<PAGE>

   
                                   Form 10-Q/A
    
                       SECURITIES AND EXCHANGE COMMISSION


                             Washington, D.C. 20549

  (Mark One)
         [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


                  For the quarterly period ended August 29, 1998.
                  -----------------------------------------------

                                       OR

         [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934.

                  For the transition period from......to.........

                  Commission file number 1-9637.

                           LILLIAN VERNON CORPORATION
                           -------------------------- 

             (Exact Name of Registrant as Specified in its Charter)

        Delaware                                  13-2529859
----------------------------------     ------------------------------------ 
(State or other jurisdiction           (IRS Employer Identification Number)
 of incorporation or organization)

                       1 Theall Road, Rye, New York 10580
                       ---------------------------------- 
              (Address of principal executive offices) (Zip Code)

                                  914-925-1200
               --------------------------------------------------
              (Registrant's telephone number, including area code)

                                      N/A
             -------------------------------------------------------        
            (Former name, former address and former fiscal year, if
                           changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X  No  
                                      ---   ---

Number of shares outstanding of each of the issuer's classes of common stock:


9,134,071 Shares of Common Stock, $.01 par value, as of October 9, 1998.




<PAGE>



                           LILLIAN VERNON CORPORATION
                           --------------------------
   
                                  Form 10-Q/A
    
                                August 29, 1998

   
Part I. Financial Information                                        Page #
------------------------------                                       ------
         Item 1.
         Consolidated Balance Sheets as of
         August 29, 1998, August 23, 1997
         (unaudited) and February 28, 1998
         (audited)                                                       4


         Consolidated Statements of Operations
         for the quarter and six months
         ended August 29, 1998 and August 23, 1997
         (unaudited)                                                     5


         Consolidated Statements of Cash Flows
         for the six months ended August
         29, 1998 and August 23, 1997
         (unaudited)                                                     6


         Notes to Consolidated Financial
         Statements                                                      7-8


         Item 2.
         Management's Discussion and Analysis
         of Financial Condition and Results
         of Operations                                                   9-12

Signatures                                                               13
    






                                  Page 2 of 13


<PAGE>

   
                               RESTATED FORM 10-Q

In connection with the planned relocation of its corporate headquarters to 
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).

The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and 
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated to the appropriate 
fiscal periods.

For further information, refer to Management's Discussion and Analysis of 
Financial Condition and Results of Operations and Footnote 3 to the Company's
Consolidated Financial Statements.




    








                                  Page 3 of 13
<PAGE>




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                  LILLIAN VERNON CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

   

<TABLE>
<CAPTION>

                                                           AUGUST 29,              AUGUST 23,           FEBRUARY 28,
                     ASSETS                                     1998                    1997                   1998
                                                      -------------------     ---------------    -------------------
                                                                      (Unaudited)                        (Audited)
<S>                                                 <C>                      <C>                <C>                
Current assets:
    Cash and cash equivalents                                   $    398            $  6,955               $ 26,136
    Accounts receivable                                           12,340              12,115                 22,632
    Merchandise inventories                                       56,164              52,400                 36,935
    Deferred income taxes                                             --                  --                  1,532
    Prepayments and other current assets                          27,470              21,311                 10,173
                                                      -------------------     ---------------    -------------------
                        Total current assets                      96,372              92,781                 97,408

Property, plant and equipment, net (Note 1)                       37,975              38,796                 37,823
Deferred catalog costs                                            11,327              10,210                  5,922
Other assets                                                       3,823               2,554                  3,206
                                                      -------------------     ---------------    -------------------
                        Total                                   $149,497            $144,341               $144,359
                                                      -------------------     ---------------    -------------------


         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable and accrued expenses                 $ 19,641            $ 25,774                $ 16,331
    Cash overdrafts                                                5,596               3,716                   1,004
    Customer deposits                                                543                 374                     147
    Current portion of long-term debt and lease
     obligations                                                     635               1,508                   1,394
    Revolving debt                                                10,500                  --                      --
    Income taxes payable                                              --                  --                   4,581
    Deferred income taxes                                            335                  --                      --
                                                      -------------------     ---------------    --------------------
                           Total current liabilities              37,250              31,372                  23,457

Long-term debt , less current portion                                 --                 635                      --
Capital lease obligations, less current portion                       --                  --                      --
Deferred compensation                                              3,384               3,464                   3,426
Deferred income taxes                                              2,185                 422                     637
                                                      -------------------     ---------------    --------------------
                           Total liabilities                      42,819              35,893                  27,520
                                                      -------------------     ---------------    --------------------


Stockholders' equity:
    Preferred stock, $.01 par value; 2,000,000 shares
         authorized; no shares issued and outstanding                 --                  --                     --
    Common stock, $.01 par value; 20,000,000 shares
              authorized; issued -10,389,674 shares,
              10,368,061 shares and 10,389,674 shares                104                 104                     104
    Additional paid-in capital                                    31,148              30,846                  31,160
    Retained earnings                                             94,653              89,765                 100,883
    Unearned compensation                                             --                 (40)                     (6)
    Treasury stock, at cost - 1,240,659 shares, 825,958
              shares and 1,016,491 shares                        (19,227)            (12,227)                (15,302)
                                                      --------------------    -----------------  ---------------------
                            Total stockholders' equity           106,678             108,448                 116,839
                                                      --------------------    -----------------  ---------------------
                            Total                               $149,497            $144,341                $144,359
                                                      --------------------    ------------------ ---------------------

</TABLE>
    

                 See Notes to Consolidated Financial Statements
                                  Page 4 of 13








<PAGE>







                  LILLIAN VERNON CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



   
<TABLE>
<CAPTION>



                                            SECOND QUARTER ENDED         SIX MONTHS ENDED
                                           ------------------------ -------------------------
                                           AUGUST 29,   AUGUST 23,   AUGUST 29,    AUGUST 23,
                                                1998         1997         1998          1997
                                           ----------  -----------  -----------  ------------
<S>                                        <C>          <C>         <C>          <C>
 Revenues                                    $39,386      $37,257      $71,397       $65,005

 Costs and expenses:
      Product and delivery costs              20,478       19,388       35,990        33,685
      Selling, general and administrative 
       expenses                               21,885       18,637       42,797        35,950
                                           ----------  -----------  -----------  ------------
                                              42,363       38,025       78,787        69,635
                                           ----------  -----------  -----------  ------------
        Operating loss                        (2,977)        (768)      (7,390)       (4,630)
 Interest income                                 100          229          456           582
 Interest expense                               (105)         (90)        (178)         (183)
                                           ----------  -----------  -----------  ------------
        Loss before income taxes              (2,982)        (629)      (7,112)       (4,231)

Provision for (benefit from) income taxes:
      Current                                 (3,870)      (1,611)      (5,833)       (3,066)
      Deferred                                 2,856        1,397        3,415         1,627
                                           ----------  -----------  -----------  ------------
                                              (1,014)        (214)      (2,418)       (1,439)
                                           ----------  -----------  -----------  ------------
        Net loss                             ($1,968)       ($415)     ($4,694)      ($2,792)
                                           ----------  -----------  -----------  ------------

 Net loss per common share - Basic             ($.21)       ($.04)       ($.50)        ($.29)
                                           ----------  -----------  -----------  ------------

 Net loss per common share - Diluted           ($.21)       ($.04)       ($.50)        ($.29)
                                           ----------  -----------  -----------  ------------

 Weighted average number of common shares
      Basic and Diluted                        9,285        9,599        9,325         9,605
                                           ----------  -----------  -----------  ------------





</TABLE>
    








                 See Notes to Consolidated Financial Statements
                                  Page 5 of 13






<PAGE>

                  LILLIAN VERNON CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

   
<TABLE>
<CAPTION>

                                                                                                     SIX MONTHS ENDED
                                                                                 --------------------------------------------------
                                                                                              AUGUST 29,                 AUGUST 23,
                                                                                                    1998                       1997
                                                                                 ------------------------     ---------------------
                                                                                                       (Unaudited)
 <S>                                                                             <C>                          <C>  
 Cash flows from operating activities:
      Net loss                                                                                ($4,694)                     ($2,792)
      Adjustments to reconcile net loss to net cash provided by
          (used in) operating activities:
          Depreciation                                                                          1,401                        1,430
          Amortization                                                                             96                          247
          (Increase) decrease in accounts receivable                                           10,292                       12,361
          (Increase) decrease in merchandise inventories                                      (19,229)                     (21,920)
          (Increase) decrease in prepayments and other current assets                         (17,297)                     (10,873)
          (Increase) decrease in deferred catalog costs                                        (5,405)                      (4,070)
          (Increase) decrease in other assets                                                    (707)                        (345)
          Increase (decrease) in trade accounts payable and accrued expenses                    3,310                       11,289
          Increase (decrease) in customer deposits                                                396                          114
          Increase (decrease) in income taxes payable                                          (4,581)                      (2,715)
          Increase (decrease) in deferred compensation                                            (42)                         (36)
          Increase (decrease) in deferred income taxes                                          3,415                        1,912
                                                                              ------------------------     ------------------------
               Net cash used in operating activities                                          (33,045)                     (15,398)
                                                                              ------------------------     ------------------------

 Cash flows from investing activities:
      Purchases of property, plant and equipment                                               (1,553)                        (853)
                                                                              ------------------------     ------------------------
               Net cash used in investing activities                                           (1,553)                        (853)
                                                                              ------------------------     ------------------------

 Cash flows from financing activities:
      Principal payments on long-term debt and capital lease obligations                         (759)                        (740)
      Proceeds from short term borrowings                                                      10,500                           --
      Increase in cash overdrafts                                                               4,592                        2,364 
      Proceeds from issuance of common stock                                                       --                           63
      Dividends paid                                                                           (1,536)                      (1,372)
      Payments to acquire treasury stock                                                       (5,280)                      (1,207)
      Reissuance of treasury stock                                                              1,355                           --
      Other                                                                                       (12)                          --
                                                                              ------------------------     ------------------------
               Net cash provided by (used in) financing activities                              8,860                         (892)
                                                                              ------------------------     ------------------------

               Net decrease in cash and cash equivalents                                      (25,738)                     (17,143)
                                                                              ------------------------     ------------------------

 Cash and cash equivalents at beginning of period                                              26,136                       24,098
                                                                              ------------------------     ------------------------
 Cash and cash equivalents at end of period                                                   $   398                      $ 6,955
                                                                              ------------------------     ------------------------


 Supplemental disclosures of cash flow information:
      Cash paid during the period for:
          Interest                                                                            $   125                      $   157
          Income taxes                                                                          4,642                        2,857


</TABLE>
    

                 See Notes to Consolidated Financial Statements
                                  Page 6 of 13







<PAGE>




                  LILLIAN VERNON CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The year-end condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The interim financial
statements furnished with this report reflect all adjustments, consisting only
of items of a normal recurring nature, which are, in the opinion of management,
necessary for the fair statement of the consolidated financial condition and
consolidated results of operations for the interim periods presented. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended February 28, 1998.


1. PROPERTY, PLANT AND EQUIPMENT

   Property, plant and equipment are summarized as follows (in thousands):
   
<TABLE>
<CAPTION>

                                             August 29,   August 23,   February 28,
                                                1998         1997          1998
                                             ----------   -----------  ------------
<S>                                          <C>          <C>          <C>  
   Land and buildings                          $31,897      $31,751      $31,778
   Machinery and equipment                      30,341       27,244       29,035
   Furniture and fixtures                        3,602        3,328        3,561
   Leasehold improvements                          996        3,787        3,989
   Capital leases                                  -          1,262        1,262
                                               -------      -------      -------

    Total property, plant &
     equipment, at cost                         66,836       67,372       69,625

    Less, accumulated depreciation
          and amortization                      28,861       28,576       31,802
                                               -------      -------      -------

   Property, plant and equipment - net         $37,975      $38,796      $37,823
                                               -------      -------      -------

</TABLE>
    









                                  Page 7 of 13


<PAGE>



2. EARNINGS PER SHARE
   ------------------

   Basic and Diluted loss per share were calculated in accordance with
Statement of Financial Accounting Standards No. 128 as follows (amounts in
thousands):
   
<TABLE>
<CAPTION>
                                                      Second Quarter Ended      Six Months Ended
                                                     ----------------------  ---------------------
                                                     August 29,  August 23,  August 29, August 23,
                                                       1998         1997         1998       1997
                                                     ---------   ----------   ---------- ---------
<S>                                                  <C>         <C>          <C>        <C>   
Net Loss-Basic and Diluted                           ($1,968)      ($415)      ($4,694)   ($2,792)
                                                     --------    --------      --------   --------

Weighted average shares for
Basic EPS                                              9,285       9,599         9,325      9,605

Add: Incremental shares from
stock option exercises                                   -           -             -           -
                                                     -------      ------         -----      -----
Weighted average shares for
Diluted EPS                                            9,285       9,599         9,325      9,605
                                                     -------      ------         -----      -----

</TABLE>
    

For the second quarters ended August 29, 1998 and August 23, 1997, options on
144,000 and 142,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.

For the six months ended August 29, 1998 and August 23, 1997, options on
155,000 and 86,000 shares of common stock, respectively, were not included in
the calculation of weighted average shares for Diluted EPS because their
effects were antidilutive.

   
3. RESTATED FINANCIAL INFORMATION

In connection with the planned relocation of its corporate headquarters to 
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).

The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and 
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:
                                                                EPS Impact-
                                                             ----------------
Fiscal Years Ended    Pre-tax Amount      After-tax Amount   Basic    Diluted
------------------    --------------      ----------------   -----    -------
1985 - 1995            ($577,000)            ($381,000)        Not Applicable
February 24, 1996      ($182,000)            ($120,000)      ($.01)    ($.01)
February 22, 1997      ($187,000)            ($124,000)      ($.01)    ($.01)
February 28, 1998     $1,136,000              $750,000        $.08      $.08 
February 27, 1999      ($190,000)            ($125,000)      ($.01)    ($.01)

4. RECLASSIFICATIONS
   -----------------

Certain reclassifications have been made in the prior year financial statements
to conform with fiscal 1999 presentation.

5. SUBSEQUENT EVENT -- WRITE-OFF -- COMPUTER PROJECT
   -------------------------------------------------

During the third quarter of fiscal 1999, the Company had a non-recurring charge
related to the termination of the installation of a computer software package
for a new order entry system and wrote off its investment of $1.4 million on
a pre-tax basis ($920,000 after-tax). The Company had spent approximately $1.4
million on the project as of August 29, 1998. The Company has decided to 
internally upgrade its existing order entry system; the upgrade is scheduled
to be completed in mid 1999, at a substantially lower cost than originally 
anticipated.

    
   

                                  Page 8 of 13



<PAGE>

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Results of Operations
Quarter Ended August 29, 1998

Revenues for the quarter ended August 29, 1998 were $39.4 million, an increase
of $2.1 million, or 5.7% higher than the quarter ended August 23, 1997. The
increase in revenues was largely attributable to a 16% rise in catalog 
circulation and, to a lesser extent, a 2.7% rise in average revenue per order.
Revenues per catalog mailed declined compared to last year because of an
unexpectedly weak retail environment, as well as a circulation increase to
prospective new customers who are generally less responsive than existing
customers. If the weak retail environment continues into the second half of
fiscal 1999, it could have a negative impact on the Company's revenues and
earnings.

Product and delivery costs increased by $1.1 million, or 5.6%, in the quarter
ended August 29, 1998, as compared to the second quarter of the prior year.
Product and delivery costs include the cost of merchandise sold, and the cost
of receiving, filling and shipping the Company's orders, reduced by shipping
and handling fees charged to customers. The increase in costs was principally
attributable to a 5.9% increase in orders received. These costs comprised
approximately the same percentage of revenues, 52.0% in both quarters, due to
improved gross margin on products sold, offset by an increase in the cost to
fill orders in the current quarter.
   
Selling, general and administrative (SG&A) expenses, the largest component of
which is the cost of producing, printing and distributing the Company's 
catalogs, increased $3.2 million, or 17.4% in the current quarter. The increase
in expense is largely due to the 16% increase in catalog circulation, as well
as higher paper prices, and the cost of outside consultants working on the
Year 2000 project. As a percentage of revenues, SG&A costs increased from 50.0%
in the quarter ended August 23, 1997 to 55.6% in the quarter ended 
August 29, 1998. The percentage of revenues rose principally because the cost
of producing and mailing additional catalogs exceeded the incremental revenue
generated in the current quarter.

In connection with the planned relocation of its corporate headquarters to 
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).

The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and 
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:

                                                                EPS Impact-
                                                             -----------------
Fiscal Years Ended    Pre-tax Amount      After-tax Amount   Basic     Diluted
------------------    --------------      ----------------   -----     -------
1985 - 1995            ($577,000)            ($381,000)        Not Applicable
February 24, 1996      ($182,000)            ($120,000)      ($.01)    ($.01)
February 22, 1997      ($187,000)            ($124,000)      ($.01)    ($.01)
February 28, 1998     $1,136,000              $750,000        $.08      $.08 
February 27, 1999      ($190,000)            ($125,000)      ($.01)    ($.01)

    

Interest income for the quarter ended August 29, 1998 of $100,000 decreased by
$129,000 as compared to the second quarter of the prior year, due to a lower
investment balance. Interest expense for the quarter ended August 29, 1998 of
$105,000 was $15,000 higher than the same period last year, principally due to
higher seasonal borrowing.

The effective income tax rate was 34% for the current quarter, the same rate
as the second quarter of fiscal 1998.

Six Months Ended August 29, 1998

Revenues for the six months ended August 29, 1998 were $71.4 million, an 
increase of $6.4 million, or 9.8% higher than the corresponding period of the
prior year. The increase in revenues was primarily attributable to 19% higher
catalog circulation, including the introduction of a new catalog, Lillian
Vernon Gardening, new Spring editions of the Lilly's Kids and Personalized 
Gifts catalogs, and increased circulation of the same catalog editions mailed
in the first half last year. While

                               Page 9 of 13


<PAGE>

the weakness in the retail environment was not fully anticipated, which caused 
revenues to fall below expectations, the additional circulation established 
contact with more potential customers for the Company's busy Fall/holiday 
season.

Product and delivery costs increased by $2.3 million, or 6.8% as compared to
the same period last year primarily because of 9.2% more orders received. These
costs declined as a percentage of revenues from 51.8% in the prior six month
period to 50.4% in the current period. The decline in the percentage was driven
by higher gross margin on merchandise sold. The margin improvement was
principally the result of higher markups, but also was affected by the mix of
the merchandise sold, which included more full-priced and higher margin product
lines as compared to the first six months last year.
   
Selling, general and administrative (SG&A) expenses increased $6.8 million, or
19.0%, for the current six months as compared to the same period last year, due
primarily to a 19% increase in catalog circulation, higher paper prices, and
additional labor costs of outside consultants working on the Year 2000 project.
As a percentage of revenues, SG&A costs increased from 55.3% for the six months
ended August 23, 1997 to 59.9% in the current six month period. The increase in
the percentage of revenues is mainly due to the lower revenue per catalog
generated in the current period, as well as higher paper prices.

In connection with the planned relocation of its corporate headquarters to 
Rye, NY in July 1998, the Company wrote-off the unamortized portion of its
leasehold improvements at its corporate headquarters facility in
New Rochelle, NY on February 28, 1998. The pre-tax charge previously reported
was $1,330,000 ($878,000 after-tax).

The Company subsequently realized that an error had been made over a period of
years in the calculation of its amortization of leasehold improvements. The
Company had assumed that the assets' useful life of fifteen years was the
appropriate amortization period, rather than the shorter remaining life of the
lease, which terminated in July 1998.

The Company has restated its annual and quarterly financial statements for the
years ended February 28, 1998, February 22, 1997, and February 24, 1996, and 
for the quarters ended May 30, August 29 and November 28, 1998, to charge the
revised amortization expense to selling, general and administrative expenses in
each of those periods. The pre-tax write-off of $1.3 million previously charged
in fiscal 1998 has been reversed and reallocated as income (expense) to the
appropriate fiscal years as follows:

                                                                EPS Impact-
                                                             -----------------
Fiscal Years Ended    Pre-tax Amount      After-tax Amount   Basic     Diluted
------------------    --------------      ----------------   -----     -------
1985 - 1995            ($577,000)            ($381,000)        Not Applicable
February 24, 1996      ($182,000)            ($120,000)      ($.01)    ($.01)
February 22, 1997      ($187,000)            ($124,000)      ($.01)    ($.01)
February 28, 1998     $1,136,000              $750,000        $.08      $.08 
February 27, 1999      ($190,000)            ($125,000)      ($.01)    ($.01)
    

Interest income for the current six months ended August 29, 1998 of $456,000
decreased by $126,000 as compared to the same period of the prior year, due to 
a lower investment balance. Interest expense for the six months ended 
August 29, 1998 of $178,000 was comparable with the same period last year.

The effective income tax rate was 34% for the six months ended August 29, 1998,
the same rate as in the six months ended August 23, 1997.

Financial Condition

The Company's working capital ratio at August 29, 1998 was 2.59 to 1, as
compared to 4.15 to 1 at February 28, 1998 and 3.22 to 1 at August 23, 1997. 
Due to the seasonality of the Company's business, the first half of the fiscal 
year has historically been a loss period and a period of working capital demand
in preparation for the peak selling season. The Company builds up its inventory
and prepays substantial catalog costs during this period. It also collects its
year-end receivables from customers under its deferred billing program during
this period. For the six months ended August 29, 1998, the Company used $17.6
million more cash for working capital needs as compared to the corresponding
period last year. The major contributing factors were an increased loss, higher
catalog-related expenditures, and the timing of payments for inventory. As a
result of the higher cash demands in the current six month period as compared 
to the same period last year, the Company drew down earlier on its revolving
credit facility. Inventory levels are 7.2% higher at the end of the second
quarter of fiscal 1999 compared to the same point last year. Management expects
to be able to sell this inventory without significant overall gross margin
reduction.

The Company expended capital of $1,553,000 during the six months ended Auqust
29,1998, compared to $853,000 last year. The Company paid dividends totaling
$1.5 million, $.2 million higher than the first half last year due to the
increase in quarterly dividend rate per share from $.07 to $.08 in March 1998.

                                 Page 10 of 13

<PAGE>

During the six months ended August 29, 1998, the Company continued its open
market stock repurchase program, and acquired 314,000 shares of its common
stock at a total cost of $5.3 million. This compares to $1.2 million spent for
the first six months last year. As of September 3, 1998, the Company completed
its 1 million share stock repurchase program which was started in October 1995.
The total cost of the plan was $15.2 million.

On October 7, 1998, the Company's Board of Directors approved a new stock
repurchase program which authorizes management to repurchase up to 1 million
shares of its common stock in the open market from time to time.

Year 2000

Year 2000 Compliance Program

The Company's Year 2000 compliance program is directed primarily towards
ensuring that the Company will be able to continue to perform its critical
functions: (1) process sales orders from and ship goods to customers, (2) order
and receive merchandise from vendors, and (3) process payments to vendors and
employees.

The Company is in the process of modifying its internal computer software
applications and systems to function properly with respect to dates in the Year
2000 and thereafter. The Company is utilizing both in-house staff as well as
outside resources to modify its systems. This work is expected to be completed
by July 31, 1999. In addition to internal systems, the Company has established
procedures to determine that outside computer software vendors are either
already Year 2000 compliant or have timely dates when they intend to be
compliant. The Company is also reviewing all computer hardware such as
mid-range, mainframe and personal computers, networks, telephone switches,
voice mail systems, and timeclocks, as well as its distribution and warehouse
equipment, to ensure Year 2000 compliance. The Company has also contacted its
various merchandise vendors to inquire as to their Year 2000 readiness, and is
following up with those vendors who have not responded to-date.

Costs

The Company presently anticipates that the cost of modifying its computer
software applications and systems to be Year 2000 compliant will be
approximately $1.2 million, of which approximately $500,000 has been spent to
date. These amounts are expected to be funded from operating cash flow.

Risks

The variety and complexity of the Year 2000 issues identified and the
proposed solutions, the Company's dependence on the technical skills of
employees and independent contractors, and especially the representations and
readiness of third parties are among the factors that could cause the Company's
efforts to be less than

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<PAGE>

fully effective. In addition, Year 2000 issues present a number of risks that
are beyond the Company's reasonable control, such as continued service from
outside parties such as utility companies, financial institutions, and
transportation and delivery companies (such as the US Postal Service and United
Parcel Service).

The Company's peak selling season runs from September through mid-December;
therefore, disruption of its business at the beginning of Year 2000 would be
less significant than if it happened during its peak season. The Company
expects to have adequate inventory on hand to service its customers, and the
Company can shift its customer delivery operations to alternative carriers, if
necessary. The Company does not rely on any supplier for a significant portion
of its products, and the majority of its vendors do not rely on computerized
manufacturing systems. The Company has computerized telephone systems which
process customer phone orders; any interruption in service by major telephone
carriers could have a detrimental impact on the Company's ability to receive
orders and service its customers.

The Company intends to develop a contingency plan after its risk assessment
is completed, in the event that any unresolved issues are identified.

Although the Company believes that its Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to the Company's reasonable control, there can be no assurance that the
Company's efforts in this regard will be fully effective or that Year 2000
issues will not have a material adverse effect on the Company's business,
financial condition or results of operations.

Forward Looking Statements
-------------------------

Except for historical information contained herein, this Report on Form 10-Q
contains forward-looking statements which are based on the Company's current
expectations and assumptions. Various factors could cause actual results to
differ materially from those set forth in such statements. These factors
include, but are not limited to, the potential for changes in consumer
spending, consumer preferences and general economic conditions, increasing
competition in the direct mail industry, changes in government regulations,
dependence on foreign suppliers, possible future increases in operating costs,
including postage and paper costs, as well as a delay or inability to become
Year 2000 compliant. For further information, see Part I of Form 10-K for the
fiscal year ended February 28, 1998.

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<PAGE>




                                   SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



                                               Lillian Vernon Corporation
                                               --------------------------
                                                    (Registrant)




   
Date:  March 16, 1999          By: /s/ Richard P. Randall
                                   ----------------------------
                                   Richard P. Randall
                                   Senior Vice President-Chief Financial Officer
    
























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