Diluted weighted average shares outstanding for the three and six months ended December 31, 2004 exclude 30,583 and 15,833 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 six months ended December 31, 2003 exclude 14,000 and 35,000 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.

For the six month periods ending December 31, 2004 and 2003, the diluted net income per share calculation does not include the effect of the conversion of Series C preferred and Series D preferred because the conversion of those shares would have an antidilutive effect. Dividends on the Series C preferred and Series D preferred were $65,826 and $46,859 for the six months ending December 31, 2004 and 2003. Diluted weighted average shares outstanding for the six months periods ending December 31, 2004 and 2003 excluded 796,834 and 641,010 potential shares.

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 stockholders' 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 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 applied 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 December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.123R, Share-Based Payment ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exeptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005. The Company is evaluating the two methods of adoption allowed by SFAS No. 123R; the modified-prospective transition method and the modified-retrospective transition method.

On November 29, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and waste material. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of Statement 151 will have a material effect on its consolidated financial position, results of operations or cash flows.

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 six month 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 increased PajamaGram revenues and increased revenues from the Calyx & Corolla floral delivery service. The Company realized revenues in the Calyx segment for the entire six months ended December 31, 2004, whereas last year, the Company only realized Calyx revenues in the four months following the August 29, 2003 acquisition of the Calyx business. Revenues generated in the BearGram segment for the six month period ended December 31, 2004 are even to the same period last year. TastyGram revenues increased in the period while Retail Store and Corporate segments revenues decreased in the same month period described in this report as compared to the same period last year. The Company's gross margin dollars increased in this period, due to increased margin dollars in the PajamaGram and Calyx & Corolla segments, which offset decreased margins in the Bear-Gram, Retail, TastyGram and Corporate segments.

The Company incurred higher unit costs in manufacturing for the BearGram segment during the first six months of fiscal 2005 attributed to reduced throughput as the Company transitioned 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 costs 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 and improved quality as problems are caught and addressed immediately when each bear is completed within the shortened cycle. With the transition completed, the Company expects to achieve in the second half of this year, higher levels of manufacturing 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 is being addressed as the Company reallocates manufacturing space to other operations and as throughput increases in the second half of the year.

Package delivery costs have increased in all of the Company's business segments due to increased fuel and other ancillary surcharges imposed by common carriers. Increased package delivery costs were most significant in the Calyx segment as the Company continued to ship packages via Federal Express. During the second half of this year, the Company expects to move virtually all Calyx package delivery to United Parcel Service, its lower cost primary carrier.

Gross margins showed continued improvement in the PajamaGram segment as the Company sold more of its own PajamaGram private labeled merchandise imported directly from its suppliers overseas.

Increases in marketing and selling expenses for the Calyx & Corolla, PajamaGram, BearGram, and Retail Store segments, along with call center costs were partially offset by decreases in marketing and selling expenses for the TastyGram and Corporate segments during the period. The Company realized marketing and selling expenses in the Calyx segment for the entire six month period ended December 31, 2004 versus only four months in six month period ended December 31, 2003 following the acquisition of the Calyx business on August 29, 2003. Marketing and selling expenses, as a percentage of net revenues, increased during the three and six month periods described in this report, primarily as a result of increased product development and graphic design costs and increased costs related to the Calyx 2004 Holiday catalog that yielded lower than anticipated response rates. While the Company continues to analyze the performance of the Calyx Holiday 2004 catalog, it believes the lower response ra te may be attributed to higher shipping prices charged to customers and a shift in the drop schedule. The Company is lowering its Calyx shipping prices beginning with the Easter catalog and will conform to prior year drop schedules for the remainder of this fiscal year. Improved returns on PajamaGram marketing and selling costs partially offset the lower response rates for Calyx.

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.

Net revenues for the three month period ended December 31, 2004 totaled $16,128,000, an increase of $2,718,000 from net revenues of $13,410,000 for the three month period ended December 31, 2003. By business segment, increases in PajamaGram revenues of $2,171,000, increases of $327,000 generated from the Calyx & Corolla floral delivery segment, $257,000 in increased revenues attributable to the BearGram gift delivery service, and increased revenues of $34,000 in the TastyGram segment, were partially offset by $69,000 in decreased revenues attributable to the Retail Store segment, and $2,000 in decreased revenues attributable to the Corporate segment. PajamaGram segment revenues increased as the Company increased catalog and television advertising during the three months ended December 31, 2004. Calyx & Corolla revenues increased as the Company increased catalog advertising and BearGram revenues increased as the Company increased radio advertising in this segment in the three mo nth period ended December 31, 2004. Revenues in the Retail Store segment declined due to fewer tourists visiting the Company's factory retail store in the three months ended December 31, 2004 compared to the three months ended December 31, 2003.

Corresponding to an increase of net revenues of approximately $2,718,000 in the second quarter, marketing and selling expenses increased $1,491,000 to $6,710,000 for the three month period ended December 31, 2004, from $5,219,000 for the three month period ended December 31, 2003. PajamaGram segment marketing and selling costs increased $624,000 as the Company increased the segment's catalog and television advertising. BearGram segment advertising costs, which include radio, television, catalog, Internet and print costs increased $471,000 as the Company increased its radio advertising. Marketing and selling costs associated with the Calyx & Corolla segment increased $187,000 as the Company increased Calyx & Corolla catalog advertising. Call center and customer service costs increased $239,000 due to higher revenues and the Retail segment's marketing and selling costs increased $5,000. These increases were partially offset by decreased Corporate/Wholesale marketing and selling c osts of $24,000 and decreased TastyGram marketing and merchandising costs of $11,000 as compared to the three month period ended December 31, 2003. Marketing and selling expenses as a percent of net revenues increased to 41.6 percent for the three-month period ended December 31, 2004 from 38.9 percent for the three-month period ended December 31, 2003.

General and Administrative expenses increased to $1,709,000 for the three month period ended December 31, 2004, compared to $1,484,000 for the three month period ended December 31, 2003. The $225,000 increase is primarily attributed to increased legal expenses, order processing fees, employee benefit costs, buildings and maintenance costs and telephone costs. The Company incurred additional legal expenses of $67,000 in the three months ended December 31, 2004 largely due to the renewed legal activity in conducting discovery and preparing for a possible trial in the New York lease dispute (see note 9). Order processing fees increased $82,000 as a result of higher revenues. Employee benefit costs increased year over year in the second quarter by $26,000. Buildings and maintenance costs, and telephone costs were higher by $22,000 and $23,000, respectively in the three month period ended December 31, 2004 as compared to the same period last year, as the result of unanticipated labor reduc tions and credits obtained in the prior year. As a percentage of net revenues, general and administrative expenses decreased to 10.6 percent for the three-month period ended December 31, 2004, from 11.1 percent for the three month period ended December 31, 2003.

Interest expense decreased to $168,000 for the three month period ended December 31, 2004 due to the reduction in long term debt obligations, compared to $184,000 for the three month period ended December 31, 2003. Interest income decreased to $3,000 as a result of lower average cash balances in the three month period ended December 31, 2004, compared to $6,000 for the three month period ended December 31, 2003.

The Company has recorded a tax provision of $209,000 for the three month period ended December 31, 2004, an effective income tax rate of 40.9 percent. The Company recorded a tax provision of $356,000 for the three month period ended December 31, 2003, an effective income tax rate of 40.7 percent.

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, and the Series D Preferred Stock dividends of $31,500, the net income available to Common Stockholders for the three month period ended December 31, 2004 was $251,000, compared to a net income available to Common Stockholders of $372,000 for the three month period ended December 31, 2003.

Net revenues for the six month period ended December 31, 2004 totaled $22,266,000, an increase of $3,876,000 from net revenues of $18,390,000 for the six month period ended December 31, 2003. By business segment, increases in PajamaGram revenues of $2,203,000, increases of $1,859,000 generated from the Calyx & Corolla floral delivery segment, and increased revenues of $46,000 in the TastyGram segment, were partially offset by $168,000 in decreased revenues attributable to the Retail Store segment, $60,000 in decreased revenues to the Corporate segment and $4,000 in decreased revenues attributable to the BearGram gift delivery service. PajamaGram segment revenues increased as the Company increased catalog and television advertising during the six months ended December 31, 2004. Calyx & Corolla revenues increased as the Company increased catalog advertising and as the Company realized revenues during the entire six month period ending December 31, 2004. During the six month pe riod ended December 31, 2003, the Company realized Calyx & Corolla revenues in the four months subsequent to the August 29, 2003 acquisition date. Revenues in the Retail Store segment declined due to fewer tourists visiting the Company's factory retail store.

Gross margin increased $1,626,000 to $12,052,000 for the six month period ended December 31, 2004, from $10,426,000 for the six month period ended December 31, 2003. The gross margin dollars in the PajamaGram segment increased $1,322,000 due to increased revenues and the Calyx & Corolla segment gross margin increased $639,000 as the Company realized gross margins during the entire six month period ended December 31, 2004. During the six month period ended December 31, 2003, the Company realized gross margins in the four months subsequent to the August 29, 2003 acquisition date. These increases were offset by a gross margin decrease in the BearGram segment of $161,000, Retail Store segment decrease of $137,000, Corporate/Wholesale segment gross margin decrease of $33,000, and TastyGram segment decrease $4,000. The gross margin dollar decreases in the Retail Store and Corporate/Wholesale segments were primarily the result of lower net revenues in each of these segments. Package deli very costs have increased in all of the Company's business segments due to increased fuel and other ancillary surcharges imposed by common carriers. Gross margin as a percentage of net revenue decreased to 54.1 percent from 56.7 percent in the period compared to the same period in the previous year. Increased delivery costs, increased costs from the recently expanded fulfillment and distribution center and increased bear unit manufacturing costs resulted in a 2.0 percentage point decrease in BearGram gross margin as a percentage of net revenues.

The Company continued to incur higher unit costs in manufacturing for the BearGram segment attributed to reduced throughput as the Company adjusted to lower volume in this segment and transitioned its teddy bear manufacturing operations to modular manufacturing. 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 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. Excess overhead that 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 and as throughput increases later i n the year.

The decrease of 3.6 percentage points in the Calyx & Corolla segment resulted from increased delivery costs during the period. The Calyx & Corolla gross margin is less as a percentage of net revenues than the Company's overall gross margin percentage, contributing to the Company's decrease in consolidated gross margin as a percentage of net revenues. The gross margin decrease of 11.4 percentage points in the TastyGram gift delivery service segment is primarily attributed to increased delivery costs. The Corporate/Wholesale segment decreased 2.9 gross margin percentage points due to increased product mix of domestically made teddy bears, which traditional have lower unit margins than the Company's imported teddy bear products. The Retail Store segment experienced a decrease of 1.5 gross margin percentage points due to higher domestic unit costs in this segment and the November factory seconds sale. These gross margin percentage decreases were partially offset by increases in th e PajamaGram segment. The PajamaGram segment increase of 1.2 percentage points resulted from improved unit gross margins associated with the Company's transition to private label goods imported directly from suppliers in Asia and product mix changes which more than offset increased delivery costs in the period.

Corresponding to an increase of net revenues of approximately $3,876,000 in the six months ended December 31, 2004, marketing and selling expenses increased $1,509,000 to $8,509,000 for the six month period ended December 31, 2004, from $7,000,000 for the six month period ended December 31, 2003. PajamaGram segment marketing and selling costs increased $635,000 as the Company increased the segment's catalog and television advertising. Marketing and selling costs associated with the Calyx & Corolla segment increased $452,000 as the Company increased Calyx & Corolla catalog advertising and realized expenses primarily related to catalog cost amortization for the entire six month period in fiscal 2005 as opposed to only four months in fiscal 2004 following the August 29, 2003 acquisition. BearGram segment advertising costs, which include radio, television, catalog, Internet and print costs increased $150,000. Call center and customer service costs increased $281,000 due to higher r evenues and the Retail segment's marketing and selling costs increased $39,000. These increases were partially offset by decreased Corporate/Wholesale marketing and selling costs of $25,000 and decreased TastyGram marketing and merchandising costs of $23,000 as compared to the six month period ended December 31, 2003. The Company is continuing to reallocate its advertising expenditures between business segments depending on segment response rates and performance at different times of the year. As the Company reallocated advertising dollars between Calyx, BearGram, and PajamaGram segments, marketing and selling expenses as a percent of net revenues increased to 38.2 percent for six month period ended December 31, 2004 from 38.1 percent for the six month period ended December 31, 2003.

General and Administrative expenses increased to $2,927,000 for the six month period ended December 31, 2004, compared to $2,557,000 for the six month period ended December 31, 2003. The $370,000 increase is primarily attributed to increased legal expenses, order processing fees, employee benefit costs, buildings and maintenance costs and telephone costs. The Company incurred additional legal expenses of $99,000 in the first six months of fiscal 2005 largely due to the renewed legal activity in conducting discovery and preparing for a possible trial in the New York lease dispute (see note 9). Order processing fees increased $108,000 as a result of higher revenues. Employee benefit costs increased year over year in the first six months of the fiscal year by $39,000. Buildings and maintenance and telephone costs were higher by $49,000 and $61,000, respectively in the six month period ended December 31, 2004 as compared to the same period last year, as the result of unanticipated labor re ductions and credits obtained in the prior year period. As a percentage of net revenues, general and administrative expenses decreased to 13.1 percent for the six month period ended December 31, 2004, from 13.9 percent for the six month period ended December 31, 2003.

Interest expense decreased to $329,000 for the six month period ended December 31, 2004 due to the reduction of long-term debt obligations, compared to $337,000 for the six month period ended December 31, 2003. Interest income decreased to $11,000 as a result of lower average cash balances in the six month period ended December 31, 2004, compared to $18,000 for the six month period ended December 31, 2003.

The Company has recorded a tax provision of $124,000 for the six month period ended December 31, 2004, an effective income tax rate of 40.9 percent. The Company recorded a tax provision of $262,000 for the six month period ended December 31, 2003, an effective income tax rate of 40.7 percent.

As a result of the foregoing factors and the Series A Preferred Stock dividends of $36,000, the Series C Preferred Stock dividends of $2,800, and the Series D Preferred Stock dividends of $63,000, the net income available to Common Stockholders for the six month period ended December 31, 2004 was $78,000, compared to a net income available to Common Stockholders of $189,000 for the six month period ended December 31, 2003.

The following is a summary of the Company's contractual commitments and other obligations as of December 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 December 31, 2004, the Company's cash position decreased to $5,412,000, from $7,057,000 at June 30, 2004. Of the $5,412,000, $473,000 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 the seasonal increase in inventories, which was partially offset by the increase in accounts payable and accrued expenses.

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 returned 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 continues 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 settl ement 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 scheduled to be completed in March 2005 and no trial date has been set. The Company has agreed to enter into mediation with the landlord and a mediation date, after prior cancellations, will be scheduled. There can be no assurance that this non-binding mediatio n 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 and Part I, Item 2 of this report under Commitments & Contingencies.

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.

None.

None.

On December 7, 2004, the Company held an Annual Meeting of Shareholders, at which the following matters were voted upon:

1. To have Common shareholders elect two (2) individuals to the Company's Board of Directors for the ensuing year.

All matters were approved by the Company's Shareholders.

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).

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: February 14, 2005 /s/ Elisabeth B. Robert ,