<PAGE>
                                                                  EXECUTION COPY

                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE


      This SETTLEMENT AGREEMENT AND MUTUAL RELEASE (this "Settlement
Agreement"), dated as of May 12, 2003, is by and between ENRON NORTH AMERICA
CORP., a Delaware corporation ("Enron"), and LILLIAN VERNON CORPORATION, a
Delaware corporation ("Counterparty"). Enron and Counterparty may be referred to
hereinafter collectively as the "Parties" or individually as a "Party."

                                    RECITALS

      A. Enron and Counterparty entered into certain agreements listed on
Schedule A attached hereto (collectively, whether one or more, the "Contracts").

      B. As credit support for the Contracts, Enron Corp. issued the Guaranty
Agreement listed on Schedule A, which Guaranty Agreement is hereinafter referred
to as the "Guaranty."

      C. On December 2, 2001, Enron filed a voluntary petition for relief (the
"Bankruptcy Case") under Chapter 11 of Title 11 of the United States Code, as
amended (the "Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court").

      D. On the date(s) set forth on Schedule A, Enron terminated the Contracts
in accordance with the terms of the Contracts.

      E. On May 30, 2002, the Bankruptcy Court entered an order approving
procedures for the settlement of terminated safe-harbor agreements and expedited
procedures for the approval by the Bankruptcy Court of such settlements (the
"Settlement Protocol").

      F. Enron and Counterparty now desire to amicably settle (pursuant to the
Settlement Protocol) all matters between them relating to the Contracts and, to
the extent not already otherwise revoked, to revoke the Guaranty on the terms
hereof and to release each other from all claims, obligations and liabilities
thereunder.

      NOW,THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the receipt and sufficiency of which are hereby acknowledged, the
Parties agree as follows:

                                    ARTICLE I

                                     PAYMENT

      Section 1.1. Settlement Payment

      (a) As consideration for the release and settlement of all Claims (as
defined in Section 2.2(b) below) and the Parties' agreement to settle all
matters related to the Contracts, Counterparty shall pay to Enron the total sum
of THREE MILLION DOLLARS ($3,000,000.00) (the "Settlement Payment").
<PAGE>
      (b) Payment of the Settlement Payment shall be made on the second Business
Day after the Bankruptcy Court Order Date (as defined in Section 4.1 below).
Payment of the Settlement Payment shall be (i) made without setoff, recoupment,
counterclaim or reduction of any kind and (ii) made by wire transfer in
immediately available United States funds to the following account designated by
Enron:



                                CITIBANK N.A.
                                NEW YORK
                                ENRON CORP. - EIM CASH SERVICE ACCOUNT
                                BANK ID: 021000089
                                ACCOUNT: 4080-7482

For purposes of this Settlement Agreement, the term "Business Day" shall mean
any day other than Saturday or Sunday or any other day on which banks in New
York City, New York, are permitted or required to close.


      Section 1.2. Interest Rate. Interest shall accrue on any overdue portion
of the Settlement Payment from the date such portion was due to be paid by
Counterparty until the date of receipt thereof by Enron at a rate equal to the
lesser of (a) a rate per annum equal to the "Prime Rate" published in The Wall
Street Journal from time to time, and which is defined as "the base rate on
corporate loans at large money center commercial banks," plus two percent (2%),
or (b) the maximum non-usurious rate under Applicable Law (as defined in Section
2.2(e) below).

                                   ARTICLE II

                           MUTUAL WAIVER AND RELEASE

      Section 2.1. Payment Date. For purposes of this Settlement Agreement, the
Settlement Payment shall be deemed to have been paid to Enron on the earliest
date upon which all of the following requirements have been satisfied (the
"Payment Date"): (a) Counterparty has received a Federal Reserve reference
number conforming that the amount of $3,000,000 had been wired to Enron,
(b) there has been no breach of the provisions of Section 5.3 by Counterparty,
and (c) Counterparty has either (i) returned to Enron the original Guaranty or
(ii) provided Enron with an executed certificate in the form attached hereto as
Schedule B.

      Section 2.2. Mutual Release. As of the Bankruptcy Court Order Date (in the
case of Counterparty) and as of the Payment Date (in the case of Enron):

      (a) Enron, for itself, its successors and assigns, hereby waives, releases
and forever discharges Counterparty and its Affiliates and each of their past,
present and future officers, directors, partners, members, employees, agents,
and servants from any and all claims, obligations, demands, actions, causes of
action and liabilities, of whatsoever kind and nature, character and
description, whether in law or equity, whether sounding in tort, contract or
under other Applicable Law (as defined in Section 2.2(e) below), whether known
or unknown, and whether anticipated or unanticipated, of or to Enron, which
Enron and its successors and assigns ever had, now have or may ever have,
arising from any event, transaction, matter, circumstance or fact including, but
not limited to, the Investigative Matters (as defined in Section 3.4 below) in
any way arising out of, arising as a result of, related to, with respect to or
in connection with or



                                       2
<PAGE>
based in whole or in part on the Contracts (such claims, obligations, demands,
actions, causes of action and liabilities referred to herein collectively as
"Enron Claims"); provided, however, that Enron does not hereby waive, release or
discharge Counterparty from any of its obligations under this Settlement
Agreement, including, without limitation, Counterparty's obligation to pay the
Settlement Payment.

          (b)  Counterparty, for itself, its successors and assigns, hereby
waives, releases and forever discharges Enron and its Affiliates and each of
their past, present and future officers, directors, partners, members,
employees, agents, and servants from any and all claims, obligations, demands,
actions, causes of action and liabilities, of whatsoever kind and nature,
character and description, whether in law or equity, whether sounding in tort,
contract or under other Applicable Law, whether known or unknown, and whether
anticipated or unanticipated, of or to Counterparty, which Counterparty and its
successors and assigns ever had, now have or may ever have, arising from any
event, transaction, matter, circumstance or fact (including, but not limited
to, the Investigative Matters) in any way arising out of, arising as a result
of, related to, with respect to or in connection with or based in whole or in
part on the Contracts (including, without limitation, the Guaranty) (such
claims, obligations, demands, actions, causes of action and liabilities
referred to herein collectively as "Counterparty Claims" and, together with the
Enron Claims, as "Claims"); provided, however, that Counterparty does not
hereby waive, release or discharge Enron from any of its obligations under this
Settlement Agreement.

          (c)  The consequences of the foregoing waiver provisions have been
explained by each of the Parties' respective counsel. Each of the Parties
acknowledge that they may hereafter discover facts different from, or in
addition to, those which they now know or believe to be true with respect to the
Claims, and agree that this Settlement Agreement and the releases contained
herein shall be and remain effective in all respects notwithstanding such
different or additional facts or the discovery thereof.

          (d)  To the extent Applicable Law would not otherwise recognize the
provisions of subsections (a) and (b) of this Section 2.2 as constituting a full
and final release applying to all unknown and unanticipated Claims, as well as
those now known or disclosed, the Parties hereby expressly waive all rights or
benefits which either one or both of them may have now or in the future under
any such Applicable Law. The Parties acknowledge that they have separately
bargained for the foregoing mutual releases and such mutual releases constitute
a key element of this Settlement Agreement.

          (e)  For purposes of this Settlement Agreement, the following terms
shall have the following meanings:

          (i)  "Affiliates" shall mean a Person directly or indirectly
               controlled by, controlling or under common control with the other
               Person. For the purposes of this definition, "control" means,
               when used with respect to any Person, the possession, directly or
               indirectly, of the power to direct or cause the direction of the
               management and policies of such Person, whether through the
               ownership of voting securities, by contract or otherwise.


                                       3
<PAGE>
      (ii) "Applicable Law" shall mean any statute, law, rule or regulation or
      any judgment, order, consent order, stipulated agreement, ordinance, writ,
      injunction or decree of any Governmental Entity.

      (iii) "Governmental Entity" shall mean any domestic court or tribunal in
      any domestic jurisdiction or any federal, state, municipal or local
      government or other governmental body, agency, authority, district,
      department, commission, board, bureau, or other instrumentality,
      arbitrator or arbitral body (domestic or foreign), including any joint
      action agency, public power authority, public utility district, or other
      similar political subdivision.

      (iv) "Person" shall mean any individual, corporation, partnership, joint
      venture, trust, limited liability company, unincorporated organization,
      Governmental Entity or other entity.

      Section 2.3. Limitation of Mutual Release. The Parties hereby acknowledge
and agree that the provisions of Section 2.2 above and the releases provided for
therein shall be solely applicable to the Contracts and the Investigative
Matters. The provisions of Section 2.2 above shall not be interpreted as or
otherwise intended to be a release of any rights, remedies or obligations either
one or both of the Parties may have against the other Party and/or any
Affiliates of the other Party arising out of, related to or in connection with
any contracts, agreements or other arrangements, other than those rights,
remedies, or obligations set forth in the Contracts and as encompassed by the
Investigative Matters.

                                   ARTICLE III

                 REPRESENTATIONS AND WARRANTIES OF COUNTERPARTY

      Section 3.1. Due Organization, Standing and Authority. Counterparty is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of its formation. Counterparty has all necessary power and
authority to execute, deliver and perform its obligations under this Settlement
Agreement as contemplated by its formation agreements, by-laws, or other
charter, organizational or governing documents (collectively, the "Governing
Documents").

      Section 3.2. Authorization and Validity of Agreement. The execution,
delivery and performance of this Settlement Agreement (a) are within
Counterparty`s powers, (b) have been duly authorized by all necessary action on
its behalf and all necessary consents or approvals have been obtained and are in
full force and effect and (c) do not violate any of the terms and conditions of
(i) its Governing Documents, (ii) any Applicable Law, or (iii) any contracts to
which it is a party (except with respect to (c)(ii) and (iii) for such
violations that would not be reasonably expected to have a material adverse
affect on Counterparty's ability to consummate the transactions contemplated by
this Settlement Agreement).

      Section 3.3. Enforceability. This Settlement Agreement has been duly
executed and delivered on behalf of Counterparty constitutes a legal, valid and
binding obligation of Counterparty enforceable against it in accordance with its
terms and the terms of the Bankruptcy Court Order, except that such
enforceability may be limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors' rights
generally, and


                                       4
<PAGE>
(b) equitable principles which may limit the availability of certain equitable
remedies (such as specific performance).

      Section 3.4. Acknowledgment of Counterparty.

      (a) Counterparty acknowledges that: (i) Enron and/or certain of its
Affiliates are currently subject to pending investigations by Governmental
Entities, including, without limitation, investigations by the Federal Energy
Regulatory Commission ("FERC"), the United States House of Representatives and
United States Senate (collectively, "Congress") and the State of California, in
relation to Enron`s and or its Affiliates' conduct in connection with the
wholesale electric power and gas markets, and could be subject to further
investigations and proceedings by the same or other Governmental Entities; (ii)
there are pending and may be future investigations or proceedings by
Governmental Entities relating to the wholesale electric power or gas markets
(all such pending and future investigations and proceedings described in (i) and
(ii) collectively, the "Investigations"); (iii) the course of the Investigations
and the results thereof cannot be predicted; (iv) the knowledge of Enron and/or
certain of its Affiliates or their current or past employees regarding the facts
and circumstances relevant to such Investigations is incomplete and additional
facts and circumstances may be discovered and disclosed as a result of such
Investigations; and (v) in connection with such Investigations, certain
Governmental Entities have the authority, among other things, to award damages,
grant restitution, or order refunds, rebates, past or future rate reductions or
adjustments, charges, fees, assessments, lost profits, adders, surcharges or
penalties with respect to any Contract or Counterparty. The foregoing matters,
including the Investigations, shall be collectively referred to in this
Settlement Agreement as the "Investigative Matters."

      (b) Counterparty further acknowledges that: (i) it has relied on its own
independent investigation, and has not relied on any information or
representations furnished by Enron or any representative or agent thereof with
respect to the Contracts or in determining whether or not to enter into this
Settlement Agreement; (ii) it has conducted its own due diligence, including a
review of the Contracts and Applicable Law in connection therewith, as well as
undertaken the opportunity to review information, ask questions and receive
satisfactory answers concerning the Contracts, the Investigative Matters and the
terms and conditions of this Settlement Agreement; and (iii) it possesses the
knowledge, experience and sophistication to allow it to fully evaluate and
accept the merits and risks of entering into the transactions contemplated by
this Settlement Agreement.

                                   ARTICLE IV

                BANKRUPTCY COURT ORDER; TERMINATION OF CONTRACT

      Section 4.1. Bankruptcy Court Order. This Settlement Agreement shall be
binding on Enron and Counterparty as of the date set forth in the introductory
paragraph of this Settlement Agreement, subject to the entry of a Bankruptcy
Court Order (as defined below); provided, however, that Section 4.2, Section
5.10 and Section 5.15 shall be binding and in full force and effect upon both
Parties as of the date set forth in the introductory paragraph of this
Settlement Agreement. For purposes of this Settlement Agreement, the term (a)
"Bankruptcy Court Order" shall mean, as applicable, (i) the entry by the
Bankruptcy Court, after notice and a hearing, of an order approving this
Settlement Agreement or (ii) the Notice of Proposed Settlement of Terminated
Safe-Harbor Contract Pursuant to Sections 3.0 and 4.2 of the Settlement Protocol



                                       5
<PAGE>
(the "Notice") as to this Settlement Agreement filed with the Bankruptcy Court,
provided that no objections are filed in accordance with the terms of the
Notice, and (b) "Bankruptcy Court Order Date" shall mean, as applicable, (i)
the date upon which the Bankruptcy Court Order is entered by the Bankruptcy
Court and any applicable appeal period has lapsed or (ii) the date established
in the Notice upon which this Settlement Agreement becomes effective and any
applicable appeal period has lapsed.

      Section 4.2. Covenants/No Bankruptcy Court Order. Enron shall use
commercially reasonable efforts to obtain the entry of the Bankruptcy Court
Order, and Counterparty shall use commercially reasonable efforts to cooperate
with and support Enron's efforts to obtain entry of the Bankruptcy Court Order
in all respects and shall take no actions inconsistent therewith. In the event
no Bankruptcy Court Order is granted or otherwise approved by the Bankruptcy
Court for approval of this Settlement Agreement, this Settlement Agreement shall
be deemed to be null and void and neither Party shall have any obligations to
the other Party arising out of this Settlement Agreement, save and except for
the obligations and/or provisions set forth in Sections 5.4, 5.9 and 5.15
hereof, which provisions are intended to survive the expiration or earlier
termination of this Settlement Agreement.

      Section 4.3. Effect of Payment Date. The Parties hereby agree that on the
Payment Date, automatically and immediately without further action by either
Party, the Contracts (inclusive of the Guaranty) shall be deemed irrevocably and
unconditionally null, void and unenforceable, and the Parties shall have no
further obligation whatsoever under such Contracts. Notwithstanding anything in
this Settlement Agreement to the contrary, Enron shall have all rights and
remedies provided by Applicable Law to enforce Counterparty's obligations under
this Settlement Agreement, including without limitation, Counterparty's
obligation to pay the Settlement Payment.

                                    ARTICLE V
                                 MISCELLANEOUS

      Section 5.1. Notices. All notices, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given:
(i) when personally delivered; (ii) upon actual receipt (as established by
confirmation of receipt or otherwise) during normal business hours, otherwise on
the first Business Day thereafter, if transmitted by facsimile or telecopier
with confirmation of receipt; (iii) when mailed by certified mail, return
receipt requested, postage prepaid; or (iv) when sent by overnight courier; in
each case, to the following addresses, or to such other addresses as a Party may
from time to time specify by notice to the other Party given pursuant hereto.

      If to Enron, to:

                  Enron North America Corp.
                  1400 Smith Street
                  Houston, TX 77002
                  Attention: Craig Hiddleston
                  Telecopier No.: (713) 646-3059




                                       6
<PAGE>
      With a copy to:

                  Enron North America Corp.
                  1400 Smith Street
                  Houston,TX 77002
                  Attention: Legal Department
                  Telecopier No.: (713) 646-3490

      If to Counterparty, to

                  Lillian Vernon Corporation
                  One Theall Rd.
                  Rye, NY 10580
                  Attention: Chief Financial Officer
                  Telecopier No.: (914) 925-1572

      With a copy to:

                  Salon Marrow Dyckman & Newman, LLP
                  685 Third Avenue
                  New York, NY 10017
                  Attention: Joel Salon, Esq.
                  Telecopier No.: (212) 661-3339

      Section 5.2. Intended Beneficiaries. To the extent that this Settlement
Agreement inures to the benefit of Persons not signatories hereto as set forth
in Article II, they shall be deemed to be intended beneficiaries and this
Settlement Agreement is hereby declared to be made in and for their respective
benefits and uses. Counterparty acknowledges that Enron Corp. is a third party
beneficiary to this Settlement Agreement.

      Section 5.3. Covenant Not to Take Action in Breach of Representations and
Warranties. Each Party agrees not to take any actions from and including the
date of execution of this Settlement Agreement up to and including the payment
of the Settlement Payment that will result, whether directly or indirectly, in
the breach of its representations, warranties, agreements, covenants or
obligations contained in this Settlement Agreement.

      Section 5.4. Governing Law/Jurisdiction. THIS SETTLEMENT AGREEMENT AND
THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER WILL BE GOVERNED BY AND
CONSTRUED, ENFORCED AND PERFORMED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW
YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD
REQUIRE THE APPLICATION OF LAWS OF ANOTHER JURISDICTION. THE PARTIES ACKNOWLEDGE
AND AGREE THAT THE BANKRUPTCY COURT SHALL HAVE THE EXCLUSIVE JURISDICTION OVER
THIS SETTLEMENT AGREEMENT AND THAT ANY CLAIMS ARISING OUT OF OR RELATED IN ANY
MANNER TO THIS SETTLEMENT AGREEMENT SHALL BE PROPERLY BROUGHT ONLY BEFORE THE
BANKRUPTCY COURT. IF AND TO THE EXTENT THAT THE BANKRUPTCY CASE IS CLOSED OR
DISMISSED, THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT
COURT



                                       7
<PAGE>
LOCATED IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY SHALL HAVE EXCLUSIVE
JURISDICTION OVER THIS SETTLEMENT AGREEMENT AND ANY SUCH CLAIMS.

      Section 5.5. Entire Agreement. This Settlement Agreement contains the
entire agreement between the Parties with respect to the subject matter hereof
and there are no agreements, understandings, representations or warranties
between the Parties other than those set forth or referred to herein.

      Section 5.6. Severability. In case any provision of this Settlement
Agreement shall be determined to be invalid, illegal or unenforceable for any
reason, the remaining provisions of this Settlement Agreement shall be
unaffected and unimpaired thereby, and shall remain in full force and effect, to
the fullest extent permitted by Applicable Law.


      Section 5.7. Survival of Representations. All representations, warranties,
agreements, covenants and obligations herein are material, shall be deemed to
have been relied upon by the other Party, and shall survive the Payment Date.

      Section 5.8. Successors and Assigns. This Settlement Agreement shall be
binding upon and inure to the benefit of the Parties hereto and their respective
successors and assigns.

      Section 5.9. No Admission of Liability. This Settlement Agreement is not
an admission of any liability but is a compromise and the settlement and this
Settlement Agreement shall not be treated as an admission of liability. All
communications (whether oral or in writing) between and/or among the Parties,
their counsel and/or their respective representatives relating to, concerning or
in connection with this Settlement Agreement, or the matters covered hereby and
thereby, shall be governed and protected in accordance with the Federal Rule of
Evidence 408 and New York Civil Practice Law and Rules Section 4547 to the
fullest extent permitted by law.

      Section 5.10. No Assignment of Claims. Each Party represents and warrants
that it is the only Person who, to its knowledge, has any interest in any Claims
released hereby and that none of such Claims, nor any part thereof, have been
assigned, granted or transferred in any way to any Person.

      Section 5.11. Interpretation. This Settlement Agreement has been jointly
drafted by the Parties at arm's-length and each Party has had ample opportunity
to consult with independent legal counsel. No provision or ambiguity in this
Settlement Agreement shall be resolved against any Party solely by virtue of its
participation in the drafting of this Settlement Agreement.

      Section 5.12. Attorney's Fees. Each Party shall be responsible for the
payment of (a) its own costs and expenses (including reasonable attorneys'
fees), and (b) all of its costs and expenses (including reasonable attorneys'
fees) in connection with the matters referred to in this Settlement Agreement.
Nevertheless, in any action or proceeding to enforce this Settlement Agreement,
the prevailing Party shall be entitled to payment of its reasonable costs and
expenses (including reasonable attorneys' fees).



                                       8
<PAGE>
      Section 5.13. Captions. The captions of this Settlement Agreement are for
convenience only and are not a part of this Settlement Agreement and do not in
any way limit or amplify the terms and provisions of this Settlement Agreement
and shall have no effect on its interpretation.

      Section 5.14. Counterparts. This Settlement Agreement may be executed in
counterparts, by either an original signature or signature transmitted by
facsimile transmission or other similar process and each copy so executed shall
be deemed to be an original and all copies so executed shall constitute one and
the same agreement.

      Section 5.15. Confidentiality. Each Party agrees that it shall hold in
strict confidence and shall not disclose to any third party any Confidential
Information (as defined below) of the other Party for the period of three (3)
years after the date hereof; provided, however, that nothing herein shall
prevent (a) either Party from disclosing relevant confidential information in
papers filed with the Bankruptcy Court or during any hearing before the
Bankruptcy Court, (b) either Party from disclosing Confidential Information to
the officers, directors, employees, representatives, lenders, counsel and other
professionals (including potential lenders and investors and their counsel) of
such Party and of its Affiliates (collectively, "Representatives") who need to
know such information for purposes of conducting their ordinary course of
business, or (c) Enron from disclosing Confidential Information it may be
requested to provide to members of any creditors' committee established in the
Bankruptcy Case or to any legal or financial advisor of any such creditors'
committee, but in each case under this subsection (c) only to the extent
necessary to evaluate and/or obtain requisite approvals of this Settlement
Agreement. Each of the Representatives to whom Confidential Information is
disclosed shall be informed of the confidential nature of such information. In
the event that either Party is requested by subpoena, civil investigative
demand, or interrogatories to disclose any Confidential Information, such Party
will provide the other Party with prompt notice of such request, demand or
interrogatories so that the other Party may seek an appropriate protective order
at its cost. The Parties agrees that because an award of money damages (whether
pursuant to the foregoing sentence or otherwise) would be inadequate for any
breach of this Section, any such breach would cause the non-disclosing Party
irreparable harm and therefore the non-disclosing Party shall be entitled,
without the requirement of posting a bond or other security, to equitable
relief, including injunctive relief and specific performance. As used in this
Section, "Confidential Information" shall mean information delivered by one
Party to the other Party hereto that should reasonably have been understood by
the recipient, because of legends or other markings, the circumstances of
disclosure or the nature of the information itself, to be proprietary or
confidential to such disclosing Party. Confidential Information shall not
include information to the extent, but only to the extent, disclosure thereof
(or the terms and conditions thereof) is required by Applicable Law (including
the Bankruptcy Code or pursuant to any order of the Bankruptcy Court), or
information which (v) is or becomes generally available to the public other than
as a result of disclosure by the recipient; (w) was within the recipient's
possession prior to its being furnished by or on behalf of the other Party to
this Agreement, provided that the source of such information was not known by
the recipient to be bound by a confidentiality agreement with or other
contractual, legal or fiduciary obligation of confidentiality to the disclosing
Party or any other party with respect to such information; (x) becomes available
to the recipient on a non-confidential basis from a source other than the
disclosing Party or any of its representatives, provided that such source is not
known by the recipient to be bound by a confidentiality agreement with or other
contractual, legal or fiduciary obligation of confidentiality to the disclosing
Party or any other party with respect to such information; (y)



                                       9
<PAGE>
was independently developed by the recipient without reference to the
Confidential Information, provided such independent development can reasonably
be demonstrated by the recipient; or (z) is identified by the disclosing Party
as no longer proprietary or confidential. The obligations of the Parties under
this Section shall survive the termination or expiration of this Settlement
Agreement for the period specified herein.

      Section 5.16. Taxes. Counterparty acknowledges and agrees that
notwithstanding anything in Section 2.2 of this Settlement Agreement to the
contrary or the termination of the Contracts pursuant to this Settlement
Agreement, Counterparty shall remain obligated and responsible for paying,
and/or reimbursing to the appropriate Enron Parties, all "Taxes" (as that term
is defined for purposes of the Contracts) that Counterparty is responsible for
paying under the Contracts.

      Section 5.17. Proofs Of Claims. To the extent that the Counterparty has
filed any proofs of claims related to the Contracts in the Bankruptcy Court,
Counterparty agrees that it will withdraw such proofs of claims within ten (10)
Business Days of the Bankruptcy Court Order Date.

      IN WITNESS WHEREOF, the Parties have signed this Settlement Agreement in
multiple counterparts.

                                                    ENRON NORTH AMERICA CORP.


                                                    By: /s/ Craig Hiddleston
                                                        ------------------------
                                                         Name: Craig Hiddleston
                                                         Title: Vice President
                                                    Date:     May 12,2003
                                                         -----------------------

                                                    LILLIAN VERNON CORPORATION



                                                    By: /s/ Lillian Vernon
                                                        ------------------------
                                                         Name:
                                                         Title:
                                                    Date:    4/29/03
                                                         -----------------------


                                       10
<PAGE>
                                   SCHEDULE A
                                       TO
                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

                           DESCRIPTION OF CONTRACT(S)

--ISDA Master Agreement between Enron North America Corp. (f/k/a Enron Capital &
Trade Resources Corp.) ("Enron") and Lillian Vernon Corporation
("Counterparty"), dated as of December 15, 1998, including all schedules,
exhibits, and annexes thereto, and including all confirmations and transactions
thereunder (the "Agreement"), all of which were terminated pursuant to
correspondence from Enron dated March 26, 2002, and including all invoices
rendered with respect to the Agreement prior to such termination.

                            DESCRIPTION OF GUARANTY

--Guaranty by Enron Corp. in favor of Counterparty, dated as of December
15,1998.



                                ***END OF PAGE***



                                       11
<PAGE>
                                   SCHEDULE B
                                       TO
                     SETTLEMENT AGREEMENT AND MUTUAL RELEASE

                  Certificate Relating to Enron Corp. Guaranty

      The undersigned,----------[name]----------- ,--------- [title]
-------------of Lillian Vernon Corporation, a ----------- corporation (the
"Company"), hereby certifies as follows:

      After a thorough search of our corporate records by persons with relevant
      knowledge of this matter relating to the ISDA Master Agreement (the
      "Agreement") between Enron North America Corp. f/k/a Enron Capital & Trade
      Resources Corp. ("Enron") and the Company, dated as of December 15, 1998,
      the original Guaranty (the "Guaranty") provided by Enron Corp. in favor of
      the Company, dated as of December 15, 1998, related to Enron's obligations
      under the Agreement, could not be located. The Company agrees that the
      Guaranty shall be rendered null and void on the Payment Date, as defined
      in the Settlement Agreement and Mutual Release between Enron and the
      Company.

                               ------------------
                                [name]
                                [title]


      IN WITNESS WHEREOF,I have signed this certificate this----- day
of---------- ,2003.


                               ------------------
                                [name of witness]



                                       12