owned
                    by that party or any of its Affiliates or (b)  circumstances
                    forming the basis of any violation, or alleged violation, by
                    that party of any Environmental Law.

                    1.3.3.   ENVIRONMENTAL   LAWS:   any   and   all   statutes,
                    regulations,  ordinances  and laws,  including  common  law,
                    relating to the protection of public  health,  safety or the
                    environment

                    1.3.4. ERISA: the Employee Retirement Income Security Act of
                    1974, as amended.

                    1.3.5. ERISA AFFILIATE:  with respect to a party, any member
                    (other   than  that   party)  of  a   controlled   group  of
                    corporations,  group of trades or  businesses  under  common
                    control or affiliated service group that includes that party
                    (as defined for purposes of Code  Sections  414(b),  (c) and
                    (m)).

                    1.3.6. EXCHANGE ACT: the Securities Exchange Act of 1934, as
                    amended.

                    1.3.7.  MATERIAL  ADVERSE  EFFECT:  any  materially  adverse
                    change in or effect on the  financial  condition,  business,
                    operations,  assets,  properties,  results of  operations or
                    prospects of an entity.

                    1.3.8. MATERIALS OF ENVIRONMENTAL CONCERN: petroleum and its
                    by-products  and all  substances  or  constituents  that are
                    regulated  by, or form the  basis of  liability  under,  any
                    Environmental Law.

                                       4
<PAGE>



                    1.3.9. PERMITTED  ENCUMBRANCES:  (a) liens for current taxes
                    and other statutory liens and trusts not yet due and payable
                    or that are being  contested  in good faith,  (b) liens that
                    were  incurred in the ordinary  course of business,  such as
                    carriers,   warehousemens,   landlords  and  mechanics liens
                    and other similar  liens  arising in the ordinary  course of
                    business,  (c)  liens  on  personal  property  leased  under
                    operating leases, (d) liens, pledges or deposits incurred or
                    made in connection with workmens  compensation, unemployment
                    insurance and other social  security  benefits,  or securing
                    the performance of bids, tenders,  leases,  contracts (other
                    than  for  the  repayment  of  borrowed  money),   statutory
                    obligations,  progress payments, surety and appeal bonds and
                    other  obligations of like nature,  in each case incurred in
                    the ordinary course of business,  (e) pledges of or liens on
                    manufactured products as security for any drafts or bills of
                    exchange  drawn in connection  with the  importation of such
                    manufactured  products in the  ordinary  course of business,
                    (f) liens  under  Article 2 of the Uniform  Commercial  Code
                    that are special  property  interests in goods identified as
                    goods  to  which a  contract  refers,  and (g)  liens  under
                    Article 9 of the Uniform  Commercial  Code that are purchase
                    money security interests,  none of which, individually or in
                    the aggregate, exceed $50,000.

                    1.3.10.   PERSON:   an   individual,   a   corporation,   an
                    association,  a partnership,  an estate, a limited liability
                    company, a trust and any other entity or organization.

                    1.3.11 REAL PROPERTY LEASES: each lease,  sublease,  license
                    or other  agreement  under which a Person uses,  occupies or
                    has the  right to  occupy  any  real  property  or  interest
                    therein  that (a) provides  for future  minimum  payments of
                    $25,000  or more  (ignoring  any  right of  cancellation  or
                    termination) or (b) the cancellation or termination of which
                    would result in costs to the Person of $25,000 or more.

                    1.3.12. SEC: the Securities and Exchange Commission,  or any
                    Governmental Entity succeeding to its functions.

                    1.3.13  SECURITIES  ACT:  the  Securities  Act of  1933,  as
                    amended.

                    1.3.14. SUBSIDIARY: any corporation,  association,  or other
                    business  entity  a  majority  (by  number  of  votes on the
                    election of  directors  or persons  holding  positions  with
                    similar responsibilities) of the shares of capital stock (or
                    other  voting  interests)  of which is owned by Parent,  the
                    Company or their  respective  Subsidiaries,  as the case may
                    be.

                                       5
<PAGE>

                                    ARTICLE 2

                           THE MERGER AND CONTRIBUTION

         2.1.  THE  MERGER  OF MERGER  SUB INTO  HOLDINGS.  Merger  Sub shall be
merged, in accordance with the applicable  provisions of the DGCL, with and into
Holdings,  which  shall  be  and  is  sometimes  referred  to  herein  to as the
"Surviving Corporation." The Merger shall be effected by filing a certificate of
merger,  substantially  in the form of Exhibit A (the  "Certificate  of Merger")
hereto,  with  the  Secretary  of  State  of  Delaware  in  accordance  with the
applicable  provisions  of the  DGCL.  The  effective  date of the  Merger  (the
"Effective  Date")  shall be the date upon  which the  Certificate  of Merger is
filed with the  Secretary  of State of Delaware  and the  effective  time of the
Merger (the "Effective Time") shall be the time of the filing of the Certificate
of Merger with the Secretary of State of Delaware.

         2.2.  SURVIVING CORPORATION AND MERGER SUB.

                  2.2.1.  CORPORATE EXISTENCE.  The Surviving  Corporation shall
continue its corporate existence under the laws of the State of Delaware. At the
Effective  Time,  the name of the  Surviving  Corporation  shall  be and  become
"Diamond Acquisition Corp." The separate corporate existence of Merger Sub shall
cease at the Effective Time.

                                       6
<PAGE>



                  2.2.2.   CERTIFICATE  OF   INCORPORATION   AND  BY-LAWS.   The
Certificate of Incorporation of the Surviving  Corporation  shall be amended and
shall be and become the Amended and Restated  Certificate  of  Incorporation  of
Diamond  Acquisition  Corp.,  a copy of which  appears  as  Attachment  1 to the
Certificate  of  Merger  that  is  Exhibit  A  to  this  Agreement,  until  such
Certificate of Incorporation  shall be amended thereafter in accordance with the
DGCL and such Certificate of  Incorporation.  Without limiting the generality of
the foregoing,  at the Effective Time, the purposes of the Surviving Corporation
and the total  number of shares and the par value of each  class of stock  which
the Surviving  Corporation shall be authorized to issue shall be as set forth in
such Amended and Restated  Certificate of Incorporation  of Diamond  Acquisition
Corp. The by-laws of Merger Sub, as in effect immediately prior to the Effective
Time, shall be and become the by-laws of the Surviving  Corporation (except that
the name of the Surviving Corporation shall be Diamond Acquisition Corp.), until
the  same  shall  be  amended  thereafter  in  accordance  with  the  DGCL,  the
Certificate of Incorporation of the Surviving Corporation and such by-laws.

                  2.2.3.  DIRECTORS AND  OFFICERS.  From and after the Effective
Time,  the  respective  officers  and members of the board of  directors  of the
Surviving Corporation will consist of Timothy Fallon,  Chairman, Chief Executive
Officer and Director;  Peter Baker, President and Director; and Bruce MacDonald,
Vice President of Finance, Treasurer,  Secretary and Director, each such officer
to serve at the  pleasure of the board of  directors  and each such  director to
hold  office,  subject  to  the  applicable  provisions  of the  Certificate  of
Incorporation  and by-laws of the Surviving  Corporation,  until the next annual
meeting  of  stockholders  of the  Surviving  Corporation  and  until his or her
successor shall be duly elected or appointed and shall duly qualify.

                  2.2.4. EFFECT OF THE MERGER. At the Effective Time, the effect
of the  Merger  shall  be as  provided  in this  Agreement  and  the  applicable
provisions of the DGCL. Without limiting the generality of the foregoing, at the
Effective  Time, all of the estate,  property,  rights,  privileges,  powers and
franchises of Holdings and Merger Sub and all of their property,  real, personal
or mixed,  and all the debts due on whatever  account to any of them, as well as
all stock  subscriptions  and other  choses in action  belonging to any of them,
shall be transferred to and vested in the Surviving Corporation.

                                       7
<PAGE>

         2.3.  PARENT.

                  2.3.1.  CORPORATE EXISTENCE.  At and after the Effective Time,
Parent shall  continue its  corporate  existence  under the laws of the State of
Delaware. At the Effective Time, the name of Parent shall be and become "Vermont
Pure Holdings, Ltd."

                  2.3.2.   CERTIFICATE  OF   INCORPORATION   AND  BY-LAWS.   The
Certificate of  Incorporation  of Parent as in effect  immediately  prior to the
effective time,  which shall be  substantially  in the form of Exhibit B hereto,
shall be the  Certificate  of  Incorporation  of Parent  thereafter,  until such
Certificate of Incorporation  shall be amended thereafter in accordance with the
DGCL and such Certificate of  Incorporation.  Without limiting the generality of
the  foregoing,  at and after the Effective  Time the purposes of Parent and the
total  number of shares  and the par value of each class of stock  which  Parent
shall be  authorized  to  issue  shall be as set  forth  in the  Certificate  of
Incorporation  of Parent as in effect  immediately  prior to the Effective Time.
The  by-laws of Parent as in effect  immediately  prior to the  Effective  Time,
which  shall be  substantially  in the form of  Exhibit C  hereto,  shall be the
by-laws of Parent until the same shall be amended  thereafter in accordance with
the DGCL, the Certificate of Incorporation of Parent and such by-laws.

                  2.3.3.  DIRECTORS AND  OFFICERS.  From and after the Effective
Time,  the  respective  officers and members of the board of directors of Parent
will consist of the following: Timothy Fallon, Chairman, Chief Executive Officer
and Director;  Henry E. Baker,  Chairman Emeritus and Director;  Peter K. Baker,
President  and  Director;  John  B.  Baker,  Executive  Vice  President;   Bruce
MacDonald,  Vice President of Finance,  Chief  Financial  Officer and Treasurer;
Philip Davidowitz,  Director;  Robert C. Getchell,  Director;  David R. Preston,
Director;  Ross  Rapaport,   Director;   Norman  Rickard,   Director;  and  Beat
Schlagenhauf,  Director; each such officer to serve at the pleasure of the board
of directors  and each such director to hold office,  subject to the  applicable
provisions of the Certificate of Incorporation and by-laws of Parent,  until the
next annual  meeting of  stockholders  of Parent and until his or her  successor
shall be duly elected or appointed and shall duly qualify.

         2.4.  CONVERSION OF STOCK AND OTHER EQUITY SECURITIES IN THE MERGER.

                  2.4.1. HOLDINGS STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of the respective holders thereof, (a)
each one (1) share of the Common Stock,  par value $.001 per share,  of Holdings
("Holdings  Stock"),  issued and outstanding  immediately prior to the Effective
Time  (other  than  Holdings  Stock  held  in  treasury)  will be  canceled  and
extinguished  and will be converted  automatically  into one (1) validly issued,
fully paid and  nonassessable  share of the Common  Stock,  par value  $.001 per
share, of Parent ("Parent Stock");  and (b) each share of Holdings Stock held in
treasury will be canceled and extinguished.

                                       8
<PAGE>

                  2.4.2.   OTHER  EQUITY  SECURITIES  OF  HOLDINGS.   After  the
Effective  Time,  each option to  purchase  Holdings  Stock  granted by Holdings
pursuant to any stock  option  plan of  Holdings,  and each  warrant to purchase
Holdings  Stock,  that is outstanding  immediately  prior to the Effective Time,
shall, in the case of options, be deemed to be an option granted pursuant to the
corresponding  stock  option plan of Parent,  and, in the case of  warrants,  be
deemed to be a warrant  issued by  Parent,  and Parent  shall  assume all of the
obligations  of Holdings  under each and every stock option,  stock option plan,
employee  stock  purchase  plan and warrant of Holdings.  Each holder of such an
option or warrant shall be entitled to purchase from Parent,  in accordance with
the  respective  terms of such  options and  warrants,  and in lieu of shares of
Holdings  Stock,  the same  number of shares  of Parent  Stock as the  number of
shares of  Holdings  Stock  which such  holder was  entitled  to  purchase  from
Holdings immediately prior to the Effective Time. Except for the foregoing, each
such option and warrant shall remain  subject  after the  Effective  Time to the
same terms and conditions,  including  without  limitation those with respect to
the  dates on which  and the  proportionate  extent  to which  such  options  or
warrants may be exercised from time to time, as were  applicable to such options
and warrants immediately prior to the Effective Time. Holdings hereby represents
and warrants  that the aggregate  number of shares of Holdings  Stock subject to
outstanding  options and warrants is 1,872,218 as of the date hereof, and agrees
not to grant or issue any additional options and warrants prior to the Effective
Time except with the consent of the Company.

                  2.4.3.  MERGER SUB STOCK.  At the Effective Time, by virtue of
the Merger and without any action on the part of the respective holders thereof,
each one (1) share of the Common Stock,  par value $.01,  of Merger Sub,  issued
and  outstanding  immediately  prior to the Effective  Time will be canceled and
extinguished and be converted  automatically into one (1) validly issued,  fully
paid and  nonassessable  share of the Common Stock, par value $.01 per share, of
the Surviving Corporation.

                  2.4.4.   CERTIFICATES  FOR  PARENT  STOCK.   Each  issued  and
outstanding  stock  certificate  evidencing shares of Holdings Stock outstanding
immediately prior to the Effective Time, shall, at and after the Effective Time,
by virtue of the Merger  and  without  any action on the part of the  respective
holders thereof, be deemed to evidence the same number of shares of Parent Stock
as the  number  of  shares  of  Holdings  Stock  evidenced  by such  certificate
immediately prior to the Effective Time.

                                       9
<PAGE>

         2.5.  CONTRIBUTION OF COMPANY COMMON STOCK TO PARENT

                  2.5.1. CONTRIBUTION BY STOCKHOLDERS. At the Closing, effective
at the Effective  Time,  each  Stockholder  shall  contribute  all of his or its
shares of Common Stock, no par value per share, of the Company  ("Company Common
Stock"),  issued and  outstanding  immediately  prior to the Closing (other than
Company  Common Stock,  if any, held in  treasury),  to Parent,  in each case by
delivering to Parent stock  certificates,  duly endorsed for transfer to Parent,
with  signature  guaranteed,  evidencing all of the Company Common Stock held of
record by such Stockholder.

                    2.5.2.  TRANSFER OF CASH,  STOCK AND  SUBORDINATED  NOTES BY
                    PARENT.  At the Closing,  effective at the  Effective  Time,
                    Parent  shall  transfer  and remit to each  Stockholder  the
                    amount of cash,  the  principal  amount of 12%  Subordinated
                    Promissory  Note  due  2007  of  Parent  (the  "Subordinated
                    Notes"),  and the number of shares of Parent Stock set forth
                    opposite such  Stockholder's  name on EXHIBIT D hereto.  The
                    aggregate  amount  of such  cash will be equal to the sum of
                    (A) $8,000,000.00, plus (B) the greater of $1,500,000 or the
                    average amount of cash and  cash-equivalents  of the Company
                    as of the  close  of  business  on the  five  business  days
                    immediately  preceding  the  Effective  Date.  The aggregate
                    principal    amount   of   Subordinated    Notes   will   be
                    $22,600,000.00.  The  aggregate  number  of shares of Parent
                    Stock to be issued by  reason  of the  Contribution  will be
                    calculated by multiplying the aggregate  number of shares of
                    Company  Common Stock,  issued and  outstanding  immediately
                    prior to the Effective  Time,  by the "Exchange  Ratio." For
                    purposes of this Agreement, the following definitions apply:

                    2.5.2.1.  EXCHANGE  RATIO:  a number rounded to five decimal
                    places  equal to a fraction,  the  numerator of which is the
                    "Parent  Share Amount" and the  denominator  of which is the
                    aggregate  number of shares of Company  Common  Stock issued
                    and outstanding immediately prior to the Effective Time.

                    2.5.2.2. PARENT SHARE AMOUNT:  $31,100,000.00 divided by the
                    "Share Price."

                    2.5.2.3.  SHARE PRICE:  the average of the closing price per
                    share of  Holdings  Stock (as quoted on the  American  Stock
                    Exchange) for the ten (10) business days ending on the fifth
                    business day prior to the Effective  Date of the Merger (the
                    "Share Price Calculation");  provided,  however, that if the
                    Share Price  Calculation is less than $2.80,  then the Share
                    Price shall be $2.80, and if the Share Price  Calculation is
                    more than $3.15, then the Share Price shall be $3.15.

                                       10
<PAGE>



                  2.5.3.  ADJUSTMENT OF EXCHANGE RATIO.  If, between the date of
this Agreement and the Closing,  the outstanding  shares of Holdings Stock shall
have been  changed  into a different  number of shares or a  different  class by
reason of any  reclassification,  recapitalization,  split-up,  stock  dividend,
stock combination,  exchange of shares or readjustment, the Exchange Ratio shall
be appropriately adjusted.

         2.6.  FRACTIONAL  SHARES.  Only  whole  shares of Parent  Stock will be
issued by reason of the  Contribution.  Any  Stockholder  who would otherwise be
entitled  to a  fraction  of a share of  Parent  Stock  (after  aggregating  all
fractional shares of Parent Stock to be received by such Stockholder) shall have
such fractional  share interest rounded up or down to the nearest whole share of
Parent Stock.

         2.7. DELIVERY OF CERTIFICATES;  TRANSFERS OF OWNERSHIP.  At or promptly
after the  Effective  Time,  Parent shall cause its transfer  agent to prepare a
stock certificate for each  Stockholder,  each such certificate to be registered
in the name of such  Stockholder  and  evidencing  the total number of shares of
Parent Stock issuable to such Stockholder by reason of the Contribution.  If any
certificate for shares of Parent Stock is to be issued in a name other than that
in which the certificate surrendered in exchange therefor is registered, it will
be a condition of the issuance  thereof that the certificate so surrendered will
be properly endorsed,  with signature  guaranteed,  and otherwise in proper form
for transfer,  and that the Stockholder  requesting such exchange will have paid
to Parent or any agent  designated by it any transfer or other taxes required by
reason of issuance of a certificate for shares of Parent Stock in any name other
than that of the registered holder of the certificate surrendered,  or will have
established to the reasonable  satisfaction of Parent or any agent designated by
it that such tax has been paid or is not payable.

         2.8.  CLOSING.   The  closing  of  the  Merger  and  Contribution  (the
"Closing") shall take place at the offices of Foley, Hoag & Eliot LLP in Boston,
Massachusetts on July 28, 2000, or at such other time and place or on such other
date as the parties hereto agree (the "Closing Date").

         2.9. TAX  CONSEQUENCES.  It is intended by the parties  hereto that the
Merger and the  Contribution  shall  constitute a transaction  described in Code
Section 351.

         2.10. ADDITIONAL ACTIONS. If, at any time after the Effective Time, any
further  action is  necessary  or  desirable  to carry out the  purposes of this
Agreement or to vest, perfect or confirm in the Surviving  Corporation or Parent
title to or ownership or possession of any property,  right,  privilege,  power,
franchise  or  other  asset of any  constituent  corporation  acquired  or to be
acquired  by reason of, or as a result of, the Merger or the  Contribution,  the
officers and directors of the  constituent  corporations  to this  Agreement are
fully  authorized in the name of their  respective  corporations or otherwise to
take,  and will take,  all such  lawful and  necessary  action,  so long as such
action is consistent with this Agreement.

                                       11
<PAGE>



                                    ARTICLE 3
                         REPRESENTATIONS AND WARRANTIES

         Holdings  represents to the Company and each of the  Stockholders,  and
the Company represents to Parent, Holdings and Merger Sub as follows (subject in
each  case to such  exceptions  as are set  forth  in the  representing  party's
attached Disclosure Schedule in the labeled section corresponding to the caption
of the representation or warranty to which such exceptions relate):

         3.1.  CORPORATE  STATUS.  It is a corporation  duly organized,  validly
existing  and  in  good  standing  under  the  laws  of  its   jurisdiction   of
incorporation,  with the requisite corporate power to own, operate and lease its
properties  and to carry on its  business  as now  being  conducted.  It is duly
qualified  or  licensed  to  do  business  and  is  in  good   standing  in  all
jurisdictions in which the character of the properties owned or held under lease
by it or the nature of the business  transacted  by it makes such  qualification
necessary, except where the failure to be so qualified would not have a Material
Adverse Effect.  All  jurisdictions  in which it is qualified to do business are
set forth in its Disclosure Schedule  3.1.

         3.2.  CAPITAL STOCK.

                  3.2.1.  AUTHORIZED AND OUTSTANDING  STOCK.  Its authorized and
outstanding capital stock are as set forth in its Disclosure Schedule   3.2. The
Company represents that all such outstanding shares of its capital stock are, as
of the date of this  Agreement,  and will be,  immediately  prior the  Effective
Time,  owned of record and  beneficially by the  Stockholders in the amounts set
forth opposite their respective names as set forth  in  its Disclosure  Schedule
3.2. All such outstanding shares of capital stock, and all outstanding shares of
capital stock of each of its Subsidiaries, have been duly authorized and validly
issued,  were not issued in  violation  of any  Persons   preemptive  or similar
rights, and are fully paid and  nonassessable.  No Person has any valid right to
rescind any purchase  from or issuance by it or any of its  Subsidiaries  of any
shares of capital stock of it or any of its Subsidiaries.  It owns,  directly or
indirectly through a Subsidiary, all of the issued and outstanding shares of the
capital stock of each of its Subsidiaries, free and clear of all liens, pledges,
charges,  security  interests,  encumbrances,  or  adverse  claims  of any  kind
whatsoever.

                  3.2.2.  OPTIONS,  CONVERTIBLE  SECURITIES AND SIMILAR  RIGHTS.
Except as set forth in its Disclosure  Schedule   3.2, neither it nor any of its
Subsidiaries  has  or  is  bound  by  any  outstanding  subscriptions,  options,
warrants,   conversion  rights  or  other  rights,  securities,   agreements  or
commitments  obligating it or any such  Subsidiary  to issue,  sell or otherwise
dispose  of  shares of its  capital  stock,  or any  securities  or  obligations
convertible  into, or exercisable or exchangeable for, any shares of its or such
subsidiary's  capital stock.  except  as  set forth in its  Disclosure  Schedule
3.2, neither it nor any of its Subsidiaries (a) has any outstanding  obligation,
contractual or otherwise, to repurchase, redeem, or otherwise acquire any shares
of its or such Subsidiary's capital stock, (b) is a party to or bound by, or has
knowledge of, any agreement or instrument  relating to the voting of its or such
Subsidiary's  voting securities,  or (c) is a party to or bound by any agreement
or  instrument  under which any Person has the right to require it or any of its
Subsidiaries to effect, or to include any securities held by such Person in, any
registration under the Securities Act.

         3.3.  SUBSIDIARIES.  Its  Subsidiaries  are as set forth in  Disclosure
Schedule   3.3, and, except as set forth therein,  it does not own,  directly or
indirectly,  any shares or other equity  interest or  securities in any business
organization, entity or enterprise. It has delivered to Holdings, in the case of
the Company, or to the Company, in the case of Holdings, true and correct copies
of the charter documents and by-laws, and all amendments thereto, of each of its
Subsidiaries,  as in effect on the date hereof.  Disclosure  Schedule   3.3 sets
forth a list of each of its Subsidiary's directors and officers.

                                       12
<PAGE>

         3.4. CERTIFICATE OF INCORPORATION,  BY-LAWS, DIRECTORS AND OFFICERS. It
has delivered to Holdings, in the case of the Company, or to the Company, in the
case of Holdings,  true and correct copies of its  Certificate of  Incorporation
and by-laws,  including all amendments thereto, as in effect on the date hereof.
Its minute books, which have been made available to Holdings, in the case of the
Company, or to the Company, in the case of Holdings, contain accurate records of
all meetings and consents in lieu of meetings of its board of directors (and any
committees   thereof  that  recorded  written  minutes,   whether  permanent  or
temporary) and of its stockholders since the date of its incorporation, and such
records  accurately  reflect all  transactions  referred to in such  minutes and
consents.  The Company represents that its stock books accurately reflect record
ownership of the Companys  capital stock. Disclosure Schedule   3.4 sets forth a
list of its directors and officers.

         3.5.  AUTHORITY FOR AGREEMENT; NONCONTRAVENTION

                 3.5.1.  AUTHORITY. It has the corporate power and authority to
enter  into this  Agreement  and to  consummate  the  transactions  contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions  contemplated  hereby have been duly and validly  authorized by its
board of directors and stockholders,  and no other corporate  proceedings on its
part are necessary to authorize the execution and delivery of this Agreement and
except, in the case of Holdings, for the requisite approval of its stockholders,
which has not been obtained as of the date of this Agreement,  the  consummation
of the transactions  contemplated  hereby. This Agreement has been duly executed
and  delivered  by  it  and  constitutes  its  valid  and  binding   obligation,
enforceable against it in accordance with its terms, with the qualification that
enforcement  of the  rights  and  remedies  created  hereby  are  subject to (a)
bankruptcy,  insolvency,  reorganization,  fraudulent conveyance, moratorium and
other  laws  of  general  application  affecting  the  rights  and  remedies  of
creditors,  (b) general principles of equity (regardless of whether  enforcement
is  considered  in a  proceeding  in equity  or at law),  and (c) in the case of
Holdings, the requisite approval of its stockholders. On or before the Effective
Date, the other agreements  contemplated  hereby to be executed and delivered by
it on or before the Effective  Date will have been executed and delivered by it,
and, upon such  execution and delivery,  will  constitute  its valid and binding
obligations,  enforceable  against it in accordance with their respective terms,
with the  qualification  that  enforcement  of the rights and  remedies  created
thereby are subject to (a) bankruptcy,  insolvency,  reorganization,  fraudulent
conveyance,  moratorium  and other laws of  general  application  affecting  the
rights and remedies of creditors,  (b) general  principles of equity (regardless
of whether enforcement is considered in a proceeding in equity or at law).

                  3.5.2.  NO CONFLICT.  SUBJECT TO OBTAINING  THE  TERMINATIONS,
CONSENTS  AND WAIVERS SET FORTH IN ITS  Disclosure Schedule   3.5,  neither the
execution and delivery of this Agreement by it, nor the performance by it of its
obligations   hereunder,   nor  the  consummation  by  it  of  the  transactions
contemplated  hereby  will (a)  conflict  with or result in a  violation  of any
provision of its Certificate of  Incorporation  or by-laws,  (b) with or without
the giving of notice or the lapse of time, or both,  conflict with, or result in
any  violation  or breach of, or  constitute a default  under,  or result in any
right to accelerate or result in the creation of any encumbrance pursuant to, or
right of  termination  under,  any provision of any note,  mortgage,  indenture,
lease,  instrument or other agreement,  Permit,  concession,  grant,  franchise,
license,  judgment,  order, decree,  statute,  ordinance,  rule or regulation to
which it is a party or by which it or any of its assets or  properties  is bound
or  which  is  applicable  to  it  or  any  of  its  assets  or  properties.  No
authorization,  consent or approval  of, or filing with or notice to, any United
States or foreign governmental or public body or authority (each a "Governmental
Entity") is necessary for the execution and delivery of this  Agreement by it or
the consummation by it of the transactions  contemplated hereby,  except for the
filing of the Certificate of Merger with the Secretary of State of Delaware, and
the filing  with the SEC by Holdings or Parent of a  registration  statement  on
Form S-4 together with any required filings under Regulation C of the Securities
Act in connection therewith, and related filings, if any, under state securities
laws.

                                       13
<PAGE>

         3.6. FINANCIAL STATEMENTS.  DISCLOSURE SCHEDULE   3.6 contains accurate
and complete copies of the following  financial  statements  (collectively,  the
"Financial Statements"): (a) its audited consolidated balance sheets, statements
of income  and  statements  of cash flow for each of the fiscal  years  ended in
October 1997, October 1998 and October 1999, and (b) its unaudited  consolidated
balance sheet, statement of income and statement of cash flows as of, at and for
the period  commencing on the first day of its fiscal year 2000 through the last
day of its first fiscal quarter  ending in January 2000 (the "Interim  Financial
Statements").  The Financial Statements are based upon the information contained
in its books and records and fairly  present its  financial  condition as at the
dates thereof and results of operations for the periods referred to therein. The
Financial  Statements have been prepared in accordance  with generally  accepted
accounting  principles  ("GAAP")  applied on a consistent  basis  throughout the
periods indicated;  provided, however, that the Interim Financial Statements are
subject to normal year end adjustments (which will not be material, individually
or in the aggregate,  when made on a basis consistent with the audited Financial
Statements)  and lack  footnotes  and other  presentation  items.  For  purposes
hereof,  the "Interim Balance Sheet Date" shall be January 31, 2000, in the case
of the Company,  and January 29, 2000, in the case of Holdings,  and the balance
sheet as of that date shall be the "Interim Balance Sheet."

         3.7.  ABSENCE OF MATERIAL ADVERSE CHANGES AND UNDISCLOSED LIABILITIES.

                  3.7.1. CHANGES. EXCEPT AS SET FORTH IN ITS DISCLOSURE SCHEDULE
  3.7,  since the Interim  Balance  Sheet Date, it has not suffered any Material
Adverse Effect,  nor has there occurred or arisen any event,  condition or state
of facts of any  character  that could  reasonably  be  expected  to result in a
Material  Adverse Effect.  Except as described or expressly  contemplated in its
Disclosure Schedule    3.7 or by  this  Agreement,  and  without  limiting  the
generality of the foregoing, since the Interim Balance Sheet Date, it has not:

     (a)  experienced  any  change  in its or any of its  Subsidiaries'  assets,
liabilities, sales, income or business or in their relationships with suppliers,
customers,  or lessors,  other than changes in the  ordinary  course of business
that have not resulted,  either individually or in the aggregate,  in a Material
Adverse Effect;

     (b) either  directly or through any  Subsidiary  entered  into any material
transaction, other than in the ordinary course of business;

     (c) sold,  leased,  transferred or assigned any of its assets,  tangible or
intangible, other than in the ordinary course of business;

     (d) experienced the loss of any director, executive officer or key employee
of it or any of its Subsidiaries;

     (e)  accelerated,  terminated,  modified  in a  manner  adverse  to it,  or
canceled any contract,  lease,  sublease,  license,  or sublicense (or series of
related contracts, leases, subleases,  licenses, and sublicenses) involving more
than $25,000 to which it is a party;

     (f)  canceled,  compromised,  waived,  or  released  any right or claim (or
series of related  rights and  claims)  either  involving  more than  $25,000 or
outside the ordinary course of business;

     (g) granted any license or  sublicense  of any rights under or with respect
to any of its Proprietary  Rights other than to its distributors,  resellers and
other licensees under agreements as set forth on its Disclosure Schedule 3.17;

     (h)  experienced  material  damage,  destruction,  or loss  (whether or not
covered by  insurance)  to its  property,  other than ordinary wear and tear not
caused by neglect;

     (i)  created  or  suffered  to exist any  encumbrance  not in effect on the
Interim Balance Sheet Date, other than Permitted  Encumbrances,  upon any of its
assets, tangible or intangible;

                                       14
<PAGE>

     (j) issued,  sold or  otherwise  disposed of, or  redeemed,  purchased,  or
otherwise acquired,  any of its capital stock;  granted or redeemed,  purchased,
canceled or  otherwise  acquired,  any  options,  warrants,  or other  rights to
purchase or obtain  (including  upon  conversion or exercise) any of its capital
stock,  or any securities  convertible or  exchangeable  into any of its capital
stock; or otherwise changed its capital structure or stock ownership in any way;

     (k) declared,  set aside, or paid any dividend or distribution with respect
to its capital stock (whether in cash or in kind);

     (l) entered into  financial  arrangements  for the benefit of any of any of
its directors,  executive  officers or beneficial  owners of more than 5% of its
outstanding  capital stock, except in the ordinary course of business consistent
with past practice;

     (m) made or committed to make any capital  expenditures or entered into any
other  material  transaction,  in either  case  outside the  ordinary  course of
business or involving an expenditure in excess of $25,000;

     (n)  amended  or  modified  in  any  respect  any  employment  contract  or
arrangement or any profit sharing,  bonus,  incentive  compensation,  severance,
employee benefit or multiemployer plans;

     (o)  entered  into  any  employment  agreement  or  collective   bargaining
agreement or increased the compensation paid to, in any capacity, (A) any of its
directors and executive officers, or (B) any of its other employees;

     (p) incurred any indebtedness for borrowed money;

     (q) written off as uncollectible any of its notes or accounts receivable or
written  down  the  value  of any of its  assets  or  inventory,  other  than in
immaterial amounts;

     (r)  changed  any method of  accounting  or keeping its books of account or
accounting practices; or

     (s) committed orally or in writing to any of the foregoing.

                  3.7.2.  LIABILITIES.  Except  as set  forth on its  Disclosure
Schedule   3.7, it has no liabilities or obligations, fixed, accrued, contingent
or  otherwise  (collectively,  "Liabilities"),  that are not fully  reflected or
provided for on, or disclosed in the notes to, the Interim Balance Sheet, except
Liabilities  incurred  in the  ordinary  course of  business  since the  Interim
Balance Sheet Date, none of which  individually or in the aggregate has resulted
or could reasonably be expected to result in costs to it, individually or in the
aggregate, in excess of $25,000. Since the Interim Balance Sheet Date, there has
not been any discharge or satisfaction  by it or any of its  Subsidiaries of any
lien or  encumbrance,  or payment by any of them of any Liability other than (a)
current  Liabilities   included  in  its  Interim  Balance  Sheet,  (b)  current
Liabilities incurred since the Interim Balance Sheet Date in the ordinary course
of  business,  and (c)  current  Liabilities  incurred in  connection  with this
transaction and set forth on its Disclosure Schedule  3.7.

                                       15
<PAGE>



         3.8. COMPLIANCE WITH APPLICABLE LAW,  CERTIFICATES OF INCORPORATION AND
BY-LAWS.  It has all  requisite  licenses,  permits  and  certificates  from all
Governmental  Entities  (collectively,    Permits)  necessary  to  conduct  its
business as currently conducted, and to own, lease and operate its properties in
the manner  currently  held and  operated,  except for any the absence of which,
individually or in the aggregate,  would not have a Material Adverse Effect.  It
is in  compliance  in all material  respects  with all the terms and  conditions
related to such Permits.  There are no proceedings pending or, to its knowledge,
threatened,  which may result in revocation,  cancellation,  suspension,  or any
material adverse  modification of any of such Permits. Its business is not being
conducted in violation of any applicable law,  statute,  ordinance,  regulation,
rule, judgment, decree, order, Permit, concession,  grant or other authorization
of any Governmental Entity,  except for violations that,  individually or in the
aggregate,  have not resulted in, and could not reasonably be expected to result
in,  a  Material  Adverse  Effect.  It is not in  default  or  violation  of any
provision of its Certificate of Incorporation or its by-laws.

         3.9.  LITIGATION  AND  AUDITS.  Except as set  forth on its  Disclosure
Schedule   3.9, (a) there is no claim, action,  suit,  arbitration or proceeding
pending or, to its knowledge,  threatened against or involving it, or any of its
assets  or  properties,  at  law or in  equity,  or  before  any  arbitrator  or
Governmental Entity, and there are no judgments,  decrees, injunctions or orders
of any Governmental  Entity or arbitrator  outstanding against it, and (b) there
is no investigation by any Governmental  Entity or any other Person with respect
to it that is pending or, to its knowledge, threatened, nor has any Governmental
Entity or other Person indicated to it an intention to conduct the same.

         3.10. TAX MATTERS. EXCEPT AS SET FORTH ON ITS DISCLOSURE SCHEDULE 3.10:

                  3.10.1.  DEFINITIONS.  As used in this Agreement,  "Affiliated
Group" means any affiliated  group within the meaning of Code Section 1504(a) or
any similar group defined under a similar  provision of state,  local or foreign
law; "Tax" means any federal,  state, local, or foreign income,  gross receipts,
license, payroll,  employment,  excise, severance,  stamp, occupation,  premium,
windfall  profits,  environmental  (including  taxes  under Code  Section  59A),
customs duties, capital stock, franchise, profits, withholding,  social security
(or similar), unemployment, disability, real property, personal property, sales,
use,  transfer,  registration,  value  added,  alternative  or  add-on  minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition  thereto,  whether  disputed or not; "Tax Returns" means any return,
declaration,  report,  claim for  refund,  or  information  return or  statement
relating to Taxes,  including any schedule or attachment thereto,  and including
any  amendment  thereof;  and  "Treasury  Regulation"  means  those  regulations
promulgated under the Code.

                  3.10.2.  TAX  RETURNS  AND  PAYMENTS.   It  and  each  of  its
Subsidiaries  has filed all material Tax Returns  required to be filed. All such
Tax Returns were correct and  complete in all material  respects.  All Taxes due
and payable by it (whether or not shown on any Tax Return) have been paid (other
than amounts being contested in good faith by appropriate  proceedings for which
adequate reserves have been established on its books). Neither it nor any of its
Subsidiaries  is currently the beneficiary of any extension of time within which
to file any Tax Return.  No claim that has not been  finally  resolved  has ever
been made by an authority in a jurisdiction  where it or any of its Subsidiaries
does not file Tax  Returns  that such entity is or may be subject to taxation by
that jurisdiction.  There are no encumbrances on any of its or its Subsidiaries'
assets that arose in connection with any failure (or alleged failure) to pay any
Tax (other than liens for Taxes that are not yet due or that are being contested
in good faith by appropriate proceedings),  except for encumbrances that are not
reasonably likely,  individually or in the aggregate, to have a Material Adverse
Effect on it.

                                       16
<PAGE>

                  3.10.3.  WITHHOLDING.  It and  each  of its  Subsidiaries  has
withheld  and  paid  all  Taxes  required  to have  been  withheld  and  paid in
connection with amounts paid or owing to any employee,  independent  contractor,
creditor,  stockholder,  or other third  party,  except for amounts that are not
reasonably likely,  individually or in the aggregate, to have a Material Adverse
Effect on it.

                  3.10.4.   AUDITS.   There  is  no  pending  dispute  or  claim
concerning any Tax liability of it or any of its Subsidiaries either (a) claimed
or  raised  by any  authority  in  writing  or (b) as to which any of its or its
Subsidiaries' directors and officers (and employees responsible for Tax matters)
has  knowledge  based upon  personal  contact with any agent of such  authority.
Disclosure Schedule   3.10 lists all federal,  state, local, and foreign income
Tax Returns filed with respect to its taxable  periods ended on or after October
31, 1994,  indicates  those Tax Returns that have been  audited,  and  indicates
those Tax Returns that  currently are the subject of audit.  It has delivered or
made available to Holdings,  in the case of the Company,  or to the Company,  in
the case of  Holdings,  correct and  complete  copies of all federal  income Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed to by it since October 31, 1994.

                  3.10.5.  WAIVERS  AND  EXTENSIONS.  Neither  it nor any of its
Subsidiaries  has granted  any  currently  outstanding  waiver of any statute of
limitations in respect of Taxes or agreed to any currently outstanding extension
of time with respect to a Tax assessment or deficiency.

                  3.10.6.  ELECTIONS  AND  CONSENTS.  Neither  it nor any of its
Subsidiaries   has  filed  a  consent  under  Code  Section  341(f)   concerning
collapsible  corporations.  Neither it nor any of its  Subsidiaries has made any
payments,  is not  obligated  to make  any  payments,  and is not a party to any
agreement  that  under  certain  circumstances  could  obligate  it to make  any
payments  that will not be  deductible  under either of Code  Section  162(m) or
280G. Neither it nor any of its Subsidiaries is a party to any Tax allocation or
sharing  agreement.  Neither it nor any of its  Subsidiaries (a) has ever been a
member of an Affiliated  Group filing a  consolidated  federal income Tax Return
(other  than a group  the  Common  Parent  of  which is  Parent)  or (b) has any
liability for the Taxes of any person (other than it and its Subsidiaries) under
Treasury  Regulation Section 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract, or otherwise.

                  3.10.7.  UNPAID TAXES. Its unpaid Taxes (a) did not, as of the
Interim  Balance Sheet Date,  exceed the reserve for Tax liability  (rather than
any reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the Interim  Balance Sheet (rather than in any
notes thereto) and (b) do not exceed that reserve as adjusted for the passage of
time through the date of the Closing in accordance with the its past practice in
filing its Tax Returns.

                                       17
<PAGE>

         3.11. EMPLOYEE BENEFIT PLANS.

                  3.11.1.  LIST OF  PLANS.  Disclosure  Schedule    3.11  hereto
contains a correct and complete list of all pension, profit sharing, retirement,
deferred  compensation,  welfare,  legal  services,  medical,  dental  or  other
employee  benefit or health  insurance  plans,  life  insurance  or other  death
benefit plans, disability, stock option, stock purchase, restricted stock, stock
compensation,  bonus,  vacation  pay,  severance  pay and other  similar  plans,
programs or agreements,  relating to any persons  employed by it or in which any
person  employed  by it is  eligible  to  participate  and  which  it  currently
maintains  or has  maintained  at any  time  in the  last  five  calendar  years
(collectively,  the  "Benefit  Plans").  It has  provided or made  available  to
Holdings,  in the  case  of the  Company,  or to the  Company,  in the  case  of
Holdings,  complete copies,  as of the date hereof,  of all of the Benefit Plans
that have been reduced to writing,  together with all documents  establishing or
constituting any related trust,  annuity contract,  insurance  contract or other
funding  instrument,  and  summaries  of those  that  have not been  reduced  to
writing.  It has  provided or made  available  to  Holdings,  in the case of the
Company, or to the Company, in the case of Holdings,  complete copies of current
plan  summaries,   employee  booklets,  personnel  manuals  and  other  material
documents  or written  materials  concerning  the Benefit  Plans that are in its
possession as of the date hereof.  It does not have any "defined  benefit plans"
as defined in Section 3(35) of ERISA.

                  3.11.2.  ERISA. Neither it nor any of its ERISA Affiliates has
incurred any "withdrawal  liability" calculated under Section 4211 of ERISA, and
there has been no event or circumstance which would cause them to incur any such
liability.  Neither it nor any of its ERISA  Affiliates  has ever  maintained  a
Benefit Plan providing  health or life insurance  benefits to former  employees,
other  than as  required  pursuant  to Code  Section  4980B or to any  state law
conversion  rights. No pension plan (as defined by ERISA) previously  maintained
by it or its ERISA Affiliates which was subject to ERISA has been terminated; no
proceedings to terminate any such plan have been  instituted  within the meaning
of Subtitle C of Title IV of ERISA;  and no reportable  event within the meaning
of Section  4043 of said  Subtitle C of Title IV of ERISA with  respect to which
the requirement to file a notice with the Pension Benefit  Guaranty  Corporation
has not been waived has occurred with respect to any such Benefit  Plan,  and no
liability to the Pension Benefit Guaranty Corporation has been incurred by it or
its ERISA Affiliates.  With respect to all the Benefit Plans, it and each of its
ERISA Affiliates are in material compliance with all requirements  prescribed by
all statutes,  regulations, orders or rules currently in effect, and have in all
material  respects  performed all obligations  required to be performed by them.
Neither  it  nor  any of its  ERISA  Affiliates,  nor  any of  their  directors,
officers,  employees or agents,  nor any trustee or  administrator  of any trust
created  under  the  Benefit  Plans,  has  engaged  in or  been a  party  to any
"prohibited  transaction"  as defined in Code  Section  4975 and  Section 406 of
ERISA which could subject it or its ERISA Affiliates,  directors or employees or
the Benefit Plans or the trusts  relating  thereto or any party dealing with any
of  the  Benefit  Plans  or  trusts  to  any  tax  or  penalty  on   "prohibited
transactions"  imposed by Code Section  4975.  Neither the Benefit Plans nor the
trusts created thereunder have incurred any "accumulated funding deficiency," as
such term is defined in Code  Section  412 and  regulations  issued  thereunder,
whether or not waived.

                                       18
<PAGE>



                  3.11.3.  PLAN  DETERMINATIONS.  Each Benefit Plan  intended to
qualify under Code Section  401(a) has been  determined by the Internal  Revenue
Service to so qualify, and the trusts created thereunder have been determined to
be exempt  from tax  under  Code  Section  501(a);  copies of all  determination
letters have been  delivered  to it; and nothing has occurred  since the date of
such  determination   letters  which  is  likely  to  cause  the  loss  of  such
qualification  or  exemption.  With  respect  to each  Benefit  Plan  which is a
qualified profit sharing plan, all employer contributions accrued for plan years
ending prior to the date hereof under the Benefit Plan terms and  applicable law
have been made.

                3.11.4. FUNDING.Except as set forth on Disclosure Schedule 3.11:

     (a) all  contributions,  premiums or other  payments  due or required to be
made to the Benefit Plans prior to the date hereof have been made as of the date
hereof or are properly reflected on the Interim Balance Sheet;

     (b)  there  are no  actions,  liens,  suits or  claims  pending  or, to its
knowledge,  threatened  (other than routine claims for benefits) with respect to
any Benefit Plan;

     (c) each Benefit Plan that is a "group  health plan" (as defined in Section
607(1) of ERISA) has been operated at all times in material  compliance with the
provisions of COBRA and any applicable, similar state law; and

     (d) with respect to any Benefit  Plan that is qualified  under Code Section
401(k),  individually and in the aggregate,  no event has occurred,  and, to its
knowledge, there exists no condition or set of circumstances, in connection with
which it could be subject to any liability  that is reasonably  likely to result
in costs to it,  individually or in the aggregate,  in excess of $25,000 (except
liability for benefits  claims and funding  obligations  payable in the ordinary
course) under ERISA, the Code or any other applicable law.

         3.12. EMPLOYMENT-RELATED MATTERS.

                  3.12.1.  LABOR RELATIONS.  It is not a party to any collective
bargaining  agreement or other contract or agreement with any labor organization
or other  representative  of any of its  employees.  There  is no labor  strike,
dispute,  slowdown,  work  stoppage  or lockout  that is  pending or  threatened
against or otherwise  affecting it, and it has not  experienced  the same at any
time during the period of five years  preceding the date of this  Agreement.  It
has not closed any plant or  facility,  effected  any  layoffs of  employees  or
implemented any early  retirement or separation  program at any time during such
period,  nor has it  planned or  announced  any such  action or program  for the
future with respect to which it has any liability. All salaries, wages, vacation
pay, bonuses,  commissions and other compensation payable by it to its employees
before the date hereof have been paid or accrued in all material  respects as of
the date hereof.

                                       19
<PAGE>



                  3.12.2.  EMPLOYEE  LIST. It has delivered or made available to
Holdings,  in the  case  of the  Company,  or to the  Company,  in the  case  of
Holdings,  a list  (the  "Employee  List")  containing  the  name of each of its
employees,  and each such  employee's  position,  starting  employment  date and
annual  salary or hourly wage.  The Employee  List is correct and complete as of
the date of the  Employee  List,  and is  correct  and  complete  as of the date
hereof, except for changes since that date that are not material individually or
in the aggregate.  No third party has asserted any claim,  or, to its knowledge,
has any reasonable  basis to assert any valid claim,  against it that either the
continued  employment by or association with it of any of its present  officers,
employees or consultants  contravenes  any agreement or law applicable to unfair
competition, trade secrets or proprietary information. To its knowledge, each of
the  employees  listed on its  Employee  List  intends  to  continue  his or her
employment with it after the Closing.

         3.13.  ENVIRONMENTAL.

                  3.13.1.  ENVIRONMENTAL  LAWS.  It  is  in  compliance  in  all
material  respects with all applicable  Environmental  Laws. It has not received
any communication that alleges that it is not in compliance in all respects with
all  applicable  Environmental  Laws in effect on the date hereof.  There are no
circumstances  that may prevent,  and there are no circumstances  specific to it
that may  interfere  with,  compliance  by it in the future with all  applicable
Environmental Laws. All Permits and other governmental  authorizations currently
held by it pursuant to the  Environmental  Laws are in full force and effect, it
is in compliance in all material  respects with all of the terms of such Permits
and  authorizations,  and no other Permits or authorizations  are required by it
for the conduct of its business as of the date hereof. The management, handling,
storage,  transportation,  treatment,  and  disposal by it of all  Materials  of
Environmental  Concern has been in compliance in all material  respects with all
applicable Environmental Laws.

                  3.13.2.  ENVIRONMENTAL CLAIMS. There is no Environmental Claim
pending or, to its knowledge,  threatened  against or involving the it or any of
its  Subsidiaries  or, to its  knowledge,  against  any  Person or entity  whose
liability for any Environmental Claim it has knowingly retained or assumed.

                  3.13.3.  NO BASIS FOR CLAIMS.  To its knowledge,  there are no
past or present actions or activities by it or any of its  Subsidiaries,  or any
circumstances,   conditions,   events  or  incidents,   including  the  storage,
treatment, release, emission, discharge, disposal or arrangement for disposal of
any Material of Environmental  Concern,  that could reasonably form the basis of
any  Environmental  Claim  against  it or  against  any  Person or entity  whose
liability for any Environmental Claim it has knowingly retained or assumed.

         3.14.  NO  BROKER'S  OR  FINDER'S  FEES.  EXCEPT  AS SET  FORTH  IN ITS
Disclosure Schedule   3.14, it has not paid or become  obligated to pay any fee
or  commission  to any broker,  finder,  financial  advisor or  intermediary  in
connection with the transactions contemplated by this Agreement.

         3.15.  ASSETS OTHER THAN REAL PROPERTY

                                       20
<PAGE>



                  3.15.1. TITLE. It or its Subsidiaries have good and marketable
title to all of the tangible  assets shown on the Interim Balance Sheet, in each
case, free and clear of any mortgage,  pledge,  lien,  claim,  charge,  security
interest, lease or other encumbrance (collectively,  "Encumbrances"), except for
(a) assets  disposed of since the  Interim  Balance  Sheet Date in the  ordinary
course of business, in a manner consistent with past practices and with a value,
individually  or  in  the  aggregate,  of  $25,000  or  less,  (b)  liabilities,
obligations and Encumbrances reflected in the Interim Balance Sheet or otherwise
in the Financial Statements,  (C) permitted  Encumbrances,  and (d) liabilities,
obligations and Encumbrances set forth on Disclosure Schedule  3.15.

                  3.15.2. CONDITION.  Except as set forth on Disclosure Schedule
3.15, all  receivables  shown on  the  Interim Balance Sheet and all receivables
accrued by it since the Interim  Balance Sheet Date,  have been collected or, to
its  knowledge,  are  collectible  in  the  aggregate  amount  shown,  less  any
allowances  for  doubtful  accounts  reflected  therein,  and,  in the  case  of
receivables  arising  since the  Interim  Balance  Sheet  Date,  any  additional
allowance  in  respect  thereof  calculated  in a  manner  consistent  with  the
allowance  reflected in the Interim Balance Sheet, it being  understood that the
foregoing  representation  and  warranty  is not a guaranty of  collection.  All
material plant, equipment and personal property owned by it and its Subsidiaries
and regularly  used in its business is in good  operating  condition and repair,
ordinary wear and tear excepted.

         3.16.  REAL PROPERTY.

                  3.16.1.  REAL PROPERTY.  Disclosure Schedule   3.16 lists (a)
each parcel of real property in which it or its  Subsidiaries  have an ownership
interest  and  describes  the  plants,  buildings,  structures,   installations,
fixtures,  betterments,   additions  and  other  improvements  located  thereon,
together with all easements  used or useful in connection  therewith  (the "Real
Property"), and (b) all Encumbrances upon the Real Property.

                  3.16.2. REAL PROPERTY LEASES. Disclosure Schedule   3.16 lists
all of its and its Subsidiaries'  Real Property Leases.  Complete copies of such
Real Property Leases, including all material amendments thereto, have previously
been delivered or made available by Holdings to the Company or by the Company to
Holdings,  as the case may be. Such Real Property Leases grant leasehold estates
free and clear of all  Encumbrances,  except Permitted  Encumbrances.  Such Real
Property  Leases are in full force and effect and, to its knowledge with respect
to any party  other  than it or any  Subsidiary,  are  binding  and  enforceable
against each of the parties thereto in accordance with their  respective  terms.
Neither it nor, to its knowledge  with respect to any party other than it or any
Subsidiary, any other party to any of such Real Property Leases, has committed a

                                       21
<PAGE>


material breach or default under any Real Property Lease,  nor, to its knowledge
with respect to any party other than it or any  Subsidiary,  has there  occurred
any event  that with the  passage  of time or the giving of notice or both would
constitute  such a breach or default,  nor are there any facts or  circumstances
known to it that would reasonably indicate that it or any of its Subsidiaries is
likely to be in material  breach or default  thereunder.  Disclosure    Schedule
3.16  correctly  identifies  each such Real  Property  Lease that  requires  the
consent of any third  party in  connection  with the  transactions  contemplated
hereby. No material construction, alteration or other leasehold improvement work
with  respect  to the real  property  covered by any such Real  Property  Leases
remains to be paid for or to be performed by it or any Subsidiary.

                  3.16.3. CONDITION. All buildings,  structures and fixtures, or
parts thereof,  used by it or any of its  Subsidiaries  in the conduct of its or
their  business are in good  operating  condition and repair,  ordinary wear and
tear  excepted,  and are insured with coverages that are usual and customary for
similar properties and similar businesses or are required, pursuant to the terms
of its  Real  Property  Leases  or the  terms  of the  Encumbrances  on its Real
Property,  to be insured by third  parties.  The zoning of its Real Property and
the property subject to its Real Property Leases permits the presently  existing
improvements and the  continuation of the business  presently being conducted on
such Real Property and property subject to Real Property Leases.

         3.17.  INTELLECTUAL PROPERTY.

                  3.17.1. LIST OF INTELLECTUAL  PROPERTY.  Disclosure   Schedule
3.17  lists  all  patents,   trademarks,  trade  names,  service  marks,  logos,
copyrights,  and licenses,  and any applications  therefor,  that are used in or
necessary to its or any of its  Subsidiaries'  businesses as now being conducted
or as currently proposed to be conducted (other than software programs that have
not  been  customized  for  its or such  subsidiary's  use)  (collectively,  and
together with any technology,  know-how, trade secrets, processes,  formulas and
techniques  used in or  necessary to its or any of its  Subsidiaries'  business,
"Proprietary Rights"). It and its Subsidiaries own, or are licensed or otherwise
have the full and unrestricted  right to use, all Proprietary  Rights used in or
necessary  to its or  its  Subsidiaries'  business,  and no  other  intellectual
property  rights,  privileges,  licenses,  contracts  or other  instruments,  or
evidences of interests, are necessary to the conduct of its or its Subsidiaries'
business.

                                       22
<PAGE>



                  3.17.2.  RIGHTS IN INTELLECTUAL  PROPERTY;  No Infringement In
any  instance  where  its  or any of its  Subsidiaries'  rights  to  Proprietary
Information  arise under a license or similar agreement (other than for software
programs that have not been customized for its or such  subsidiary's  use), such
licenses and  agreements  are set forth in disclosure  schedule   3.17, and such
rights are licensed  exclusively to it or such subsidiary except as indicated in
disclosure  schedule   3.17. Except as set forth in Disclosure  Schedule   3.17,
neither it nor any of its  Subsidiaries  has any  obligation to  compensate  any
other Person or the use of  any proprietary  information.   Disclosure Schedule
3.17 lists every instance in which it or any of its  Subsidiaries has granted to
any other  Person  any  license  or other  right to use in any manner any of the
Proprietary  Information,  whether or not  requiring  the  payment of  royalties
(other than  licenses of  commercially  available  software  entered into in the
ordinary  course of  business).  No other  Person has an interest in or right or
license to use any of its or its Subsidiaries'  Proprietary Information.  To its
knowledge,  none of its or any of its Subsidiaries'  Proprietary  Information is
being  infringed  by others,  or is subject to any  outstanding  order,  decree,
judgment or  stipulation.  No  litigation  or other  proceeding in or before any
court or other Governmental  Entity or adjudicatory,  arbitral or administrative
body  either  (a)  relating  to it  or  any  of  its  Subsidiaries'  Proprietary
Information or (b) charging it or any of its Subsidiaries  with  infringement of
any patent, trademark, copyright, license or other proprietary right, is pending
or, or to its knowledge,  threatened,  nor is there, to its knowledge, any basis
for  any  such  litigation  or  proceeding.  It and  its  Subsidiaries  maintain
reasonable security measures for the preservation of the secrecy and proprietary
nature of such of their Proprietary Information as constitutes trade secrets.

                  3.17.3. YEAR 2000 READINESS. EXCEPT AS SET FORTH IN DISCLOSURE
SCHEDULE    3.17,  neither  it  nor any of its  Subsidiaries  has  incurred  any
business  disruption as a result of any instance in which  computer  hardware or
software was not Year 2000  Compliant.  It has received  assurances of Year 2000
Compliance from its material vendors and, to the extent material to its business
and operations, its customers, financial institutions, payroll service providers
and retirement plan administrators. "Year 2000 Compliant" means, with respect to
computer hardware and software, that such hardware and software (a) did and will
accurately receive,  record, store, provide,  recognize and process all date and
time  data  from,  during,  into and  between  the  twentieth  and  twenty-first
centuries;  (b) did and will accurately perform all date-dependent  calculations
and  operations  (including  mathematical  operations,  sorting,  comparing  and
reporting)  from,  during,  into and  between  the  twentieth  and  twenty-first
centuries;  and (c) did and will not  malfunction,  cease to function or provide
invalid or incorrect results as a result of (i) the change of century, (ii) date
data,  including date data which represents or references different centuries or
more than one century or (iii) the  occurrence of any  particular  date; in each
case without human intervention, other than original data entry.

         3.18.  AGREEMENTS, CONTRACTS AND COMMITMENTS.

     3.18.1.  CONTRACTS.  Except as set forth on its  Disclosure  Schedule 3.18,
neither it nor any of its Subsidiaries is a party to:

     (a) any employment agreement with any present employee,  officer,  director
or consultant (or former employees,  officers,  directors and consultants to the
extent there remain at the date hereof  obligations to be performed by it or any
such Subsidiary);

     (b) any  agreement  for  personal  services  or  employment  with a term of
service  or  employment  specified  in the  agreement  in  which  it or any such
Subsidiary has agreed on the  termination of such agreement to make any payments
greater than those that would otherwise be imposed by law;

     (c) any agreement to guarantee the obligations of others;

     (d)  any  agreement  or  commitment   containing  a  covenant  limiting  or
purporting to limit the freedom of it or any such Subsidiary to compete with any
Person in any geographic area or to engage in any line of business;

     (e) any joint venture or profit-sharing agreement;

                                       23
<PAGE>



     (f)  except  for trade  indebtedness  incurred  in the  ordinary  course of
business and, prior to the Interim Balance Sheet Date,  reflected on the Interim
Balance  Sheet,  any loan or credit  agreements  providing  for the extension of
credit to it or any such  Subsidiary or any instrument  evidencing or related in
any way to  indebtedness  incurred  in the  acquisition  of  companies  or other
entities or indebtedness  for borrowed money by way of direct loan, sale of debt
securities,  purchase money obligation,  conditional sale, lease,  guarantee, or
otherwise that individually is in the amount of $50,000 or more;

     (g) any license or royalty agreement other than those
disclosed on its Disclosure Schedule  3.17;

     (h) any  distribution,  VAR or OEM agreement  (identifying any that contain
exclusivity provisions);

     (i) any  agreement  or  arrangement  with any third  party to  develop  any
intellectual  property or other asset  expected to be used or currently  used or
useful in the its or any such Subsidiary's business;

     (j) any agreement or arrangement  for it or any such  Subsidiary to develop
any intellectual property or other asset for any third party;

     (k)  any  agreement  or  arrangement  providing  for  the  payment  of  any
commission based on sales;

     (l)  any  agreement  for  the  sale  or  license  by or to it or  any  such
Subsidiary of  materials,  products,  services or supplies that involves  future
payments by or to it or such Subsidiary of more than $50,000;

     (m) any  agreement  for the  purchase  or  capital  lease by it or any such
Subsidiary of any materials,  equipment (including rolling stock),  services, or
supplies, that either (i) involves a binding commitment by it or such Subsidiary
to make future  payments in excess of $50,000 and cannot be  terminated by it or
such  Subsidiary  without penalty upon less than three months notice or (ii) was
not entered into in the ordinary course of business;

     (n) any agreement or commitment for the  acquisition,  construction or sale
of fixed assets owned or to be owned by it or any such  Subsidiary that involves
future payments by it or such Subsidiary of more than $50,000;

     (o) any  agreement  or  commitment  to which any of its  present  or former
directors  or  officers  (or their  Affiliates  or  members  of their  immediate
families) or  Affiliates  (or  directors or officers of an  Affiliate)  are also
parties;

     (p) any agreement not described above  (ignoring,  solely for this purpose,
any dollar  amount  thresholds in those  descriptions)  involving the payment or
receipt by it or any such  Subsidiary of more than $50,000,  other than the Real
Property Leases; or

                                       24
<PAGE>



     (q) any  agreement  not  described  above that was not made in the ordinary
course of business and that is material to the  financial  condition,  business,
operations,  assets,  results  of  operations  or  prospects  of it or any  such
Subsidiary.

                  3.18.2.  VALIDITY.  Except  as set  forth  on  its  Disclosure
Schedule     3.18,  all  contracts,  leases,  instruments,  licenses  and  other
agreements or documents described or referred to thereon are enforceable against
it, and to its knowledge,  against the other parties thereto, and neither it nor
any of its Subsidiaries has, nor, to its knowledge, has any other party thereto,
committed  any  material  breach  of or  default  under  the  terms  of any such
contract,  lease,  instrument,  license  or other  agreement  or  document.  Its
Disclosure Schedule   3.18  identifies  each  agreement and other  document set
forth thereon or disclosed by it on another  section of itS Disclosure Schedule
that requires the consent of a third party in connection  with the  transactions
contemplated hereby.

         3.19. INSURANCE.  Its Disclosure Schedule   3.19 lists all contracts of
insurance  and  indemnity  (not  shown  on  another  section  of its  Disclosure
Schedule)  in  force  at  the  date  hereof  with  respect  to it or  any of its
Subsidiaries  (collectively,  the "Insurance  Contracts").  All of the Insurance
Contracts are in full force and effect,  with no default thereunder by it or any
such  Subsidiary  that  could  permit  the  insurer  to deny  payment  of claims
thereunder.  The  execution  and delivery of this  Agreement by it or any of its
Affiliates,  and the consummation of the transactions  contemplated hereby, will
not cause it or any of its  Subsidiaries to be in violation or default under any
Insurance Contracts,  nor, to its knowledge,  entitle any other party thereto to
terminate  or  modify  an  Insurance  Contract.   Neither  it  nor  any  of  its
Subsidiaries has received notice from any insurance  carriers that any insurance
premiums  will be  materially  increased  in the  future  or that any  insurance
coverage  provided  under the Insurance  Contracts  will not be available in the
future on substantially  the same terms as now in effect.  Neither it nor any of
its Subsidiaries has received or given a notice of cancellation  with respect to
any of the Insurance Contracts.

         3.20.  BANKING  RELATIONSHIPS.  Its  Disclosure Schedule   3.20 hereto
shows the names and  locations  of all banks and trust  companies in which it or
any of its  Subsidiaries  has accounts,  lines of credit or safety deposit boxes
and,  with respect to each  account,  line of credit or safety  deposit box, the
names of all persons authorized to draw thereon or to have access thereto.

         3.21. NO APPRAISAL  RIGHTS.  Its  stockholders  will not be entitled to
dissenters'  rights of appraisal or similar rights in connection with the Merger
or the transactions contemplated in connection therewith.

         3.22.  SUPPLIERS,  DISTRIBUTORS  AND CUSTOMERS.  To its knowledge,  the
relationships of it and its  Subsidiaries its and their suppliers,  distributors
and customers  are  satisfactory  commercial  working  relationships.  Since the
Interim Balance Sheet Date, no material supplier,  distributor or customer of it
or any such Subsidiary has canceled or otherwise  modified its relationship with
it or any such  Subsidiary  in a  manner  materially  adverse  to it or any such
Subsidiary and, to its knowledge, no supplier,  distributor or customer of it or
any of its Subsidiaries has any intention to do so.

                                       25
<PAGE>



         3.23.  PRODUCT  WARRANTIES.  Each  product  sold,  leased,  licensed or
delivered by it or any of its Subsidiaries has been in material  conformity with
all applicable  contractual  commitments and all express and implied warranties,
and neither it nor any such Subsidiary has any Liability, individually or in the
aggregate  (and none of them has any  knowledge  of any basis for any present or
future action, suit,  proceeding,  hearing,  investigation,  charge,  complaint,
claim,  or demand  giving  rise to any such  Liability,  individually  or in the
aggregate)  that could  reasonably  be  expected to result in costs to it or any
such  Subsidiary,  individually  or in the  aggregate,  in excess of $25,000 for
replacement  or repair  thereof or other  damages in connection  therewith.  Its
Disclosure Schedule   3.23 includes copies of the standard terms and conditions
of license and sale for it and its Subsidiaries  (containing APPLICABLE WARRANTY
and  indemnity  provisions).  Except  as  set forth on its  Disclosure Schedule
3.23, no product sold,  leased,  licensed or delivered by the Company is subject
to any guarantee,  warranty,  or other indemnity beyond the applicable  standard
terms  and  conditions  of  license  and  sale and such  other  indemnities  and
warranties disclosed on its Disclosure Schedule  3.23.

         3.24. ACQUIRED BUSINESS.  The Company represents that upon consummation
of the  Contribution to Parent by the Stockholders of all of their capital stock
of the Company,  Parent will own, of record and beneficially,  free and clear of
all liens, pledges, charges, security interests, encumbrances, or adverse claims
of any kind  whatsoever,  all of the capital  stock of the  Company  outstanding
immediately prior to the Effective Time.

         3.25.  ACCOUNTING SYSTEM. It maintains a system of internal  accounting
controls  sufficient to provide  reasonable  assurance that (a) transactions are
executed in accordance with managements  general or specific authorizations; (b)
transactions  are  recorded as  necessary  to permit  preparation  of  financial
statements  in a manner  consistent  with its past  accounting  practices and to
maintain  asset  accountability;  (c)  access  to assets  is  permitted  only in
accordance  with  managements   general or specific  authorization;  and (d) the
recorded  accountability  for assets is  compared  with the  existing  assets at
reasonable  intervals  and  appropriate  action  is taken  with  respect  to any
differences.

         3.26. SEC STATEMENTS,  REPORTS AND DOCUMENTS.  Holdings represents that
it has  delivered or made  available to the Company true and complete  copies of
(a) all reports on Forms 10-K or 10-KSB, 10-Q or 10-QSB and 8-K filed by it with
the SEC since January 1, 1999,  and (b) all  amendments to such reports filed by
Holdings  with the SEC (the  documents  referred to in clauses (a) and (b) being
hereinafter  referred  to  as  the  "Holdings  Public  Filings").  As  of  their
respective  dates, the Holdings Public Filings complied in all material respects
with all applicable  requirements of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder, and did not contain any untrue
statement  of a material  fact or omit to state a material  fact  required to be
stated  therein or necessary  to make the  statements  therein,  in light of the
circumstances  under which they were made, not misleading.  None of the Holdings
Public Filings is required to be amended or supplemented.

         3.27.  FAIRNESS OPINION.  Holdings  represents that it has received the
oral  opinion of Duff & Phelps,  LLC,  its  financial  advisor  (the  "Financial
Advisor"),  that the  Merger  and the  Contribution  and the other  transactions
contemplated  thereby  are  fair,  from  a  financial  point  of  view,  to  its
stockholders.

                                       26
<PAGE>



         3.28. CREDIT  COMMITMENT.  Each of Holdings and the Company  represents
that it has entered into a credit  commitment  with Webster Bank as set forth in
commitment letter of Webster Bank dated as of April 14, 2000.

         3.29.  FULL   DISCLOSURE.   Neither  this  Agreement  nor  any  written
statement, report or other document furnished or to be furnished by it or any of
its  Subsidiaries   pursuant  to  this  Agreement  or  in  connection  with  the
transactions contemplated hereby contains, or will contain, any untrue statement
of a  material  fact or omits to state a  material  fact  necessary  to make the
statements contained herein or therein not false or misleading. There is no fact
known to it or any of its Subsidiaries which has not been disclosed to Holdings,
in the case of the  Company,  or to the Company,  in the case of Holdings,  that
could  reasonably  be  expected  to have a  Material  Adverse  Effect on (a) the
ability of it or any of its Subsidiaries to perform this Agreement and carry out
the  transactions   contemplated  hereby,  or  (b)  its  consolidated  financial
condition,  business,  operations,  assets, properties, results of operations or
prospects.

                                    ARTICLE 4

               REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS

         Each of the  Stockholders,  severally and not jointly,  represents  and
warrants to Parent, Holdings and Merger Sub as follows:

         4.1.  AUTHORITY.  Such  Stockholder  has the  power to enter  into this
Agreement  and the  other  agreements  contemplated  hereby to be signed by such
Stockholder and to consummate the transactions  contemplated hereby and thereby.
Such  Stockholder  has  good  title  to  the  shares  of  company  common  stock
purportedly  owned by such  stockholder  as shown on Disclosure Schedule    3.2,
free and clear of all Encumbrances  other than  restrictions on transfer imposed
by reason of the issuance of such shares without  registration or  qualification
under  applicable  securities  laws.  This  Agreement  and the other  agreements
contemplated hereby to be signed by such Stockholder have been duly executed and
delivered by such Stockholder,  and constitute the valid and binding obligations
of such  Stockholder,  enforceable  against such  Stockholder in accordance with
their respective terms,  subject to the  qualifications  that enforcement of the
rights and  remedies  created  hereby and thereby is subject to (a)  bankruptcy,
insolvency, reorganization,  fraudulent conveyance, moratorium and other laws of
general  application  affecting  the rights and  remedies of  creditors  and (b)
general   principles  of  equity  (regardless  of  whether  the  enforcement  is
considered  in a  proceeding  in equity or at law).  On or before the  Effective
Date, the other agreements  contemplated  hereby to be executed and delivered by
any  Stockholder  on or before the  Effective  Date will have been  executed and
delivered by such  Stockholder,  and, upon such  execution  and  delivery,  will
constitute  valid  and  binding  obligations  of such  Stockholder,  enforceable
against such Stockholder in accordance with their respective  terms,  subject to
the  qualifications  that enforcement of the rights and remedies created thereby
are  subject  to  (a)   bankruptcy,   insolvency,   reorganization,   fraudulent
conveyance,  moratorium  and other laws of  general  application  affecting  the
rights  and  remedies  of  creditors  and  (b)  general   principles  of  equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law).

                                       27
<PAGE>



         4.2. NO CONFLICT.  Neither the execution and delivery of this Agreement
by such Stockholder and the other agreements contemplated hereby to be signed by
such Stockholder,  nor the performance by such Stockholder of such Stockholder's
obligations hereunder or thereunder, nor the consummation by such Stockholder of
the transactions  contemplated hereby or thereby will with or without the giving
of  notice  or the  lapse of time,  or both,  conflict  with,  or  result in any
violation or breach of, or constitute a default under, or result in any right to
accelerate or result in the creation of any Encumbrance pursuant to, or right of
termination  under,  any  provision  of any note,  mortgage,  indenture,  lease,
instrument or other agreement,  Permit, concession,  grant, franchise,  license,
judgment,  order, decree, statute,  ordinance,  rule or regulation to which such
Stockholder is a party or by which such Stockholder or any of such Stockholder's
assets or properties is bound or which is applicable to such  Stockholder or any
of such Stockholders  assets or properties.

         4.3 NO BROKER'S  OR FINDER'S  FEES.  Such  Stockholder  has not paid or
become obligated to pay any fee or commission to any broker,  finder,  financial
advisor or intermediary in connection with the transactions contemplated by this
Agreement.

         4.4  SOPHISTICATION.  Such Stockholder by reason of such  Stockholder's
business and financial experience,  and the business and financial experience of
those  persons  retained by such  Stockholder  to advise such  Stockholder  with
respect  to the  cash  and  shares  of  Parent  Stock  to be  received  by  such
Stockholder by reason of the  Contribution,  has such knowledge,  sophistication
and experience in business and financial  matters as to be capable of evaluating
the merits and risks of the  transactions  contemplated by this Agreement.  Such
Stockholder  acknowledges  that he or it has been granted the opportunity to ask
questions of, and receive answers from,  representatives of Holdings  concerning
Holdings and Parent and the Parent Stock that such  Stockholder  is receiving by
reason of the Contribution,  and to obtain any additional  information that such
Stockholder  deems  necessary  to  verify  the  accuracy  of  the  answers  such
Stockholder received from such representatives.  Such Stockholder represents and
warrants that such Stockholder is an "accredited investor" within the meaning of
Rule 501 promulgated under the Securities Act.

                                    ARTICLE 5

             REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

         Parent and Merger Sub, jointly and severally,  represent and warrant to
the Company and the Stockholders as follows:

         5.1.  CORPORATE  STATUS OF PARENT  AND MERGER  SUB.  Each of Parent and
Merger Sub is a  corporation  duly  incorporated,  validly  existing and in good
standing  under  the laws of the  jurisdiction  of its  incorporation,  with the
requisite  corporate power to own, operate and lease its properties and to carry
on its business as now being conducted.

         5.2.  AUTHORITY FOR AGREEMENT; NONCONTRAVENTION

                                       28
<PAGE>



                  5.2.1.  AUTHORITY.  Each  of  Parent  and  Merger  Sub has the
corporate power and authority to enter into this Agreement and to consummate the
transactions  contemplated  hereby. The execution and delivery of this Agreement
and the consummation of the transactions  contemplated hereby have been duly and
validly  authorized  by the boards of directors of Parent and Merger Sub and the
stockholder  of Merger  Sub and no other  corporate  proceedings  on the part of
Parent or Merger Sub are  necessary to authorize  the  execution and delivery of
this Agreement and the  consummation of the  transactions  contemplated  hereby.
This Agreement has been duly executed and delivered by Parent and Merger Sub and
constitutes  the  valid  and  binding  obligation  of  Parent  and  Merger  Sub,
enforceable  against each of them in accordance  with its terms,  subject to the
qualifications  that  enforcement of the rights and remedies  created hereby are
subject to (a) bankruptcy,  insolvency,  reorganization,  fraudulent conveyance,
moratorium  and other  laws of  general  application  affecting  the  rights and
remedies  of  creditors  and (b) general  principles  of equity  (regardless  of
whether  enforcement  is  considered in a proceeding in equity or at law). On or
before  the  Effective  Date,  the other  agreements  contemplated  hereby to be
executed and delivered by Parent and Merger Sub on or before the Effective  Date
will have been  executed and  delivered by Parent and Merger Sub, and, upon such
execution and delivery,  will constitute valid and binding obligations of Parent
and Merger Sub,  enforceable  against  Parent and Merger Sub in accordance  with
their respective terms,  subject to the  qualifications  that enforcement of the
rights and remedies  created thereby are subject to (a) bankruptcy,  insolvency,
reorganization,  fraudulent  conveyance,  moratorium  and other  laws of general
application  affecting  the rights and  remedies  of  creditors  and (b) general
principles  of equity  (regardless  of whether  enforcement  is  considered in a
proceeding in equity or at law).

                  5.2.2. NO CONFLICT. Neither the execution and delivery of this
Agreement by Parent or Merger Sub, nor the  performance  by Parent or Merger Sub
of its obligations  hereunder,  nor the  consummation by Parent or Merger Sub of
the  transactions  contemplated  hereby  will (a)  conflict  with or result in a
violation of any provision of the  Certificates of  Incorporation  or by-laws of
Parent or Merger  Sub,  or (b) with or without the giving of notice or the lapse
of time,  or both,  conflict  with,  or result in any violation or breach of, or
constitute a default  under,  or result in any right to  accelerate or result in
the creation of any Encumbrance  pursuant to, or right of termination under, any
provision  of  any  note,  mortgage,   indenture,  lease,  instrument  or  other
agreement,  Permit,  concession,  grant, franchise,  license,  judgment,  order,
decree, statute,  ordinance, rule or regulation to which Parent or Merger Sub is
a party  or by  which  either  of  them or any of  their  respective  assets  or
properties  is bound or which is  applicable  to  either of them or any of their
assets or properties.  No authorization,  consent or approval of, or filing with
or notice  to,  any  Governmental  Entity is  necessary  for the  execution  and
delivery of this Agreement by Parent or Merger Sub or the consummation by Parent
or Merger Sub of the transactions contemplated hereby, except for (i) the filing
of the  Certificate of Merger with the Secretary of State of Delaware,  and (ii)
any  filings as may be required  under  applicable  federal or state  securities
laws.

         5.3  LITIGATION.  There  is  no  claim,  action,  suit  arbitration  or
proceeding  pending  or, to the  knowledge  of  Parent,  threatened  against  or
involving Parent which, if determined adversely to Parent, could have a material
adverse  effect  on  the  financial  condition,  business,  operations,  assets,
properties, results of operations or prospects of Parent.

                                       29
<PAGE>



         5.4 INTERIM OPERATIONS OF MERGER SUB. Parent and Merger Sub were formed
solely for the  purpose of  engaging in the  transactions  contemplated  by this
Agreement and have engaged in no business  activities other than as contemplated
by this Agreement.

                                    ARTICLE 6

                       CONDUCT PRIOR TO THE EFFECTIVE TIME

         Each of Holdings and the  Company,  in each case for itself and each of
its  Subsidiaries,  covenants and agrees as follows,  from and after the date of
this  Agreement  and until the  Effective  Time,  except as otherwise  expressly
contemplated  by or set forth in this  Agreement  or  expressly  consented to in
writing by the Company, in the case of Holdings,  or by Holdings, in the case of
the Company:

         6.1.  GENERAL  CONDUCT OF BUSINESS.  Between the date of this Agreement
and the Effective  Time or the date, if any, on which this  Agreement is earlier
terminated  pursuant  to its terms,  it shall (a) carry on its  business  in the
usual,  regular  and  ordinary  course  in  substantially  the  same  manner  as
heretofore  conducted,  pay its debts and taxes  when due  subject to good faith
disputes  over such debts or taxes,  pay or perform other  material  obligations
when due  subject  to good faith  disputes  over such  obligations,  and use all
reasonable  efforts  consistent  with past  practices  and  policies to preserve
intact its present  business  organization,  keep  available the services of its
present  officers and employees and preserve its  relationships  with customers,
suppliers and others having business  relationships with it, to the end that its
goodwill and ongoing  business be  unimpaired  at the  Effective  Time,  and (b)
promptly notify  Holdings,  in the case of the Company,  or the Company,  in the
case of Holdings,  of any event or occurrence not in the ordinary  course of its
business which will result or could reasonably be expected to result in costs to
it,  individually  or in the  aggregate,  in excess of  $100,000,  or that could
prevent or materially delay the  consummation of the  transactions  contemplated
hereby.  Without limiting the generality of the foregoing except as indicated in
the specific exceptions set forth below, it shall not:

                         (a)  amend its Certificate of Incorporation or by-laws;

                         (b) declare  or  pay any dividends or  distributions on
         its  outstanding  shares  of  capital  stock  nor  purchase,  redeem or
         otherwise  acquire for consideration any shares of its capital stock or
         other  securities  except in accordance with agreements  existing as of
         the date hereof;

                         (c)  issue  or  sell any  shares of its  capital  stock
         (except pursuant to any options, stock appreciation or purchase rights,
         warrants,  conversion rights or other rights, securities or commitments
         obligating  it to issue or sell any  shares  of its  capital  stock and
         outstanding as of the date hereof), effect any stock split or otherwise
         change its  capitalization  as it exists on the date hereof,  or issue,
         grant,  or sell any options,  stock  appreciation  or purchase  rights,
         warrants,  conversion rights or other rights, securities or commitments
         obligating it to issue or sell any shares of its capital stock,  or any
         securities  or   obligations   convertible   into,  or  exercisable  or
         exchangeable for, any shares of its capital stock;

                                       30
<PAGE>



                           (d)   borrow  or  agree  to   borrow   any  funds  or
         voluntarily  incur, or assume or become subject to, whether directly or
         by way of guaranty or otherwise,  any  obligation or Liability,  except
         obligations incurred in the ordinary course of business consistent with
         past practices and except for debt incurred  pursuant to the commitment
         letter referred to in Section 3.28 and the Subordinated Notes;

                           (e) pay,  discharge or satisfy any claim,  obligation
         or Liability in excess of $50,000 (in any one case) or $100,000 (in the
         aggregate),  other than the payment,  discharge or  satisfaction in the
         ordinary  course of business of  obligations  reflected  on or reserved
         against in the Interim  Balance  Sheet,  or incurred  since the Interim
         Balance Sheet Date in the ordinary  course of business  consistent with
         past;

                           (f) except as required by  applicable  law,  adopt or
         amend  in any  material  respect,  any  agreement  or  plan  (including
         severance arrangements) for the benefit of its employees;

                           (g) sell,  mortgage,  pledge or otherwise encumber or
         dispose of any of its assets which are material, individually or in the
         aggregate,  to its business,  except in the ordinary course of business
         consistent with past;

                           (h) acquire by merging or  consolidating  with, or by
         purchasing any equity  interest in or a material  portion of the assets
         of, any business or any corporation,  partnership interest, association
         or other  business  organization  or  division  thereof,  or  otherwise
         acquire  any  assets  which  are  material,   individually  or  in  the
         aggregate,  to the its  business,  except  in the  ordinary  course  of
         business consistent with past practices;

                           (i) grant any bonus;  grant any  increase in the rate
         of pay or  otherwise  increase  the  compensation  payable or to become
         payable to any  officer,  director,  key salaried  employee,  or agent;
         grant any increase in the rates of pay or other compensation payable to
         its  employees,  other than  increases in the  salaries of  non-officer
         employees made in the ordinary course of business  consistent with past
         practices;  or  institute  or increase  the  benefits  under any bonus,
         insurance, pension or other benefit plan, payment, contract, commitment
         or arrangement;

                                       31
<PAGE>



                           (j) enter  into any  transaction  with any  Affiliate
         other than (A)  transactions  involving only the elimination of rights,
         claims  or  other   benefits  of  such   Affiliate,   with  no  adverse
         consequences to it (including  without  limitation the obtaining of the
         terminations, consents and waivers set forth in its Disclosure Schedule
         3.5);  (B)  the payment of compensation  and  reimbursement of expenses
         in  accordance  with  existing  employment  agreements  and usual  past
         practices); (C) subject to this Section, sales of goods and services to
         its  Subsidiaries  in the ordinary  course of business  consistent with
         past  practices;  and (D) the  transfer  of funds  to its  Subsidiaries
         solely for the  purpose of  investment  in bank time  deposits or money
         market investments;

                           (k) dispose of, permit to lapse, or otherwise fail to
         preserve the its right to use its Proprietary  Rights or enter into any
         settlement  regarding  the  breach  or  infringement  of,  any  of  its
         Proprietary Rights, or modify any existing rights with respect thereto,
         other than in the  ordinary  course of  business  consistent  with past
         practices, and other than any such disposal, lapse, failure, settlement
         or  modification  that does not  have,  and  could  not  reasonably  be
         expected to have, a Material Adverse Effect;

                           (l) enter into any contract or commitment or take any
         other  action  that is not in the  ordinary  course of its  business or
         could  reasonably  be  expected  to  have  an  adverse  impact  on  the
         transactions  contemplated  hereunder  or that  would  result  or could
         reasonably be expected to result in costs to it, individually or in the
         aggregate, in excess of $100,000;

                           (m) amend in any  material  respect any  agreement to
         which it is a party or to which any of its property or assets is bound,
         the  amendment of which will result or could  reasonably be expected to
         result in costs to it,  individually OR IN THE AGGREGATE,  IN EXCESS OF
         $100,000,  except as provided  herein with respect to the  execution of
         new  employment  agreements  as set forth in Section  7.9 or  otherwise
         executed in connection with the execution of this Agreement;

                           (n) waive,  release,  transfer or permit to lapse any
         claims or rights (i) that has a value,  or involves  payment or receipt
         by it, of more than  $25,000 or (ii) the waiver,  release,  transfer or
         lapse of which would result or could  reasonably  be expected to result
         in costs to it in excess of $25,000;

                           (o) make any  change in any  method of accounting  or
         accounting practice; or

                           (p) agree,  whether in writing or otherwise,  to take
any action described in this Section.

         6.2. INSURANCE.  It shall maintain with financially sound and reputable
insurance companies, funds or underwriters adequate insurance (including without
limitation  insurance described in its Disclosure Schedule   3.19) of the kinds,
covering  such  risks,  and in  such  amounts,  and  with  such  deductible  and
exclusions, as are consistent with past practices.

                                       32
<PAGE>



         6.3.  CONSENTS OF THIRD  PARTIES.  It shall  employ its best efforts to
secure, before the Closing Date, the consent, in form and substance satisfactory
to the other party and its  counsel,  to the  consummation  of the  transactions
contemplated  by  this  Agreement  by  each  party  to  any  of  its  contracts,
commitments,  or obligations  under which such  transactions  would constitute a
default, or would accelerate,  modify or vest any rights or obligations of it or
any other party  thereto,  or would permit  cancellation  or  termination by any
other party of any such contract, commitment or obligation.

         6.4.  COMPLIANCE  WITH  LAWS.  It shall  duly  comply  in all  material
respects with all applicable laws, rules, regulations and orders.

         6.5.  ACCESS AND  INFORMATION.  It shall afford to the other and to its
officers, employees,  accountants,  counsel and other authorized representatives
full and complete access, upon 24 hours advance telephone notice, during regular
business hours, throughout the period prior to the earlier of the Effective Time
or the  termination  of this  Agreement  pursuant to its terms,  to its offices,
properties,  books and records,  and shall use  reasonable  efforts to cause its
representatives and independent public accountants to furnish to the other party
such  additional  financial and operating  data and other  information as to its
business,  customers,  vendors and properties as the other may from time to time
reasonably  request.  It shall  exercise  such  rights  in a manner so as not to
interfere unreasonably with the normal business operations of the other.

         6.6. PUBLIC DISCLOSURE.  It agrees that its non-disclosure  obligations
contained in a Mutual Agreement of Confidentiality dated November 8, 1999 by and
between  Holdings  and the  Company,  and any other  non-disclosure  obligations
agreed to in writing by Holdings and the Company, shall remain in full force and
effect in  accordance  with the terms of such  letter  agreement  and such other
writings.  Unless  otherwise  required by law, any press release or other public
disclosure  of  information   regarding  this  Agreement  or  the   transactions
contemplated hereby will be prepared by Holdings, subject to the approval of the
Stockholders, which approval shall not be unreasonably withheld or delayed.

                                    ARTICLE 7

                              ADDITIONAL AGREEMENTS

                                       33
<PAGE>



         7.1.  FILING OF PROXY  STATEMENT/PROSPECTUS.  Parent and Holdings shall
prepare  and file  with the SEC a  registration  statement  on Form S-4 or other
appropriate form (including all duly filed  amendments and supplements  thereto,
the "Registration Statement"), relating to the registration under the Securities
Act of the Parent  Stock to be issued in the Merger  and the  Contribution,  and
shall file with appropriate  state securities  administrators  such registration
statements or other documents,  if any, as may be required under applicable blue
sky laws to register or qualify  such shares in such states as are  necessary to
consummate  the  Merger and the  Contribution.  Parent  and  Holdings  shall use
commercially  reasonable  efforts to have the  Registration  Statement  declared
effective by the SEC as promptly as  practicable.  The parties to this Agreement
agree to correct  promptly any  information  provided by each of them for use in
the Registration Statement that contains any untrue statement of a material fact
required to be stated  therein or necessary to make the statements  therein,  in
the light of the circumstances  under which they were made, not misleading.  The
prospectus contained in the Registration  Statement will also constitute a proxy
statement of Holdings for the meeting of its  stockholders to be held to approve
the  Merger  (the  "Stockholder  Approval").  Holdings  shall,  as  promptly  as
practicable,  take all steps  necessary to call,  give notice of,  convene and a
hold a meeting of its  stockholders for the purpose of approving this Agreement,
the Merger, and the other transactions  contemplated hereby, and shall recommend
to its  stockholders,  and  solicit  proxies  for,  and in general  use its best
commercially   reasonable  efforts  to  obtain,  the  Stockholder  Approval  and
stockholder  approval of all other  matters  that  Holdings  shall submit to its
stockholders.

         7.2.   PROCEDURES  IN  CONNECTION  WITH  THE  REGISTRATION   STATEMENT;
COOPERATION.  Parent and  Holdings  shall  promptly  notify  the  Company of the
receipt by Parent or  Holdings  of any  comments  of or requests by the SEC with
respect to the Registration  Statement and will promptly supply the Company with
copies of correspondence  between the Parent,  Holdings and its representatives,
on the one hand,  and the SEC or members  of its staff or any other  appropriate
government officials,  on the other, with respect to the Registration Statement.
The  parties to this  Agreement  will use all  reasonable  efforts to obtain and
furnish the information  required to be included in the  Registration  Statement
and shall each use  commercially  reasonable  efforts to respond promptly to any
comments made by the SEC or any other governmental  official with respect to the
Registration  Statement and any  preliminary  versions  thereof and to cause the
proxy statement  contained  therein to be mailed to the stockholders of Holdings
as soon as practicable; provided, however, that Parent and Holdings shall direct
and control all  communications  with the SEC with  respect to the  Registration
Statement,  and the  Company and the  Stockholders  shall  cooperate  therewith.
Parent or Holdings shall advise the Company,  promptly after it receives  notice
thereof, of the time when the Registration Statement has become effective or any
amendment  or  supplement  thereto has been filed,  or the  issuance of any stop
order in any  jurisdiction,  of the  initiation or threat of any  proceeding for
such  purpose,  or of any request by the SEC for the  amendment or supplement of
the Registration Statement or for any additional information.

         7.3. BLUE SKY LAWS.  Parent and Holdings shall take such steps, if any,
as may be  necessary  to  comply  with the  securities  and blue sky laws of all
jurisdictions  which are  applicable  to the  issuance of shares of Parent Stock
pursuant to the Merger and the Contribution  except that it will not be required
to execute a general consent to service of process in jurisdictions where it has
not already  done so. The Company and the  Stockholders  shall use  commercially
reasonable  efforts to assist  Parent and Holdings as may be necessary to comply
with the securities and blue sky laws of all jurisdictions  which are applicable
in  connection  with  the  issuance  of  Parent  Stock  pursuant  hereto.   Each
Stockholder  represents  that such  Stockholder  has resided,  and  continues to
reside, in the State of Connecticut at all times since November 8, 1999.

         7.4.  AMERICAN STOCK EXCHANGE  LISTING.  Parent agrees to authorize for
listing on the American Stock Exchange,  prior to the Effective Time, the shares
of Parent Stock  issuable in  connection  with the Merger and the  Contribution,
upon official notice of issuance.

                                     34
<PAGE>

         7.5.  EXPENSES.  Parent and Holdings shall be responsible for their own
costs  and  expenses  in  connection   with  the  Merger,   including  fees  and
disbursements of consultants,  investment bankers and other financial  advisors,
brokers and finders,  counsel and accountants.  The Company shall be responsible
for its and the  Stockholders'  costs and expenses in connection with the Merger
and  the   Contribution,   including  fees  and  disbursements  of  consultants,
investment bankers and other financial  advisors,  brokers and finders,  counsel
and accountants.

         7.6.  EXCLUSIVITY.  From and after the date of this Agreement until the
earlier of the Effective  Time and  termination  of this Agreement in accordance
with  Article  10  hereof  (the  Exclusivity  Period),    the  Company  and  the
Stockholders shall not, directly or indirectly,  through any officer,  director,
employee,  Affiliate or agent of the Company or any  Stockholder,  or otherwise,
take any action to solicit, initiate, seek, entertain,  encourage or support any
inquiry,  proposal or offer from,  furnish any information to, or participate in
any negotiations with, any third party regarding any acquisition of the Company,
any merger or consolidation with or involving the Company, or any acquisition of
any material portion of the stock or assets or the Company.  The Company and the
Stockholders  agree that in no event shall the Company or any Stockholder accept
or  enter  into  an  agreement  concerning  any  such  third  party  acquisition
transaction  during the  Exclusivity  Period.  The Company and the  Stockholders
shall notify Parent and Holdings immediately after receipt by the Company or any
Stockholder  (or any  officer,  director,  employee,  Affiliate  or agent of the
Company or any  Stockholder)  at any time during the  Exclusivity  Period of any
unsolicited  proposal for, or inquiry  respecting,  any third party  acquisition
transaction  involving the Company or any request for nonpublic  information  in
connection  with such a proposal  or inquiry,  or for access to the  properties,
books or records of the  Company  by any  person,  or entity  that  informs  the
Company or any Stockholder  that it is considering  making,  or has made, such a
proposal or inquiry.  Such notice to Parent will indicate in  reasonable  detail
the  identity  of the person  making the  proposal  or inquiry and the terms and
conditions of such proposal or inquiry.

         7.7. TAX-FREE TREATMENT; TAX MATTERS CERTIFICATES. Parent, Holdings and
the Company  shall each use all  reasonable  efforts to cause the Merger and the
Contribution,  taken  together,  to be treated  as a  transaction  described  in
Section 351 of the Code. Parent and Holdings,  on the one hand, and the Company,
on the  other,  shall use all  reasonable  efforts  to obtain,  as  promptly  as
practicable  following  the date hereof and in any event prior to the  Effective
Time,  such oral or written  assurances  as it  reasonably  deems  sufficient to
enable it to  execute  and  deliver  to the  Company,  in the case of Parent and
Holdings,  or to Parent and Holdings,  in the case of the Company,  certificates
substantially  in the  forms set forth in  Exhibit  E hereto  (the "Tax  Matters
Certificates")  as an exhibit to the tax matters opinions to be delivered at the
Closing in accordance with Section 8.2.6 of this Agreement.

         7.8.  TRANSFER OF THE WATERTOWN,  CONNECTICUT  FACILITY AND THE RELATED
MORTGAGE DEBT; LEASES. At or before the Closing,  the Company shall transfer and
sell its  Watertown,  Connecticut  facility to one or more  Stockholders,  or an
entity  controlled by one or more of them, in consideration of the assumption by
such buyer or buyers of the mortgage debt currently  secured thereby,  and shall
cause the transfer or  assumption  to or by such buyer or buyers of the mortgage
debt currently secured thereby,  with no further liability therefor attaching to
the  Company  or any  other  corporate  party  to this  Agreement.  The sale and
transfer of the Watertown  facility  shall be  permissible  under this Agreement
notwithstanding  any other provision to the contrary  herein.  Contemporaneously
with the  execution and delivery of this  Agreement,  the Company and each other
party  thereto  has  executed  and  delivered  leases in the FORMS OF EXHIBIT F,
EXHIBIT G AND EXHIBIT H with respect to the facilities currently owned or leased
by the  Company  in  Watertown  and  Stamford,  Connecticut,  such  leases to be
effective at the Closing.

                                       35
<PAGE>



         7.9. EMPLOYMENT  AGREEMENTS.  Contemporaneously  with the execution and
delivery of this Agreement, Parent and Holdings' wholly owned subsidiary Vermont
Pure  Springs,  Inc. and each other party  thereto has  executed  and  delivered
employment  agreements  (which shall have the effect of terminating any existing
employment  agreements)  in the forms  attached  hereto as Exhibit I, Exhibit J,
Exhibit K, Exhibit L and Exhibit M with,  respectively,  Timothy  Fallon,  Bruce
MacDonald, Peter K. Baker,  John B. Baker  and  Henry E.Baker,  such  employment
agreements to be effective at the Closing.

         7.10.  LOCK-UP  AGREEMENTS.  At the Closing,  each of the  Stockholders
shall have furnished to Parent and Holdings a Lock-Up  Agreement,  substantially
in the form of Exhibit N, prohibiting until the first anniversary of the Closing
Date the sale, transfer,  pledge or other disposition by him or it of the shares
of Parent Stock received in connection with the Contribution.

         7.11. BOARD OF DIRECTORS OF PARENT. Prior to the Closing,  effective at
the Effective  Time, the board of directors of Parent will establish the size of
the full board at nine  directors,  six of whom shall be  current  directors  of
Holdings,  and will elect to the board  Peter  Baker,  Ross  Rapaport  and Henry
Baker.  Subject only to the fiduciary  duties of its directors,  with respect to
the first annual meeting of stockholders following the Closing,  Parent will use
its best  efforts to nominate  and cause Peter  Baker,  Ross  Rapaport and Henry
Baker to be elected as a member of the Board of Directors.

         7.12. DISCLOSURE SUPPLEMENTS.  From time to time prior to the Effective
Time, and in any event immediately prior to the effective time, each of Holdings
and the Company shall promptly  supplement or amend its Disclosure Schedule with
respect to any matter hereafter arising that, if existing,  occurring,  or known
at the date of this  Agreement,  would  have  been  required  to be set forth or
described  in such  Disclosure Schedule  or that is  necessary  to correct  any
information  in  such  Disclosure Schedule  that is or has  become  inaccurate.
Notwithstanding  the foregoing,  if any such supplement or amendment discloses a
Material  Adverse  Effect,  the  conditions to the other party's  obligations to
consummate the Merger and the  Contribution  set forth in Article 8 hereof shall
be deemed not to have been satisfied.

                                       36
<PAGE>

         7.13.  REASONABLE  EFFORTS.  Subject  to terms  and  conditions  herein
provided,  each of the parties agrees to use all reasonable  efforts to take, or
cause to be  taken,  all  action  and to do,  or cause  to be done,  all  things
necessary,  proper  or  advisable  under  applicable  laws  and  regulations  to
consummate  and make  effective  the Merger and the  Contribution  and the other
transactions contemplated by this Agreement.  Without limiting the generality of
the foregoing, the Parent, Holdings and the Company each will use all reasonable
efforts to obtain all approvals, authorizations,  consents and waivers from, and
give all notices to, any public or private  third  parties that are necessary on
its part in order to effect the transactions contemplated hereby.

                                    ARTICLE 8

                              CONDITIONS PRECEDENT

         8.1.  CONDITIONS  PRECEDENT  TO THE  OBLIGATIONS  OF  EACH  PARTY.  The
obligations  of the  parties  hereto to effect the  Merger and the  Contribution
shall be subject to the  fulfillment at or prior to the Closing of the following
conditions:

                  8.1.1.  NO  INJUNCTION.  No injunction or restraining or other
order issued by a court of competent  jurisdiction  that prohibits or materially
restricts  the  consummation  of the  Merger,  the  Contribution  or  the  other
transactions  contemplated hereby shall be in effect (each party agreeing to use
all  reasonable  efforts  to have  any  injunction  or other  order  immediately
lifted),  and no action or  proceeding  shall have been  commenced  seeking  any
injunction  or  restraining  or other  order that seeks to  prohibit,  restrain,
invalidate or set aside  consummation of the Merger,  the Contribution or any of
the other transactions contemplated hereby.

                  8.1.2. ILLEGALITY. There shall not have been any action taken,
and no statute,  rule or  regulation  shall have been  enacted,  by any state or
federal  government  agency  that would  prohibit  or  materially  restrict  the
consummation  of  the  Merger,   the  Contribution  or  the  other  transactions
contemplated hereby.

                  8.1.3.  PREMERGER  NOTIFICATION  COMPLIANCE.   To  the  extent
applicable,  if any,  all  requirements  under the  Hart-Scott-Rodino  Antitrust
Improvements Act of 1976 and the rules promulgated  thereunder applicable to the
transactions  contemplated  hereby  shall  have  been  met,  including,  without
limitation,  all  necessary  filing and  waiting  requirements,  and neither the
United States  Department of Justice nor the Federal Trade Commission shall have
raised objection to the transactions contemplated hereby.

                  8.1.4.  STOCKHOLDER APPROVAL.  Holdings  shall  have  obtained
 the Stockholder Approval specified in Section 7.1.

                  8.1.5.  CREDIT  COMMITMENT.  The credit  commitment of Webster
Bank  described  in  Section  3.28  shall be in full  force and effect as of the
Closing Date,  and all  conditions to the  disbursement  of funds  thereunder in
accordance with the terms and provisions thereof shall have been satisfied.

                                       37
<PAGE>

                  8.1.6.  REGISTRATION  STATEMENT.  The  Registration  Statement
shall have been  declared  effective  by the SEC and at the  Closing  Date shall
remain effective and shall not be subject to any stop order.

         8.2.  CONDITIONS  PRECEDENT  TO THE  OBLIGATIONS  OF PARENT,  HOLDINGS,
MERGER  SUB,  THE  COMPANY  AND THE  STOCKHOLDERS  TO EFFECT  THE MERGER AND THE
CONTRIBUTION.  The obligation of Parent,  Holdings and Merger Sub (collectively,
the "VPS Parties") to effect the Merger,  and the obligation of the Stockholders
to effect the  Contribution,  shall be subject to the fulfillment by the Company
and the  Stockholders  (collectively,  the  "CRI  Parties"),  at or prior to the
Closing Date, of each of the indicated  conditions  below, or the written waiver
of  fulfillment  of any  such  indicated  condition  by the  VPS  Parties,.  The
obligation of the CRI Parties to effect the Contribution shall be subject to the
fulfillment by the VPS Parties,  at or prior to the Closing Date, of each of the
indicated  conditions  below,  or the written  waiver of fulfillment of any such
indicated condition by the CRI Parties.

                  8.2.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the VPS Parties or the CRI Parties,  as the case may be, set forth
in this Agreement  shall be true and correct in all material  respects on and as
of the  Effective  Time,  except  for  changes  expressly  contemplated  by this
Agreement  and except for those  representations  and  warranties  which address
matters only as of a particular  date (which shall remain true and correct as of
such date), with the same force and effect as if made on and as of the Effective
Time; and, without limiting the generality of the foregoing, the VPS Parties and
the  CRI  Parties,  as  the  case  may  be,  shall  have  obtained  all  of  the
terminations,  consents and waivers set forth in Disclosure Schedule   3.5 to be
obtained by the appropriate party.

                  8.2.2. AGREEMENTS AND COVENANTS.  Each of the VPS Parties, and
each of the CRI  Parties,  as the  case  may be,  shall  have  performed  in all
material  respects all of their  agreements  and covenants set forth herein that
are required to be performed by it at or prior to the Effective Time.

                  8.2.3. NO MATERIAL  CHANGE.  Since the date of this Agreement,
there shall not have been any material damage to or loss or destruction (whether
or not covered by insurance) of any of the  properties or assets owned or leased
by the VPS  Parties or the  Company,  as the case may be, nor has there been any
Material Adverse Effect or the imposition of any law, rule,  regulation or order
that could reasonably be expected to have a Material Adverse Effect upon the VPS
Parties or the Company, as the case may be.

                  8.2.4.  OFFICERS' CLOSING  CERTIFICATE.  The VPS Parties shall
have executed and  delivered to the CRI Parties,  and the CRI Parties shall have
executed and delivered to the VPS Parties,  a certificate,  duly executed by the
President  and the Chief  Financial  Officer  of Parent  and  Holdings,  or duly
executed by the Stockholders and by the President and Chief Financial Officer of
the Company, as the case may be, in form and substance  reasonably  satisfactory
to the receiving  parties and their counsel,  that the  conditions  specified in
Sections 8.2.1, 8.2.2 and 8.2.3 have been satisfied.

                  8.2.5.  LEGAL  OPINION.  The VPS Parties  shall have  received
opinions from Ross Rapaport,  Esq., and Bingham Dana LLP, respectively,  counsel
to the CRI Parties,  reasonably  satisfactory  in form and  substance to the VPS
Parties and their  counsel;  and the CRI Parties  shall have received an opinion
from  Foley,  Hoag  &  Eliot  LLP,  counsel  to  the  VPS  Parties,   reasonably
satisfactory in form and substance to the CRI Parties and their counsel.

                                       38
<PAGE>

                  8.2.6.  TAX  MATTERS  OPINION.  The  VPS  Parties  shall  have
received a favorable  opinion from Foley,  Hoag & Eliot LLP, special tax counsel
to the VPS Parties,  and the CRI Parties shall have received a favorable opinion
of Bingham Dana LLP,  special tax counsel to the CRI Parties,  in each case with
respect to matters under Section 351 of the Code.  In rendering  such  opinions,
counsel  shall be  entitled  to  request,  receive  and rely  upon  certificates
regarding tax matters containing representations,  warranties and covenants that
are customary for transactions of this nature.

                  8.2.7.  DELIVERY OF CERTIFICATE OF MERGER.  The obligations of
the  CRI  Parties  shall  be  subject  to the  condition  that  the  constituent
corporations   to  the  Merger  shall  have  duly  executed  and  delivered  the
Certificate of Merger for filing with the Secretary of State of Delaware.

                  8.2.8.  TENDER OF COMPANY COMMON STOCK. The obligations of the
VPS  Parties  shall be subject to the  condition  that each of the  Stockholders
shall have tendered his or its certificates  evidencing  Company Common Stock as
described in Section 2.5.1.

                  8.2.9. DELIVERY OF EMPLOYMENT AGREEMENTS BY HOLDINGS OFFICERS.
The  obligations  of the CRI Parties shall be subject to the condition that each
of Timothy  Fallon and Bruce  MacDonald  shall have  executed and  delivered the
employment  agreements  described in Section 7.9. The transactions  contemplated
hereby  shall not have  triggered,  and shall  have no  remaining  potential  to
trigger,  any  contractual  obligation  on the  part of  Parent,  the  Surviving
Corporation  or  any  Subsidiary  of  the  Surviving  Corporation  to  make  any
compensation or other similar  payments to the directors,  officers or employees
of any of  them;  and  neither  Parent  nor  the  Surviving  Corporation  or any
Subsidiary of the Surviving Corporation shall have any obligation to provide any
severance  benefits to any of their employees in connection with any termination
of their employment.

                  8.2.10.  DELIVERY OF EMPLOYMENT AGREEMENTS BY COMPANY OFFICERS
AND LOCK-UP  AGREEMENTS BY THE STOCKHOLDERS.  The obligations of the VPS Parties
shall be subject to the condition that each of Peter Baker, Jack Baker and Henry
Baker shall have executed and delivered the employment  agreements  described in
Section  7.9,  and to the further  condition  that each  Stockholder  shall have
executed and delivered  the Lock-Up  Agreement  described in Section 7.10.  Each
officer and each  member of the board of  directors  of the  Company  shall have
resigned as an officer or director of the Company, as the case may be, effective
as of the Effective Time. The  transactions  contemplated  hereby shall not have
triggered,  and shall have no remaining  potential to trigger,  any  contractual
obligation on the part of Parent, the Surviving Corporation or any Subsidiary of
the  Surviving  Corporation,  or the Company to make any  compensation  or other
similar  payments to the  directors,  officers or employees of any of them;  and
neither Parent nor the Surviving  Corporation or any Subsidiary of the Surviving
Corporation  nor the Company shall have any  obligation to provide any severance
benefits to any of their  employees in connection  with any termination of their
employment.


                                       39
<PAGE>

                  8.2.11.  REAL PROPERTY TRANSFER AND LEASES. The obligations of
the VPS Parties  shall be subject to the  condition  that the Company shall have
transferred its Watertown,  Connecticut facility and the related indebtedness as
contemplated  by Section 7.8, and the Company shall have entered into the leases
described in Section 7.8 effective as of the Closing.

                  8.2.12.  PROCEEDINGS AND CLOSING DOCUMENTS  SATISFACTORY.  All
proceedings  in  connection  with the  Merger,  the  Contribution  and the other
transactions  contemplated by this Agreement, and all certificates and documents
delivered by the VPS Parties or the CRI Parties pursuant to this Agreement shall
be reasonably  satisfactory  to the CRI Parties or the VPS Parties,  as the case
may be, and their counsel.

                                    ARTICLE 9

                   SURVIVAL OF REPRESENTATIONS AND WARRANTIES

         9.1. NO SURVIVAL OF  REPRESENTATIONS  AND  WARRANTIES.  The  respective
representations,  warranties,  covenants, agreements and promises of the parties
in this  Agreement and any  schedule,  certificate  or other  writing  delivered
pursuant hereto or in connection herewith,  other than those that by their terms
are to be performed by Parent,  the  Surviving  Corporation,  the Company or the
Stockholders after the Effective Time or after the Contribution, as the case may
be, and other  than as set forth in Section  10.2,  shall  terminate  as of, and
shall not survive,  the  consummation of the Merger and the  Contribution or the
termination of this Agreement.  Notwithstanding the foregoing,  representations,
warranties  and  covenants  in the Tax Matters  Certificates  shall  survive the
consummation of the Merger and the Contribution.

                                   ARTICLE 10

                                   TERMINATION

         10.1.  TERMINATION  EVENTS.  This  Agreement may be terminated  and the
Merger  abandoned  at any time  prior  to the  Effective  Time,  notwithstanding
approval of the stockholders of Holdings:

     (a) by mutual written consent of Holdings and the Company;

     (b) by Holdings if there has been a material breach of any  representation,
warranty,  covenant or agreement  contained in this Agreement on the part of the
Company or the  Stockholders  and such breach has not been cured within ten (10)
business days after written  notice to the Company or the  stockholders,  as the
case may be (provided that neither  Parent nor Merger sub is in material  breach
of the terms of this agreement,  and provided further, that no cure period shall
be  allowed  for a breach  which by its  nature  cannot be cured)  such that the
conditions  set forth in Article 8 required to be  satisfied  on the part of the
Company or the Stockholders, as the case may be, will not be satisfied;

                                       40
<PAGE>

     (c)  by  the   Company  if  there  has  been  a  material   breach  of  any
representation,  warranty,  covenant or agreement contained in this Agreement on
the part of Parent,  Holdings  or Merger Sub and such  breach has not been cured
within ten (10)  business  days after written  notice to parent  (provided  that
neither the Company nor the  Stockholders  is in material breach of The terms of
this Agreement, and provided further, that no cure period shall be allowed for a
breach which by its nature cannot be cured) such that the  conditions  set forth
in Article 8 required to be satisfied on the part of Parent,  Holdings or Merger
Sub, as the case may be, will not be satisfied;

     (d) by any party  hereto  if:  (i) there  shall be a final,  non-appealable
order of a federal  or state  court in  effect  preventing  consummation  of the
Merger or the  Contribution,  or (ii) there shall be any final action taken,  or
any statute, rule, regulation or order enacted,  promulgated or issued or deemed
applicable to the Merger or the  Contribution by any  Governmental  Entity which
would make consummation of the Merger or the Contribution illegal or which would
prohibit  Parents   ownership or  operation of all or a material  portion of the
business  or  assets of the  Company,  or compel  Parent to  dispose  of or hold
separate  all or a material  portion of the business or assets of the Company or
Parent as a result of the Merger or the Contribution; or

     (e) by any party  hereto if the merger shall not have been  consummated  by
August 31, 2000,  provided that the right to terminate this Agreement under this
Section 10.1(e) shall not be available to any party whose failure to fulfill any
material  obligation under this Agreement has been the cause of, or resulted in,
the failure of the Effective Time to occur on or before such date.

         Where  action is taken to  terminate  this  Agreement  pursuant to this
Section  10.1,  such action shall be authorized by the board of directors of the
party taking such action.

         10.2.  EFFECT  OF  TERMINATION.  In the  event of  termination  of this
Agreement as provided in Section 10.1 hereof,  this  Agreement  shall  forthwith
become void and there shall be no  liability  or  obligation  on the part of the
Parent, Holdings,  Merger Sub, the Company, the Stockholders or their respective
officers,  directors,  stockholders  or Affiliates,  except to the extent that a
party hereto is in breach of any of its representations,  warranties,  covenants
or agreements set forth in this  Agreement,  and provided that the provisions of
Sections  6.6 and 7.5 hereof and  Articles 9 and 11 hereof  shall remain in full
force and effect and survive any termination of this Agreement.

                                   ARTICLE 11

                                  MISCELLANEOUS

         11.1.  AMENDMENTS AND  SUPPLEMENTS.  This Agreement may not be amended,
modified or supplemented  by the parties hereto in any manner,  except (i) prior
to the Effective Time, to the fullest extent permissible under Section 251(d) of
the DGCL, by an agreement in writing signed by Parent, Holdings, Merger Sub, the
Company and the Stockholders, and (ii) after the Effective Time, by an agreement
in writing signed by Parent and the Stockholders.

                                       41
<PAGE>

         11.2.  WAIVER. The terms and conditions of this Agreement may be waived
only by a written instrument signed by the party waiving compliance. The failure
of any  party  hereto  to  enforce  at any  time any of the  provisions  of this
Agreement shall in no way be construed to be a waiver of any such provision, nor
in any way to affect the  validity of this  Agreement  or any part hereof or the
right of such party  thereafter  to enforce  each and every such  provision.  No
waiver of any breach of or  non-compliance  with this Agreement shall be held to
be a waiver of any other or subsequent breach or non-compliance.  The rights and
remedies  herein  provided are cumulative and are not exclusive of any rights or
remedies that any party may otherwise have at law or in equity.

         11.3. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance  with, the substantive laws of the State of Delaware,
without regard to its principles of conflicts of laws.

         11.4. NOTICES. All notices and other communications  hereunder shall be
in writing and shall be deemed  given if  delivered  by hand,  sent by facsimile
transmission  with  confirmation  of  receipt,  sent via a  reputable  overnight
courier service with confirmation of receipt requested,  or mailed by registered
or certified mail (postage prepaid and return receipt  requested) to the parties
at the  following  addresses  (or at such other  address for a party as shall be
specified  by like  notice),  and  shall  be  deemed  given on the date on which
delivered by hand or otherwise on the date of receipt as confirmed:

         TO HOLDINGS, PARENT OR MERGER SUB:

                  Vermont Pure Holdings, Ltd.
                  P.O. Box C
                  Route 66, Catamount Industrial Park
                  Randolph, Vermont 05060
                  Facsimile:  (802) 728-4614

                  Attn:  Chairman and Chief Executive Officer

                                       42
<PAGE>

         With a copy to:

                  Dean F. Hanley, Esq.
                  Foley, Hoag & Eliot LLP
                  One Post Office Square
                  Boston, Massachusetts 02109
                  Facsimile:  (617) 832-7000

         TO THE COMPANY:

                  Crystal Rock Spring Water Company
                  1050 Buckingham Street
                  Watertown, Connecticut 06795
                  Facsimile: (860) 945-6246
                  Attn:  President

         With a copy to:

                  Brian Keeler, Esq.
                  Bingham Dana LLP
                  150 Federal Street
                  Boston, Massachusetts  02110
                  Facsimile:  (617) 951-8736

         TO THE STOCKHOLDERS:

                  Henry E. Baker
                  c/o Crystal Rock Spring Water Company
                  1050 Buckingham Street
                  Watertown, Connecticut 06795

                  Peter K. Baker
                  c/o Crystal Rock Spring Water Company
                  1050 Buckingham Street
                  Watertown, Connecticut 06795

                                       43
<PAGE>



                  John B. Baker
                   c/o Crystal Rock Spring Water Company
                  1050 Buckingham Street
                  Watertown, Connecticut 06795

                  Joan A. Baker
                  c/o Crystal Rock Spring Water Company
                  1050 Buckingham Street
                  Watertown, Connecticut 06795

                  Peter K. Baker Life Insurance Trust, Ross S. Rapaport, Trustee
                  750 Summer Street
                  Stamford, Connecticut 06901

                  John B. Baker Life Insurance Trust, Ross S. Rapaport, Trustee
                  750 Summer Street

                  Stamford, Connecticut 06901

                  Ross S.  Rapaport,  Trustee  U/T/A dated  12/16/91  F/B/O Joan
                  Baker et al.
                  750 Summer Street
                  Stamford, Connecticut 06901

         With a copy to:

                  Brian Keeler, Esq.
                  Bingham Dana LLP
                  150 Federal Street
                  Boston, Massachusetts  02110
                  Facsimile:  (617) 951-8736

         11.5.   ENTIRE   AGREEMENT.   This  Agreement  and  the  documents  and
instruments and other  agreements among the parties hereto as contemplated by or
referred  to herein  constitute  the entire  agreement  among the  parties  with
respect to the subject  matter hereof and  supersede all other prior  agreements
and  understandings,  both written and oral, between the parties with respect to
the subject matter  hereof,  excluding the Mutual  Agreement of  Confidentiality
dated  November  8, 1999 by and between  Holdings  and the  Company.  Each party
hereto  acknowledges  that, in entering into this  Agreement and  completing the
transactions   contemplated   hereby,   such   party  is  not   relying  on  any
representation,  warranty,  covenant or agreement not  expressly  stated in this
Agreement  or in the  agreements,  certificates  and  other  documents  among or
between the parties contemplated by or referred to herein.

         11.6.  BINDING EFFECT;  ASSIGNABILITY.  This Agreement shall be binding
upon and  inure to the  benefit  of the  parties  hereto  and  their  respective
successors and assigns. This Agreement is not intended to confer upon any person
other than the  parties  hereto (and such  parties'  respective  successors  and
assigns)  any  rights  or  remedies  hereunder,  except as  otherwise  expressly
provided herein. Neither this Agreement nor any of the rights and obligations of
the parties  hereunder  shall be assigned or delegated,  whether by operation of
law or otherwise, without the written consent of all parties hereto, except that
certain rights and  obligations of Merger Sub and the Holdings will by operation
of law be assigned and delegated to the Surviving Corporation as a result of the
Merger without any further consent hereunder.


                                       44
<PAGE>

     11.7. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement  shall  not  affect  the  validity  or  enforceability  of  any  other
provisions  of this  Agreement,  each of which  shall  remain in full  force and
effect.

     11.8.  COUNTERPARTS.  This  Agreement  may  be  executed  in  one  or  more
counterparts, all of which together shall constitute one and the same agreement.

                                    * * * * *

                                       45
<PAGE>



         IN WITNESS WHEREOF,  the parties have caused this Agreement and Plan of
Merger and Contribution to be executed as an agreement under seal as of the date
first above written.

                           VERMONT PURE HOLDINGS, LTD.

                        By: ____________________________
                                     Title:

                        VP MERGER PARENT, INC.


                        By: ____________________________
                                     Title:

                        VP ACQUISITION CORP.


                        By: ____________________________
                                     Title:

                        CRYSTAL ROCK SPRING WATER COMPANY

                        By: ____________________________
                                     Title:


                                                /S/ HENRY E. BAKER
                                                --------------------------------
                                                HENRY E. BAKER

                                                /S/ JOAN A. BAKER
                                                --------------------------------
                                                JOAN A. BAKER

                                                /S/ PETER K. BAKER
                                                --------------------------------
                                                PETER K. BAKER

                                                /s/ JOHN B. BAKER
                                                --------------------------------
                                                JOHN B. BAKER


                                       46
<PAGE>

                                                /S/
                                                --------------------------------
                                            PETER K. BAKER LIFE INSURANCE TRUST,
                                   ROSS RAPAPORT, TRUSTEE (AND NOT INDIVIDUALLY)

                                                /s/
                                                --------------------------------
                                             JOHN B. BAKER LIFE INSURANCE TRUST,
                                   ROSS RAPAPORT, TRUSTEE (AND NOT INDIVIDUALLY)

                                                /s/
                                                --------------------------------
                                              ROSS RAPAPORT, TRUSTEE U/T/A DATED
                                              12/16/91 F/B/O JOAN BAKER  ET  AL.
                                              (AND NOT INDIVIDUALLY)

                                       47
<PAGE>



                                LIST OF EXHIBITS

Exhibit A                  Certificate of Merger

Exhibit B                  Certificate of Incorporation of Parent

Exhibit C                  By-laws of Parent

Exhibit D                  Table of Cash,  Parent  Stock and  Subordinated Notes
                           Payable to each of the Stockholders

Exhibit E                  Forms of Tax Matters Certificate

Exhibit F                  Watertown Lease

Exhibit G                  Stamford Ground Lease

Exhibit H                  Stamford Building Lease

Exhibit I                  Employment Agreement with Tim Fallon

Exhibit J                  Employment Agreement with Bruce MacDonald

Exhibit K                  Employment Agreement with Peter Baker

Exhibit L                  Employment Agreement with Jack Baker

Exhibit M                  Employment Agreement with Henry Baker

Exhibit N                  Form of Lock-Up Agreement


                                       48