<PAGE>   1
THIS SERIES B NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE REGULATORY
AUTHORITY UNDER ANY STATE SECURITIES LAWS AND THEREFORE CANNOT BE RESOLD UNLESS
IT IS REGISTERED UNDER SUCH ACT OR APPLICABLE LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.

PAYMENTS OF PRINCIPAL AND PURCHASE PRICE OF AND INTEREST ON THIS NOTE WILL BE
MADE FROM DRAWINGS UNDER THE LETTER OF CREDIT ISSUED BY NATIONSBANK, N.A.
(CAROLINAS) (THE "BANK") IF REMARKETING PROCEEDS ARE NOT AVAILABLE OR IF AN
EVENT OF DEFAULT HAS OCCURRED. ALTHOUGH THE LETTER OF CREDIT IS A BINDING
OBLIGATION OF THE BANK, THIS NOTE IS NOT A DEPOSIT OR OBLIGATION OF NATIONSBANK
CORPORATION OR ANY OF ITS AFFILIATED BANKS AND IS NOT GUARANTEED BY ANY OF THESE
ENTITIES. THIS NOTE IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
AND IS SUBJECT TO CERTAIN INVESTMENT RISKS INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.



REGISTERED                                                      REGISTERED

No. R-1                                                         $10,000,000.00

                              HANOVER DIRECT, INC.
                              FLEXIBLE TERM NOTES,
                                    SERIES B


INTEREST RATE                       MATURITY DATE            DATE OF ISSUANCE

As Described                        October 1,  2009         April 27, 1995

REGISTERED OWNER: Cede & Co.


PRINCIPAL AMOUNT: Ten Million Dollars ($10,000,000.00)

         Hanover Direct, Inc., a Delaware corporation (the "Borrower"), for
value received, hereby promises to pay, solely from the sources and in the
manner hereinafter provided, to the registered owner, or registered assigns or
legal representative, upon presentation and surrender hereof at the principal
corporate trust office of Norwest Bank Minnesota, N.A., or its successor (in
such capacity, the "Paying Agent"), or by wire transfer, as provided in the
Series B Note Agreement, as hereinafter defined, the principal sum set forth
above on the Maturity Date set forth above, subject to the prior mandatory or
optional redemption of this Series B Note as hereinafter provided, and to pay
solely from such source interest hereon at the Interest Rate, as hereinafter
defined, payable in arrears on the Interest Payment Date, as hereinafter
defined, until payment in full and, to the extent permitted by law, interest on
overdue installments of such interest, from the Interest Payment Date applicable
to this Series B Note next preceding the date on which this Series B Note is
authenticated, unless this Series B Note is (a) authenticated before the first
Interest Payment Date following the initial delivery
<PAGE>   2
of the Series B Notes issued herein, in which case it shall bear interest from
the date of such initial delivery or (b) authenticated upon an Interest Payment
Date, in which case it shall bear interest from such Interest Payment Date
(unless interest on this Series B Note is in default at the time of
authentication, in which case this Series B Note shall bear interest from the
last date to which interest has been paid). Except as otherwise provided in the
Series B Note Agreement, interest hereon shall be paid to the person in whose
name this Series B Note is registered on the register of the Paying Agent at the
close of business on the Record Date next preceding each Interest Payment Date,
by check or draft mailed to such person at his address as it appears on the
register maintained by the Paying Agent, or by wire transfer for holders of an
aggregate principal amount of at least $500,000, at the request of such holders,
as provided in the Series B Note Agreement. Principal and Purchase Price, as
hereinafter defined, of and interest on this Series B Note are payable in lawful
currency of the United States of America. If any payment hereon is due on a day
which is not a Business Day, as hereinafter defined, payment shall be made on
the next succeeding Business Day with the same force and effect as if made on
the day such payment was due and, in the case of such payment, no interest shall
accrue for the intervening period.

         This Series B Note is one of an issue not to exceed $10,000,000 Hanover
Direct, Inc. Flexible Term Notes, Series B (the "Series B Notes"), issued
pursuant to a Series B Note Agreement dated as of April 27, 1995 (the "Series B
Note Agreement"), between the Borrower and Norwest Bank Minnesota, N.A., as
trustee (in such capacity, the "Trustee") and Paying Agent, for the purpose of
refinancing and/or financing certain construction, refurbishment and related
costs of an approximately 530,000 square foot distribution facility of the
Borrower located in Roanoke, Virginia and a new retail store of Gump's, Inc., a
subsidiary of the Borrower located in San Francisco, California. Pursuant to the
Series B Note Agreement, the Borrower has caused NationsBank, N.A. (Carolinas)
(the "Bank") to issue its irrevocable Series B Letter of Credit dated the Date
of Issuance (as hereinafter defined and as set forth above) of the Series B
Notes (the "Series B Letter of Credit") in favor of the Trustee, in an amount
sufficient to pay the Series B Facility Amount and unpaid interest on or
Purchase Price of the Series B Notes, but not to exceed $10,145,833, pursuant to
a Credit Facilities and Reimbursement Agreement dated as of October 12, 1994
(the "Reimbursement Agreement") by and among the Borrower, the financial lenders
listed on the signature pages of the Reimbursement Agreement, including the
Bank, and the Bank, as agent, which Series B Letter of Credit initially expires
(subject to extension or earlier termination as provided in the Reimbursement
Agreement and the Series B Note Agreement) on April 27, 1998. Substitute letters
of credit may be delivered in accordance with the Series B Note Agreement. The
Trustee is authorized and directed pursuant to the Series B Note Agreement to
make timely draws under the Series B Letter of Credit in accordance with the
terms thereof, to the extent necessary to make when due the payments of
principal of (whether on the Maturity Date referenced above, by acceleration, or
by call for redemption), the Purchase Price of and interest on the Series B
Notes, except as otherwise provided in the Series B Note Agreement and the
Series B Letter of Credit. Reference is hereby made to the Series B Note
Agreement, the Series B Letter of Credit, the Reimbursement Agreement and to all
amendments and supplements thereto for a description of the provisions, among
others, with

                                        2
<PAGE>   3
respect to the nature and extent of the security, the default provisions, the
rights, duties and obligations of the Borrower and the Trustee and the rights of
the holders of the Series B Notes and the terms upon which the Series B Notes
are issued and secured.

         The Series B Notes are issuable in registered form without coupons in
denominations of $100,000 or any integral multiple of $100,000 in excess thereof
(the "Authorized Denominations"). This Series B Note, upon surrender hereof at
the principal corporate trust office of the Paying Agent with a written
instrument of transfer satisfactory to the Paying Agent duly endorsed for
transfer or accompanied by an assignment duly executed by the holder hereof or
his attorney duly authorized in writing and, in either case, with an appropriate
guarantee of signature conforming to the requirements of the assignment attached
hereto, may, at the option of the holder hereof, be exchanged for Series B Notes
of the same aggregate principal amount and tenor as the Series B Notes being
exchanged and of any Authorized Denomination. This Series B Note is transferable
as provided in the Series B Note Agreement, subject to certain limitations
therein contained, only upon the register of the Paying Agent, and only upon
surrender of this Series B Note for transfer to the Paying Agent duly endorsed
for transfer or accompanied by a written instrument of transfer (in
substantially the form of the assignment attached hereto) duly executed by the
holder hereof or his duly authorized attorney. Thereupon, one or more new Series
B Notes of any Authorized Denomination or Authorized Denominations and in the
same aggregate principal amount and tenor as the Series B Note surrendered will
be issued to the designated transferee or transferees.

         The person in whose name this Series B Note is registered shall be
deemed and regarded as the absolute owner hereof for any purpose, as provided in
and as qualified by the Series B Note Agreement.

         The Paying Agent or NationsBank, N.A. (Carolinas) (formerly NationsBank
of North Carolina, N.A.), as Remarketing Agent (the "Remarketing Agent"), may
make appropriate arrangements for some or all of the Series B Notes to be issued
or held by means of a book-entry system administered by a Securities Depository,
as hereinafter defined, with no physical distribution of Series B Notes made to
the public (other than those Series B Notes, if any, not held under such
book-entry system).

         Initially, all of the Series B Notes will be held by means of a
book-entry system administered by the Securities Depository. One Series B Note
certificate in registered form will be issued for the Series B Notes in the
aggregate principal amount of $10,000,000, and will be registered in the name of
the Securities Depository Nominee and will be deposited with the Paying Agent.
Thereafter, in the event that Series B Notes are issued to the Beneficial Owners
thereof in certificated (physical) form (and in each and every case thereafter
in which a change in the principal amount of Series B Notes held pursuant to a
book-entry system is made), the Paying Agent will take all actions necessary to
comply with the Balance Certificate Agreement dated as of the date hereof
between Norwest Bank Minnesota, N.A., as transfer agent, and the Securities
Depository, which agreement governs

                                        3
<PAGE>   4
the mechanisms for the registration of transfer of Series B Note certificates
registered in the name of the Securities Depository Nominee.

         With respect to any Series B Notes that are held by means of a
book-entry system, such book-entry system will evidence beneficial ownership of
the Series B Notes so held in Authorized Denominations (or, as applicable,
positions held by the Participants, beneficial ownership being evidenced in the
records of such Participants). Registration and transfers of ownership shall be
effected on the records of the Securities Depository and the Participants, as
applicable, pursuant to rules and procedures established by the Securities
Depository and the Participants. Subject to the provisions of Section 7.09 of
the Series B Note Agreement relating to the Bank as holder of the Series B
Notes, the Borrower, the Trustee and the Paying Agent will recognize the
Securities Depository Nominee, as hereinafter defined, while the registered
owner of the Series B Notes so held, as the owner of the Series B Notes for all
purposes, including (i) payments of principal and Purchase Price of, and
interest on, the Series B Notes, (ii) notices and (iii) voting, subject to
certain qualifications as stated in the Series B Note Agreement. Transfer of
principal, interest and Purchase Price payments to beneficial owners of the
Series B Notes so held will be the responsibility of the Securities Depository
and the Participants. The Borrower, the Trustee, the Bank and the Paying Agent
will not be responsible or liable for such transfers of payments or for
maintaining, supervising or reviewing the records maintained by the Securities
Depository, the Securities Depository Nominee or the Participants.

         While the Securities Depository Nominee is the owner of the Series B
Notes so held, notwithstanding the provision hereinabove contained, payments of
principal and Purchase Price of and interest on such Series B Notes shall be
made in accordance with the Letter of Representations dated as of April 27, 1995
among the Borrower, the Trustee, the Remarketing Agent and Paying Agent and
received and accepted by the Securities Depository.

SO LONG AS A BOOK-ENTRY SYSTEM OF EVIDENCE AND TRANSFER OF OWNERSHIP IS
MAINTAINED WITH RESPECT TO THIS SERIES B NOTE IN ACCORDANCE WITH THE TERMS OF
THE SERIES B NOTE AGREEMENT, (1) THE PROVISIONS OF THIS SERIES B NOTE RELATING
TO THE DELIVERY OF PHYSICAL SERIES B NOTES SHALL BE DEEMED INAPPLICABLE OR BE
OTHERWISE SO CONSTRUED WITH REGARD TO THIS SERIES B NOTE AS TO GIVE FULL EFFECT
TO SUCH BOOK-ENTRY SYSTEM AND (2) THE PROVISIONS OF THIS SERIES B NOTE RELATING
TO ISSUANCE, PAYMENTS OF PRINCIPAL, PURCHASE PRICE AND INTEREST, AND
ESTABLISHMENT OF INTEREST RATES AND INTEREST PERIODS WITH RESPECT TO THE SERIES
B NOTES SHALL BE APPLICABLE TO BENEFICIAL OWNERSHIP INTERESTS IN THE SERIES B
NOTES IN AUTHORIZED DENOMINATIONS TO THE SAME EXTENT AS SUCH PROVISIONS ARE
APPLICABLE TO REGISTERED OWNERSHIP INTERESTS IN THE SERIES B NOTES.


                                        4
<PAGE>   5
         In the event that a book-entry system of evidence and transfer of
ownership of the Series B Notes is discontinued pursuant to the provisions of
the Series B Note Agreement, the Series B Notes shall be delivered solely in
registered form without coupons in the Authorized Denominations, shall be
lettered "R" and numbered separately from 1 upward, and shall be payable,
executed, authenticated, registered, exchanged and cancelled pursuant to the
provisions hereof and of the Series B Note Agreement.

         All references herein to time shall be Charlotte, North Carolina time
unless otherwise expressly stated herein.

         Except as otherwise specifically provided herein, all capitalized words
and terms shall have the same meaning when used herein as set forth in the
Series B Note Agreement.

         1. CERTAIN DEFINITIONS.

                  "BENEFICIAL OWNER" or "BENEFICIAL OWNER" means the holder of
the beneficial ownership interest in each Series B Note as evidenced on (i) if
such Series B Note is held pursuant to a book-entry system, the books maintained
by the Securities Depository (and, as applicable, its participants or persons
acting through such participants), as more fully described in the Letter of
Representations, or (ii) if such Series B Note is not held pursuant to a
book-entry system, the register maintained by the Paying Agent.

                  "BUSINESS DAY" means any day other than (a) Saturday or
Sunday, (b) a day on which commercial banks in New York, New York, or in the
city or cities in which the corporate trust office of the Trustee or the Paying
Agent, the primary office of the Remarketing Agent or the Placement Agent or the
paying office of the Bank are authorized by law or executive order to close or
(c) a day on which the New York Stock Exchange is closed. For purposes of this
definition, "paying office of the Bank" means the Bank office responsible for
making payments under any Series B Letter of Credit.

                  "DATE OF ISSUANCE" means the date upon which the Series B
Notes are issued, authenticated and delivered in accordance with the terms and
conditions of Section 2.06 of the Series B Note Agreement.

                  "INTEREST PAYMENT DATE" means the first day after the last day
of each Interest Period.

                  "INTEREST PERIOD" means, with respect to any Series B Note,
each period of between one (1) and one hundred eighty (180) days established
from time to time by the Remarketing Agent in accordance with the Interest
Period determination method described in Section 2.02(a) of the Series B Note
Agreement.


                                        5
<PAGE>   6
                  "INTEREST RATE" means, with respect to any Series B Note, the
interest rate on such Series B Note determined from time to time by the
Remarketing Agent in accordance with the Interest Rate determination method
described in Section 2.02(a) of the Series B Note Agreement. In no event shall
the Interest Rate exceed the lesser of fifteen percent (15%) per annum or the
highest interest rate which may be borne by the Series B Notes under applicable
law.

                  "PARTICIPANTS" means securities brokers and dealers, banks,
trust companies and clearing corporations which have access to the Securities
Depository's system.

                  "PURCHASE DATE" means, with respect to any Series B Notes, the
date on which such Series B Notes are required to be purchased pursuant to the
terms and conditions of Section 3.07(a) of the Series B Note Agreement.

                  "PURCHASE PRICE" means an amount equal to 100% of the
principal amount of any Series B Note tendered or deemed tendered to the Trustee
for purchase pursuant to the terms and conditions of Section 3.07 of the Series
B Note Agreement, plus accrued and unpaid interest thereon to, but excluding,
the Purchase Date.

                  "RECORD DATE" means, with respect to each Interest Payment
Date, the Trustee's close of business on the Business Day next preceding such
Interest Payment Date.

                  "SECURITIES DEPOSITORY" means, initially, The Depository Trust
Company, or any successor or substitute securities depository selected by the
Borrower (with the consent of the Trustee and the Remarketing Agent), which
shall maintain a book-entry system in respect of the Series B Notes.

                  "SECURITIES DEPOSITORY NOMINEE" means, as to any Securities
Depository, such Securities Depository or the nominee of such Securities
Depository in whose name there shall be registered on the register maintained by
the Paying Agent the Series B Note certificate to be delivered to and
immobilized with the Paying Agent during continuation with such Securities
Depository of participation in its book-entry system, and shall initially be
Cede & Co., nominee of The Depository Trust Company.

         2.  INTEREST ON THE SERIES B NOTES.

                  The Series B Notes will bear interest at the Interest Rate
from the Date of Issuance until paid in full. Interest accrued on each Series B
Note shall be paid on the applicable Interest Payment Date therefor. The amount
of interest payable on any Interest Payment Date shall be computed on the basis
of the actual number of days elapsed over a year of 360 days. The initial
Interest Period and corresponding Interest Rate for each Series B Note will be
determined by the Remarketing Agent on the Date of Issuance. After the initial
determination of the Interest Period and corresponding Interest Rate, the
applicable Interest Period and corresponding Interest Rate shall be determined
by the Remarketing Agent


                                        6
<PAGE>   7
at the time and in the manner specified in Section 2.02 of the Series B Note
Agreement. The Remarketing Agent's determination of the Interest Periods and
Interest Rates shall be conclusive and binding on the Noteholders, the Paying
Agent, the Remarketing Agent, the Borrower, the Bank and the Trustee. The
Remarketing Agent will notify the Paying Agent in writing (which may be in
telecopy form) or by telephone promptly confirmed in writing by 10:00 a.m. on
the first Business Day of each Interest Period with respect to any Series B
Note, of the identity of such Series B Note, the length of such Interest Period,
the Interest Rate therefor and the principal amount of such Series B Note, and,
upon the request of the Borrower or the Bank, the Paying Agent shall promptly
(but in no event later than the end of such Business Day) after its receipt of
such information, forward such information to the Borrower and the Bank. The
failure by the Remarketing Agent or the Paying Agent, as applicable, to give any
such notice shall not affect the change in the Interest Period and/or Interest
Rate.

                  The calculation of interest payable on the Series B Notes as
provided in this Agreement will be conclusive and binding on the Borrower, the
Bank, the Trustee, the Paying Agent, the Remarketing Agent and the Noteholders,
absent manifest error.

                  Neither the Remarketing Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower, the Trustee, the
Paying Agent, the Bank or any Noteholder for any action taken or not taken by
the Remarketing Agent or any of its directors, officers, agents or employees in
connection with the determination of the Interest Period and Interest Rate for
each Series B Note pursuant to the Series B Note Agreement, in the absence of
its own negligence or willful misconduct.

         3. REDEMPTION OF SERIES B NOTES.

                  (a) OPTIONAL REDEMPTION. The Series B Notes are subject to
redemption at the option of the Borrower, in whole or in part, at a redemption
price equal to the principal amount thereof plus accrued and unpaid interest
thereon to, but excluding, the redemption date; provided that any such
redemption in part shall be in a minimum principal amount of $100,000.

                  (b) MANDATORY SINKING FUND REDEMPTION. The Series B Notes are
subject to mandatory sinking fund redemption prior to the Maturity Date, in
part, with the Series B Notes to be redeemed being selected pursuant to Section
3.03 of the Series B Note Agreement, at a redemption price equal to the
principal amount thereof, on October 1, or if any such date is not a Business
Day, on the next succeeding Business Day with the same force and effect, in the
years and in the principal amounts indicated below:



                                        7
<PAGE>   8
<TABLE>
<CAPTION>
           REDEMPTION DATE                              PRINCIPAL
             (OCTOBER 1)                                  AMOUNT
             -----------                                  ------
<S>                                                     <C>
                1996                                     $500,000
                1997                                      500,000
                1998                                      500,000
                1999                                      500,000
                2000                                      800,000
                2001                                      800,000
                2002                                      800,000
                2003                                      800,000
                2004                                      800,000
                2005                                      800,000
                2006                                      800,000
                2007                                      800,000
                2008                                      800,000
                2009                                      800,000
</TABLE>

                  (c) MANDATORY REDEMPTION ON EXPIRATION OR TERMINATION OF
SERIES B LETTER OF CREDIT WITHOUT EXTENSION OR PROVIDING A SUBSTITUTE SERIES B
LETTER OF CREDIT. The Series B Notes are subject to mandatory redemption in
whole on the fifth (5th) Business Day prior to the stated date of expiration or
termination of the Series B Letter of Credit, at a redemption price equal to the
principal amount thereof plus accrued and unpaid interest thereon to, but
excluding, the redemption date, unless by the twentieth (20th) day prior to such
redemption date the Borrower provides to the Trustee, and the Trustee has
accepted, (1) evidence that such Series B Letter of Credit has been extended or
(2) a Substitute Series B Letter of Credit to be effective on or prior to such
redemption date.

                  (d) REDEMPTION DATE. The redemption date for Series B Notes to
be redeemed as described in paragraph 3(a) above must be an Interest Payment
Date with respect to the Series B Notes being redeemed. The redemption date for
mandatory redemptions will be as specified in paragraph 3(b) or (c) above, as
the case may be, or determined by the Trustee or the Remarketing Agent
consistently with the provisions thereof and of the Series B Note Agreement.

                  (e) SELECTION OF SERIES B NOTES TO BE REDEEMED. Except as
otherwise provided herein or in Section 3.03 of the Series B Note Agreement, if
fewer than all the Series B Notes are to be redeemed, the Remarketing Agent will
select the Series B Notes to be redeemed by lot or such other method as it deems
in its sole discretion to be fair and appropriate and shall notify the Paying
Agent (which notice may be provided by telephone, immediately confirmed in
writing by legible facsimile transmission, registered or certified mail,
overnight express delivery, or other secure means) of the holders and
denominations of Series B Notes to be redeemed; provided, however, that in
selecting Series B Notes to be redeemed the Remarketing Agent shall (i) select
only Series B Notes not previously called for

                                        8
<PAGE>   9
redemption, (ii) select Bank Notes prior to any other Series B Notes, and (iii)
with respect to any mandatory sinking fund redemption as described in paragraph
3(b) above, select the Series B Notes to be redeemed on or before the sixtieth
(60th) day prior to the redemption date, and in making such selection take into
account the duration of the Interest Periods with respect to such Series B
Notes.

                  In the event the Remarketing Agent fails to notify the Paying
Agent of the Series B Notes to be redeemed on or before the ninth (9th) Business
Day prior to the redemption date, the Paying Agent shall proceed to select
Series B Notes for redemption from among the Outstanding Series B Notes in the
chronological order in which their Purchase Dates occur, beginning with the
earliest Purchase Date; provided, however, that in selecting Series B Notes to
be redeemed the Paying Agent shall (i) select only Series B Notes not previously
called for redemption and (ii) select Bank Notes prior to any other Series B
Notes. If fewer than all Series B Notes having the same Purchase Date (selected
for redemption as provided in the immediately preceding sentence) are to be
redeemed, the Paying Agent shall treat each owner of Series B Notes as the owner
of one Series B Note for purposes of selection for redemption, and shall select
Series B Notes for redemption by lot or such other method as it deems fair and
appropriate, (1) from among the holders of less than $1,000,000 in aggregate
principal amount, provided that if there are no such holders, or if, after
selection from among such holders such selection has not resulted in redemption
of a sufficient amount of Series B Notes, then (2) from among the holders of
$1,000,000 or more in aggregate principal amount of Series B Notes.

                  No portion of a Series B Note may be redeemed that would
result in a Series B Note which is smaller than the then permitted minimum
Authorized Denomination. For this purpose, the Remarketing Agent or the Paying
Agent will consider each Series B Note in a denomination larger than the minimum
denomination permitted by the Series B Notes at the time to be separate Series B
Notes each in the minimum denomination.

                  (f) NOTICE OF REDEMPTION. The Trustee will prepare and cause
the Paying Agent to send notice of each redemption to each Noteholder whose
Series B Notes are being redeemed, the Borrower, the Remarketing Agent and the
Bank by first-class mail at least seven (7) Business Days but not more than
sixty (60) (or twenty (20), in the case of a mandatory redemption pursuant to
paragraph 3(c) above) days before each redemption. The notice shall identify the
Series B Notes or portions thereof to be redeemed and will state: (i) the type
of redemption and the redemption date, (ii) the redemption price, (iii) that the
Series B Notes called for redemption must be surrendered to collect the
redemption price, (iv) the address of the Paying Agent at which the Series B
Notes must be surrendered, (v) that interest on the Series B Notes called for
redemption ceases to accrue on the redemption date, (vi) the CUSIP number of the
Series B Notes called for redemption and (vii) any condition to the redemption.
Failure by the Trustee or the Paying Agent to give any notice of redemption as
to any particular Series B Notes will not affect the validity of the call for
redemption of any Series B Notes in respect of which no such failure has
occurred. Any notice mailed as provided in the Series B Notes will be
conclusively presumed to have been given whether or


                                        9
<PAGE>   10
not actually received by any holder or beneficial owner.

                  (g) EFFECT OF REDEMPTION. On the date fixed for redemption,
notice having been given in the manner and under the conditions provided in the
Series B Note Agreement, the Series B Notes or portions thereof called for
redemption shall be due and payable at the redemption price provided therefor,
plus accrued interest to such date. On such redemption date, if moneys
sufficient to pay the redemption price of the Series B Notes to be redeemed,
plus accrued interest thereon to the date fixed for redemption, are held by the
Paying Agent, interest on the Series B Notes called for redemption shall cease
to accrue; such Series B Notes shall cease to be entitled to any benefits or
security under the Series B Note Agreement or to be deemed Outstanding; and the
holders and beneficial owners of such Series B Notes shall have no rights in
respect thereof except to receive payment of the redemption price thereof, plus
accrued interest to, but excluding, the date of redemption.

                  (h) SERIES B NOTES REDEEMED IN PART. Upon surrender of a
Series B Note redeemed in part, the Paying Agent will authenticate for the
holder a new Series B Note or Series B Notes equal in principal amount to the
unredeemed portion of the Series B Note surrendered.

         4.  PURCHASE OF SERIES B NOTES.

                  (a) MANDATORY PURCHASE OF SERIES B NOTES; NOTICE. Except as
provided in paragraph 4(c) below, Series B Notes are subject to mandatory
purchase at the Purchase Price:

                           (i) on each Interest Payment Date applicable to such
Series B Note; and

                           (ii) on the effective date of any Substitute Series B
Letter of Credit delivered in accordance with the terms and conditions of the
Series B Note Agreement, if, but only if, such Substitute Series B Letter of
Credit will result in a Credit Modification.

                  The Trustee will prepare and cause the Paying Agent to send
written notice of each mandatory purchase described in paragraph 4(a)(ii) above
(a "Notice of Mandatory Purchase") to each Noteholder whose Series B Notes are
being purchased, the Remarketing Agent, the Bank and the Borrower at least 15
days but not more than 60 days before the Purchase Date. No Notice of Mandatory
Purchase will be given to holders or beneficial owners of Series B Notes if the
mandatory purchase is being made as described in paragraph 4(a)(i) above.

                  (b) PAYMENT FOR PURCHASED SERIES B NOTES. The Purchase Price
of Series B Notes to be purchased on a Purchase Date shall be paid from
Remarketing Proceeds available to pay the Purchase Price of such Series B Notes
and, to the extent Remarketing Proceeds are not available to pay the Purchase
Price of such Series B Notes, from proceeds of


                                       10
<PAGE>   11
a draw on the Series B Letter of Credit pursuant to the applicable provisions of
Section 5.02(a)(iv) of the Series B Note Agreement. To the extent that
sufficient moneys have been made available therefor to the Paying Agent or the
Remarketing Agent, as applicable, by 1:45 p.m. on the Purchase Date pursuant to
Sections 3.08 and 5.02 of the Series B Note Agreement, upon surrender to the
Paying Agent of Series B Notes called for mandatory purchase as provided in the
Series B Note Agreement, the Purchase Price therefor shall be paid in
immediately available funds by the Paying Agent's or the Remarketing Agent's, as
applicable, close of business on the Purchase Date. From and after the Purchase
Date or, if later, the date on which such moneys are made available to the
Paying Agent or the Remarketing Agent, as applicable, interest accruing on such
Series B Notes shall cease to be payable to the prior holder thereof, such
Series B Notes shall cease to be entitled to the benefits of the Series B Note
Agreement and to such extent the prior holder shall have recourse solely to the
funds held by the Paying Agent or the Remarketing Agent, as applicable, for the
purchase of such Series B Notes as provided in Section 4.03 of the Series B Note
Agreement. Notwithstanding any provision to the contrary herein or in the Series
B Note Agreement, for so long as the Series B Notes are held pursuant to a
book-entry system maintained by DTC, payments of Purchase Price with respect to
such Series B Notes shall be made pursuant to the rules and procedures
established by DTC and its Participants.

                  (c) LIMITATION ON TENDERS. The holders shall not be required
to tender any Series B Note for purchase on a Purchase Date if on such date,
following the occurrence of an Event of Default, the Trustee shall have declared
the principal of and interest on the Series B Notes immediately due and payable
pursuant to Section 7.02 of the Series B Note Agreement.

                  (d) In the event that any Series B Note purchased pursuant to
a mandatory purchase is not delivered by the holder thereof on the date such
Series B Note is purchased, the Borrower shall execute (if necessary) and the
Paying Agent will authenticate and deliver a new Series B Note of like aggregate
principal amount as the Series B Note purchased, the Series B Note purchased
shall no longer be deemed outstanding and the owner thereof shall be entitled to
receive only those funds held on deposit with respect thereto, and the new
Series B Note shall, for all purposes of the Series B Note Agreement, be deemed
to evidence the same debt as the Series B Note purchased and shall be
remarketed, delivered and registered in accordance with the terms of this Series
B Note and the Series B Note Agreement.

         5. REMARKETING OF PURCHASED SERIES B NOTES.

                  (a) REMARKETING EFFORT. Except as otherwise provided in
Section 3.08(a) of the Series B Note Agreement, the Remarketing Agent will use
reasonable best efforts to remarket on the Purchase Date all Series B Notes
purchased in accordance with the terms of Section 3.07 of the Series B Note
Agreement and, to the extent such purchased Series B Notes are not remarketed on
the Purchase Date, thereafter will continue to use reasonable best efforts to
remarket such purchased Series B Notes, upon the terms and subject to the


                                       11
<PAGE>   12
conditions of the Remarketing Agreement.

                  (b) REMARKETING PROCEEDS. To the extent the Remarketing Agent
has remarketed Series B Notes and has received funds representing a payment for
such Series B Notes (the "Remarketing Proceeds") from the purchasers thereof,
the Remarketing Agent will promptly forward the Remarketing Proceeds by wire
transfer (or in such other manner as is acceptable to the Remarketing Agent) to
the holders tendering such Series B Notes for purchase (or, if required pursuant
to Section 3.08(b) of the Series B Note Agreement, to the Paying Agent). Except
as otherwise provided below with respect to Bank Notes, until such transfer, all
such Remarketing Proceeds shall be deposited in a separate, segregated account
of the Remarketing Agent (or, if transferred to the Paying Agent as provided in
the Series B Note Agreement, in a separate, segregated account of the Paying
Agent) for application in accordance with the applicable provisions of Section
3.08(b) of the Series B Note Agreement, and until so applied shall be held in
trust for the benefit of the holders tendering such Series B Notes for purchase.
Notwithstanding any provision to the contrary herein or in the Series B Note
Agreement, for so long as the Series B Notes are held pursuant to a book-entry
system maintained by DTC, payments of Remarketing Proceeds with respect to such
Series B Notes shall be made pursuant to the rules and procedures established by
DTC and its Participants.

                  (c) DELIVERY OF PURCHASED SERIES B NOTES. Series B Notes
purchased with Remarketing Proceeds (other than Bank Notes) shall be delivered
to the purchasers thereof upon receipt of payment therefor. Prior to such
delivery, the Paying Agent shall provide for registration of transfer to the
Holders, as provided in a written notice from the Remarketing Agent.

         6. MONEYS TO BE HELD IN TRUST. All proceeds of a draw on the Series B
Letter of Credit received by the Trustee and all money that the Trustee or the
Paying Agent shall hold in, or shall have withdrawn from, the Series B Letter of
Credit Fund or shall have received from any other source and set aside for the
purpose of paying any of the Series B Notes, either on the Maturity Date set
forth above or by purchase (other than as provided in Section 3.08 of the Series
B Note Agreement regarding remarketing of Series B Notes) or call for redemption
or for the purpose of paying any interest on the Series B Notes, shall be held
in trust for the respective holders or beneficial owners of the Series B Notes.
Moneys received by the Remarketing Agent, the Paying Agent or the Trustee from
the sale of a Series B Note under Section 3.08 of the Series B Note Agreement
regarding remarketing of Series B Notes or from the purchase of any Series B
Note will be held segregated from other funds held by the Remarketing Agent, the
Paying Agent or the Trustee for the benefit of the Person from whom such Series
B Note was purchased and will not be invested while so held. Any money that is
so set aside and that remains unclaimed by the holders or beneficial owners for
a period of five (5) years after the date on which such Series B Notes have
become payable shall be remitted to the Borrower and thereafter the holders or
beneficial owners shall look only to the Borrower for payment and then only to
the extent of the amounts so received, without any interest thereon, and the
Trustee, the Remarketing Agent, the Paying Agent and the Bank shall have no
responsibility with respect to such money.


                                       12
<PAGE>   13
         7. DEFAULTS AND REMEDIES. Upon the occurrence of certain events, and on
the conditions, in the manner and with the effect set forth in Article VII of
the Series B Note Agreement, the principal of all Series B Notes then
outstanding under the Series B Note Agreement may become or may be declared due
and payable before the stated maturity thereof, together with interest accrued
thereon. The Series B Note Agreement directs the Trustee to declare an
acceleration upon notice by the Bank of the occurrence and continuance of an
event of default under the Reimbursement Agreement, and upon the occurrence of
certain other Events of Default under the Series B Note Agreement. The Trustee
has the right to accelerate the entire unpaid principal of and interest on the
Series B Notes in certain events only with the Bank's consent, all as provided
in more detail in Article VII of the Series B Note Agreement to which reference
is hereby made.

         The owner of this Series B Note shall have no right to enforce the
provisions of the Series B Note Agreement or to institute action to enforce the
covenants therein, or to take any action with respect to any Event of Default
under the Series B Note Agreement, or to institute, appear in or defend any suit
or other proceeding with respect thereto, except as provided in the Series B
Note Agreement and except that any registered owner may institute action to
enforce the payment of the principal of or interest on his Series B Note.

         8. MISCELLANEOUS. Modifications or alterations of the Series B Note
Agreement may be made only to the extent and in the circumstances permitted by
Article IX of the Series B Note Agreement.

         Executed counterparts of the Series B Note Agreement are on file at the
principal corporate trust office of the Trustee. The holder of this Series B
Note, by acceptance hereof, consents to all of the terms and provisions of the
Series B Note Agreement.

         It is hereby certified that all acts, conditions and things required to
happen, exist and be performed under the laws of the State of New York, and
under the Series B Note Agreement precedent to and in connection with the
issuance of this Series B Note have happened, exist and have been performed as
so required, and that the issuance, authentication and delivery of this Series B
Note have been duly authorized by the Borrower.

         Unless the Certificate of Authentication hereto has been executed by
the Paying Agent by manual signature of one of its Responsible Officers, this
Series B Note shall not be entitled to any benefit under the Series B Note
Agreement, or be valid or obligatory for any purpose.



                                       13
<PAGE>   14
         IN WITNESS WHEREOF, Hanover Direct, Inc. has caused this Series B Note
to be executed in its name and on its behalf by the manual or facsimile
signature of the President and Treasurer and attested by manual or facsimile
signature of the Secretary or Assistant Secretary and sealed with the corporate
seal of Hanover Direct, Inc., all as of the Date of Issuance set forth above.

                                    HANOVER DIRECT, INC.

                                    By:_____________________________

                                    Name:  Jack Rosenfeld
                                    Title: President and CEO
ATTEST:

By: __________________________
Name: ________________________
Title: _______________________


[CORPORATE SEAL]                    By: ____________________________

                                    Name:  Edward J. O'Brien
                                    Title: Senior Vice President and
                                           Treasurer


                                       14
<PAGE>   15
                          CERTIFICATE OF AUTHENTICATION



         This Series B Note is one of the Series B Notes issued under the
provisions of the within-mentioned Series B Note Agreement.

                                          NORWEST BANK MINNESOTA, N.A.,
                                          as Paying Agent


                                          By: ______________________________
                                                   Responsible Officer

Dated: _________________



                                       15
<PAGE>   16
                                   ASSIGNMENT




  FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto

________________________________________________________________________________
   (PLEASE PRINT OR TYPE THE NAME AND ADDRESS, INCLUDING THE ZIP CODE OF THE
 TRANSFEREE, AND THE FEDERAL TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER)

the within Series B Note and all rights thereunder, and hereby irrevocably
constitutes and appoints ___________________ Attorney to transfer the within
Series B Note on the books kept for registration and transfer thereof, with full
power of substitution in the premises.

Dated: _____________________


                                       By: _____________________________________

                                       NOTICE     The signature of the
                                                  Registered Owner above must
                                                  correspond with the name of
                                                  the Registered Owner as it
                                                  appears on the registration
                                                  books maintained by the Paying
                                                  Agent.


Signature Guaranteed

By: ______________________________

NOTICE:   Signature(s) must be guaranteed by a member firm of the New York Stock
          Exchange or a commercial bank or trust company.


                                       16