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Subscription Agreement - Vermont Teddy Bear Co. Inc.

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                             SUBSCRIPTION AGREEMENT

The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, Vermont 05482

Ladies and Gentlemen:

     The  undersigned,  intending  to be legally  bound,  hereby  subscribes  to
purchase the number of Units  indicated below at a purchase price per unit equal
to the Closing Price one day prior to the Closing Date, discounted as follows:



                Discount:                   Closing Price:
                ---------                   --------------

                                         
                $0.25                       up to $3.375
                $0.50                       over $3.375 to $4.00
                $0.625                      above $4.00


for a total  purchase price of $________,  in accordance  with the terms of this
Subscription  Agreement  ("Subscription   Agreement").   For  purposes  of  this
Subscription  Agreement,  the  Closing  Price  shall mean the average of (a) the
average of all bona fide trades of the Company's Common Stock effected on NASDAQ
on the day one day prior to the Closing Date;  provided,  however,  if no trades
were effected  during such day,  trades  effected  during the next preceding day
during which trades were effected  shall be used, and (b) the average of (i) the
highest  quoted bid price by a  market-maker  in the Company's  Common Stock and
(ii) the  lowest  quoted ask price by a  market-maker  in the  Company's  Common
Stock,  in each case as of the close of  trading on the day one day prior to the
Closing  Date.  This  subscription  is  irrevocable,  but may be rejected by The
Vermont Teddy Bear Co., Inc. (the "Company") in its sole discretion.


                                    SECTION 1
                         Authorization and Sale of Units

     1.1  Authorization.  The Company  shall  authorize  and issue a  sufficient
number of Units so that the purchase  price of all of the Units  authorized  and
issued shall be a minimum of $450,000 and a maximum of $750,000,  provided  that
the issuance of any Units that would cause the aggregate  purchase  price of all
Units issued to exceed $500,000 shall be at the Company's sole discretion.  Each
Unit  shall  consist  of (i) one  share of the  Company's  Series B  Convertible
Preferred  Stock (the  "Preferred  Stock")  and (ii) a three year  warrant  (the
"Warrant") to purchase one share of the Company's  Common Stock, par value $0.05
(the  "Common  Stock") at an exercise  price equal to the lesser of (i) $2.50 or
(ii) the Closing Price minus $0.25.  The  Preferred  Stock shall have the rights
and  preferences  as set forth in the Amendment to the Company's  Certificate of
Incorporation, attached hereto as Exhibit A. The form of the Warrant is attached
hereto as Exhibit B. The shares of Common Stock into which the  Preferred  Stock
will be  convertible  and which may be  purchased  upon  exercise of the Warrant
shall be referred to as the "Conversion Stock."

     1.2  Sale  of the  Units.  Subject  to the  terms  and  conditions  of this
Subscription  Agreement,  the Company shall issue and sell, and the  undersigned
shall  purchase,   _________  (___)  Units,   for  a  total  purchase  price  of
________________  Dollars  ($________).  The number of Units to be  purchased is
equal to the  undersigned's  total purchase price divided by the price per Unit,
as defined above.


                                    SECTION 2
                                     Closing

     2.1 Closing Date.  The closing of the purchase and sale of a minimum of the
Units having an aggregate purchase price of $450,000 or greater shall be held at
the offices of the Company at 12:00 p.m., on June 28, 1996 (the "Closing") or at
such other time as the Company  and the  undersigned  shall agree (the  "Closing
Date").  The closing of the purchase and sale of the remaining Units  subscribed
for and  accepted  by the  Company  pursuant  to Section 1.1 shall be held on or
before July 12, 1996.

     2.2 Delivery. At the Closing the Company shall deliver to the undersigned a
certificate or certificates of Preferred Stock and a Warrant,  registered in the
undersigned's  name,  representing  the number of whole Units  purchased  by the
undersigned against payment of the purchase price therefor,  by check payable to
the Company or wire transfer per the Company's instructions. Any excess purchase
price shall be returned to the undersigned.


                                    SECTION 3
                  Undersigned's Representations and Warranties

     3.1 Accredited Investor. The undersigned represents and warrants that he or
she is an  "accredited  investor"  as that  term is  defined  in Rule  501(a) of
Regulation D,  promulgated  under the  Securities  Act of 1933 (the "1933 Act").
Specifically, the undersigned is (check appropriate items):

          a. A bank as defined in Section 3(a)(2) of the Securities Act of 1933,
as amended (the "Act"),  or a savings and loan association or other  institution
as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or
fiduciary capacity;  a broker or dealer registered pursuant to Section 15 of the
Securities  Exchange  Act of 1934;  an  insurance  company as defined in Section
2(13) of the Act; an investment  company registered under the Investment Company
Act of 1940 (the "Investment Company Act") or a business  development company as
defined in Section  2(a)(48) of the  Investment  Company  Act; a Small  Business
Investment  Company licensed by the U.S. Small Business  Administration  Company
under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan
established and maintained by a state,  its political  subdivision or any agency
or instrumentality  of a state or its political  subdivisions for the benefit of
its  employees,  if such plan has total  assets  in  excess  of  $5,000,000;  an
employee  benefit  plan within the  meaning of the  Employee  Retirement  Income
Security Act of 1974  ("ERISA"),  if the  investment  decision is made by a plan
fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings
and loan association, insurance company, or registered investment advisor, or if
the  employee  benefit plan has total  assets in excess of  $5,000,000  or, if a
self-directed  plan, with  investment  decisions made solely by persons that are
accredited investors.

          b. A private  business  development  company  as  defined  in  Section
202(a)(22) of the Investment Advisers Act of 1940.

          c. An  organization  described  in Section  501(c)(3)  of the Internal
Revenue  Code,   corporation,   Massachusetts  or  similar  business  trust,  or
partnership,  not formed for the specific  purpose of acquiring  Units  offered,
with total assets in excess of $5,000,000.

          d. A director or executive officer of the Company.

          e. A natural  person whose  individual  net worth,  or joint net worth
with  that  person's  spouse,  at  the  time  of his  or  her  purchase  exceeds
$1,000,000.

          f. A natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that  person's  spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.

          g. A trust, with total assets in excess of $5,000,000,  not formed for
the  specific  purpose of  acquiring  Units,  whose  purchase  is  directed by a
sophisticated  person as described in Rule  506(b)(2)(ii)  promulgated under the
Act (i.e.,  a person who has such  knowledge  and  experience  in financial  and
business  matters that he is capable of  evaluating  the merits and risks of the
prospective investment).

          h.  An  entity  in  which  all of the  equity  owners  are  accredited
investors.  (If this alternative is checked,  the undersigned must identify each
equity owner and provide  statements  signed by each  demonstrating  how each is
qualified as an accredited investor.)

     3.2  Investment  Intent.  The  undersigned  is acquiring  the Units and the
Conversion Stock for investment for its own account,  not as a nominee or agent,
and not with the view to, or for resale in  connection  with,  any  distribution
thereof.  The undersigned  understands  that the Preferred  Stock,  Warrants and
Conversion  Stock have not been, and will not be,  registered under the 1933 Act
(except in accordance with Section 7 of this  Subscription  Agreement) by reason
of a specific  exemption from the  registration  provisions of the 1933 Act, the
availability of which depends upon, among other things,  the bona fide nature of
the investment intent and the accuracy of the undersigned's  representations  as
expressed  herein  and in the  Suitability  Questionnaire,  attached  hereto  as
Exhibit C.

     3.3 Restricted Securities.  The undersigned acknowledges that the Preferred
Stock,  Warrants  and the  Conversion  Stock  must be held  indefinitely  unless
subsequently  registered  under the 1933 Act, or unless an  exemption  from such
registration  is available.  The  undersigned is aware of the provisions of Rule
144  promulgated  under  the 1933 Act,  which  permit  limited  resale of shares
purchased  in a  private  placement  subject  to  the  satisfaction  of  certain
conditions,  including, among other things, the existence of a public market for
the shares,  the  availability of certain current public  information  about the
Company,  the  resale  occurring  not less  than  two  years  after a party  has
purchased and paid for the security to be sold, the sale being effected  through
a "broker's  transaction" or in transactions  directly with a "market maker" and
the number of shares  being sold  during any  three-month  period not  exceeding
specified limitations.

     3.4 No Public Market. The undersigned  understands and acknowledges that no
public market exists for the Preferred Stock or the Warrants to be issued by the
Company and that the Company has made no  assurances  that a public  market will
ever exist for the Preferred Stock or the Warrants.

     3.5  Access  to  Information.  The  undersigned  acknowledges  that  he has
received and reviewed the Company's  Prospectus,  issued in connection  with the
Company's initial public offering in 1993 (the "IPO"),  and all of the Company's
Annual Reports to Shareholders,  Proxy Statements,  Forms 10-QSB and 10-KSB sent
to shareholders or filed with the Securities and Exchange  Commission  since the
IPO, and its Business Plan, and that the  undersigned  has had an opportunity to
discuss the  Company's  business,  management  and  financial  affairs  with the
Company's  management.  The  undersigned  has  also  had an  opportunity  to ask
questions of and receive answers from the Company's officers.

     3.6 Authorization.  This Subscription Agreement when executed and delivered
by the undersigned  shall  constitute a valid and legally binding  obligation of
the undersigned, enforceable in accordance with its terms.

     3.7  Indemnification.  The  undersigned  acknowledges  that the undersigned
understands  the  meaning  and legal  consequences  of the  representations  and
warranties  contained in this Section, and agrees to indemnify and hold harmless
the Company and its directors,  officers, employees and agents, past, present or
future, from and against any and all loss, damage or liability due to or arising
out of a breach of any such representation or warranty made by the undersigned.

     3.8  Survival.  The  undersigned  acknowledges  that  the  representations,
warranties  and  agreements  made by the  undersigned  herein shall  survive the
execution and delivery of this Agreement and the Closing.


                                    SECTION 4
                    Company's Representations and Warranties

     4.1  Organization  and  Standing;  Articles and  By-Laws.  The Company is a
corporation duly organized and existing under, and by virtue of, the laws of the
State of New York and is in good  standing  under such  laws.  The  Company  has
requisite  corporate  power and authority to own and operate its  properties and
assets,  and to carry on its business as presently  conducted and as proposed to
be conducted.  The Company is qualified to do business as a foreign  corporation
in the State of Vermont.

     4.2  Corporate  Power.  The  Company  will  have at the  Closing  Date  all
requisite  legal and  corporate  power and authority to execute and deliver this
agreement,  to sell and issue the Units hereunder, to issue the Conversion Stock
upon conversion of the Preferred  Stock and/or exercise of the Warrants,  and to
carry out and perform its obligations under the terms of this Agreement.

     4.3  Authorization.  All corporate  action on the part of the Company,  its
directors and shareholders necessary for the authorization,  execution, delivery
and  performance  of this  Agreement by the Company,  the  authorization,  sale,
issuance and delivery of the Units and the Conversion  Stock and the performance
of all of the  Company's  obligations  hereunder has been taken or will be taken
prior to the  Closing.  This  Agreement,  when  executed  and  delivered  by the
Company,  shall  constitute  a valid  and  binding  obligation  of the  Company,
enforceable in accordance with its terms.  The Units,  when issued in compliance
with the provisions of this Agreement,  will be validly  issued,  fully paid and
nonassessable and will have the rights,  preferences and privileges described in
Exhibits  A and B,  attached  hereto;  the  Conversion  Stock have been duly and
validly  reserved  and, when issued in  compliance  with the  provisions of this
Agreement,  will be validly issued, fully paid and nonassessable;  and the Units
and  Conversion  Stock will be subject to  restrictions  on transfer under state
and/or federal securities laws as set forth herein. Issuance of the Units is not
subject to any preemptive rights or rights of first refusal.

     4.4  Capitalization  and  Voting  Rights.  As  of  the  Closing  Date,  the
authorized capital of the Company consists of:

          (i)  Preferred  Stock.  One Million  (1,000,000)  shares of  Preferred
               Stock (the "Preferred  Stock"),  Ninety (90) of which shares have
               been designated Series A Preferred Stock (the "Series A Preferred
               Stock") and all of which have been issued. The rights, privileges
               and  preferences of the Series A Preferred Stock are as stated in
               the  Company's   Certificate  of  Incorporation.   Three  Hundred
               Seventy-Five  Thousand  (375,000)  shares of Preferred Stock have
               been designated Series B Convertible Preferred Stock (the "Series
               B Preferred  Stock")  and a portion of which,  as  determined  in
               Section  1 of this  Agreement,  will be issued  pursuant  to this
               Agreement. The rights, privileges and preferences of the Series B
               Preferred  Stock will be as stated in the  Company's  Amended and
               Restated Certificate of Incorporation, attached hereto as Exhibit
               A. The remaining shares of preferred stock are undesignated.

          (ii) Common Stock. Twenty Million  (20,000,000) shares of common stock
               ("Common  Stock"),  of which  5,160,750  shares  are  issued  and
               outstanding.

     4.5 Governing  Documents.  Except for  amendments  necessary to satisfy the
representations  and  warranties or conditions  contained  herein,  the Restated
Certificate of Incorporation  and Bylaws of the Company are in the form attached
as Schedule 4.5.

     4.6 Financial Statements.  The Company has delivered to the undersigned its
audited  financial  statements  (balance  sheet and profit  and loss  statement,
statement of stockholders'  equity and statement of cash flows,  including notes
thereto)  at December  31, 1994 and for the fiscal year then ended,  at June 30,
1995,  and for the  transition  period then ended,  and its unaudited  financial
statements  (balance  sheet and  profit  and loss  statement)  as at and for the
nine-month  period  ended  March 31,  1996  (the  "Financial  Statements").  The
Financial  Statements have been prepared in accordance  with generally  accepted
accounting  principles  applied on a  consistent  basis  throughout  the periods
indicated and with each other,  except that unaudited  Financial  Statements may
not contain all footnotes required by generally accepted accounting  principles.
The Financial  Statements  fairly present the financial  condition and operating
results of the Company as of the dates, and for the periods,  indicated therein,
subject in the case of unaudited  Financial  Statements to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has no
material  liabilities,  contingent  or  otherwise,  other  than (i)  liabilities
incurred in the ordinary  course of business  subsequent to March 31, 1996,  and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted  accounting  principles to
be reflected in the Financial Statements,  which, in both cases, individually or
in the  aggregate,  are not  material to the  financial  condition  or operating
results of the Company.  There has been no material  adverse  change since March
31, 1996, in the business, operations, assets, prospects or condition (financial
or otherwise) of the Company.  Except as disclosed in the Financial  Statements,
the Company is not a guarantor or  indemnitor of any  indebtedness  of any other
person, firm or corporation. The Company maintains and will continue to maintain
a standard system of accounting  established and administered in accordance with
generally accepted accounting principles.

     4.7 No Violation or Defaults. As of the Closing Date, the Company is not in
violation  or  default  of  any  provision  of  its  Restated   Certificate   of
Incorporation or Bylaws, or in any material respect of any instrument, judgment,
order,  writ, decree or contract to which it is a party or by which it is bound,
or,  of any  provision  of any  federal  or state  statute,  rule or  regulation
applicable to the Company which  violation  would have a material  effect on the
Company's  operations or business.  The execution,  delivery and  performance of
this Agreement,  and the  consummation of the transactions  contemplated  hereby
will not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice,  either a default under any
such provision,  instrument,  judgment,  order,  writ,  decree or contract or an
event that results in the creation of any lien,  charge or encumbrance  upon any
assets of the Company or the suspension,  revocation, impairment, forfeiture, or
nonrenewal  of  any  material  permit,  license,   authorization,   or  approval
applicable  to the Company,  its business or  operations or any of its assets or
properties.

     4.8 Broker's  Fees.  Except for a finders fee payable to Equinox  Ventures,
Inc.,  to  consist  of (i) a cash  payment  equal to 5% of the  total  aggregate
purchase price of the Units  purchased at the Closing and (ii) a Warrant for the
purchase of the number of shares of the Company's Common Stock equal to the Cash
Payment  divided by the purchase  price per Unit, the Company is not liable for,
nor is it aware of, any broker's fee or other compensation payable in connection
with the transactions contemplated by this Agreement. The Company will indemnify
and hold the undersigned  harmless against any and all liability with respect to
any such commission,  fee or other  compensation  which may be payable or deemed
payable in connection with the transactions contemplated by this Agreement.

     4.9 Absence of Undisclosed Liabilities.  Except as disclosed in information
furnished  pursuant to Section  3.5,  the  financial  statements  referred to in
Section  4.6  hereof,  or arising in the  ordinary  course of  business  and for
obligations  created  pursuant to this  Agreement,  as of the Closing Date,  the
Company  will have no  material  liabilities  and will be subject to no material
obligations under any contract or commitment of any kind.

     4.10  Litigation.  As of  the  Closing  Date,  there  is no  action,  suit,
proceeding or investigation  pending or currently threatened against the Company
that  questions  the  validity of this  Agreement or the right of the Company to
enter into such agreements,  or to consummate the  transactions  contemplated by
this Agreement,  or that might result,  either individually or in the aggregate,
in any material adverse changes in the assets,  condition,  affairs or prospects
of the Company,  financially  or otherwise,  or any change in the current equity
ownership  of  the  Company.  The  Company  is not a  party  or  subject  to the
provisions of any order,  writ,  injunction,  judgment or decree of any court or
government agency or instrumentality.  There is no action,  suit,  proceeding or
investigation  by the Company  currently  pending or that the Company intends to
initiate.

     4.11  Consents.  No  consent,  approval,  order  or  authorization  of,  or
registration,  qualification,  designation,  declaration  or  filing  with,  any
federal,  state or local  governmental  authority  on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except for the filing of Form D with the Securities and Exchange
Commission and the waiver of the application of 9 V.S.A.  [SECTION]  4204a(a)(9)
by  the  Commissioner  of  the  Vermont  Department  of  Banking,   Insurance  &
Securities, which waiver has been granted.

     4.12 Trademark, Licenses. The Company has sufficient title and ownership of
all  trademarks,   service  marks,  trade  names,  copyrights,   trade  secrets,
information,  proprietary  rights,  licenses  and  processes  necessary  for its
business as now conducted and as proposed to be conducted  without,  to the best
of the Company's  knowledge,  any conflict with or infringement of the rights of
others;  provided,  however,  that the  Company has  entered  into a  collateral
assignment of its pending and registered  trademarks (the  "Trademarks")  to the
Vermont National Bank ("VNB"),  in connection with VNB's term loan of $3,500,000
and revolving line of credit in the maximum  amount of  $1,000,000.  Pursuant to
this  collateral  assignment,  the  Company  has an  exclusive,  nontransferable
license to use the Trademarks and a license to grant sublicenses with respect to
the Trademarks.  The Company has not received any  communications  alleging that
the Company has violated  or, by  conducting  its  business as  proposed,  would
violate any of the trademarks,  service marks, trade names,  copyrights or trade
secrets or other proprietary rights of any other person or entity.

     4.13 Subsidiaries.  The Company does not presently own or control, directly
or  indirectly,  any interest in any other  corporation,  association,  or other
business entity, except that the Company owns all of the stock in VTB Marketing,
Inc.,  a  Vermont  corporation,  which  currently  has  minimal  capital  and no
operations. The Company is not a participant in any joint venture,  partnership,
or similar arrangement.

     4.14 Title to  Properties,  Liens and  Encumbrances.  The Company  owns its
property  and  assets  free  and  clear  of  all  mortgages,  liens,  loans  and
encumbrances,  except  such  encumbrances  and liens that arise in the  ordinary
course of business and do not materially  impair the Company's  ownership or use
of such  property or assets.  With respect to the property and assets it leases,
the Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.

     4.15 Environmental  Compliance.  As of the Closing Date, the Company is not
in  violation  of any  applicable  statute,  law or  regulation  relating to the
environment or  occupational  health and safety,  which  violation  would have a
materially  adverse effect on the Company's  business or operations,  and to the
best of its knowledge, no material expenditures are or will be required in order
to comply with any such existing statute, law or regulation.

     4.16  Exempt  Offering.  Subject in part to the truth and  accuracy  of the
undersigned's  representations  set forth in  Section 3 of this  Agreement,  the
offer,  sale and issuance of the Units and Conversion  Shares as contemplated by
this  Agreement are exempt from the  registration  requirements  of the Act, and
neither the Company nor any authorized  agent acting on its behalf will take any
action  hereafter that would cause the loss of such  exemption.  The Company has
complied  with and will  comply  with all  applicable  state  "blue sky" laws in
connection  with the offer,  sale and  issuance of the Units and the  Conversion
Stock.

     4.17  Disclosure.  The Company has fully provided the undersigned  with all
the  information  that he has  requested  for  deciding  whether to purchase the
Units. The information  furnished to the undersigned  pursuant to Section 3.5 is
true and correct and  discloses  all  information  required to be  disclosed  by
applicable  securities law. Neither this Agreement,  nor any other  information,
statements or certificates made or delivered in connection herewith contains any
untrue  statement of a material fact or omits to state a material fact necessary
to make the statements herein not misleading.

     4.18 Agreement Affecting Capital Stock. As of the Closing Date, the Company
is not a party to any agreements affecting its Capital Stock, with the exception
of (i) an  agreement  by and  between  the  Company and the holder of all of the
Ninety (90) shares of the Series A Preferred  Stock (the "Series A Holder"),  by
which Agreement the Series A Holder has agreed to forego her cumulated dividends
through June 30, 1996,  in exchange for a warrant for the purchase of 43,826.087
shares of the  Company's  Common Stock at a purchase  price of $2.875 per share,
(ii) the  Company's  Incentive  Stock Option  Plan,  and (iii) a warrant for the
purchase  of up to 20,000  shares of the  Company's  Common  Stock at a purchase
price of $3.375 per share, held by Green Mountain Capital, Ltd. A description of
the options currently issued and outstanding under the Company's Incentive Stock
Option Plan is attached as Schedule 4.18.


                                    SECTION 5
                               Company's Covenant

     5.1  Protective  Covenant.  The Company  hereby  agrees not to authorize or
issue any additional  shares of Series A Preferred  Stock or the Preferred Stock
or any other series of preferred  stock that would have rights or preferences at
parity  with  or  superior  to the  Preferred  Stock  as to  redemption  rights,
dividends or  distribution  of assets in  liquidation,  or to otherwise alter or
amend any of the rights or  privileges  of the  Preferred  Stock  without  first
obtaining the written approval of at least Sixty Percent (60%) of the holders of
the Preferred Stock.

     5.2 Information  Rights. The Company shall provide the undersigned with all
reports,  including  financial  statements,  sent to holders of the Common Stock
and/or the Company's  Series A Preferred  Stock, by mailing such  information to
the  undersigned  on the same date that such  information is mailed to any other
shareholder of the Company.


                                    SECTION 6
                         Company's Conditions to Closing

     The  Company's  obligation to issue and sell on the Closing Date is, at the
option of the Company,  subject to the fulfillment as of the Closing Date of the
following conditions:

     6.1 Minimum  Investment.  There  shall be  subscriptions  for a  sufficient
number of Units having an aggregate purchase price of not less than $450,000.

     6.2 Representations. The representations made by the undersigned in Section
3 of the  Subscription  Agreement shall be true and correct when made, and shall
be true and correct on the Closing Date.

     6.3  Suitability  Questionnaire.  The  undersigned  shall have executed and
delivered to the Company a Suitability Questionnaire,  acceptable to counsel for
the Company.

     6.4 Compliance  with Federal and State  Securities  Laws. The Company shall
have  obtained  all  permits  and  qualifications  required  by the any state or
federal  government  for the  offer  and sale of the  Units  and the  Conversion
Shares, or shall have the availability of exemptions therefrom. Upon sale of the
Units,  the Company  shall file a Form D with the United States  Securities  and
Exchange Commission in a timely manner.

     6.5 Amended  Certificate of Incorporation.  The Company shall have filed an
Amended  Certificate of Incorporation in the form of Exhibit A, attached hereto,
with the New York  Department of State,  pursuant to Section 805 of the New York
Business Corporation Law.

     6.6 Legal Matters.  All material matters of a legal nature which pertain to
this  Agreement,  and the  transactions  contemplated  hereby,  shall  have been
reasonably approved by counsel to the Company.


                                    SECTION 7
                       Undersigned's Conditions to Closing

     The undersigned's  obligation to purchase the Units on the Closing Date is,
at the option of the  undersigned,  subject to the fulfillment as of the Closing
Date of the following conditions:

     7.1  Representations.  The representations made by the Company in Section 4
of the Subscription  Agreement shall be true and correct when made, and shall be
true  and  correct  on the  Closing  Date.  The  Company  shall  deliver  to the
undersigned  at the  Closing an  officer's  certificate  acknowledging  that the
representations by the Company in Section 4 are true and correct.

     7.2 Certified  Documents.  The Company shall deliver to the  undersigned at
the  Closing  copies  of  resolutions  of  the  Company's   Board  of  Directors
authorizing  the  issuance  of the  Units  and  the  Conversion  Shares  and the
execution of this  Agreement,  the Company's  Certificate of  Incorporation  and
Bylaws,  an  incumbency   certificate  regarding  the  Company's  officers,  all
certified by the Company's  Secretary and Certificates of Good Standing from the
Secretary of State of New York and Vermont.

     7.3 Opinion of Counsel. The Company shall deliver to the undersigned at the
Closing a copy of the opinion of Dinse, Erdmann, Knapp & McAndrew, P.C., counsel
to the Company, substantially in the form attached hereto as Exhibit D.


                                    SECTION 8
         Restrictions on Transferability; Compliance with the 1933 Act;
                               Registration Rights

     8.1  Restrictions  on  Transferability.  The Preferred  Stock,  Warrants or
Conversion  Stock (the  "Restricted  Securities")  shall not be sold,  assigned,
transferred  or pledged except in accordance  with the  conditions  specified in
this  Section 8, which  conditions  are intended to ensure  compliance  with the
provisions of the 1933 Act. The undersigned  will cause any proposed  purchaser,
assignee,  transferee, or pledgee of the Preferred Stock, Warrants or Conversion
Stock of the  undersigned to agree to take and hold such  securities  subject to
the provisions and conditions of this Section 8.

     8.2 Restrictive  Legend.  Each  certificate  representing (i) the Preferred
Stock,  (ii) the Warrants,  and (iii) the Conversion  Stock,  and (iv) any other
securities  issued in respect of the Preferred  Stock or Warrants upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event,
shall  (unless  otherwise  permitted by the  provisions of Section 8.3 below) be
stamped or otherwise  imprinted with a legend in the following form (in addition
to any legend required under applicable state securities laws):

       THE  SHARES   REPRESENTED  BY  THIS  CERTIFICATE  HAVE  NOT  BEEN
       REGISTERED  UNDER THE SECURITIES ACT OF 1933, SUCH SHARES MAY NOT
       BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
       OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
       SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
       OR ITS TRANSFER  AGENT THAT SUCH  REGISTRATION  IS NOT  REQUIRED.
       COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND
       RESTRICTING  THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
       REQUEST MADE BY THE HOLDER OF RECORD OF THIS  CERTIFICATE  TO THE
       SECRETARY OF THE CORPORATION AT THE PRINCIPAL  EXECUTIVE  OFFICES
       OF THE CORPORATION.

     The  undersigned  consents to the Company  making a notation on its records
and giving  instructions to any transfer agent of the Preferred Stock,  Warrants
or  Conversion  Stock  in  order  to  implement  the  restrictions  on  transfer
established in this Section 8. Upon registration of the Conversion Stock and the
request of the  undersigned,  the  Company  shall  authorize  the removal of the
restrictive  legend from the  certificates of stock  representing the Conversion
Stock  registered,  and shall  provide  its  transfer  agent with any opinion of
counsel necessary to effect the removal of the restrictive legend.

     8.3  Notice  of  Proposed   Transfers.   The  holder  of  each  certificate
representing  Restricted Securities,  by acceptance thereof, agrees to comply in
all respects  with the  provisions  of this  Section 8.3.  Prior to any proposed
sale,  assignment,  transfer or pledge of any Restricted  Securities (other than
(i)  transfers   not  involving  a  change  in  beneficial   ownership  or  (ii)
transactions  involving the  distribution  without  consideration  of Restricted
Securities by the undersigned to any of its partners, or retired partners, or to
the estate of any of its  partners  or  retired  partners),  unless  there is in
effect  a  registration  statement  under  the 1933 Act  covering  the  proposed
transfer,  the holder  thereof shall give written  notice to the Company of such
holder's  intention to effect such transfer,  sale,  assignment or pledge.  Each
such  notice  shall  describe  the  manner  and  circumstances  of the  proposed
transfer,  sale,  assignment  or  pledge  in  sufficient  detail,  and  shall be
accompanied,  at such  holder's  expense  by either (i) an  unqualified  written
opinion  of legal  counsel  who shall  be,  and whose  legal  opinion  shall be,
reasonably  satisfactory to the Company addressed to the Company,  to the effect
that the proposed transfer of the Restricted  Securities may be effected without
registration  under  the  1933  Act,  or (ii) a "no  action  "  letter  from the
Securities and Exchange  Commission  (the  "Commission")  to the effect that the
transfer  of  such  securities  without   registration  will  not  result  in  a
recommendation  by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such  Restricted  Securities in accordance with the terms of the notice
delivered  by the  holder  to  the  Company.  Each  certificate  evidencing  the
Restricted  Securities  transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the  appropriate  restrictive  legend set
forth in Section  8.2 above,  except that such  certificate  shall not bear such
restrictive  legend if in the opinion of counsel for such holder and the Company
such legend is not required in order to establish  compliance with any provision
of the 1933 Act.

     8.4 Requested  Registration.  The holders of the Units shall be entitled to
two (2) demand  registrations  as  follows:  (i) the  holders of at least  sixty
percent  (60%) of the  Preferred  Stock,  or  Conversion  Stock  into  which the
Preferred  Stock is  convertible,  or has been  converted,  may  request one (1)
resale  registration of the Conversion  Stock;  and (ii) the holders of at least
sixty percent (60%) of the  Warrants,  or Conversion  Stock which may be, or has
been,  purchased  upon  exercise  of the  Warrants,  may  request one (1) resale
registration  of the Conversion  Stock.  Upon receipt by the Company of a proper
request of at least sixty percent (60%) of the holders of the Preferred Stock or
the Warrants, and the Conversion Stock, as the case may be (the "Holders"),  the
Company will:

          a.  promptly  give notice of the proposed  registration  to all of the
Holders,  who shall then have  twenty (20) days to notify the Company in writing
of their  interest  in  participating  in the  registration;  provided  that any
Holders who fail or decline to participate in the resale registrations  provided
under this Section 8.4 shall not have a right to request any  additional  resale
registrations; and

          b.  as  soon  as  practicable,  the  Company  shall  effect  a  resale
registration  of all of the Conversion  Stock  (including,  without  limitation,
appropriate  compliance with applicable blue sky or other state  securities laws
and appropriate compliance with applicable regulations issued under the 1933 Act
and any other  governmental  requirements or regulations) as may be so requested
and as would permit or facilitate  the sale and  distribution  of the Conversion
Stock;  provided,  however  that the Company  shall not be obligated to take any
action to effect any such registration pursuant to this Section 8.4:

               (i) Prior to twelve  (12) months or later than  seventy-two  (72)
months after the issuance of the Units; or

               (ii) If the Company shall furnish to the requesting  shareholders
a certificate  signed by the  President of the Company  stating that in the good
faith  judgment of the Board of  Directors  of the Company it would be seriously
detrimental to the Company or its shareholders  for a registration  statement to
be filed in the near future, in which case the Company's  obligation to register
under this  Section  8.4 shall be  deferred  for a period not to exceed 120 days
from  the  date  of  receipt  of  the  written   request  from  the   requesting
shareholders.

     The  Holders  shall  be  entitled  to  request  registration  only  once in
connection with the Conversion  Stock  underlying the Preferred  Stock, and only
once in connection with the Conversion  Stock  underlying the Warrants,  and any
Holders that do not join in the demand registrations shall have no further right
to  registration,  except for the  piggyback  registration  rights  described in
Section 8.5 below.

     8.5 Company Registration.

          a. Notice of  Registration.  If at any time, or from time to time, the
Company shall  determine to register any of its  securities,  either for its own
account  or  the  account  of  a  security  holder  or  holders,  other  than  a
registration  relating  solely  to  employee  benefit  plans  or a  registration
relating solely to a Commission Rule 145 transaction, the Company will:

               (i) promptly give to each Holder written notice thereof; and

               (ii) include in such registration (and any related  qualification
under  blue sky  laws or other  compliance),  and in any  underwriting  involved
therein,  all the Conversion  Stock  specified in a written request or requests,
made  within  twenty  (20) days after  receipt of such  written  notice from the
Company, by any Holder.

          b. Underwriting. If the registration of which the Company gives notice
is for a registered public offering involving an underwriting, the Company shall
so advise the Holders as a part of the written  notice given pursuant to Section
8.5(a)(i).  In such event,  the right of any Holder to registration  pursuant to
this Section 8.5 shall be conditioned  upon such Holder's  participation in such
underwriting  and  the  inclusion  of  such  Holder's  Conversion  Stock  in the
underwriting to the extent provided herein.  All Holders proposing to distribute
their securities  through such underwriting shall (together with the Company and
other  shareholders  distributing  their securities  through such  underwriting)
enter  into an  underwriting  agreement  in  customary  form  with the  managing
underwriter  selected for such underwriting by the Company.  Notwithstanding any
other provision of this Section 8.5, if the managing underwriter determines that
marketing   factors  require  a  limitation  of  the  number  of  shares  to  be
underwritten,  the managing  underwriter  may limit the  Conversion  Stock to be
included in such  registration.  The Company shall so advise all Holders and the
numbers of shares of Conversion  Stock that may be included in the  registration
and underwriting  shall be allocated among all Holders in proportion,  as nearly
as  practicable,  to the  respective  amounts of  Conversion  Stock held by such
Holders at the time of filing the  registration  statement.  To  facilitate  the
allocation of shares in accordance  with the above  provisions,  the Company may
round the number of shares  allocated to any Holder or other  shareholder to the
nearest 100 shares. If any Holder or other shareholder  disapproves of the terms
of any such  underwriting,  he may elect to withdraw therefrom by written notice
to the  Company  and  the  managing  underwriter.  Any  securities  excluded  or
withdrawn from such underwriting shall be withdrawn from such registration,  and
shall not be  transferred  in a public  distribution  prior to 90 days after the
effective date of the registration  statement  relating  thereto,  or such other
shorter period of time as the underwriters may require.  The Company may include
shares of Common Stock held by shareholders other than Holders in a registration
statement  pursuant  to this  Section  8.5 and to the extent  that the amount of
Conversion Stock otherwise  includible in such registration  statement would not
thereby be diminished.

          c. Right to Terminate  Registration.  The company shall have the right
to terminate or withdraw any registration initiated by it under this Section 8.5
prior to the  effectiveness of such  registration  whether or not any Holder has
elected to include securities in such registration.

     8.6  Limitations  on  Subsequent  Registration  Rights.  From and after the
Closing Date, the Company shall not enter into any agreement granting any holder
or prospective holder of any securities of the Company  registration rights with
respect  to such  securities  unless  such new  registration  rights,  including
standoff obligations, are subordinate to the registration rights granted Holders
hereunder.

     8.7 Expenses of Registration. All Registration Expenses, except for Selling
Expenses relating to securities registered on behalf of the Holders, incurred in
connection with (i) two (2) registrations  pursuant to Section 8.4, and (ii) all
registrations  pursuant to Section 8.5,  shall be borne by the  Company.  Unless
otherwise  stated,  all Selling  Expenses  relating to securities  registered on
behalf of the Holders shall be borne by the Holders of such  securities pro rata
on the basis of the  number of shares  so  registered.  "Registration  Expenses"
shall include all  registration  and filing fees,  printing  expenses,  fees and
disbursements  of counsel and  independent  public  accountants for the Company,
fees and expenses, including counsel fees, incurred in connection with complying
with state  securities or "blue sky" laws,  fees of the National  Association of
Securities   Dealers,   Inc.,  transfer  taxes,  fees  of  transfer  agents  and
registrars.  "Selling  Expenses"  shall include all  underwriting  discounts and
selling  commissions  applicable to the  registration and sale of any securities
held by the Holders.

     8.8   Registration   Procedures.   In  the   case  of  each   registration,
qualification or compliance  effected by the Company pursuant to this Section 8,
the Company  will keep each Holder  advised in writing as to the  initiation  of
each  registration,  qualification  and  compliance  and  as to  the  completion
thereof. At its expense the Company will:

          a. Prepare and file with the Commission a registration  statement with
respect to such  securities and use its best efforts to cause such  registration
statement  to become and remain  effective  for at least  ninety (90) days,  and
prepare  and file  with the  Commission  such  amendments  to such  registration
statement  and  supplements  to  the  prospectus  contained  therein  as  may be
necessary to keep such registration statement effective for at least ninety (90)
days,  provided that no such registration  shall constitute a shelf registration
under Rule 415 promulgated by the Commission under the Securities Act;

          b. Enter into a written  underwriting  agreement in customary form and
substance  reasonably  satisfactory to the Company, the Holders and the managing
underwriter or underwriters of the public  offering of such  securities,  if the
offering is to be underwritten in whole or in part;

          c. Furnish to the Holders  participating  in such  registration and to
the underwriters of the securities  being  registered such reasonable  number of
copies of the registration statement,  preliminary prospectus,  final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;

          d. Use its best efforts to register or qualify the securities  covered
by such  registration  statement under such state securities or blue sky laws of
such jurisdictions as such  participating  Holders may reasonably request within
ten (10)  days  prior to the  original  filing of such  registration  statement,
except  that the  Company  shall not for any  purpose be  required  to execute a
general  consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction where it is not so qualified;

          e. Notify the Holders (or if they have appointed an  attorney-in-fact,
such  attorney-in-fact)  participating in such  registration,  promptly after it
shall receive notice thereof,  of the time when such registration  statement has
become  effective  or a  supplement  to any  prospectus  forming  a part of such
registration statement has been filed;

          f.  Notify  such  Holders or their  attorney-in-fact  promptly  of any
request by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;

          g. Prepare and file with the  Commission  promptly upon the request of
any such Holders,  any amendments or supplements to such registration  statement
or prospectus which, in the reasonable  opinion of counsel for such Holders,  is
required  under  the  1933  Act or  the  rules  and  regulations  thereunder  in
connection with the distribution of the Conversion Stock by such Holders;

          h. Prepare and promptly file with the Commission,  and promptly notify
such  Holders or their  attorney-in-fact  of the filing of,  such  amendment  or
supplement to such  registration  statement or prospectus as may be necessary to
correct any  statements or omissions if, at the time when a prospectus  relating
to such securities is required to be delivered under the 1933 Act, any event has
occurred as the result of which any such  prospectus or any other  prospectus as
then in effect would  include an untrue  statement of a material fact or omit to
state any material fact necessary to make the statements  therein not misleading
in light of the circumstances in which they were made;

          i. In case any of such Holders or any underwriter for any such Holders
is required to deliver a prospectus at a time when the prospectus then in effect
may no longer be used under the 1933 Act,  prepare  promptly  upon  request such
amendment or amendments to such registration  statement and such prospectuses as
may be necessary to permit compliance with the requirements of the 1933 Act;

          j. Advise such Holders or their  attorney-in-fact,  promptly  after it
shall receive notice or obtain  knowledge  thereof,  of the issuance of any stop
order  by the  Commission  suspending  the  effectiveness  of such  registration
statement or the  initiation or  threatening  of any proceeding for that purpose
and  promptly  use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued; and

          k. At the request of any such Holder, furnish on the effective date of
the registration  statement and, if such  registration  includes an underwritten
public offering, at the closing provided for in the underwriting agreement,  (i)
an opinion,  dated each such date, of the counsel  representing  the Company for
the purposes of such registration, addressed to the underwriters, if any, and to
the Holder or Holders making such request, covering such matters with respect to
the  registration  statement,  the  prospectus  and each amendment or supplement
thereto,  proceedings  under state and federal  securities  laws,  other matters
relating to the Company,  the securities being registered and the offer and sale
of such  securities  as are  customarily  the  subject of  opinions  of issuer's
counsel provided to underwriters in underwritten  public offerings,  and (ii) to
the extent the  Company's  accounting  firm is willing to do so, a letter  dated
each  such  date,  from  the  independent  public  accountants  of the  Company,
addressed to the underwriters,  if any, and to the Holder or Holders making such
request, stating that they are independent public accountants within the meaning
of the  1933 Act and  that in the  opinion  of such  accountants  the  financial
statements and other financial data of the Company  included in the registration
statement or the prospectus or any amendment or supplement thereto comply in all
material respects with the applicable  accounting  requirements of the 1933 Act,
and additionally covering such other financial matters, including information as
to the period  ending not more than five (5) business  days prior to the date of
such letter with respect to the  registration  statement and prospectus,  as the
underwriters or such requesting Holder or Holders may reasonably request.

     8.9  Information  by Holder.  The Holder or  Holders  of  Conversion  Stock
included  in  any  registration  shall  furnish  the  Company  such  information
regarding  such Holder or  Holders,  the  Conversion  Stock held by them and the
distribution  proposed  by such  Holder or Holders as the Company may request in
writing  and  as  shall  be  required  in  connection  with  any   registration,
qualification or compliance referred to in this Section 8.

     8.10 Transfer of  Registration  Rights.  The rights to cause the Company to
register  securities  granted  Purchasers  under  Sections  8.4  and  8.5 may be
assigned to a transferee  or assignee  reasonably  acceptable  to the Company in
connection  with any transfer or assignment of the Units or Conversion  Stock by
the  undersigned  provided  that: (i) such transfer may otherwise be effected in
accordance with applicable securities laws, and (ii) such assignee or transferee
acquires all of the Units and/or  Conversion Stock  (appropriately  adjusted for
Recapitalizations)  held by the transferor.  Notwithstanding the foregoing,  the
rights to cause the  Company  to  register  securities  may be  assigned  to any
constituent partner of the undersigned, without compliance with item (ii) above,
provided written notice thereof is promptly given to the Company.

     8.11 Indemnification.  In the event any Conversion Shares are included in a
registration statement under this Section 8:

          (a)  To the extent  permitted by law, the Company will  indemnify  and
               hold harmless  each Holder,  any  underwriter  (as defined in the
               1933 Act) for such Holder and each  person,  if any, who controls
               such Holder or underwriter  within the meaning of the 1933 Act or
               the 1934 Act, against any losses, claims, damages, or liabilities
               (joint or  several)  to which they may become  subject  under the
               Act,  the 1934 Act or other  federal or state law insofar as such
               losses,  claims,  damages,  or liabilities (or actions in respect
               thereof)  arise  out of or are  based  upon any of the  following
               statements, omissions or violations (collectively a "Violation"):
               (i)  any  untrue  statement  or  alleged  untrue  statement  of a
               material fact contained in such registration statement, including
               any preliminary  prospectus or final prospectus contained therein
               or any  amendments or supplements  thereto,  (ii) the omission or
               alleged  omission to state therein a material fact required to be
               stated therein,  or necessary to make the statements  therein not
               misleading,  or (iii) any  violation or alleged  violation by the
               Company of the 1933 Act, the 1934 Act, any state  securities  law
               or any rule or  regulation  promulgated  under the 1933 Act,  the
               1934 Act or any state securities law; and the Company will pay to
               each such Holder, underwriter or controlling person, as incurred,
               any  legal  or  other  expenses  reasonably  incurred  by them in
               connection with  investigating or defending any such loss, claim,
               damage,   liability,   or  action;  provided  however,  that  the
               indemnity  agreement  contained in this subsection  8.11(a) shall
               not apply to amounts paid in settlement of any such loss,  claim,
               damage,  liability,  or action  if such  settlement  is  effected
               without the consent of the Company  (which  consent  shall not be
               unreasonably  withheld),  nor shall the  Company be liable in any
               such case for any such loss, claim, damage,  liability, or action
               to the extent  that it arises out of or is based upon a Violation
               which  occurs in reliance  upon and in  conformity  with  written
               information  furnished  expressly for use in connection with such
               registration  by any  such  Holder,  underwriter  or  controlling
               person.

          (b)  To  the  extent  permitted  by  law,  each  selling  Holder  will
               indemnify and hold harmless the Company,  each of its  directors,
               each of its officers who has signed the  registration  statement,
               each person,  if any, who controls the Company within the meaning
               of the 1933  Act,  any  underwriter,  any  other  Holder  selling
               securities in such  registration  statement  and any  controlling
               person  of any such  underwriter  or other  Holder,  against  any
               losses,  claims,  damages,  or liabilities  (joint or several) to
               which any of the foregoing  persons may become  subject under the
               1933 Act, the 1934 Act or other federal or state law,  insofar as
               such  losses,  claims,  damages,  or  liabilities  (or actions in
               respect thereto) arise out of or are based upon any Violation, in
               each  case to the  extent  (and  only to the  extent)  that  such
               Violation  occurs in reliance upon and in conformity with written
               information  furnished  by  such  Holder  expressly  for  use  in
               connection with such  registration;  and each such if holder will
               pay, as incurred, any legal or other expenses reasonably incurred
               by  any  person  intended  to be  indemnified  pursuant  to  this
               subsection 8.11(b), in connection with investigating or defending
               any such loss, claim,  damage,  liability,  or action;  provided,
               however,   that  the,  indemnity   agreement  contained  in  this
               subsection  8.l1(b) shall not apply to amounts paid in settlement
               of any such  loss,  claim,  damage,  liability  or action if such
               settlement is effected  without the consent of the Holder,  which
               consent shall not be unreasonably withheld; provided, that, in no
               event shall any indemnity  under this  subsection  8.11(b) exceed
               the gross proceeds from the offering received by such Holder.

          (c)  Promptly after receipt by an indemnified party under this Section
               8.11 of notice of the  commencement of any action  (including any
               governmental  action), such indemnified party will, if a claim in
               respect  thereof is to be made  against  any  indemnifying  party
               under this  Section  8.11,  deliver to the  indemnifying  party a
               written notice of the  commencement  thereof and the indemnifying
               party shall have the right to participate  in, and, to the extent
               the  indemnifying  party  so  desires,  jointly  with  any  other
               indemnifying  party  similarly  noticed,  to assume  the  defense
               thereof  with  counsel  mutually  satisfactory  to  the  parties;
               provided,  however,  that an indemnified party (together with all
               other  indemnified  parties  which  may  be  represented  without
               conflict  by one  counsel)  shall  have the right to  retain  one
               separate  counsel,  with the fees and  expenses to be paid by the
               indemnifying  party, if  representation of such indemnified party
               by the  counsel  retained  by the  indemnifying  party  would  be
               inappropriate  due to actual  or  potential  differing  interests
               between such indemnified party and any other party represented by
               such counsel in such  proceeding.  The failure to deliver written
               notice to the indemnifying  party within a reasonable time of the
               commencement of any such action, if prejudicial to its ability to
               defend such action,  shall relieve such indemnifying party of any
               liability to the  indemnified  party under this Section 8.11, but
               the  omission so to deliver  written  notice to the  indemnifying
               party will not  relieve it of any  liability  that it may have to
               any indemnified party otherwise than under this Section 8.11.

          (d)  If the indemnification  provided for in this Section 8.11 is held
               by a court of  competent  jurisdiction  to be  unavailable  to an
               indemnified  party with  respect to any loss,  liability,  claim,
               damage,  or expense  referred to therein,  then the  indemnifying
               party, in lieu of indemnifying  such indemnified party hereunder,
               shall   contribute   to  the  amount  paid  or  payable  by  such
               indemnified  party as a result of such  loss,  liability,  claim,
               damage,  or  expense  in such  proportion  as is  appropriate  to
               reflect the relative fault of the  indemnifying  party on the one
               hand and of the indemnified party on the other in connection with
               the   statements  or  omissions   that  resulted  in  such  loss,
               liability,  claim,  damage,  or  expense  as  well  as any  other
               relevant  equitable  considerations.  The  relative  fault of the
               indemnifying   party  and  of  the  indemnified  party  shall  be
               determined  by  reference  to,  among other  things,  whether the
               untrue or alleged  untrue  statement  of a  material  fact or the
               omission to state a material fact relates to information supplied
               by the  indemnifying  party or by the  indemnified  party and the
               parties' relative intent, knowledge,  access to information,  and
               opportunity to correct or prevent such statement or omission.

          (e)  Notwithstanding the foregoing,  to the extent that the provisions
               on indemnification and contribution contained in the underwriting
               agreement entered into in connection with the underwritten public
               offering  are in  conflict  with the  foregoing  provisions,  the
               provisions in the underwriting agreement shall control.

          (f)  The  obligations  of the Company and Holders  under this  Section
               8.11 shall  survive the  completion of any offering of Conversion
               Shares in a  registration  statement  under  this  Section 8, and
               otherwise.


                                    SECTION 9
             Preferred Stock Conversion and Warrant Exercise Rights

     The holders of the Preferred  Stock and the Warrants shall have  conversion
and exercise  rights as  described  in the  Company's  Amdended  Certificate  of
Incorporation,  attached  hereto  as  Exhibit  A,  and the form of  Warrant,  as
attached hereto as Exhibit B, respectively.


                                   SECTION 10
              Right to Participate in Subsequent Private Placements

     In the event that the Company shall make any private offering of securities
subsequent to the offering  contemplated  by this  Subscription  Agreement,  the
Company  shall  provide the  undersigned  with at least thirty (30) days written
notice  of  the  offering  and  shall,  thereby,  provide  the  undersigned  the
opportunity  to  participate,  on the same  terms  and  conditions,  in any such
offering,  provided such  participation  will not  interfere  with the Company's
ability to proceed with such offering.  The undersigned shall have ten (10) days
from the date of the Company's  notice to indicate in writing whether he desires
to participate  in the offering and the dollar amount of his desired  investment
or the number of securities  that he desires to purchase.  In the event that any
such offering is  oversubscribed  as a result of this  participation  right, the
Holders shall be entitled to  participate in the offering on a pro rata basis in
proportion to their indicated degree of desired participation.


                                   SECTION 11
                                    Expenses

     The Company shall be responsible  for, and shall pay, all expenses  related
to this  private  placement  of the Units  and the  subsequent  issuance  of the
Conversion Shares,  including the reasonable out-of-pocket costs incurred by the
purchasers  of the  Units,  including  the  legal  fees of a law firm  acting as
special  counsel  retained by one or more of the  purchasers on behalf of all of
the  purchasers,  up to $5,000 (or up to $7,500  upon  mutual  agreement  of the
parties and upon advance notice of the status of such expenses).


                                   SECTION 12
                                  Miscellaneous

     12.1 Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Vermont.

     12.2 Survival.  The representations,  warranties,  covenants and agreements
made herein shall  survive any  investigation  made by the  undersigned  and the
closing of the transactions contemplated hereby.

     12.3  Successors  and Assigns.  Except as otherwise  provided  herein,  the
provisions  hereof  shall  inure to the  benefit  of, and be binding  upon,  the
successors,  assigns, heirs, executors and administrators of the parties hereto,
provided,  however,  that the rights of the  undersigned  to purchase  the Units
shall not be assignable without the consent of the Company.

     12.4 Entire  Agreement:  Amendment.  This Agreement and the other documents
delivered  pursuant  hereto  at the  Closing  constitute  the  full  and  entire
understanding  and  agreement  between the parties  with regard to the  subjects
hereof and thereof,  and no party shall be liable or bound to any other party in
any  manner  by  any  warranties,   representations   or  covenants   except  as
specifically set forth herein or therein.  Except as expressly  provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written  instrument  signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.

     12.5  Notices,  etc.  All  notices  and other  communications  required  or
permitted  hereunder  shall be in writing and shall be mailed by  registered  or
certified mail postage  prepaid or otherwise  delivered by hand or by messenger,
addressed (a) if to the undersigned at:

                           ---------------------------

                           ---------------------------

     with a copy to:     H. Kenneth Merritt, Esq.

                         Merritt & Merritt
                         112 Lake Street
                         P.O. Box 5839
                         Burlington, Vermont 05402-5839

or at such other address as such  Purchaser  shall have furnished to the Company
in writing,  or (b) if to any other holder of any Units or Conversion  Stock, at
such  address as such holder  shall have  furnished  the Company in writing,  or
until any such holder so furnishes an address to the Company, then to and at the
address  of the last  holder  of such  Shares  or  Conversion  Stock  who has so
furnished an address to the Company,  or (c) if to the Company,  one copy should
be sent to its  address  set  forth  on the  cover  page of this  Agreement  and
addressed to the attention of the Corporate Secretary,  or at such other address
as the Company shall have furnished to the Purchasers

     with a copy to:     Spencer R. Knapp, Esq.
                         Dinse, Erdmann, Knapp & McAndrew, P.C.
                         209 Battery Street
                         P.O. Box 988
                         Burlington, Vermont 05402-0988.

     Each such notice or other  communication  shall,  for all  purposes of this
Agreement,  be treated as  effective  or having  been  given when  delivered  if
delivered  personally,  or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.

     12.6  Counterparts.  This  Agreement  may  be  executed  in any  number  of
counterparts,  each of which shall be enforceable  against the parties  actually
executing such  counterparts,  and all of which  together  shall  constitute one
instrument.

     12.7  Severability.  In the  event  that any  provision  of this  Agreement
becomes or is  declared  by a court of  competent  jurisdiction  to be  illegal,
unenforceable  or void,  this Agreement  shall continue in full force and effect
without said provision.

     12.8 Titles and Subtitles.  The titles and subtitles used in this Agreement
are  used  for  convenience  only  and  are  not  considered  in  construing  or
interpreting this Agreement.

     DATED at __________________, Vermont, this _____ day of June, 1996.


                                        ________________________________________
                                        (Signature)


                                        ________________________________________
                                        (Please print name)


ACCEPTED BY:
THE VERMONT TEDDY BEAR CO., INC.



By: __________________________________
         Its Duly Authorized Agent




<PAGE>


                                    EXHIBIT A

                    AMENDMENT TO CERTIFICATE OF INCORPORATION


<PAGE>


                                    EXHIBIT B

                                 FORM OF WARRANT


<PAGE>


                                    EXHIBIT C

                            SUITABILITY QUESTIONNAIRE



<PAGE>


                                    EXHIBIT D

                            FORM OF OPINION OF DEK&M