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

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended March 31, 2004 and 2003

(Unaudited)

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

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(1) Basis of Presentation

The interim financial statements of The Vermont Teddy Bear Co., Inc. (the "Company") included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, in the opinion of management, reflect all adjustments necessary to present fairly the financial condition and results of operations for such interim periods. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior period amounts have been reclassified to conform to the current-year financial statement presentation. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended June 30, 2003, included in the Company's filing with the SEC on Form 10-K. The Company's sal es are seasonal in nature and, therefore, the results for these interim periods are not necessarily indicative of the results expected for the respective full years.

The consolidated financial statements include the accounts of The Vermont Teddy Bear Co., Inc. and its wholly owned subsidiaries, SendAMERICA, Inc. and Calyx & Corolla, Inc. All material inter-company balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management bases its estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances.

Diluted weighted average shares outstanding for the three and nine months ended March 31, 2004 exclude 6,000 and 27,500 potential common shares respectively because the price of the potential common shares was greater than the average market price of the common stock for that period.

Diluted weighted average shares outstanding for the three and nine months ended March 31, 2003 exclude 22,000 and 73,500 potential common shares respectively because the price of the potential common shares was greater than the average market price of the common stock for that period.

Stock-based compensation cost is accounted for using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including the tax benefits realized, are credited to shareholders' equity.

Had the Company recognized compensation costs for its stock option and purchase plans based on fair market value for awards under those plans, in accordance with Statements of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation," pro forma net income and pro forma net income per share would have been as follows:

The fair values used to compute pro forma net income and net income per share were estimated at their fair value at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:

In January and December 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 (FIN 46) and No. 46, revised (FIN 46R), "Consolidation of Variable Interest Entities". These statements, which address perceived weaknesses in accounting for entities commonly known as special-purpose or off-balance-sheet entities, require consolidation of certain interests or arrangements by virtue of holding a controlling financial interest in such entities. Certain provisions of FIN 46R related to interests in special purpose entities were applicable for the period ended December 31, 2003. The Company must apply FIN 46R to its interests in all entities subject to the interpretation as of the first annual period ending after March 15, 2004. Adoption of this new method of accounting for variable interest entities did not and is not expected to have a material impact on the Company's consolidated financial position or results of operations.

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This pronouncement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as liabilities. The provisions of this statement are effective for transactions that are entered into or modified after May 31, 2003. The adoptions of SFAS No. 150 did not have a material impact on the Company's consolidated financial position or results of operations.

On August 29, 2003, the Company, through a wholly-owned subsidiary, Calyx & Corolla, Inc., a Delaware corporation, purchased substantially all of the assets and assumed certain liabilities of the floral delivery business Calyx & Corolla from Equity Resource Partners, LLC, a Delaware limited liability company. The acquisition was consummated pursuant to an Asset Purchase Agreement and related documents on August 29, 2003. The results of Calyx & Corolla's operations have been included in the Company's consolidated financial statements since August 29, 2003.

The acquired assets included accounts receivable, inventory, the trade name, customer databases and lists, other intellectual property, and fixed assets, including order processing equipment and certain office furnishings used in the Calyx & Corolla floral delivery business. Working capital obligations assumed include trade payables, accrued compensation and certain executory contracts. Calyx & Corolla, Inc. holds the acquired assets and liabilities assumed and continues the Calyx & Corolla business.

The consideration paid was $3.7 million consisting of $1.2 million paid in cash and the remainder paid in the form of 250 shares of the Company's Series D Convertible Redeemable Preferred Stock ("Series D Preferred") at a fair value of $10,000 per share. In addition, the Company incurred approximately $173,000 of transaction costs consisting primarily of legal and accounting fees. The Series D Preferred shares are convertible into the Company's common stock at a price of $3.53 per common share and have voting rights on an as-converted basis. A portion of the cash consideration paid was financed with the five-year Acquisition Loan in the amount of $1.0 million from Banknorth, N.A, the remainder of the cash consideration and transaction costs paid was funded from cash on hand.

The following table sets forth the consideration paid by the Company:

The acquisition was accounted for using the purchase method, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date.

The following table sets forth the allocation of the purchase consideration to working capital, fixed assets and intangible assets acquired:

The amount allocated to the trademark, tradename and customer list was determined by management after considering the results of an independent appraisal based on established valuation techniques. The customer list is being amortized over its estimated useful life of 3 years. The goodwill, trademark, tradename and customer list will be deductible for tax purposes over the tax life of 15 years.

The following unaudited pro forma information for the Company and its consolidated subsidiaries for the following three and nine month periods ended March 31, 2004 and 2003 was prepared assuming the acquisition of Calyx & Corolla occurred on July 1, 2002. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the Calyx & Corolla acquisition had occurred on July 1, 2002.

Three Months Ended Nine Months Ended

March 31, March 31,

The Company obtained consent from its lessor in the sale-leaseback transaction and its lender related to this transaction as a result of restrictive covenants contained in certain of its lending arrangements.

There are no material relationships among the parties to the acquisition of Calyx & Corolla or their affiliates, officers, directors, members or managers, or any of their associates.

Subsequent to the August 29, 2003 closing date of the Calyx & Corolla acquisition, Equity Resource Partners, LLC reimbursed the Company $225,000 related to obligations of Equity Resource Partners, LLC paid by the Company.

Operating segments represent components of the Company's business that are evaluated regularly by the Chief Executive Officer in assessing performance and resource allocation. The Company has determined that its reportable segments consist of the Gram delivery service, Retail Operations, and Corporate/Wholesale (including licensing). The Gram delivery service is comprised of Bear-Gram, PajamaGram, Calyx & Corolla floral, and TastyGram delivery services.

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

The PajamaGram delivery service involves sending pajamas and related loungewear and spa products to recipients as gifts for similar special occasions and holidays. PajamaGram orders are placed via a toll free number or online at pajamagram.com.

The Calyx & Corolla business was acquired on August 29, 2003 for the purposes of extending the Company's product offerings in the gift delivery service industry to include floral delivery service. The Calyx & Corolla delivery service involves sending premium flowers and plants with unique up-scale arrangements and containers to recipients, direct from the growers, as gifts for special occasions and holidays. Calyx & Corolla orders are placed through a catalog, via a toll free number or online at calyxandcorolla.com.

The Retail Operation segment involves a retail location and family tours of its teddy bear factory in Shelburne, located ten miles south of Burlington, Vermont. The Company also has a retail store located on Route 100 in Waterbury, Vermont. In an effort to make a visit to the stores more entertaining and draw additional traffic, the Company has implemented the Make-A-Friend-For-Life bear assembly area at both stores, where visitors can participate in the creation of their own teddy bear.

The Wholesale/Corporate segment develops opportunities in the corporate affinity market and certain wholesale markets.

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

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

(10) Legal Proceedings

The Company is a party in a suit against 538 Madison Realty Company pending in the Supreme Court of the State of New York, County of New York, seeking a declaration that a lease with 538 Madison Realty Company is terminated.

On October 24, 1996, the Company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obliga ted to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, being the lease itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgment on its claims and dismissal of the landlord's claims. That motion was granted by order dated July 25, 2001 and judgment was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord filed an appeal of that judgment and, as settlement discussions were unsuccessful, posted a bond to stay e nforcement of the judgment pending its appeal, which was argued on November 1, 2002. That judgment was affirmed by a 3-2 vote of New York's Appellate Division, First Department. Based on the two dissenting votes, the landlord had a right of appeal to New York's Court of Appeals. That appeal was fully briefed and then argued on February 10, 2004. On March 25, 2004, the New York Court of Appeals issued a decision reversing the Appellate Division, and denying the Company's summary judgment motion. This decision returns the case to the New York Supreme Court for a determination as to whether the Company's lease was terminated or continued in effect following the December 7, 1997 incident. The Company will continue to pursue all of its legal remedies to resolve the litigation favorably by decision or settlement. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlem ent is reached and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.

There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.

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

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their impact cannot be determined with absolute certainty. Therefore the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

We have identified certain critical accounting policies, which are described below:

The Company carries its inventory at the lower of cost or market on a first-in, first-out basis. The Company makes certain assumptions to adjust inventory based on historical experience and current information in order to assess that inventory is recorded properly at the lower of cost or market. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required. These adjustments can have a significant impact on future operating results and financial position.

Providing for Litigation Contingencies

The Company acquired Calyx & Corolla, Inc. on August 29, 2003. This acquisition resulted in $5,383,000 of goodwill and other indefinite lived intangible assets. The Company will test goodwill and other indefinite lived intangible assets for impairment at least annually. The Company expects to complete its impairment testing as of June 30, 2004. Management's estimates of market values, projections of future cash flows and other factors are significant factors in testing goodwill and indefinite lived intangible assets for impairment. If these estimates or projections change in the future, the Company may be required to record an impairment charge. These adjustments can have a significant impact on future operating results and financial position.

The Company provides for income taxes at rates equal to our combined federal and state effective rates, however, certain estimates are made based on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Subsequent revisions to the estimated net realizable value of deferred tax assets, deferred tax liabilities and other income tax liabilities could cause our provision for income taxes to vary significantly from period to period.

The following is a summary of the Company's contractual commitments and other obligations as of March 31, 2004. The Company's Other Long-Term Obligations are comprised of employment contracts and certain consulting arrangements.

Payments due by fiscal period

As of March 31, 2004, the Company's cash position increased to $8,894,000, from $5,701,000 at June 30, 2003. Of the $8,894,000, $540,000 is classified as restricted cash; there was $533,000 of restricted cash at June 30, 2003. The largest component of the restricted cash is $470,000 restricted by a debt service reserve, which was required as part of the Acquisition Loan agreement with Banknorth, N.A., that is required to be maintained as part of the Company's sale-leaseback transaction. Cash increases provided by net income, increases in deferred revenue and the cash provided from the borrowing from Banknorth, N.A. associated with the acquisition of Calyx & Corolla were offset by the cash paid for the acquisition of Calyx & Corolla and payments on long term debt.

The Company's sales are heavily seasonal, with Valentine's Day, Mother's Day and Christmas as the Company's largest sales seasons, resulting in fluctuations in working capital obligations similar to those incurred during the same periods in past years.

The Company intends to continue to invest in support of its growth strategy. These investments include primarily continued advertising and marketing programs designed to enhance the Company's brand name recognition, retain and acquire new customers, expand its current product offerings and further develop its web site and operating infrastructure.

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

On October 24, 1996, the Company entered into a ten-year lease for 2,600 square feet on Madison Avenue in New York City. On December 7, 1997, the Company's 538 Madison Avenue location was closed due to structural problems at neighboring 540 Madison Avenue. On December 16, the Company announced that it was permanently closing that retail location. The City of New York deemed the 538 Madison Avenue building uninhabitable from December 8, 1997 to April 9, 1998, and the Company has not made any rent payments on the lease since December, 1997. On December 24, 1998, the Company received a notice from its landlord of 538 Madison Avenue alleging that it was in default under the lease for failure to resume occupancy, and demand for back rent for the period July 8, 1998 to December 31, 1998 in the amount of $144,355. Further on January 4, 1999 the Company received a demand to resume rent payments beginning January 1999. The Company disputed the landlord's position and believed it was not obliga ted to resume occupancy or pay rent under the lease. As a result, on May 25, 1999, the Company commenced action in the Supreme Court of the State of New York, County of New York against 538 Madison Realty Company. The action sought breach of contract damages and a declaration that the contract at issue, the former lease between the parties, has been terminated. The landlord moved to dismiss the action based on purported documentary evidence, being the lease itself. That motion was denied by order entered April 12, 2000. After having unsuccessfully attempted to resolve the disputes and after engaging in document discovery, the Company moved for summary judgment on its claims and dismissal of the landlord's claims. That motion was granted by order dated July 25, 2001 and judgment was entered in favor of the Company and against the landlord in the amount of $211,146 on August 10, 2001. The landlord filed an appeal of that judgment and, as settlement discussions were unsuccessful, posted a bond to stay e nforcement of the judgment pending its appeal, which was argued on November 1, 2002. That judgment was affirmed by a 3-2 vote of New York's Appellate Division, First Department. Based on the two dissenting votes, the landlord had a right of appeal to New York's Court of Appeals. That appeal was fully briefed and then argued on February 10, 2004. On March 25, 2004, the New York Court of Appeals issued a decision reversing the Appellate Division, and denying the Company's summary judgment motion. This decision returns the case to the New York Supreme Court for a determination as to whether the Company's lease was terminated or continued in effect following the December 7, 1997 incident. The Company will continue to pursue all of its legal remedies to resolve the litigation favorably by decision or settlement. The Company has accrued management's estimated cost of $220,000 to settle this contingency, but no assurance can be given that this dispute can be settled for this amount. In the event that no settlem ent is reached and the Company is not successful in its suit against 538 Madison Realty Company, the remaining amount owed under the lease over its remaining term at face value is $2,825,000.

There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.

The Company's earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A ten percent fluctuation in interest rates would not have a material impact on the Company's ability to meet its financial obligations.

The Company is a party in a suit against 538 Madison Realty Company pending in the Supreme Court of the State of New York, County of New York, seeking a declaration that a lease with 538 Madison Realty Company is terminated. A description of the background and current status of this action appears in Part I, Note 10 of this report under the heading Legal Proceedings.

There are various other claims, lawsuits, and pending actions against the Company incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. There can be no assurance, however, that claims will not be made against the Company in the future. Such claims, if material, may adversely affect the Company's businesses and results of operations.

Not applicable.

Not applicable.

There were no matters submitted to a vote of stockholders for the quarter ended March 31, 2004.

Elisabeth B. Robert, the Company's Chief Executive Officer/Chief Financial Officer and Mark J. Sleeper, the Chief Accounting Officer, have furnished to the SEC the certification with respect to this Form 10-Q that is required by Section 906 of the Sarbanes-Oxley Act of 2002. See exhibit 32.

31 Rule 13a-14(a)/15d-14(a) Certifications.

As reported on March 25, 2004

The Company filed a Form 8-K with respect to the decision of the New York Court of Appeals to reverse the New York Appellate Division's decision to grant the Company summary judgment in its action against 538 Madison Realty Company in the Supreme Court of the State of New York, County of New York.

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

Date: May 17, 2004 /s/ Elisabeth B. Robert ,