(Mark One)

For the quarterly period ended September 30, 2004 .

For the transition period from _______________ to _______________.

Commission file number 1-12580 .

(Exact name of registrant as specified in its charter)

(State or other jurisdiction (I.R.S. Employer

of incorporation or organization) Identification No.)

(Address of principal executive offices)

(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X ; No .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes__; No X.

APPLICABLE ONLY TO CORPORATE ISSUERS

As of November 11, 2004, there were 5,013,649 shares of the registrant's common stock (par value $.05 per share) outstanding.

THE VERMONT TEDDY BEAR CO., INC AND SUBSIDIARIES

Consolidated Balance Sheets

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

THE VERMONT TEDDY BEAR CO., INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For the Three Months Ended September 30, 2004 and 2003

(Unaudited)

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 Three Months Ended September 30, 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 in the United States of America 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, 2004, included in the Company's filing with the SEC on Form 10-K. The C ompany's sales 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions 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. The primary estimates underlying the Company's financial statements include inventory valuation, returns and allowances, the income tax provision, impairment of goodwill and other intangible assets and, as discussed in Note 9, the accrual for an estimated loss under a lease obligation as of September 30, 2004. 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 months ended September 30, 2004 and 2003 exclude 2,024,517 and 2,002,167 potential common shares respectively because to include such shares would have been anti-dilutive to the Company's net loss for the quarters ended September 30, 2004 and September 30, 2003.

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 to employees at fair market value until they are exercised. Upon exercise, net proceeds, including the tax benefits realized, are credited to shareholders' equity.

Pro-forma disclosure - Had the Company recognized compensation costs for its stock option 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," as amended by Statements of Financial Accounting Standards ("SFAS") No. 148, 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 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.

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 Gift Delivery Services, Retail Operations, and Corporate/Wholesale (including licensing). The Gift Delivery Services segment is comprised of the BearGram, PajamaGram, Calyx & Corolla floral, and TastyGram delivery services.

The BearGram delivery service involves sending personalized teddy bears directly to recipients for special occasions such as birthdays, get well, and new births, as well as holidays such as Valentine's Day, Christmas, and Mother's Day. BearGram 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, Inc. segment was acquired on August 29, 2003 for the purpose 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 Make-A-Friend-For-Life bear assembly areas at both stores, where visitors can participate in the creation of their own teddy bear.

The Corporate/Wholesale 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 any single customer, revenues between business segments, and revenues, operating profit and identifiable assets of foreign operations are not significant.

(9) 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.

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 statements. The Company undertakes no obligation to pu blicly 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 Company's sales are seasonal in nature and, therefore, the results for interim periods are not necessarily indicative of the results expected for the respective full years. It is more instructive to compare the Company's performance in each interim period to the performance in the same interim period of prior years, in the context of comparable seasonal forces. In the period described in this report, net revenues increased substantially in the Company's Gift delivery segment over the same period in the prior year primarily due to revenues from the Calyx & Corolla floral delivery service and increased revenues in the PajamaGram, and TastyGram segments. The Company realized revenues from Calyx for the entire quarter in fiscal 2005, whereas, during the same quarter of fiscal 2004, the Company only realized revenues from Calyx in the last month of the quarter, following the August 29, 2004 acquisition of the Calyx business. The Bear-Gram, Retail Store and Corporate segmen ts had decreased net revenues over the prior year during the same three-month period described in this report. Decreased revenue in the BearGram segment, the Company's largest segment, is primarily attributed to reduced radio advertising in the period. While BearGram revenues declined approximately $260,000, the Company reduced BearGram marketing and selling expenses by approximately $321,000. The Company's net margins increased in this period, due to increased margin dollars in the Calyx & Corolla and TastyGram segments, which offset decreased margins in the Bear-Gram, Retail, PajamaGram and Corporate segments. The Company continues to incur higher unit costs in manufacturing for the BearGram segment attributed to reduced throughput as the Company adjusts to lower volume in this segment and transitions its teddy bear manufacturing operations to modular manufacturing. The Company began the transition to modular manufacturing in February 2004 primarily in response to escalating worker's compensation cost s related to repetitive motion injuries. In modular processes, employees work in teams or "modules" and rotate between manufacturing tasks performed to complete a bear in significantly shortened manufacturing cycles. The anticipated benefits to modular manufacturing, in addition to reduced worker's compensation costs, include reduced levels of work in process inventory which is already being recognized in the Company's inventory balances and improved quality as problems are caught and addressed immediately when each bear is completed within the shortened cycle. When the transition is complete later this year, the Company expects to achieve higher levels of efficiency with lower direct labor costs and improved employee satisfaction as employees no longer focus on a single operation and can work in a team environment. Excess overhead that currently impacts negatively on the Company's cost of goods in the BearGram segment will be addressed as the Company reallocates manufacturing space to other operations an d as throughput increases later in the year. While lower as a percent of net revenues, net marketing and selling expenses increased during the period described in this report. Increases in marketing and selling expenses for the Calyx & Corolla, Retail Store, PajamaGram segments and call center costs were partially offset by decreases in marketing and selling expenses for the BearGram, TastyGram and Corporate segments during the period. The Company realized marketing and selling expenses in the Calyx segment for the entire first quarter of fiscal 2005 versus only one month in fiscal 2004 following the acquisition of this segment on August 29, 2004.

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, 2005. 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.

Interest expense increased to $161,000 for the three month period ended September 30, 2004 due to increased long term debt obligations associated with the acquisition of Calyx & Corolla during the fiscal year ended June 30, 2004, compared to $153,000 for the three month period ended September 30, 2003. Interest income decreased to $8,000 as a result of lower average cash balances in the three month period ended September 30, 2004, compared to $12,000 for the three month period ended September 30, 2003.

As a result of the foregoing factors and the Series A Preferred Stock dividends of $18,000, the Series C Preferred Stock dividends of $1,400, the Series D Preferred Stock dividends of $31,500, the net loss available to Common Stockholders for the three month period ended September 30, 2004 was $173,000, compared to a net loss available to Common Stockholders of $183,000 for the three month period ended September 30, 2003.

The following is a summary of the Company's contractual commitments and other obligations as of September 30, 2004. The Company's Other Long-Term Obligations are comprised of employment contracts and certain consulting arrangements.

Payments due by fiscal period

As of September 30, 2004, the Company's cash position decreased to $1,780,000, from $7,057,000 at June 30, 2004. Of the $1,780,000, $472,000 is classified as restricted cash in accordance with the terms of the Company's sale leaseback transaction. There was $471,000 of restricted cash at June 30, 2004. The decrease in cash was the result of a decrease in accounts payable, the seasonal increase in inventories, and a decrease in deferred revenue.

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 line of credit commitment 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. The landlord also claims damages, pursuant to the lease for interest, attorneys fees and its costs incurred in connection with re-letting the space. In the event there is a determination that the lease continued in effect, the Company would assert offsets to the damages claimed, based on other settlements reached by the landlord in connection with the December 7, 1997 incident and the current re-letting of the space. Nevertheless there can be no assurance that this dispute can be resolved for less than the full amount claimed by the landlord. Discovery is ongoing and no trial date has been set. The Company has agreed to enter into mediation with the landlord and a mediation date was previously set for October 14, 2004. This date has subsequently been changed to December 2, 2004. There can be no assurance that thi s non-binding mediation will lead to a resolution of this matter.

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.

On July 29, 2004, the Company entered into a new ten year lease for its Shelburne warehouse and fulfillment center to incorporate a 60,400 square foot addition to the existing facility that is contiguous to the property on which the Company's factory headquarters are located. The addition replaces 25,000 square feet of month-to-month leased space in Williston, Vermont. The new consolidated lease for 120,800 square feet replacing the July 19, 2000 lease began in October 2004. The consolidated lease is for ten years with three five-year renewal options.

(a) Quantitative Information About Market Risk

Under its current policies, the Company does not use interest rate sensitive 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.

(b) Qualitative Information About Market Risk

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.

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 9 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.

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 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. The Series D Preferred shares are convertible into the Company's common stock at a price of $3.53 per common share. Each of the shares of Series D Preferred has a minimum liquidation value of $10,000 per share, and is convertible into 2,832 shares of the Company's common stock. The Series D Preferred ranks junior to both Series A and Series C Preferred Stock but senior to all other shares of capital stock of the Company. The Series D Preferred stockholders may, at any time after December 31, 2004, require the Company to redeem some or all of the Series D Preferred shares at their minimum liquidation value, not to exceed $650,000 annually on a rolling 12-month basis. The Series D Preferred requires mandatory redemption of all outstanding sh ares at the minimum liquidation value along with all accrued but unpaid dividends ten years after issuance. The Series D Preferred carries voting rights on an as-converted basis, and, as a class, has the right to elect one member to the Company's Board of Directors. The Series D Preferred shares have a cumulative preferred cash dividend of 5.0 % per annum, payable quarterly.

On December 1, 2003, Series C Preferred Stockholders exercised the convertible rights associated with the Series C Preferred Stock and converted 9 shares of Series C Preferred Stock into 85,707 shares of the Company's Common Stock.

None.

There were no matters submitted to a vote of stockholders for the quarter ended September 30, 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.

1. Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Elisabeth B. Robert, President, Chief Executive Officer, Treasurer, and Chief Financial Officer and Mark J. Sleeper, Chief Accounting Officer (filed herein).

As reported on October 27, 2004

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: November 15, 2004 /s/ Elisabeth B. Robert ,