<PAGE>   1
                                                           Exhibit 10.34

                                NAR GROUP LIMITED

                             SEVEN-YEAR STOCK OPTION

            This STOCK OPTION AGREEMENT (this "Agreement") is made as of August
23, 1996 between NAR Group Limited, a British Virgin Islands corporation
("NAR"), and Rakesh K. Kaul (the "Executive").

            WHEREAS, NAR is the majority shareholder of Hanover Direct, Inc., a
Delaware corporation ("Hanover");

            WHEREAS, NAR deems it to be in its interest and in the interest of
Hanover for the Executive to serve as President and Chief Executive Officer of
Hanover; and

            WHEREAS, the Compensation Committee of Hanover's Board of Directors
(the "Compensation Committee") has heretofore adopted and Hanover's shareholders
have heretofore approved and ratified the Long-Term Incentive Plan for Rakesh K.
Kaul (the "Plan");

            WHEREAS, in consideration of the Executive's agreement to serve as
President and Chief Executive Officer of Hanover, and to compensate the
Executive for his services in such capacity, NAR has agreed in accordance with
the Plan to grant the Executive an option to purchase securities in Hanover held
by NAR.

            NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:

            1. NAR hereby evidences and confirms its grant to the Executive on
August 23, 1996 (the "Date of Grant") of an option (the "Option") to purchase
377,500 shares of common stock, par value $.66-2/3 per share (the "Common
Stock"), of Hanover (the "Shares") at an option price of $1.15625 per share. The
Option shall expire on March 7, 2003 (the "Expiration Date"), subject to earlier
cancellation or termination as provided herein.

            2. Subject to the other provisions contained herein regarding the
exercisability of the Option, this Option shall vest and become exercisable on
March 7, 1998; provided, however, that the Option shall immediately vest and
become exercisable in full upon the Executive's death or permanent disability
(as determined by the Compensation Committee), or upon the occurrence of a
change in control (as defined in the Employment Agreement


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dated March 7, 1996 between Hanover and the Executive (the "Employment
Agreement")). For purposes hereof, a permanent disability means the Executive's
inability to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of not less than 12 months.

            3. In the event of a termination of the Executive's employment with
Hanover while any portion of the Option remains unexercised, the Executive's
rights to exercise the Option shall be exercisable only as follows:

            (i) Involuntary Termination. If the Executive's employment is
      involuntarily terminated by Hanover other than for cause, the Executive
      may, until the later of (i) 12 months following the date of such
      termination, or (ii) March 10, 1998 if such termination occurs after
      December 31, 1996 and before March 10, 1997, exercise the Option with
      respect to such number of Shares as to which the Option is exercisable (or
      would be exercisable if his employment had not terminated) on the date of
      exercise, as determined pursuant to Section 2. For purposes hereof, the
      provisions of the Employment Agreement shall apply in determining whether
      the Executive's employment has been involuntarily terminated by Hanover
      other than for cause.

            (ii) Death. If the Executive's employment terminates by reason of
      death, his Option may be exercised during the 12-month period following
      such termination.

            (iii) Disability. If the Executive's employment terminates by reason
      of permanent disability (as determined by the Compensation Committee), the
      Option may be exercised during the three-month period following such
      termination.

            (iv) Termination in Other Circumstances. If the Executive's
      employment terminates in circumstances not described in clauses (i)
      through (iii), the Executive may, within 30 days following such
      termination, exercise the Option with respect to such number of Shares as
      to which the Option is exercisable (or would be exercisable if his
      employment had not terminated) on the date of exercise, as determined
      pursuant to Section 2.

Notwithstanding the foregoing, the Option shall in no event be exercisable in
whole or in part after the Expiration Date.

            4.  (a)  Except as provided in paragraph (b), the


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Option is not transferable by the Executive other than by will or the laws of
descent and distribution and is exercisable, during the Executive's lifetime,
only by the Executive.

            (b) Notwithstanding the provisions of paragraph (a), if the current
transferability restrictions imposed by the Securities and Exchange Commission
under Rule 16b-3 are eliminated or modified, the following provisions shall
apply if and to the extent that they will not adversely affect the Option's
status under such rule:

            (i)  In the event of the Executive's incapacity, the
      Option may be exercised by a conservator, guardian, or the
      agent under a Durable Power of Attorney;

            (ii) Upon the Executive's death, the Option is transferable by will,
      by a revocable or irrevocable trust established by the Executive, or by a
      written beneficiary designation executed by the Executive and delivered to
      NAR prior to the Executive's death;

            (iii) The Executive may transfer the Option to the Executive's
      spouse and/or issue or trusts for the benefit of the Executive, the
      Executive's spouse, and/or the Executive's issue.

            5. In order to exercise the Option, in whole or in part, the
Executive shall give written notice to NAR, specifying the number of Shares to
be purchased and the purchase price to be paid, and accompanied by the payment
of the purchase price. Such purchase price may be paid in cash, a certified
check, or a bank check payable to NAR, or in whole shares of Common Stock
evidenced by negotiable certificates, valued at their fair market value on the
date of exercise, or in a combination of the foregoing. Alternatively, the
Option may be exercised, in whole or in part, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to deliver
promptly to NAR the amount of sale or loan proceeds necessary to pay the
purchase price, and such other documents as NAR may require. Upon receipt of
payment, NAR shall deliver to the Executive (or to any other person entitled to
exercise the Option) a certificate or certificates for such Shares. If
certificates representing shares of Common Stock are used to pay all or part of
the purchase price of the Option, separate certificates shall be delivered by
NAR representing the same number of shares as each certificate so used and an
additional certificate shall be delivered representing the additional shares to
which the Executive is entitled as a result of exercise of the Option.


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            6. The Option shall be exercised only with respect to full Shares;
no fractional Shares shall be issued.

            7. As a condition to the issuance of Shares under the Option, the
Executive agrees to remit to Hanover at the time of exercise any taxes required
to be withheld by Hanover under the applicable laws or other regulations of any
governmental authority, whether federal, state or local, and whether domestic or
foreign.

            8. If the Executive so requests in writing, shares purchased upon
exercise of the Option may be issued in the name of the Executive and another
person jointly with the right of survivorship, or in the name of a revocable
trust of which the Executive is the grantor.

            9. The Option does not qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.

            10. This Option shall be binding upon and inure to the benefit of
any successor or assignee of NAR and to any executor, administrator, legal
representative, legatee, or distributee or transferee entitled by law or the
provisions of the Plan to the Executive's rights hereunder.

            11.  The Option is subject in all respects to the terms
of the Plan, the provisions of which are incorporated in this
Agreement by reference.

            12. This Agreement is entered into, and shall be construed and
enforced, under the laws of the State of New York, and shall not be modified
except by written agreement signed by the parties hereto.

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.

                                          NAR GROUP LIMITED



                                          By: __________________________


                                          ______________________________
                                                Rakesh K. Kaul



<PAGE>   5
                                                         Exhibit 10.35

                                NAR GROUP LIMITED

                             EIGHT-YEAR STOCK OPTION

            This STOCK OPTION AGREEMENT (this "Agreement") is made as of August
23, 1996 between NAR Group Limited, a British Virgin Islands corporation
("NAR"), and Rakesh K. Kaul (the "Executive").

            WHEREAS, NAR is the majority shareholder of Hanover Direct, Inc., a
Delaware corporation ("Hanover");

            WHEREAS, NAR deems it to be in its interest and in the interest of
Hanover for the Executive to serve as President and Chief Executive Officer of
Hanover; and

            WHEREAS, the Compensation Committee of Hanover's Board of Directors
(the "Compensation Committee") has heretofore adopted and Hanover's shareholders
have heretofore approved and ratified the Long-Term Incentive Plan for Rakesh K.
Kaul (the "Plan");

            WHEREAS, in consideration of the Executive's agreement to serve as
President and Chief Executive Officer of Hanover, and to compensate the
Executive for his services in such capacity, NAR has agreed in accordance with
the Plan to grant the Executive an option to purchase securities in Hanover held
by NAR.

            NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:

            1. NAR hereby evidences and confirms its grant to the Executive on
August 23, 1996 (the "Date of Grant") of an option (the "Option") to purchase
377,500 shares of common stock, par value $.66-2/3 per share (the "Common
Stock"), of Hanover (the "Shares") at an option price of $1.15625 per share. The
Option shall expire on March 7, 2004 (the "Expiration Date"), subject to earlier
cancellation or termination as provided herein.

            2. Subject to the other provisions contained herein regarding the
exercisability of the Option, this Option shall vest and become exercisable on
March 7, 1999; provided, however, that the Option shall immediately vest and
become exercisable in full upon the Executive's death or permanent disability
(as


<PAGE>   6

determined by the Compensation Committee), or upon the occurrence of a change in
control (as defined in the Employment Agreement dated March 7, 1996 between
Hanover and the Executive (the "Employment Agreement")). For purposes hereof, a
permanent disability means the Executive's inability to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than 12 months.

            3. In the event of a termination of the Executive's employment with
Hanover while any portion of the Option remains unexercised, the Executive's
rights to exercise the Option shall be exercisable only as follows:

            (i) Involuntary Termination. If the Executive's employment is
      involuntarily terminated by Hanover other than for cause, the Executive
      may, until the later of (i) 12 months following the date of such
      termination, or (ii) March 10, 1999 if such termination occurs before
      after December 31, 1997 and before March 10, 1998, exercise the Option
      with respect to such number of Shares as to which the Option is
      exercisable (or would be exercisable if his employment had not terminated)
      on the date of exercise, as determined pursuant to Section 2. For purposes
      hereof, the provisions of the Employment Agreement shall apply in
      determining whether the Executive's employment has been involuntarily
      terminated by Hanover other than for cause.

            (ii) Death. If the Executive's employment terminates by reason of
      death, his Option may be exercised during the 12-month period following
      such termination.

            (iii) Disability. If the Executive's employment terminates by reason
      of permanent disability (as determined by the Compensation Committee), the
      Option may be exercised during the three-month period following such
      termination.

            (iv) Termination in Other Circumstances. If the Executive's
      employment terminates in circumstances not described in clauses (i)
      through (iii), the Executive may, within 30 days following such
      termination, exercise the Option with respect to such number of Shares as
      to which the Option is exercisable (or would be exercisable if his
      employment had not terminated) on the date of exercise, as determined
      pursuant to Section 2.

Notwithstanding the foregoing, the Option shall in no event be


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exercisable in whole or in part after the Expiration Date.

            4. (a) Except as provided in paragraph (b), the Option is not
transferable by the Executive other than by will or the laws of descent and
distribution and is exercisable, during the Executive's lifetime, only by the
Executive.

            (b) Notwithstanding the provisions of paragraph (a), if the current
transferability restrictions imposed by the Securities and Exchange Commission
under Rule 16b-3 are eliminated or modified, the following provisions shall
apply if and to the extent that they will not adversely affect the Option's
status under such rule:

            (i)  In the event of the Executive's incapacity, the
      Option may be exercised by a conservator, guardian, or the
      agent under a Durable Power of Attorney;

            (ii) Upon the Executive's death, the Option is transferable by will,
      by a revocable or irrevocable trust established by the Executive, or by a
      written beneficiary designation executed by the Executive and delivered to
      NAR prior to the Executive's death;

            (iii) The Executive may transfer the Option to the Executive's
      spouse and/or issue or trusts for the benefit of the Executive, the
      Executive's spouse, and/or the Executive's issue.

            5. In order to exercise the Option, in whole or in part, the
Executive shall give written notice to NAR, specifying the number of Shares to
be purchased and the purchase price to be paid, and accompanied by the payment
of the purchase price. Such purchase price may be paid in cash, a certified
check, or a bank check payable to NAR, or in whole shares of Common Stock
evidenced by negotiable certificates, valued at their fair market value on the
date of exercise, or in a combination of the foregoing. Alternatively, the
Option may be exercised, in whole or in part, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to deliver
promptly to NAR the amount of sale or loan proceeds necessary to pay the
purchase price, and such other documents as NAR may require. Upon receipt of
payment, NAR shall deliver to the Executive (or to any other person entitled to
exercise the Option) a certificate or certificates for such Shares. If
certificates representing shares of Common Stock are used to pay all or part of
the purchase price of the Option, separate certificates shall be delivered by
NAR representing the same number of shares as each certificate so used and an
additional certificate shall be delivered representing the additional shares


<PAGE>   8

to which the Executive is entitled as a result of exercise of the
Option.

            6. The Option shall be exercised only with respect to full Shares;
no fractional Shares shall be issued.

            7. As a condition to the issuance of Shares under the Option, the
Executive agrees to remit to Hanover at the time of exercise any taxes required
to be withheld by Hanover under the applicable laws or other regulations of any
governmental authority, whether federal, state or local, and whether domestic or
foreign.

            8. If the Executive so requests in writing, shares purchased upon
exercise of the Option may be issued in the name of the Executive and another
person jointly with the right of survivorship, or in the name of a revocable
trust of which the Executive is the grantor.

            9. The Option does not qualify as an incentive stock option under
Section 422 of the Internal Revenue Code.

            10. This Option shall be binding upon and inure to the benefit of
any successor or assignee of NAR and to any executor, administrator, legal
representative, legatee, or distributee or transferee entitled by law or the
provisions of the Plan to the Executive's rights hereunder.

            11.  The Option is subject in all respects to the terms
of the Plan, the provisions of which are incorporated in this
Agreement by reference.

            12. This Agreement is entered into, and shall be construed and
enforced, under the laws of the State of New York, and shall not be modified
except by written agreement signed by the parties hereto.

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.

                                          NAR GROUP LIMITED



                                          By: __________________________


                                          ______________________________


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                                          Rakesh K. Kaul