<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q/A

                                Amendment No. 1

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


                  For the quarterly period ended MARCH 27, 2004

                         Commission file number 1-08056

                              HANOVER DIRECT, INC.
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)


             DELAWARE                                  13-0853260
     ------------------------                 ---------------------------------
     (State of incorporation)                 (IRS Employer Identification No.)


115 RIVER ROAD, BUILDING 10, EDGEWATER, NEW JERSEY                  07020
--------------------------------------------------             -------------
     (Address of principal executive offices)                    (Zip Code)


                                 (201) 863-7300
                                 --------------
                               (Telephone number)

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 for 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

Common stock, par value $.66 2/3 per share: 220,173,633 shares outstanding
(net of treasury shares) as of May 3, 2004.
<PAGE>


                                EXPLANATORY NOTE

     This Amendment No. 1 on Form 10-Q/A amends certain information contained in
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
27, 2004 filed with the Securities and Exchange Commission on May 11, 2004.
<PAGE>
                              HANOVER DIRECT, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               ----
<S>                                                                                            <C>
Part I - Financial Information

    Item 1.  Financial Statements

       Condensed Consolidated Balance Sheets -
         March 27, 2004 and December 27, 2003 ...............................................    2

       Condensed Consolidated Statements of Income (Loss) - 13- weeks ended
         March 27, 2004 and March 29, 2003 ..................................................    4

       Condensed Consolidated Statements of Cash Flows - 13- weeks ended
         March 27, 2004 and March 29, 2003...................................................    5

       Notes to Condensed Consolidated Financial Statements..................................    6

    Item 2.  Management's Discussion and Analysis of Consolidated Financial Condition and
         Results of Operations...............................................................   18

    Item 3.  Quantitative and Qualitative Disclosures about Market Risk......................   27

    Item 4.  Controls and Procedures.........................................................   27

Part II - Other Information

    Item 1.  Legal Proceedings...............................................................   28

    Item 5.  Other Information...............................................................   32

    Item 6.  Exhibits and Reports on Form 8-K................................................   33

    Signatures...............................................................................   34
</TABLE>


                                       1
<PAGE>
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                      HANOVER DIRECT, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                          MARCH 27,      DECEMBER 27,
                                                            2004            2003
                                                         -----------     ------------
                                                         (UNAUDITED)
<S>                                                      <C>             <C>
                                     ASSETS
CURRENT ASSETS:
      Cash and cash equivalents                           $   2,434       $   2,282
      Accounts receivable, net of allowance
         for doubtful accounts of $1,069 and
         $1,105, respectively                                12,614          14,335
      Inventories                                            37,646          41,576
      Prepaid catalog costs                                  15,305          11,808
      Other current assets                                    3,294           3,951
                                                          ---------       ---------
         Total Current Assets                                71,293          73,952
                                                          ---------       ---------
PROPERTY AND EQUIPMENT, AT COST:
      Land                                                    4,361           4,361
      Buildings and building improvements                    18,210          18,210
      Leasehold improvements                                 10,108          10,108
      Furniture, fixtures and equipment                      53,331          53,212
                                                          ---------       ---------
                                                             86,010          85,891
      Accumulated depreciation and amortization             (59,125)        (58,113)
                                                          ---------       ---------
         Property and equipment, net                         26,885          27,778
                                                          ---------       ---------
Goodwill                                                      9,278           9,278
Deferred tax assets                                           2,213           2,213
Other assets                                                  1,742           1,575
                                                          ---------       ---------
         Total Assets                                     $ 111,411       $ 114,796
                                                          =========       =========
</TABLE>

                             Continued on next page.

                                       2
<PAGE>
                      HANOVER DIRECT, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
                 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                            MARCH 27,      DECEMBER 27,
                                                                               2004           2003
                                                                           -----------     ------------
                                                                           (UNAUDITED)
<S>                                                                        <C>             <C>
                    LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
     Short-term debt and capital lease obligations                          $  15,135       $  13,468
     Accounts payable                                                          38,499          41,880
     Accrued liabilities                                                       11,997          12,918
     Customer prepayments and credits                                           5,866           5,485
     Deferred tax liability                                                     2,213           2,213
                                                                            ---------       ---------
              Total Current Liabilities                                        73,710          75,964
                                                                            ---------       ---------
NON-CURRENT LIABILITIES:
     Long-term debt                                                             8,001           9,042
     Series C Participating Preferred Stock, authorized, issued and
         outstanding 564,819 shares; liquidation preference of $56,482         72,689          72,689
     Other                                                                      4,097           4,609
                                                                            ---------       ---------
              Total Non-current Liabilities                                    84,787          86,340
                                                                            ---------       ---------
              Total Liabilities                                               158,497         162,304
                                                                            ---------       ---------
SHAREHOLDERS' DEFICIENCY:
     Common Stock, $0.66 2/3 par value, authorized 300,000,000
         shares; 222,294,562 shares issued and 220,173,633 shares
         outstanding                                                          148,197         148,197
     Capital in excess of par value                                           302,436         302,432
     Accumulated deficit                                                     (494,373)       (494,791)
                                                                            ---------       ---------
                                                                              (43,740)        (44,162)
                                                                            ---------       ---------
Less:
     Treasury stock, at cost (2,120,929 shares)                                (2,996)         (2,996)
     Notes receivable from sale of Common Stock                                  (350)           (350)
                                                                            ---------       ---------
              Total Shareholders' Deficiency                                  (47,086)        (47,508)
                                                                            ---------       ---------
              Total Liabilities and Shareholders' Deficiency                $ 111,411       $ 114,796
                                                                            =========       =========
</TABLE>

            See notes to Condensed Consolidated Financial Statements.

                                       3
<PAGE>
                      HANOVER DIRECT, INC. AND SUBSIDIARIES
               CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
               (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   FOR THE 13- WEEKS ENDED
                                                                 ---------------------------
                                                                  MARCH 27,        MARCH 29,
                                                                    2004             2003
                                                                 ----------       ----------
<S>                                                              <C>              <C>
NET REVENUES                                                     $   95,312       $  102,474
                                                                 ----------       ----------
OPERATING COSTS AND EXPENSES:
     Cost of sales and operating expenses                            59,243           65,539
     Special charges (income)                                           (31)             277
     Selling expenses                                                23,276           24,453
     General and administrative expenses                             10,367           11,278
     Depreciation and amortization                                    1,012            1,183
                                                                 ----------       ----------
                                                                     93,867          102,730
                                                                 ----------       ----------
INCOME (LOSS) FROM OPERATIONS                                         1,445             (256)
     Gain on sale of Improvements                                        --            1,911
                                                                 ----------       ----------
INCOME BEFORE INTEREST AND INCOME TAXES                               1,445            1,655
     Interest expense, net                                              922            1,448
                                                                 ----------       ----------
INCOME BEFORE INCOME TAXES                                              523              207
     Provision for Federal income taxes                                  63               --
     Provision for state income taxes                                    42               15
                                                                 ----------       ----------
NET INCOME AND COMPREHENSIVE INCOME                                     418              192
     Preferred stock dividends                                           --            3,632
     Earnings Applicable to Preferred Stock                               1               --
                                                                 ----------       ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
      SHAREHOLDERS                                               $      417       $   (3,440)
                                                                 ==========       ==========
NET INCOME (LOSS) PER COMMON SHARE:
     Net income (loss) per common share - basic and diluted      $      .00       $     (.02)
                                                                 ==========       ==========
     Weighted average common shares outstanding -
     basic (thousands)                                              220,174          138,316
                                                                 ==========       ==========
     Weighted average common shares outstanding -
     diluted (thousands)                                            220,666          138,316
                                                                 ==========       ==========
</TABLE>

            See notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
                      HANOVER DIRECT, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (IN THOUSANDS OF DOLLARS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                     FOR THE 13- WEEKS ENDED
                                                                                   ---------------------------
                                                                                    MARCH 27,        MARCH 29,
                                                                                      2004             2003
                                                                                   ----------       ----------
<S>                                                                                <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                         $      418       $      192
Adjustments to reconcile net income to net cash used by operating activities:
     Depreciation and amortization, including deferred fees                             1,077            1,680
     Provision for doubtful accounts                                                       87              179
     Special charges (income)                                                             (31)             277
     Gain on the sale of Improvements                                                      --           (1,911)
     Gain on the sale of property and equipment                                            --               (2)
     Compensation expense related to stock options                                          4              177
Changes in assets and liabilities:
     Accounts receivable                                                                1,634            3,186
     Inventories                                                                        3,930             (294)
     Prepaid catalog costs                                                             (3,497)          (3,763)
     Accounts payable                                                                  (3,381)           1,708
     Accrued liabilities                                                                 (890)          (6,648)
     Customer prepayments and credits                                                     381            2,178
     Other, net                                                                          (309)            (455)
                                                                                   ----------       ----------
Net cash used by operating activities                                                    (577)          (3,496)
                                                                                   ----------       ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisitions of property and equipment                                              (119)            (546)
     Proceeds from sale of Improvements                                                    --            2,000
     Costs related to the early release of escrow funds                                    --              (89)
     Proceeds from disposal of property and equipment                                      --                2
                                                                                   ----------       ----------
Net cash (used) provided by investing activities                                         (119)           1,367
                                                                                   ----------       ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net borrowings under Congress revolving loan facility                              1,759            5,270
     Payments under Congress Tranche A term loan facility                                (498)            (497)
     Payments under Congress Tranche B term loan facility                                (450)            (450)
     Payments of long-term debt and capital lease obligations                            (185)              (4)
     Payment of debt issuance costs                                                      (125)             (34)
     Refund (payment) of estimated Richemont tax obligation on Series B
         Participating Preferred Stock accretion                                          347             (347)
                                                                                   ----------       ----------
Net cash provided by financing activities                                                 848            3,938
                                                                                   ----------       ----------
Net increase in cash and cash equivalents                                                 152            1,809
Cash and cash equivalents at the beginning of the year                                  2,282              785
                                                                                   ----------       ----------
Cash and cash equivalents at the end of the period                                 $    2,434       $    2,594
                                                                                   ==========       ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
     Interest                                                                      $      733       $      806
     Income taxes                                                                  $        6       $      196
Non-cash investing and financing activities:
     Series B Participating Preferred Stock redemption price increase              $       --       $    3,285
</TABLE>

            See notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
                      HANOVER DIRECT, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION

         The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. Reference should be
made to the annual financial statements, including the footnotes thereto,
included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K
for the fiscal year ended December 27, 2003. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all material adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company and its consolidated subsidiaries for the interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information," the consolidated operations of the
Company are reported as one segment.

Uses of Estimates and Other Critical Accounting Policies

         The condensed consolidated financial statements include all
subsidiaries of the Company and all intercompany transactions and balances have
been eliminated. The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations," found in the Company's Annual Report on
Form 10-K for the fiscal year ended December 27, 2003, for additional
information relating to the Company's use of estimates and other critical
accounting policies.

2.       DIVIDEND RESTRICTIONS

         The Company is restricted from paying dividends at any time on its
Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.

3.       NET INCOME (LOSS) PER COMMON SHARE

         Net income (loss) per common share is computed using the weighted
average number of common shares outstanding in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("FAS 128"). Basic net income per common share is calculated by dividing
net income available to common shareholders, reduced for participatory
interests, by the weighted average number of common shares outstanding during
the period. Diluted net income per common share is calculated using the weighted
average number of common shares outstanding adjusted to include the potentially
dilutive effect of convertible stock or stock options. The computations of basic
and diluted net income (loss) per common share are as follows (in thousands):

                                       6
<PAGE>
<TABLE>
<CAPTION>
                                                             MARCH 27, 2004    MARCH 29, 2003
                                                             --------------    --------------
<S>                                                          <C>               <C>
Net income                                                     $     418         $     192
Less:
Preferred stock dividends                                             --             3,632
Earnings Applicable to preferred stock                                 1                --
                                                               ---------         ---------
Net income (loss) applicable to common shareholders            $     417         $  (3,440)
                                                               =========         =========
Basic net income (loss) per common share                       $    0.00         $   (0.02)
                                                               =========         =========

Weighted-average common shares outstanding                       220,174           138,316
                                                               =========         =========

Net income (loss) applicable to common shareholders            $     417         $  (3,440)
Dilutive securities:
  Stock options                                                       --                --
                                                               ---------         ---------
Diluted net income (loss)                                      $     417         $  (3,440)
                                                               =========         =========
Diluted net income (loss) per common share                     $    0.00         $   (0.02)
                                                               =========         =========
Weighted-average common shares outstanding                       220,174           138,316
Effect of Dilution:
Stock options                                                        492                --
                                                               ---------         ---------
Weighted-average common shares outstanding
  assuming dilution                                              220,666           138,316
                                                               =========         =========
</TABLE>

         Diluted net income per common share excluded incremental shares of 3.9
million and 14.4 million for the periods ended March 27, 2004 and March 29,
2003, respectively, related to employee stock options due to their antidilutive
effect.

4.       COMMITMENTS AND CONTINGENCIES

         A class action lawsuit was commenced on March 3, 2000 entitled Edwin L.
Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no.
CJ2000-177 in the State Court of Oklahoma (District Court in and for Sequoyah
County). Plaintiff commenced the action on behalf of himself and a class of
persons who have at any time purchased a product from the Company and paid for
an "insurance charge." The complaint sets forth claims for breach of contract,
unjust enrichment, recovery of money paid absent consideration, fraud and a
claim under the New Jersey Consumer Fraud Act. The complaint alleges that the
Company charges its customers for delivery insurance even though, among other
things, the Company's common carriers already provide insurance and the
insurance charge provides no benefit to the Company's customers. Plaintiff also
seeks a declaratory judgment as to the validity of the delivery insurance. The
damages sought are (i) an order directing the Company to return to the plaintiff
and class members the "unlawful revenue" derived from the insurance charges,
(ii) declaring the rights of the parties, (iii) permanently enjoining the
Company from imposing the insurance charge, (iv) awarding threefold damages of
less than $75,000 per plaintiff and per class member, and (v) attorneys' fees
and costs. On April 12, 2001, the Court held a hearing on plaintiff's class
certification motion. Subsequent to the April 12, 2001 hearing on plaintiff's
class certification motion, plaintiff filed a motion to amend the definition of
the class. On July 23, 2001, plaintiff's class certification motion was granted,
defining the class as "All persons in the United States who are customers of any
catalog or catalog company owned by Hanover Direct, Inc. and who have at any
time purchased a product from such company and paid money that was designated to
be an insurance charge." On August 21, 2001, the Company filed an appeal of the
order with the Oklahoma Supreme Court and subsequently moved to stay proceedings
in the district court pending resolution of the appeal. The appeal has been
fully briefed. At a subsequent status hearing, the parties agreed that issues
pertaining to notice to the class would be stayed pending resolution of the
appeal, that certain other issues would be subject to limited discovery, and
that the issue of a stay for any remaining issues would be resolved if and when
such issues arise. On January 20, 2004, the plaintiff filed a motion for oral
argument with the Court. The Company believes it has defenses against the claims
and plans to conduct a vigorous defense of this action.

         On August 15, 2001, the Company was served with a summons and
four-count complaint filed in Superior Court for the City and County of San
Francisco, California, entitled Teichman v. Hanover Direct, Inc., Hanover
Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100. The complaint was
filed by a California resident, seeking damages and other relief for herself and
a class of all others similarly situated, arising out of the insurance fee
charged by catalogs and Internet sites operated by subsidiaries of the Company.
Defendants, including the Company, have filed motions to dismiss based on a lack
of personal jurisdiction over them. In January 2002, plaintiff sought leave to
name six additional entities: International Male, Domestications Kitchen &
Garden, Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications
as co-defendants. On March 12, 2002, the Company was served with the First
Amended Complaint in which plaintiff named as defendants the Company, Hanover
Brands, Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen
and Home, and Silhouettes. On April 15, 2002, the Company filed a Motion to Stay
the Teichman action in favor of the previously filed Martin action and also
filed a Motion to quash service of summons

                                       7
<PAGE>
for lack of personal jurisdiction on behalf of defendants Hanover Direct, Inc.,
Hanover Brands, Inc. and Hanover Direct Virginia, Inc. On May 14, 2002, the
Court (1) granted the Company's Motion to quash service on behalf of Hanover
Direct, Hanover Brands, and Hanover Direct Virginia, leaving only LWI Holdings,
Hanover Company Store, Kitchen & Home, and Silhouettes, as defendants, and (2)
granted the Company's Motion to Stay the action in favor of the previously filed
Oklahoma action, so nothing will proceed on this case against the remaining
entities until the Oklahoma case is decided. The Company believes it has
defenses against the claims. The Company plans to conduct a vigorous defense of
this action.

         A class action lawsuit was commenced on February 13, 2002 entitled Jacq
Wilson, suing on behalf of himself, all others similarly situated, and the
general public v. Brawn of California, Inc. dba International Male and
Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of
California, City and County of San Francisco. Does 1-100 are Internet and
catalog direct marketers offering a selection of men's clothing, sundries, and
shoes who advertise within California and nationwide. The complaint alleges that
for at least four years, members of the class have been charged an unlawful,
unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn;
that Brawn was engaged in untrue, deceptive and misleading advertising in that
it was not lawfully required or permitted to collect insurance, tax and sales
tax from customers in California; and that Brawn has engaged in acts of unfair
competition under the state's Business and Professions Code. Plaintiff and the
class seek (i) restitution and disgorgement of all monies wrongfully collected
and earned by Brawn, including interest and other gains made on account of these
practices, including reimbursement in the amount of the insurance, tax and sales
tax collected unlawfully, together with interest, (ii) an order enjoining Brawn
from charging customers insurance and tax on its order forms and/or from
charging tax on the delivery, shipping and insurance charges, (iii) an order
directing Brawn to notify the California State Board of Equalization of the
failure to pay the correct amount of tax to the state and to take appropriate
steps to provide the state with the information needed for audit, and (iv)
compensatory damages, attorney's fees, pre-judgment interest, and costs of the
suit. The claims of the individually named plaintiff and for each member of the
class amount to less than $75,000. On April 15, 2002, the Company filed a Motion
to Stay the Wilson action in favor of the previously filed Martin action. On May
14, 2002, the Court denied the Motion to Stay. The Wilson case proceeded to
trial before the Honorable Diane Elan Wick of the Superior Court of California
for the County of San Francisco, and the Judge, sitting without a jury, heard
evidence from April 15-17, 2003. On November 25, 2003, the Court, after hearing
evidence and considering post-trial submissions from the parties, entered
judgment in plaintiff's favor, requiring Brawn to refund insurance fees
collected from consumers for the period from February 13, 1998 through January
15, 2003 with interest from the date paid by June 30, 2004. Plaintiff did not
prevail on the tax issues. On January 12, 2004, plaintiff filed a motion
requesting approximately $740,000 in attorneys' fees and costs. On February 27,
2004, the Company filed its response to that motion. Plaintiff filed a reply
brief on March 13, 2004. A hearing was held on plaintiff's motion on March 18,
2004. The judge ruled on that motion on April 14, 2004, awarding plaintiff's
counsel approximately $445,000. The Company has appealed the trial court's
decision on the merits of the insurance fees issue as well as the decision on
the attorneys' fees issue. The two appeals will likely be consolidated with
briefing expected to begin in late May 2004. The Company will be required to
post a bond in the amount of approximately $750,000 while the appeal of the
attorneys' fees award is proceeding but its counsel does not believe the Company
will be required to do so while the appeal on the insurance fees decision is
proceeding. The Company plans to conduct a vigorous defense of this action. The
potential estimated exposure is in the range of $0 to $4.0 million. Based upon
the Company's policy of evaluating accruals for legal liabilities, the Company
has not established a reserve due to management determining that it is not
probable that an unfavorable outcome will result.

         A class action lawsuit was commenced on October 28, 2002 entitled John
Morris, individually and on behalf of all other persons & entities similarly
situated v. Hanover Direct, Inc., and Hanover Brands, Inc. (referred to here as
"Hanover"), No. L 8830-02 in the Superior Court of New Jersey, Bergen County --
Law Division. The plaintiff brings the action individually and on behalf of a
class of all persons and entities in New Jersey who purchased merchandise from
Hanover within six years prior to filing of the lawsuit and continuing to the
date of judgment. On the basis of a purchase made by plaintiff in August 2002 of
certain clothing from Hanover (which was from a men's division catalog, the only
ones which retained the insurance line item in 2002), Plaintiff claims that for
at least six years, Hanover maintained a policy and practice of adding a charge
for "insurance" to the orders it received and concealed and failed to disclose
its policy with respect to all class members. Plaintiff claims that Hanover's
conduct was (i) in violation of the New Jersey Consumer Fraud Act, as otherwise
deceptive, misleading and unconscionable; (ii) such as to constitute Unjust
Enrichment of Hanover at the expense and to the detriment of plaintiff and the
class; and (iii) unconscionable per se under the Uniform Commercial Code for
contracts related to the sale of goods. Plaintiff and the class seek damages
equal to the amount of all insurance charges, interest thereon, treble and
punitive damages, injunctive relief, costs and reasonable attorneys' fees, and
such other relief as may be just, necessary, and appropriate. On December 13,
2002, the Company filed a Motion to Stay the Morris action in favor of the
previously filed Martin action. Plaintiff then filed an Amended Complaint adding
International Male as a defendant. Hearing on the Motion to Stay took place on
June 5, 2003. The Court granted the Company's Motion to Stay the action and the
case was stayed first until December 31, 2003 and subsequently until March 31,
2004. The stay was lifted on March 31, 2004. On April 30, 2004, the Company
responded to plaintiff's Amended Complaint by filing a Motion for Summary
Judgment that is currently scheduled to be heard by the Court on June 11, 2004.
The Company plans to conduct a vigorous defense of this action.

                                       8
<PAGE>
         On June 28, 2001, Rakesh K. Kaul, the former President and Chief
Executive Officer of the Company, filed a five-count complaint (the "Complaint")
in New York State Court against the Company, seeking damages and other relief
arising out of his separation of employment from the Company, including
severance payments of $2,531,352 plus the cost of employee benefits, attorneys'
fees and costs incurred in connection with the enforcement of his rights under
his employment agreement with the Company, payment of $298,650 for 13 weeks of
accrued and unused vacation, damages in the amount of $3,583,800, or, in the
alternative, a declaratory judgment from the court that he is entitled to all
change of control benefits under the "Hanover Direct, Inc. Thirty-Six Month
Salary Continuation Plan," and damages in the amount of $1,396,066 or $850,000
due to the Company's purported breach of the terms of the "Long-Term Incentive
Plan for Rakesh K. Kaul" by failing to pay him a "tandem bonus" he alleges was
due and payable to him within the 30 days following his resignation. The Company
removed the case to the U.S. District Court for the Southern District of New
York on July 25, 2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint")
in the U.S. District Court for the Southern District of New York on September
18, 2001. The Amended Complaint repeats many of the claims made in the original
Complaint and adds ERISA claims.

         On October 11, 2001, the Company filed its Answer, Defenses and
Counterclaims to the Amended Complaint, denying liability under each and every
of Mr. Kaul's causes of action, challenging all substantive assertions, raising
several defenses and stating nine counterclaims against Mr. Kaul. The
counterclaims include (1) breach of contract; (2) breach of the Non-Competition
and Confidentiality Agreement with the Company; (3) breach of fiduciary duty;
(4) unfair competition; and (5) unjust enrichment. The Company seeks damages,
including, without limitation, the $341,803 in severance pay and car allowance
Mr. Kaul received following his resignation, $412,336 for amounts paid to Mr.
Kaul for car allowance and related benefits, the cost of a long-term disability
policy, and certain payments made to personal attorneys and consultants retained
by Mr. Kaul during his employment, $43,847 for certain services the Company
provided and certain expenses the Company incurred, relating to the renovation
and leasing of office space occupied by Mr. Kaul's spouse at 115 River Road,
Edgewater, New Jersey, the Company's current headquarters, $211,729 on a tax
loan to Mr. Kaul outstanding since 1997 and interest, compensatory and punitive
damages and attorneys' fees. The Company moved to amend its counterclaims, and
the parties each moved for summary judgment.

         The Company sought summary judgment: dismissing Mr. Kaul's claim for
severance under his employment agreement on the ground that he failed to provide
the Company with a general release of, among other things, claims for change of
control benefits; dismissing Mr. Kaul's claim for attorneys' fees on the grounds
that they are not authorized under his employment agreement; dismissing Mr.
Kaul's claims related to change in control benefits based on an administrative
decision that he is not entitled to continued participation in the plan or to
future benefits thereunder; dismissing Mr. Kaul's claim for a tandem bonus
payment on the ground that no payment is owing; dismissing Mr. Kaul's claim for
vacation payments based on Company policy regarding carry over vacation; and
seeking judgment on the Company's counterclaim for unjust enrichment based on
Mr. Kaul's failure to pay under a tax note. Mr. Kaul sought summary judgment:
dismissing the Company's defenses and counterclaims relating to a release on the
grounds that he tendered a release or that the Company is estopped from
requiring him to do so; dismissing the Company's defenses and counterclaims
relating to his alleged violations of his non-compete and confidentiality
obligations on the grounds that he did not breach the obligations as defined in
the agreement; and dismissing the Company's claims based on his alleged breach
of fiduciary duty, including those based on his monthly car allowance payments
and the leased space to his wife, on the grounds that he was entitled to the car
payments and did not involve himself in or make misrepresentations in connection
with the leased space. The Company concurrently moved to amend its Answer and
Counterclaims to state a claim that it had cause for terminating Mr. Kaul's
employment based on, among other things, after acquired evidence that Mr. Kaul
received a monthly car allowance and other benefits totaling $412,336 that had
not been authorized by the Company's Board of Directors and that his wife's
lease and related expense was not properly authorized by the Company's Board of
Directors, and to clarify or amend the scope of the Company's counterclaims for
reimbursement.

         On January 7, 2004, the Court granted summary judgment in favor of the
Company dismissing Mr. Kaul's claim for severance under his employment agreement
on the grounds that he failed to provide the Company with a general release;
granted in part the Company's motion for summary judgment on Mr. Kaul's claim
for attorneys' fees, finding as a matter of law that Mr. Kaul is not entitled to
fees incurred in prosecuting this lawsuit but finding an issue of fact as to the
amount of reasonable fees he may have incurred in seeking advice and
representation in connection with the termination of his employment; granted
summary judgment in favor of the Company dismissing Mr. Kaul's claims related to
change in control benefits on the grounds that Mr. Kaul's participation in the
plan was properly terminated when his employment was terminated, the plan was
properly terminated, and the administrator and appeals committee properly denied
Mr. Kaul's claim; granted summary judgment in favor of the Company dismissing
Mr. Kaul's claim for a tandem bonus payment on the ground that payment is not
owed to him; granted summary judgment in part and denied summary judgment in
part on Mr. Kaul's claims for vacation pay, deeming Mr. Kaul to have abandoned
claims for vacation pay in excess of five weeks but finding him

                                       9
<PAGE>
entitled to four weeks vacation pay based on the Company's policy and finding an
issue of fact as to Mr. Kaul's claim for an additional week of vacation pay in
dispute for 2000; and denied summary judgment on the Company's counterclaim for
payment under a tax note based on disputed issues of fact.

         The Court dismissed the Company's affirmative defenses as largely moot
and the Court granted summary judgment in favor of Mr. Kaul dismissing the
Company's counterclaims relating to his non-compete and confidentiality
obligations on the grounds that there is no evidence of actual damage to the
Company resulting from Mr. Kaul's alleged violations of those obligations;
granted summary judgment in favor of Mr. Kaul on the Company's breach of
contract and breach of fiduciary duty claims, including those based on his
monthly car allowance payments and the leased space to his wife, on the grounds
that he did not breach his fiduciary duties in accepting the car payments and
would not be unjustly enriched if he kept them, and on the grounds that the
Company would not be able to prove fraud in connection with the leased space
based on the circumstances, including Mr. Kaul's disclosures.

         The Court denied in part and granted in part the Company's motion to
amend its Answer and Counterclaims. The Court denied the Company's motion for
leave to state a claim that it had acquired evidence of cause for terminating
Mr. Kaul's employment based on certain reimbursements on the grounds that the
payments were authorized, but granted the Company's motion with respect to its
claim for reimbursement of amounts paid to the Internal Revenue Service ("IRS")
on Mr. Kaul's behalf.

         The Opinion identifies three remaining issues in the case: (i) Mr.
Kaul's claim for attorneys' fees pursuant to Section 12 of the employment
agreement; (ii) Mr. Kaul's claim for an additional week of vacation pay in the
amount of approximately $11,500; and (iii) the Company's counterclaim for
$211,729 plus interest paid to the IRS on Mr. Kaul's behalf.

         In an attempt to resolve the outstanding issues prior to the entry of a
final judgment, conferences were held with the Court on two separate occasions.
As a result of these conferences, the parties have tentatively reached a
settlement whereby the parties agree to dismiss the following claims: (1) Mr.
Kaul agrees to withdraw and release his claims concerning reimbursement of
certain attorneys' fees under Section 12 of the employment agreement (but
preserves and does not waive, release or limit his claim for attorneys' fees and
costs under Section 12 of the employment agreement incurred in connection with
the preparation for and litigation of this lawsuit) and reimbursement for an
additional week of vacation pay; and (2) the Company agrees to withdraw and
release its claims concerning reimbursement of certain attorneys' fees and costs
under ERISA, reimbursement of the $211,729 paid to the IRS on Mr. Kaul's behalf,
and reimbursement of the $341,803 of severance payments made to Mr. Kaul. The
parties also agree that Mr. Kaul shall not appeal that portion of the Opinion
concerning the dismissal of certain of Mr. Kaul's ERISA-based claims with
respect to the Plan and the Company shall not appeal that portion of the Opinion
concerning the dismissal of its claims relating to the leasing and build-out of
property or office space located in Edgewood, New Jersey to Mr. Kaul's wife. Mr.
Kaul has expressed his intent to now tender a general release to the Company. If
he does, in fact, do so, the Company will reject the tender on the grounds,
inter alia, that the time to do so has long passed and that the purpose for the
general release has been extinguished. After final judgment issues, each party
shall have the right to appeal any aspect of the judgment.

         The Company was named as one of 88 defendants in a patent infringement
complaint filed on November 23, 2001 by the Lemelson Medical, Education &
Research Foundation, Limited Partnership (the "Lemelson Foundation"). The
complaint, filed in the U.S. District Court in Arizona, was not served on the
Company until March 2002. In the complaint, the Lemelson Foundation accuses the
named defendants of infringing seven U.S. patents, which allegedly cover
"automatic identification" technology through the defendants' use of methods for
scanning production markings such as bar codes. The Company received a letter
dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the
Company of the complaint and offering a license. The Court entered a stay of the
case on March 20, 2002, requested by the Lemelson Foundation, pending the
outcome of a related case in Nevada being fought by bar code manufacturers. The
order for the stay in the case involving the Company provides that the Company
need not answer the complaint, although it has the option to do so. The Company
was invited to join a common interest/joint-defense group consisting of
defendants named in the complaint as well as in other actions brought by the
Lemelson Foundation. The trial in the Nevada case began on November 18, 2002 and
ended on January 17, 2003. On January 23, 2004, following extensive briefing by
the parties, the Nevada Court entered judgment declaring that the claims of each
of the patents at issue in the Nevada case, including all seven patents asserted
by the Lemelson

                                       10
<PAGE>
Foundation against the Company in the Arizona case, are unenforceable under the
doctrine of prosecution laches, are invalid for lack of written description and
enablement, and are not infringed by the bar code equipment manufacturers.
Subject to the results of any appeal that may be filed by the parties to the
Nevada litigation, the judgment of the Nevada court should preclude assertion of
each of the affected patents against all parties, including the Company in the
Arizona case. Counsel is now monitoring the Nevada and Arizona cases in order to
determine a suitable moment for moving for dismissal of the Lemelson
Foundation's claims. The Company has analyzed the merits of the issues raised by
the complaint, notified vendors of its receipt of the complaint and letter,
evaluated the merits of joining the joint-defense group, and had discussions
with attorneys for the Lemelson Foundation regarding the license offer. The
Company will not agree to a settlement at this time and thus has not established
a reserve.

         In early March 2003, the Company learned that one of its business units
had engaged in certain travel transactions that may have constituted violations
under the provisions of U.S. government regulations promulgated pursuant to 50
U.S.C. App. 1-44, which proscribe certain transactions related to travel to
certain countries. The Company immediately commenced an inquiry into the matter,
incurred resulting charges, made an initial voluntary disclosure to the
appropriate U.S. government agency under its program for such disclosures and
will submit to that agency a detailed report on the results of the inquiry. In
addition, the Company has taken steps to ensure that all of its business units
are acting in compliance with the travel and transaction restrictions and other
requirements of all applicable U.S. government programs. Although the Company is
uncertain of the extent of the penalties, if any, that may be imposed on it by
virtue of the transactions voluntarily disclosed, it does not currently believe
that any such penalties will have a material effect on its business or financial
condition.

         In addition, the Company is involved in various routine lawsuits of a
nature which is deemed customary and incidental to its businesses. In the
opinion of management, the ultimate disposition of these actions will not have a
material adverse effect on the Company's financial position or results of
operations.

5.       SPECIAL CHARGES (INCOME)

         In December 2000, the Company began a strategic business realignment
program that resulted in the recording of special charges for severance,
facility exit costs and fixed asset write-offs. The actions related to the
strategic business realignment program were taken in an effort to direct the
Company's resources primarily towards a loss reduction strategy and return to
profitability.

         As of the end of the first quarter of 2004, a liability of
approximately $2.1 million was included within Accrued Liabilities and a
liability of approximately $3.0 million was included within Other Non-current
Liabilities. These liabilities relate to future payments in connection with the
Company's strategic business realignment program. They are expected to be
satisfied no later than February 2010 and consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                            SEVERANCE &       REAL ESTATE
                                             PERSONNEL          LEASE &
                                               COSTS           EXIT COSTS          TOTAL
                                               -----           ----------          -----
<S>                                         <C>               <C>               <C>
Balance at December 27, 2003                $       205       $     5,589       $     5,794

2004 revision of previous estimate                  (31)               --               (31)
Paid in 2004                                       (174)             (469)             (643)
                                            -----------       -----------       -----------
Balance at March 27, 2004                   $        --       $     5,120       $     5,120
                                            ===========       ===========       ===========
</TABLE>

         A summary of the liability related to real estate lease and exit costs,
by location, as of March 27, 2004 and December 27, 2003 is as follows (in
thousands):


                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                MARCH 27,       DECEMBER 27,
                                                                  2004              2003
                                                                ---------       ------------
<S>                                                             <C>             <C>
Gump's facility, San Francisco, CA                              $   3,634       $      3,788

Corporate facility, Weehawken, NJ                                   1,194              1,447

Corporate facility, Edgewater, NJ                                     214                261

Administrative and telemarketing facility, San Diego, CA               78                 93
                                                                ---------       ------------

Total Real Estate Lease and Exit Costs                          $   5,120       $      5,589
                                                                =========       ============
</TABLE>

6.       SALE OF IMPROVEMENTS BUSINESS

         On June 29, 2001, the Company sold certain assets and liabilities of
its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive
Group, for approximately $33.0 million. In conjunction with the sale, the
Company's Keystone Internet Services, Inc. subsidiary (now Keystone Internet
Services, LLC) agreed to provide telemarketing and fulfillment services for the
Improvements business under a services agreement with HSN for a period of three
years.

         The asset purchase agreement between the Company and HSN provided that
if Keystone Internet Services, Inc. failed to perform its obligations during the
first two years of the services contract, HSN could receive a reduction in the
original purchase price of up to $2.0 million. An escrow fund of $3.0 million,
which was withheld from the original proceeds of the sale, had been established
for a period of two years under the terms of an escrow agreement between LWI
Holdings, Inc. (a wholly-owned subsidiary of the Company), HSN and The Chase
Manhattan Bank as a result of these contingencies.

         The Company recognized a net gain on the sale of approximately $23.2
million, net of a non-cash goodwill charge of $6.1 million, in the second
quarter of 2001. During fiscal 2002, the Company recognized approximately $0.6
million of the deferred gain consistent with the terms of the escrow agreement.
The Company recognized the remaining net deferred gain of $1.9 million upon the
receipt of the escrow balance on March 28, 2003. This gain was reported net of
the costs incurred to provide the credit to HSN of approximately $0.1 million.

7.       CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS

         Brian C. Harriss. Brian C. Harriss was appointed as Executive Vice
President, Human Resources and Legal and Secretary of the Company effective
December 2, 2002 and as Executive Vice President, Finance and Administration
effective November 11, 2003. Prior to January 2002, Mr. Harriss had served the
Company as Executive Vice President and Chief Financial Officer until his
resignation. In connection with the December 2002 appointment, Mr. Harriss and
the Company terminated a severance agreement entered into during January 2002 at
the time of Mr. Harriss' resignation from the Company during January 2002, and
Mr. Harriss waived his rights to certain payments under such severance
agreement. Effective February 15, 2004, the position of Executive Vice
President, Finance and Administration was eliminated in connection with the
Company's ongoing strategic business realignment program. In connection with
such change, Mr. Harriss and the Company entered into a severance agreement
dated February 15, 2004 providing for $545,500 of cash payments, as well as
$55,500 of other benefits, all of which were expensed in the first quarter of
2004 within General and Administrative Expenses. Mr. Harriss is also entitled to
receive a payment under the Company's 2003 Management Incentive Plan.

         Board of Directors. Effective February 15, 2004, Martin L. Edelman
resigned from the Company's Board of Directors. Effective April 12, 2004, Paul
S. Goodman joined the Company's Board of Directors as a designee of Chelsey
Direct, LLC filling the vacancy created by the resignation of Martin L. Edelman.
On April 29, 2004, the Board of Directors elected (1) Wayne P. Garten to serve
as a member and as the Chairman of the Transactions Committee of the Board of
Directors to fill the vacancy created by the resignation of Martin L. Edelman
from such positions, (2) William B. Wachtel to serve as a member of the
Executive Committee of the Board of Directors to fill the vacancy created by the
resignation of Martin L. Edelman from such position, (3) Paul S. Goodman to
serve as a member of the Corporate Governance Committee of the Board of
Directors to fill the vacancy created by the resignation of Martin L. Edelman
from such position, and (4) Donald Hecht to serve as a member of the
Compensation Committee to fill the vacancy created by the contemporaneous
resignation of Wayne P. Garten from such position.

                                       12
<PAGE>
         President and Chief Executive Officer. Thomas C. Shull resigned as
Chairman of the Board, President and Chief Executive Officer of the Company on
May 5, 2004. William B. Wachtel was elected as Chairman of the Board and Wayne
P. Garten was elected as President and Chief Executive Officer of the Company
effective the same date. In connection with Mr. Shull's resignation, Mr. Shull
and the Company agreed in principal to enter into a severance agreement dated as
of May 5, 2004 providing for $900,000 of cash payments, $300,000 payable in May
2004 and the balance to be payable in 16 installments of $35,625 payable every
two weeks commencing May 21, 2004 with a final payment in the amount of $30,000
to be payable on or about December 31, 2004. The Company will accrue the
$900,000 of severance in the second quarter of 2004. In connection with Mr.
Garten's election, Mr. Garten and the Company have negotiated the principle
terms of an employment agreement for Mr. Garten which will be presented to the
Compensation Committee of the Board of Directors for approval shortly.

8.       RECENTLY ISSUED ACCOUNTING STANDARDS

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which had been previously classified as
equity or between the liabilities and equity sections of the Condensed
Consolidated Balance Sheet. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
are effective at the beginning of the first interim period beginning after June
15, 2003. The standard is to be implemented by reporting the cumulative effect
of a change in accounting principle for financial instruments created before the
issuance of SFAS 150 and still existing at the beginning of the interim period
of adoption. The Company adopted the provisions of SFAS 150, which resulted in
the reclassification of its Series B Participating Preferred Stock to a
liability rather than between the liabilities and equity sections of the
Condensed Consolidated Balance Sheet. Based upon the requirements set forth by
SFAS 150, this reclassification was subject to implementation beginning on June
29, 2003. Upon implementation of SFAS 150, the Company reflected subsequent
increases in liquidation preference as an increase in Total Liabilities with a
corresponding reduction in capital in excess of par value, because the Company
has an accumulated deficit. Accretion was recorded as interest expense.

         On March 31,2004, the Financial Accounting Standards Board ("FASB")
issued Emerging Issues Task Force Issue No. 03-6 "Participating Securities and
the Two-Class Method under FASB Statement No. 128" ("EITF 03-6"). SFAS 128
defines earnings per share ("EPS") as "the amount of earnings attributable to
each share of common stock" and indicates that the objective of EPS is to
measure the performance of an entity over the reporting period. SFAS 128
addresses conditions under which a participating security requires the use of
the two-class method of computing EPS. The two-class method is an earnings
allocation formula that treats a participating security as having rights to
earnings that otherwise would have been available to common shareholders, but
does not require the presentation of basic and diluted EPS for securities other
than common stock. The Company's Series C Participating Preferred Stock is a
participating security and, therefore, the Company calculates EPS utilizing the
two-class method, however, it has chosen not to present basic and diluted EPS
for preferred stock.

9.       AMENDMENTS TO CONGRESS LOAN AND SECURITY AGREEMENT

         On March 25, 2004, the Company amended the Congress Credit Facility to
change the definition of Consolidated Net Worth, to amend the Consolidated
Working Capital and Consolidated Net Worth covenants to specify minimum levels
of Consolidated Working Capital and Consolidated Net Worth that must be
maintained during each month commencing January 2004, and to amend the EBITDA
covenant to specify minimum levels of EBITDA that must be achieved during the
Company's 2004, 2005 and 2006 fiscal years. The Company expects to maintain the
minimum levels of these covenants in future periods. In addition, the definition
of "Event of Default" was amended by replacing the Event of Default, which would
have occurred on the occurrence of a material adverse change in the business,
assets, liabilities or condition of the Company and its subsidiaries, with an
Event of Default that would occur if certain specific events such as a decrease
in consolidated revenues beyond certain specified levels or aging of inventory
or accounts payable beyond certain specified levels, were to occur.

         During the fourth quarter of 2003, the Company re-examined the
provisions of the Congress Credit Facility and, based on EITF Issue No. 95-22,
"Balance Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement" ("EITF 95-22") and certain provisions in

                                       13
<PAGE>
the credit agreement, the Company has classified its revolving loan facility as
short-term debt for the periods ended March 27, 2004 and December 27, 2003.

         As of March 27, 2004, the Company had $22.3 million of cumulative
borrowings outstanding under the Congress Credit Facility, comprising $10.7
million of short-term borrowings under the Revolving Loan Facility, bearing an
interest rate of 4.50%, $6.0 million under the Tranche A Term Loan, bearing an
interest rate of 4.75%, and $5.6 million under the Tranche B Term Loan, bearing
an interest rate of 13.0%. Of the aggregate borrowings, $14.6 million is
classified as short-term with $7.7 million classified as long-term on the
Company's Condensed Consolidated Balance Sheet. As of December 27, 2003, the
Company had $21.5 million of borrowings outstanding under the Congress Credit
Facility comprising $9.0 million of short-term borrowings under the revolving
loan facility, bearing an interest rate of 4.50%, $6.5 million under the Tranche
A Term Loan, bearing an interest rate of 4.75%, and $6.0 million under the
Tranche B Term Loan, bearing an interest rate of 13.0%. Of the aggregate
borrowings, $12.8 million is classified as short-term with $8.7 million
classified as long-term on the Company's Condensed Consolidated Balance Sheet.
On or before June 30, 2004, the Company is required to enter into a restatement
of the loan agreement with Congress, requiring no changes to the terms of the
current agreement.

         On April 14, 2004, the judge in the Wilson case ruled on a motion filed
by the plaintiff requesting attorneys' fees and costs, awarding plaintiff's
counsel approximately $445,000. Prior thereto, on November 25, 2003, the Court
entered judgment in the Wilson case in plaintiff's favor requiring the Company's
Brawn of California subsidiary which conducts the International Male catalog
business to refund insurance fees collected from consumers for the period from
February 13, 1998 through January 15, 2003 with interest from the date paid by
June 30, 2004. The Company is appealing both of these decisions. On or about
April 2, 2004, plaintiff's counsel filed a lien against Brawn of California's
real property assets in the State of California with respect to the insurance
fees judgment. Both the award of attorneys' fees and costs in the amount of
$445,000 and the filing of a lien by plaintiff's counsel against Brawn of
California's assets for the insurance fees judgment constitute defaults by the
Company under the Congress Credit Facility. Congress has agreed to conditionally
waive such defaults so long as (1) the Company is diligently defending the
Wilson action by all appropriate proceedings and sets aside adequate reserves
in accordance with GAAP, (2) no action shall be taken by the plaintiff in the
Wilson action against any collateral of Brawn of California or any other
borrower or guarantor under the Congress Credit Facility, (3) Brawn shall not
enter into any settlement agreement with the plaintiff in the Wilson action
without the prior written consent of Congress, (4) Congress' security interests
remain senior to any interest of the plaintiff in the Wilson action, and (5) no
other event of default exists or occurs. The Company believes that it may be a
number of years before all appeals in the Wilson action are exhausted and
continues to believe that an unfavorable outcome to the Company is not probable.

         Although certain of the conditions are outside its control, management
of the Company believes, based on discussions with its attorneys, that it can
maintain compliance with such conditions through at least December 25, 2004. If
the Company were to fail to meet any one of these conditions, Congress would
have the ability to exercise all rights and remedies available to it under the
Congress Credit Facility including the right to call a default and accelerate
the indebtedness due thereunder although Congress, in the past, has shown a
willingness to waive its rights rather than call the facility. However, there
can be no assurance that Congress will continue to do so in the future. In the
event that there is an adverse decision in the future in the Wilson action or
the Company does not comply with any of the requirements of the conditional
waiver, an event of default would occur under the Congress Credit Facility.
Congress would have the right to accelerate the indebtedness under the Congress
Credit Facility, and could exercise the rights and remedies available to it
under the Congress Credit Facility. Although management of the Company believes
that it will be able to comply with the conditional waiver requirements, in the
event it were unable to do so, it would be required to seek alternative
solutions, including possible settlement of the Wilson action or satisfaction of
any liens or renegotiation of the Congress Credit Facility. All indebtedness
under the Congress Credit Facility is currently classified as short-term. For
more information on the Wilson action, see Note 4 of the Condensed Consolidated
Financial Statements.

10.      SERIES B PARTICIPATING PREFERRED STOCK

         On December 19, 2001, as part of the Richemont Transaction, the Company
issued to Richemont Finance S.A. ("Richemont") 1,622,111 shares of Series B
Participating Preferred Stock. The Series B Participating Preferred Stock had a
par value of $0.01 per share. The holders of the Series B Participating
Preferred Stock were entitled to ten votes per share on any matter on which the
Common Stock voted. In addition, in the event that the Company defaulted on its
obligations arising in connection with the Richemont Transaction, the
Certificate of Designations of the Series B Participating Preferred Stock or its
agreements with Congress, or in the event that the Company failed to redeem at
least 811,056 shares of Series B Participating Preferred Stock by August 31,
2003, then the holders of the Series B Participating Preferred Stock, voting as
a class, were entitled to elect two members to the Board of Directors of the
Company.

         In the event of the liquidation, dissolution or winding up of the
Company, the holders of the Series B Participating Preferred Stock were entitled
to a liquidation preference, which was initially $47.36 per share, increasing
thereafter to a maximum of $86.85 per share in 2005.

         For Federal income tax purposes, the increases in the liquidation
preference of the Series B Participating Preferred Stock were considered
distributions, by the Company to Richemont, deemed made on the commencement
dates of the quarterly increases, as discussed above. These distributions may
have been taxable dividends to Richemont, provided the Company had accumulated
or current earnings and profits ("E&P") for each year in which the distributions
were deemed to be made. Under the terms of the Richemont Transaction, the
Company was obligated to reimburse Richemont for any U.S. income tax incurred
pursuant to the Richemont Transaction. Based on the Company's past income tax
filings and its current income tax position, the Company had an E&P deficit as
of December 28, 2002 and December 27, 2003. Accordingly, the Company has not
incurred a tax reimbursement obligation for fiscal 2002 and 2003.

         The Company was required to redeem the Series B Participating Preferred
Stock on August 23, 2005 consistent

                                       14
<PAGE>
with Delaware General Corporation Law. The Company could redeem all or less than
all of the then outstanding shares of Series B Participating Preferred Stock at
any time prior to that date. At the option of the holders, the Company was
required to redeem the Series B Participating Preferred Stock upon a Change of
Control or upon the consummation of an Asset Disposition or Equity Sale (all as
defined in the Certificate of Designations of the Series B Participating
Preferred Stock). The redemption price for the Series B Participating Preferred
Stock upon a Change of Control or upon the consummation of an Asset Disposition
or Equity Sale was the then applicable liquidation preference of the Series B
Participating Preferred Stock plus the amount of any declared but unpaid
dividends on the Series B Participating Preferred Stock.

         As a result of filings made by Richemont and certain related parties
with the SEC on May 21, 2003, the Company learned that Richemont sold to
Chelsey, on May 19, 2003, all of Richemont's securities in the Company
consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of Series B
Participating Preferred Stock for a purchase price equal to $40 million. The
Company was not a party to such transaction and did not provide Chelsey with any
material, non-public information in connection with such transaction, nor did
the Company's Board of Directors endorse the transaction. As a result of the
transaction, Chelsey purportedly succeeded to Richemont's rights in the Common
Shares and the Series B Participating Preferred Stock, including the right of
the holder of the Series B Participating Preferred Stock to a liquidation
preference with respect to such shares which was equal to $98,202,600 on May 19,
2003, the date of the sale of the Shares, and which could have increased to and
capped at $146,168,422 on August 23, 2005, the final redemption date of the
Series B Participating Preferred Stock.

         On November 30, 2003, the Company consummated the transactions
contemplated by the Recapitalization Agreement, dated as of November 18, 2003,
with Chelsey and recapitalized the Company, completed the reconstitution of the
Board of Directors of the Company and settled outstanding litigation between the
Company and Chelsey (the "Recapitalization").

         In the transaction, the Company exchanged all of the 1,622,111
outstanding shares of the Series B Participating Preferred Stock held by Chelsey
for the issuance to Chelsey of 564,819 shares of newly-created Series C
Participating Preferred Stock and 81,857,833 additional shares of Common Stock
of the Company.

         Effective upon the closing of the transactions contemplated by the
Recapitalization Agreement, the size of the Board of Directors was increased to
nine (9) members, and Mr. Donald Hecht was elected to the Company's Board of
Directors and the Audit Committee thereof. For a period of two (2) years from
the closing of the Recapitalization, five (5) of the nine (9) directors of the
Company will at all times be directors of the Company designated by Chelsey and
one (1) of the nine (9) directors of the Company will at all times be a director
of the Company designated by Regan Partners.

         Because its Series B Participating Preferred Stock was mandatorily
redeemable and thus accounted for as a liability, the Company accounted for the
exchange of 1,622,111 outstanding shares of its Series B Participating Preferred
Stock held by Chelsey for the issuance of 564,819 shares of newly-created Series
C Participating Preferred Stock and 81,857,833 additional shares of Common Stock
of the Company to Chelsey in accordance with SFAS No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructuring." As such, the $107.5 million
carrying value of the Series B Participating Preferred Stock as of the
consummation date of the exchange was compared with the fair value of the Common
Stock of approximately $19.6 million issued to Chelsey as of the consummation
date and the total maximum potential cash payments of approximately $72.7
million that could be made pursuant to the terms of the Series C Participating
Preferred Stock. Since the carrying value, net of issuance costs of
approximately $1.3 million, exceeded these amounts by approximately $13.9
million, pursuant to SFAS No. 15, such excess was determined to be a "gain" and
the Series C Participating Preferred Stock was recorded at the amount of total
potential cash payments (including dividends and other contingent amounts) that
could be required pursuant to its terms. Since Chelsey was a significant
stockholder at the time of the exchange and, as a result, a related party, the
"gain" was recorded in equity.

11.      SERIES C CUMULATIVE PARTICIPATING PREFERRED STOCK

         On November 30, 2003, as part of the Recapitalization, the Company
issued to Chelsey 564,819 shares of Series C Participating Preferred Stock. The
Series C Participating Preferred Stock has a par value of $.01 per share. The
holders of the Series C Participating Preferred Stock are entitled to one
hundred votes per share on any matter on which the Common Stock votes and are
entitled to one hundred votes per share plus that number of votes as shall equal

                                       15
<PAGE>
the dollar value of any accrued, unpaid and compounded dividends with respect to
such share. The holders of the Series C Participating Preferred Stock are also
entitled to vote as a class on any matter that would adversely affect such
Series C Participating Preferred Stock. In addition, in the event that the
Company defaults on its obligations under the Certificate of Designations, the
Recapitalization Agreement or the Congress Credit Facility, then the holders of
the Series C Participating Preferred Stock, voting as a class, shall be entitled
to elect twice the number of directors as comprised the Board of Directors on
the default date, and such additional directors shall be elected by the holders
of record of Series C Participating Preferred Stock as set forth in the
Certificate of Designations.

         In the event of the liquidation, dissolution or winding up of the
Company, effective through December 31, 2005, the holders of the Series C
Participating Preferred Stock are entitled to a liquidation preference of $100
per share or an aggregate amount of $56,481,900. Effective October 1, 2008, the
maximum aggregate amount of the liquidation preference is $72,689,337, which
would occur if the Company elects to accrue unpaid dividends as mentioned below.

         Commencing January 1, 2006, dividends will be payable quarterly on the
Series C Participating Preferred Stock at the rate of 6% per annum, with the
preferred dividend rate increasing by 1 1/2% per annum on each subsequent
January 1 until redeemed. At the Company's option, in lieu of cash dividends,
the Company may instead elect to cause accrued and unpaid dividends to compound
at a rate equal to 1% higher than the applicable cash dividend rate. The Series
C Participating Preferred Stock is entitled to participate ratably with the
Common Stock on a share for share basis in any dividends or distributions paid
to or with respect to the Common Stock. The right to participate has
anti-dilution protection. The Congress Credit Facility currently prohibits the
payment of dividends.

         The Series C Participating Preferred Stock may be redeemed in whole and
not in part, except as set forth below, at the option of the Company at any time
for the liquidation preference and any accrued and unpaid dividends (the
"Redemption Price"). The Series C Participating Preferred Stock, if not redeemed
earlier, must be redeemed by the Company on January 1, 2009 (the "Mandatory
Redemption Date") for the Redemption Price. If the Series C Participating
Preferred Stock is not redeemed on or before the Mandatory Redemption Date, or
if other mandatory redemptions are not made, the Series C Participating
Preferred Stock will be entitled to elect one-half (1/2) of the Company's Board
of Directors. Notwithstanding the foregoing, the Company will redeem the maximum
number of shares of Series C Participating Preferred Stock as possible with the
net proceeds of certain asset and equity sales not required to be used to repay
Congress pursuant to the terms of the 19th Amendment to the Loan and Security
Agreement with Congress (as modified by the 29th Amendment to the Loan and
Security Agreement), and Chelsey will be required to accept such redemptions,
as set forth in Section 5 of the Certificate of Designations of the Series C
Participating Preferred Stock.

         Pursuant to the terms of the Certificate of Designations of the Series
C Participating Preferred Stock, the Company's obligation to pay dividends on or
redeem the Series C Participating Preferred Stock is subject to its compliance
with its agreements with Congress.

12.      AMERICAN STOCK EXCHANGE NOTIFICATION

         On May 2, 2001, the American Stock Exchange (the "Exchange") notified
the Company that it was below certain of the Exchange's continued listing
guidelines set forth in the Exchange's Company Guide. The Exchange instituted a
review of the Company's eligibility for continuing listing of the Company's
common stock on the Exchange. The Company received a letter dated January 9,
2002 from the Exchange confirming that the American Stock Exchange determined to
continue the Company's listing on the Exchange pending quarterly reviews of the
Company's compliance with the steps of its strategic business realignment
program. This determination was made subject to the Company's favorable progress
in satisfying the Exchange's guidelines for continued listing and to the
Exchange's periodic review of the Company's Securities and Exchange Commission
and other filings.

         The Company received a letter dated November 8, 2002 from the Exchange
updating its position regarding the Company's compliance with certain of the
Exchange's continued listing standards as set forth in Part 10 of the Exchange's
Company Guide. Although the Company had been making favorable progress in
satisfying the Exchange's guidelines for continued listing based on its
compliance with the steps of its strategic business realignment program shared
with the Exchange in 2001 and updated in 2002, the Exchange informed the Company
that it had now become strictly subject to the procedures and requirements of
Part 10 of the Company Guide. Specifically, the Company must not fall below the
requirements of: (i) Section 1003(a)(i) with shareholders' equity of less than

                                       16
<PAGE>
$2,000,000 and losses from continuing operations and/or net losses in two out of
its three most recent fiscal years; (ii) Section 1003(a)(ii) with shareholders'
equity of less than $4,000,000 and losses from continuing operations and/or net
losses in three out of its four most recent fiscal years; and (iii) Section
1003(a)(iii) with shareholders' equity of less than $6,000,000 and losses from
continuing operations and/or net losses in its five most recent fiscal years.
The Exchange requested that the Company submit a plan to the Exchange by
December 11, 2002, advising the Exchange of action it has taken, or will take,
that would bring it into compliance with the continued listing standards by
December 28, 2003. The Company submitted a plan to the Exchange on December 11,
2002, in an effort to maintain the listing of the Company's common stock on the
Exchange.

         On January 28, 2003, the Company received a letter from the Exchange
confirming that, as of the date of the letter, the Company had evidenced
compliance with the requirements necessary for continued listing on the
Exchange. Such compliance resulted from a rule change by the Exchange approved
by the Securities and Exchange Commission related to continued listing on the
basis of compliance with total market capitalization or total assets and
revenues standards as alternatives to shareholders' equity standards including
the requirement that each listed company maintain $15.0 million of public float.
The letter is subject to changes in the Exchange Rules that might supersede the
letter or require the Exchange to re-evaluate its position. The Company's common
stock has traded below the minimum level of public float since April 14, 2004.
To date, the Company has not received any communication from the Exchange on
this issue.

                                       17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

         The following table sets forth, for the fiscal periods indicated, the
percentage relationship to net revenues of certain items in the Company's
Condensed Consolidated Statements of Income (Loss):

<TABLE>
<CAPTION>
                                                           13- WEEKS ENDED
                                                      --------------------------
                                                      March 27,        March 29,
                                                        2004             2003
                                                      ---------        ---------
<S>                                                   <C>              <C>
Net revenues                                            100.0%           100.0%
Cost of sales and operating expenses                     62.1             64.0
Special charges                                           0.0              0.3
Selling expenses                                         24.4             23.9
General and administrative expenses                      10.9             11.0
Depreciation and amortization                             1.1              1.1
Income (loss) from operations                             1.5             (0.3)
Gain on sale of Improvements                              0.0              1.9
Interest expense, net                                     1.0              1.4
Provision for Federal and state income taxes              0.1              0.0
Net income and comprehensive income                       0.4%             0.2%
</TABLE>

EXECUTIVE SUMMARY

         Management continues to focus on enhancing shareholder value through
the exploration of various avenues that will strengthen the Company's financial
position. The Company continues to pursue options to increase liquidity and
reduce debt through a review of its senior credit facility with Congress,
opportunistic sales of non-core assets and other financing alternatives. These
options would enable the Company to retire a portion of the Series C
Participating Preferred Stock obligation in addition to providing additional
liquidity for operational requirements.

RESULTS OF OPERATIONS - 13- WEEKS ENDED MARCH 27, 2004 COMPARED WITH THE 13-
WEEKS ENDED MARCH 29, 2003

         Net Income. The Company reported net income applicable to common
shareholders of $0.4 million or $0.00 per share for the 13- weeks ended March
27, 2004 compared with a net loss of $3.4 million, or $0.02 per share, for the
comparable period in fiscal 2003. These amounts were calculated after deducting
Series B Participating Preferred Stock dividends and accretion of $3.6 million
for the 13- weeks ended March 29, 2003. The weighted average number of shares
used in the calculation for basic and diluted net income per common share was
220,173,633 and 220,665,781, respectively, for the 13-week period ended March
27, 2004. The weighted average number of shares used in the calculation for both
basic and diluted net loss per common share was 138,315,800 for the 13-week
period ended March 29, 2003. The increase in weighted average shares was
primarily a result of the Recapitalization consummated on November 30, 2003 (see
Notes 10 and 11 to the Company's Condensed Consolidated Financial Statements).

         The $3.9 million increase in net income was primarily due to:

         -        A favorable impact of $3.6 million due to the Recapitalization
                  and exchange of the Series B for the Series C Participating
                  Preferred Stock with Chelsey. During the 13- weeks ended March
                  29, 2003 Preferred Stock dividends and accretion were recorded
                  relating to the Series B Participating Preferred Stock. The
                  Series C Participating Preferred Stock has been recorded at
                  the maximum amount of future cash payments; thus the Company
                  is currently not required to record interest expense relating
                  to the Series C Participating Preferred Stock;

         -        A favorable impact of $1.8 million comprising continued
                  reductions in cost of sales and operating expenses and general
                  and administrative expenses and a decrease in depreciation and
                  amortization;

         -        A favorable impact of $0.5 million due to reductions in
                  interest resulting from lower average borrowings and deferred
                  amendment fees which have become fully amortized relating to
                  the Congress Credit Facility; and

                                       18
<PAGE>
         -        A favorable impact of $0.3 million due to the reduction of
                  special charges recorded.

         partially offset by:

         -        An unfavorable impact of $1.9 million due to the non-recurring
                  deferred gain related to the June 29, 2001 sale of the
                  Company's Improvements business recognized during the 13-
                  weeks ended March 29, 2003; and

         -        An unfavorable impact of $0.4 million due to reduction in
                  variable contribution associated with the decline in net
                  revenues.

         Net Revenues. Net revenues decreased $7.2 million (7.0%) for the
13-week period ended March 27, 2004 to $95.3 million from $102.5 million for the
comparable period in 2003. The decline was primarily attributable to a reduction
in circulation for one of the Company's brands in order to limit the investment
in catalog production costs and working capital necessary to maintain inventory
for this brand. The majority of this reduction occurred in the first quarter of
2004, however, there will be a continuation of this trend, albeit at a lower
rate of decline in sales, for the balance of 2004. Internet sales continued to
grow, and comprised 32.2% of combined Internet and catalog revenues for the 13-
weeks ended March 27, 2004 compared with 26.5% for the comparable fiscal period
in 2003, and have increased by approximately $3.1 million, or 12.1%, to $28.6
million for the 13-week period ended March 27, 2004 from $25.5 million for the
comparable fiscal period in 2003.

         Cost of Sales and Operating Expenses. Cost of sales and operating
expenses decreased by $6.3 million to $59.2 million for the 13- weeks ended
March 27, 2004 as compared with $65.5 million for the comparable period in 2003.
Cost of sales and operating expenses decreased to 62.1% of net revenues for the
13-week period ended March 27, 2004 as compared with 64.0% of net revenues for
the comparable period in 2003. This decrease was primarily due to a 0.6% decline
in merchandise costs associated with a shift from "branded" goods to proprietary
goods that have higher product margins for one of the Company's brands, a 0.6%
decrease in the inventory obsolescence provision and other inventory write-downs
due to maintaining lower inventory levels and an increase in sales of clearance
merchandise through the Internet at discounted prices, a 0.5% decrease in
product postage costs resulting from utilizing more economical shipping sources
and methods, and a 0.2% decrease relating to information technology costs due to
declines in equipment rentals and maintenance. Fixed distribution and
telemarketing costs as a percentage of net revenues continued to remain constant
with the comparable period in 2003.

         Special Charges (Income). In December 2000, the Company began a
strategic business realignment program that resulted in the recording of special
charges for severance, facility exit costs and fixed asset write-offs. The
actions related to the strategic business realignment program were taken in an
effort to direct the Company's resources primarily towards a loss reduction
strategy and a return to profitability. Special charges (income) decreased by
$0.3 million for the 13- weeks ended March 27, 2004 as compared with the
comparable period in fiscal 2003. During the 13- weeks ended March 29, 2003,
$0.3 million of additional severance costs were recorded. No additional special
charges were recorded during the 13- weeks ended March 27, 2004, although an
adjustment was recorded relating to a revision of an estimate of benefit costs
previously recorded.

         Selling Expenses. Selling expenses decreased by $1.2 million to $23.3
million for the 13- weeks ended March 27, 2004 as compared with $24.5 million
for the comparable period in 2003. As a percentage of net revenues, selling
expenses increased to 24.4% for the 13- weeks ended March 27, 2004 from 23.9%
for the comparable period in 2003. This change was due primarily to a 0.4%
increase in costs associated with utilizing rented name lists from other mailers
and compilers as a primary source of new customers, a 0.2% increase in catalog
preparation costs and a 0.1% increase in postage costs. These increases were
partially offset by a 0.2% reduction in paper and printing costs.

         General and Administrative Expenses. General and administrative
expenses decreased by $0.9 million to $10.4 million for the 13- weeks ended
March 27, 2004 as compared with $11.3 million for the comparable period in 2003.
As a percentage of net revenues, general and administrative expenses declined
slightly to 10.9% of net revenues for the 13- weeks ended March 27, 2004
compared with 11.0% of revenues for the 13- weeks ended March 29, 2003.
Decreases were recognized with a reduction of 0.3% in incentive compensation and
legal costs, which were partially offset by a 0.2% increase in the area of
merchandising and product development.

                                       19
<PAGE>
         Depreciation and Amortization. Depreciation and amortization decreased
approximately $0.2 million to $1.0 million for the 13- weeks ended March 27,
2004 from $1.2 million for the comparable period in 2003. The decrease was
primarily due to capital expenditures that have been fully amortized.

         Income (Loss) from Operations. The Company's income from operations
increased by $1.7 million to $1.4 million for the 13- weeks ended March 27, 2004
from a loss of $0.3 million for the comparable period in 2003. See "Results of
Operations - 13- weeks ended March 27, 2004 compared with the 13- weeks ended
March 29, 2003 - Net Income and Comprehensive Income" above for further details.

         Gain on Sale of the Improvements Business. During the 13- weeks ended
March 29, 2003, the Company recognized the remaining deferred gain of $1.9
million consistent with the terms of the March 27, 2003 amendment made to the
asset purchase agreement relating to the sale of the Improvements business.
Effective March 28, 2003, the remaining $2.0 million escrow balance was received
by the Company, thus terminating the agreement. See Note 6 of Notes to the
Condensed Consolidated Financial Statements.

         Interest Expense, Net. Interest expense, net, decreased $0.5 million to
$0.9 million for the 13- weeks ended March 27, 2004 from $1.4 million for the
comparable period in fiscal 2003. The decrease in interest expense is due to
lower average cumulative borrowings relating to the Congress Credit Facility and
decreases in amortization from deferred financing costs relating to the
Company's amendments to the Congress Credit Facility that have become fully
amortized.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash used by operating activities. During the 13-week period ended
March 27, 2004, net cash used by operating activities was $0.6 million. Cash
provided by operations, net of non-cash items, and receipts resulting from a
decrease in accounts receivable were more than offset by payments made to
increase investment in working capital items such as increased prepaid catalog
costs and decreased accrued liabilities and accounts payable.

         Net cash used by investing activities. During the 13-week period ended
March 27, 2004, net cash used by investing activities was $0.1 million. This
entire amount comprised capital expenditures, consisting primarily of purchases
and upgrades to various information technology hardware and software throughout
the Company and purchases of equipment for the Company's Lacrosse, Wisconsin
location.

         Net cash provided by financing activities. During the 13-week period
ended March 27, 2004, net cash provided by financing activities was $0.8
million, which was primarily due to net borrowings of $1.8 million under the
Congress Credit Facility and a $0.3 million refund relating to withholding taxes
remitted on behalf of Richemont for estimated taxes due related to the Series B
Participating Preferred Stock. These borrowings were partially offset by $1.0
million in payments made to the Company's lender relating to the Congress
Tranche A and Tranche B term loan facilities as well as a payment of $0.1
million to the Company's lender for fees relating to the amendment of the
Congress Credit Facility. In addition, payments of $0.2 million were made to
lessors relating to obligations under capital leases.

         Amendments to the Congress Credit Facility. On March 25, 2004, the
Company amended the Congress Credit Facility to change the definition of
Consolidated Net Worth, to amend the Consolidated Working Capital and
Consolidated Net Worth covenants to specify minimum levels of Consolidated
Working Capital and Consolidated Net Worth that must be maintained during each
month commencing January 2004, and to amend the EBITDA covenant to specify
minimum levels of EBITDA that must be achieved during the Company's 2004, 2005
and 2006 fiscal years. The Company expects to maintain the minimum levels of
these covenants in future periods. In addition, the definition of "Event of
Default" was amended by replacing the Event of Default, which would have
occurred on the occurrence of a material adverse change in the business, assets,
liabilities or condition of the Company and its subsidiaries, with an Event of
Default that would occur if certain specific events such as a decrease in
consolidated revenues beyond certain specified levels or aging of inventory or
accounts payable beyond certain specified levels, were to occur.

         In the fourth quarter of 2003, the Company re-examined the provisions
of the Congress Credit Facility and, based on EITF Issue No. 95-22, "Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both

                                       20
<PAGE>
a Subjective Acceleration Clause and a Lock-Box Arrangement" ("EITF 95-22") and
certain provisions in the credit agreement, the Company has classified its
revolving loan facility as short-term debt for the periods ended March 27, 2004
and December 27, 2003.

         Under the Congress Credit Facility, the Company is required to maintain
minimum net worth, working capital and EBITDA as defined throughout the term of
the agreement. As of March 27, 2004, the Company was in compliance with all
covenants set forth under the Congress Credit Facility. However, as discussed
below under "General," the Company was in technical default under the Congress
Credit Facility for which it has obtained a conditional waiver from Congress.

         As of March 27, 2004, the Company had $22.3 million of cumulative
borrowings outstanding under the Congress Credit Facility, comprising $10.7
million of short-term borrowings under the Revolving Loan Facility, bearing an
interest rate of 4.50%, $6.0 million under the Tranche A Term Loan, bearing an
interest rate of 4.75%, and $5.6 million under the Tranche B Term Loan, bearing
an interest rate of 13.0%. Of the aggregate borrowings, $14.6 million is
classified as short-term with $7.7 million classified as long-term on the
Company's Condensed Consolidated Balance Sheet. As of December 27, 2003, the
Company had $21.5 million of borrowings outstanding under the Congress Credit
Facility comprising $9.0 million of short-term borrowings under the revolving
loan facility, bearing an interest rate of 4.50%, $6.5 million under the Tranche
A Term Loan, bearing an interest rate of 4.75%, and $6.0 million under the
Tranche B Term Loan, bearing an interest rate of 13.0%. Of the aggregate
borrowings, $12.8 million is classified as short-term with $8.7 million
classified as long-term on the Company's Condensed Consolidated Balance Sheet.
On or before June 30, 2004, the Company is required to enter into a restatement
of the loan agreement with Congress, requiring no changes to the terms of the
current agreement.

         Sale of Improvements Business. On June 29, 2001, the Company sold
certain assets and liabilities of its Improvements business to HSN, a division
of USA Networks, Inc.'s Interactive Group, for approximately $33.0 million. In
conjunction with the sale, the Company's Keystone Internet Services, Inc.
subsidiary agreed to provide telemarketing and fulfillment services for the
Improvements business under a service agreement with HSN for a period of three
years.

         The asset purchase agreement between the Company and HSN provided that
if Keystone Internet Services failed to perform its obligations during the first
two years of the services contract, the purchaser could receive a reduction in
the original purchase price of up to $2.0 million. An escrow fund of $3.0
million, which was withheld from the original proceeds of the sale of
approximately $33.0 million, had been established for a period of two years
under the terms of an escrow agreement between LWI Holdings, Inc. (a
wholly-owned subsidiary of the Company), HSN and The Chase Manhattan Bank as a
result of these contingencies.

         The Company recognized a net gain on the sale of approximately $23.2
million, net of a non-cash goodwill charge of $6.1 million, in fiscal year 2001.
During fiscal 2002, the Company recognized approximately $0.6 million of the
deferred gain consistent with the terms of the escrow agreement. The Company
recognized the remaining net deferred gain of $1.9 million from the receipt of
the escrow balance on March 28, 2003. This gain was reported net of the costs
incurred to provide the credit to HSN of approximately $0.1 million.

         American Stock Exchange Notification. On May 2, 2001, the American
Stock Exchange (the "Exchange") notified the Company that it was below certain
of the Exchange's continued listing guidelines set forth in the Exchange's
Company Guide. The Exchange instituted a review of the Company's eligibility for
continuing listing of the Company's common stock on the Exchange. The Company
received a letter dated January 9,

                                       21
<PAGE>
2002 from the Exchange confirming that the American Stock Exchange determined to
continue the Company's listing on the Exchange pending quarterly reviews of the
Company's compliance with the steps of its strategic business realignment
program. This determination was made subject to the Company's favorable progress
in satisfying the Exchange's guidelines for continued listing and to the
Exchange's periodic review of the Company's Securities and Exchange Commission
and other filings.

         The Company received a letter dated November 8, 2002 from the Exchange
updating its position regarding the Company's compliance with certain of the
Exchange's continued listing standards as set forth in Part 10 of the Exchange's
Company Guide. Although the Company had been making favorable progress in
satisfying the Exchange's guidelines for continued listing based on its
compliance with the steps of its strategic business realignment program shared
with the Exchange in 2001 and updated in 2002, the Exchange informed the Company
that it had now become strictly subject to the procedures and requirements of
Part 10 of the Company Guide. Specifically, the Company must not fall below the
requirements of: (i) Section 1003(a)(i) with shareholders' equity of less than
$2,000,000 and losses from continuing operations and/or net losses in two out of
its three most recent fiscal years; (ii) Section 1003(a)(ii) with shareholders'
equity of less than $4,000,000 and losses from continuing operations and/or net
losses in three out of its four most recent fiscal years; and (iii) Section
1003(a)(iii) with shareholders' equity of less than $6,000,000 and losses from
continuing operations and/or net losses in its five most recent fiscal years.
The Exchange requested that the Company submit a plan to the Exchange by
December 11, 2002, advising the Exchange of action it has taken, or will take,
that would bring it into compliance with the continued listing standards by
December 28, 2003. The Company submitted a plan to the Exchange on December 11,
2002, in an effort to maintain the listing of the Company's common stock on the
Exchange.

         On January 28, 2003, the Company received a letter from the Exchange
confirming that, as of the date of the letter, the Company had evidenced
compliance with the requirements necessary for continued listing on the
Exchange. Such compliance resulted from a rule change by the Exchange
approved by the Securities and Exchange Commission related to continued listing
on the basis of compliance with total market capitalization or total assets and
revenues standards as alternatives to shareholders' equity standards including
the requirement that each listed company maintain $15 million of public float.
The letter is subject to changes in the Exchange Rules that might
supersede the letter or require the Exchange to re-evaluate its position. The
Company's common stock has traded below the minimum level of public float since
April 14, 2004. To date, the Company has not received any communication from
the Exchange on this issue.

         General. At March 27, 2004, the Company had $2.4 million in cash and
cash equivalents, compared with $2.6 million at March 29, 2003. Total cumulative
borrowings, including financing under capital lease obligations, as of March 27,
2004, aggregated $23.1 million. Remaining availability under the Congress Credit
Facility as of March 27, 2004 was $4.0 million. There were nominal short-term
capital commitments (less than $0.2 million) at March 27, 2004.

         On April 14, 2004, the judge in the Wilson case ruled on a motion filed
by the plaintiff requesting attorneys' fees and costs, awarding plaintiff's
counsel approximately $445,000. Prior thereto, on November 25, 2003, the Court
entered judgment in the Wilson case in plaintiff's favor requiring the Company's
Brawn of California subsidiary which conducts the International Male catalog
business to refund insurance fees collected from consumers for the period from
February 13, 1998 through January 15, 2003 with interest from the date paid by
June 30, 2004. The Company is appealing both of these decisions. On or about
April 2, 2004, plaintiff's counsel filed a lien against Brawn of California's
real property assets in the State of California with respect to the insurance
fees judgment. Both the award of attorneys' fees and costs in the amount of
$445,000 and the filing of a lien by plaintiff's counsel against Brawn of
California's assets for the insurance fees judgment constitute defaults by the
Company under the Congress Credit Facility. Congress has agreed to conditionally
waive such defaults so long as (1) the Company is diligently defending the
Wilson action by all appropriate proceedings and sets aside adequate reserves in
accordance with GAAP, (2) no action shall be taken by the plaintiff in the
Wilson action against any collateral of Brawn of California or any other
borrower or guarantor under the Congress Credit Facility, (3) Brawn shall not
enter into any settlement agreement with the plaintiff in the Wilson action
without the prior written consent of Congress, (4) Congress' security interests
remain senior to any interest of the plaintiff in the Wilson action, and (5) no
other event of default exists or occurs. The Company believes that it may be a
number of years before all appeals in the Wilson action are exhausted and
continues to believe that an unfavorable outcome to the Company is not probable.

         Although certain of the conditions are outside its control, management
of the Company believes, based on discussions with its attorneys,  that it can
maintain compliance with such conditions through at least December 25, 2004. If
the Company were to fail to meet any one of these conditions, Congress would
have the ability to exercise all rights and remedies available to it under the
Congress Credit Facility including the right to call a default and accelerate
the indebtedness due thereunder although Congress, in the past, has shown a
willingness to waive its rights rather than call the facility. However, there
can be no assurance that Congress will continue to do so in the future. In the
event that there is an adverse decision in the future in the Wilson action or
the Company does not comply with any of the requirements of the conditional
waiver, an event of default would occur under the Congress Credit Facility,
Congress would have the right to accelerate the indebtedness under the Congress
Credit Facility, and could exercise the rights and remedies available to it
under the Congress Credit Facility. Although management of the Company believes
that it will be able to comply with the conditional waiver requirements, in the
event it were unable to do so, it would be required to seek alternative
solutions, including possible settlement of the Wilson action or satisfaction of
any liens or renegotiation of the Congress Credit Facility. All indebtedness
under the Congress Credit Facility is currently classified as short-term. For
more information on the Wilson action, see Note 4 of the Condensed Consolidated
Financial Statements.

         Management continues to focus on enhancing shareholder value through
the exploration of various avenues that will strengthen the Company's financial
position. The Company continues to pursue options to increase liquidity and
reduce debt through a review of its senior credit facility with Congress,
opportunistic sales of non-core assets and other financing alternatives. These
options would enable the Company to retire a portion of the Series C
Participating Preferred Stock obligation in addition to providing additional
liquidity for operational requirements.

         Management believes that the Company has sufficient liquidity and
availability under its credit agreement to fund its planned operations through
at least December 25, 2004. See "Cautionary Statements," below. Continued
flexibility among the Company's major vendors is critical to the maintenance of
adequate liquidity as is compliance with the terms and provisions of the
Congress Credit Facility as mentioned in Note 9 of the Condensed Consolidated
Financial Statements.

USES OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES

         The condensed consolidated financial statements include all
subsidiaries of the Company, and all intercompany transactions and balances have
been eliminated. The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations," found in the Company's Annual Report on
Form 10-K for the fiscal year ended December 27, 2003, for additional
information relating to the Company's use of estimates and other critical
accounting policies.

                                       22
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which had been previously classified as
equity or between the liabilities and equity sections of the Condensed
Consolidated Balance Sheet. The provisions of SFAS 150 are effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
are effective at the beginning of the first interim period beginning after June
15, 2003. The standard is to be implemented by reporting the cumulative effect
of a change in accounting principle for financial instruments created before the
issuance of SFAS 150 and still existing at the beginning of the interim period
of adoption. The Company adopted the provisions of SFAS 150, which resulted in
the reclassification of its Series B Participating Preferred Stock to a
liability rather than between the liabilities and equity sections of the
Condensed Consolidated Balance Sheet. Based upon the requirements set forth by
SFAS 150, this reclassification was subject to implementation beginning on June
29, 2003. Upon implementation of SFAS 150, the Company reflected subsequent
increases in liquidation preference as an increase in Total Liabilities with a
corresponding reduction in capital in excess of par value, because the Company
has an accumulated deficit. Accretion was recorded as interest expense.

         On March 31, 2004, the Financial Accounting Standards Board ("FASB")
issued Emerging Issues Task Force Issue No. 03-6 "Participating Securities and
the Two-Class Method under FASB Statement No. 128" ("EITF 03-6"). SFAS 128
defines earnings per share ("EPS") as "the amount of earnings attributable to
each share of common stock" and indicates that the objective of EPS is to
measure the performance of an entity over the reporting period. SFAS 128
addresses conditions under which a participating security requires the use of
the two-class method of computing EPS. The two-class method is an earnings
allocation formula that treats a participating security as having rights to
earnings that otherwise would have been available to common shareholders, but
does not require the presentation of basic and diluted EPS for securities other
than common stock. The Company's Series C Participating Preferred Stock is a
participating security and, therefore, the Company calculates EPS utilizing the
two-class method, however, it has chosen not to present basic and diluted EPS
for preferred stock.

         See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations," found in the Company's Annual Report on
Form 10-K for the fiscal year ended December 27, 2003 and Note 8 of the
Condensed Consolidated Financial Statements for additional information relating
to new accounting pronouncements that the Company has adopted.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

         The Company has entered into no "off-balance sheet arrangements" within
the meaning of the Securities Exchange Act of 1934, as amended, and the rules
thereunder other than operating leases, which are in the normal course of
business.

         Provided below is a tabular disclosure of contractual obligations as of
March 27, 2004, as required by Item 303(a)(5) of SEC Regulation S-K. In addition
to obligations recorded on the Company's Condensed Consolidated Balance Sheets
as of March 27, 2004, the schedule includes purchase obligations, which are
defined as legally binding and enforceable agreements to purchase goods or
services that specify all significant terms (quantity, price, and timing of
transaction).

                                       23
<PAGE>
                      PAYMENT DUE BY PERIOD (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   LESS THAN                                      MORE THAN
          CONTRACTUAL OBLIGATIONS                    TOTAL          1 YEAR         1-3 YEARS       3-5 YEARS       5 YEARS
          -----------------------                    -----          ------         ---------       ---------       -------
<S>                                               <C>             <C>             <C>             <C>             <C>
Long-term Debt Obligations, excluding the
   Series C Participating Preferred Stock         $   22,289      $   14,548      $    7,741      $       --      $       --

Total Minimum Lease Payments Under
   Capital Lease Obligations                             899             629             268               2              --

Operating Lease Obligations                           15,487           5,421           4,632           3,751           1,683

Operating Lease Obligations -
   Restructuring/Discontinued Operations               8,774           3,393           2,457           2,005             919

Purchase Obligations (a)                               2,992           1,776           1,216              --              --

Other Long-Term Liabilities Reflected on the
   Registrant's Balance Sheet under GAAP (b)          72,689              --              --              --          72,689
                                                  ----------      ----------      ----------      ----------      ----------
Total                                             $  123,130      $   25,767      $   16,314      $    5,758      $   75,291
                                                  ==========      ==========      ==========      ==========      ==========
</TABLE>

    (a) The Company's purchase obligations consist primarily of a total
        commitment of $2,000,000 to purchase telecommunication services during
        the period from May 1, 2004 through April 30, 2006; a total commitment
        of approximately $487,000 to purchase catalog photography services
        during the period from September 11, 2003 through September 10, 2005, of
        which approximately $96,000 had been fulfilled as of March 27, 2004, and
        of which approximately $258,000 should be fulfilled during the next
        fiscal year and the remaining $133,000 fulfilled by September 10, 2005;
        a total commitment of $375,000 for list processing services representing
        the maximum exposure for a service contract which requires a three-month
        notice of termination for services costing $125,000 per month; a total
        commitment of $201,000 to purchase various packaging materials from
        several vendors, under contracts wherein the vendors warehouse varying
        minimum and maximum levels of materials to ensure immediate
        availability; and several commitments totaling approximately $151,000
        for various consulting services to be provided during the period April
        2003 through July 2004, of which approximately $126,000 had been
        fulfilled as of March 27, 2004.

    (b) Represents Series C Participating Preferred Stock as disclosed in Note
        11 to the Company's Condensed Consolidated Financial Statements.

SEASONALITY

         The Company does not consider its business seasonal. The revenues for
the Company are proportionally consistent for each quarter during a fiscal year.
The percentage of annual revenues for the first, second, third and fourth
quarters recognized by the Company, respectively, were as follows: 2003 - 24.7%,
25.5%, 23.3% and 26.5%; and 2002 - 23.9%, 24.9%, 23.2% and 28.0%.

FORWARD-LOOKING STATEMENTS

         The following statements from above constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995:

         "Subject to an adverse outcome in the Wilson matter discussed above,
management believes that the Company has sufficient liquidity and availability
under its credit agreement to fund its planned operations through at least
December 25, 2004."

CAUTIONARY STATEMENTS

         The following material identifies important factors that could cause
actual results to differ materially from those expressed in the forward-looking
statements identified above and in any other forward-looking statements
contained elsewhere herein:


                                       24
<PAGE>
-        A general deterioration in economic conditions in the United States
         leading to reduced consumer confidence, reduced disposable income and
         increased competitive activity and the business failure of companies in
         the retail, catalog and direct marketing industries. Such economic
         conditions leading to a reduction in consumer spending generally and
         in-home fashions specifically, and leading to a reduction in consumer
         spending specifically with reference to other types of merchandise the
         Company offers in its catalogs or over the Internet, or which are
         offered by the Company's third party fulfillment clients.

-        Customer response to the Company's merchandise offerings and
         circulation changes; effects of shifting patterns of e-commerce versus
         catalog purchases; costs associated with printing and mailing catalogs
         and fulfilling orders; effects of potential slowdowns or other
         disruptions in postal service; dependence on customers' seasonal buying
         patterns; and fluctuations in foreign currency exchange rates. The
         ability of the Company to reduce unprofitable circulation and to
         effectively manage its customer lists.

-        The ability of the Company to achieve projected levels of sales and the
         ability of the Company to reduce costs commensurate with sales
         projections. Increases in postage, printing and paper prices and/or the
         inability of the Company to reduce expenses generally as required for
         profitability and/or increase prices of the Company's merchandise to
         offset expense increases.

-        The failure of the Internet generally to achieve the projections for it
         with respect to growth of e-commerce or otherwise, and the failure of
         the Company to increase Internet sales. The success of the Amazon.com
         venture. The imposition of regulatory, tax or other requirements with
         respect to Internet sales. Actual or perceived technological
         difficulties or security issues with respect to conducting e-commerce
         over the Internet generally or through the Company's Web sites or those
         of its third party fulfillment clients specifically.

-        The ability of the Company to attract and retain management and
         employees generally and specifically with the requisite experience in
         e-commerce, Internet and direct marketing businesses. The ability of
         employees of the Company who have been promoted as a result of the
         Company's strategic business realignment program to perform the
         responsibilities of their new positions.

-        A general deterioration in economic conditions in the United States
         leading to key vendors and suppliers reducing or withdrawing trade
         credit to companies in the retail, catalog and direct marketing
         industries. The risk that key vendors or suppliers may reduce or
         withdraw trade credit to the Company, convert the Company to a cash
         basis or otherwise change credit terms, or require the Company to
         provide letters of credit or cash deposits to support its purchase of
         inventory, increasing the Company's cost of capital and impacting the
         Company's ability to obtain merchandise in a timely manner. The ability
         of the Company to find alternative vendors and suppliers on competitive
         terms if vendors or suppliers who exist cease doing business with the
         Company.

-        The inability of the Company to timely obtain and distribute
         merchandise, leading to an increase in backorders and cancellations.

-        Defaults under the Congress Credit Facility, or inadequacy of available
         borrowings thereunder, reducing or impairing the Company's ability to
         obtain letters of credit or other credit to support its purchase of
         inventory and support normal operations, impacting the Company's
         ability to obtain, market and sell merchandise in a timely manner.

-        The inadequacy of available borrowings under the Congress Credit
         Facility preventing the Company from paying vendors or suppliers in a
         timely fashion.

-        Continued compliance by the Company with and the enforcement by
         Congress of financial and other covenants and limitations contained in
         the Congress Credit Facility, including net worth, net working capital,
         capital expenditure and EBITDA covenants, and limitations based upon
         specified percentages of eligible receivables and eligible inventory,
         and the requirement that the Company maintain $3.0 million of excess
         credit availability at all times, affecting the ability of the Company
         to continue to make borrowings under the Congress Credit Facility.

-        Continuation of the Company's history of operating losses, and the
         incidence of costs associated with the Company's strategic business
         realignment program, resulting in the Company failing to comply with
         certain financial and other covenants contained in the Congress Credit
         Facility, including net worth, net working capital, capital expenditure
         and EBITDA covenants and the ability of the Company to obtain waivers
         from Congress in the event that

                                       25
<PAGE>
         future internal and/or external events result in performance that
         results in noncompliance by the Company with the terms of the Congress
         Credit Facility requiring remediation.

-        The ability of the Company to realize the aggregate cost savings and
         other objectives anticipated in connection with the strategic business
         realignment program, or within the time periods anticipated therefor.
         The aggregate costs of effecting the strategic business realignment
         program may be greater than the amounts anticipated by the Company.

-        The ability of the Company to maintain advance rates under the Congress
         Credit Facility that are at least as favorable as those obtained in the
         past due to market conditions affecting the value of the inventory
         which is periodically re-appraised in order to re-set such advance
         rates.

-        The ability of the Company to dispose of assets related to its third
         party fulfillment business, to the extent not transferred to other
         facilities.

-        The initiation by the Company of additional cost cutting and
         restructuring initiatives, the costs associated therewith, and the
         ability of the Company to timely realize any savings anticipated in
         connection therewith.

-        The ability of the Company to maintain insurance coverage required in
         order to operate its businesses and as required by the Congress Credit
         Facility. The ability of the Company to obtain certain types of
         insurance, including directors' and officers' liability insurance, or
         to accept reduced policy limits or coverage, or to incur substantially
         increased costs to obtain the same or similar coverage, due to recently
         enacted and proposed changes to laws and regulations affecting public
         companies, including the provisions of the Sarbanes-Oxley Act of 2002
         and rules of the Securities and Exchange Commission thereunder.

-        The inability of the Company to access the capital markets due to
         market conditions generally, including a lowering of the market
         valuation of companies in the direct marketing and retail businesses,
         and the Company's business situation specifically.

-        The inability of the Company to sell non-core or other assets due to
         market conditions or otherwise.

-        The inability of the Company to redeem the Series C Participating
         Preferred Stock.

-        The ability of the Company to maintain the listing of its Common Stock
         on the American Stock Exchange due to a failure to maintain $15 million
         of public float or otherwise.

-        The continued willingness of customers to place and receive mail orders
         in light of worries about bio-terrorism.

-        The ability of the Company to sublease, terminate or renegotiate the
         leases of its vacant facilities in Weehawken, New Jersey and other
         locations.

-        The ability of the Company to achieve a satisfactory resolution of the
         various class action lawsuits that are pending against it, including
         the Wilson case. The possibility that the Company may be required to
         post a significant bond or bonds in the Wilson case or the other class
         action lawsuits when appealing an adverse decision of the courts.

-        The ability of the Company to evaluate and implement the requirements
         of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and
         Exchange Commission thereunder, as well as recent changes to listing
         standards by the American Stock Exchange, in a cost effective manner.

-        The ability of the Company to achieve cross channel synergies, create
         successful affiliate programs, effect profitable brand extensions or
         establish popular loyalty and buyers' club programs.

-        Uncertainty in the U.S. economy and decreases in consumer confidence
         leading to a slowdown in economic growth and spending resulting from
         the invasion of, war with and occupation of Iraq, which may result in
         future acts of terror. Such activities, either domestically or
         internationally, may affect the economy and consumer confidence and
         spending within the United States and adversely affect the Company's
         business.

                                       26
<PAGE>
-        Softness in demand for the Company's products.

-        The inability of the Company to continue to source goods from foreign
         sources, particularly India and Pakistan, leading to increased costs of
         sales.

-        The possibility that all or part of the summary judgment decision in
         the matter of Rakesh K. Kaul v. Hanover Direct, Inc. will be overturned
         on appeal.

-        Reductions in unprofitable circulation leading to loss of revenue,
         which is not offset by a reduction in expenses.

-        Any significant increase in the Company's return rate experience as a
         result of the recent change in its return policy or otherwise.

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         INTEREST RATES: The Company's exposure to market risk relates to
interest rate fluctuations for borrowings under the Congress revolving credit
facility and its term financing facilities, which bear interest at variable
rates. At March 27, 2004, outstanding principal balances under these facilities
subject to variable rates of interest were approximately $16.7 million. If
interest rates were to increase by one percent from current levels, the
resulting increase in interest expense, based upon the amount outstanding at
March 27, 2004, would be approximately $0.17 million on an annual basis.

         In addition, the Company's exposure to market risk relates to customer
response to the Company's merchandise offerings and circulation changes, effects
of shifting patterns of e-commerce versus catalog purchases, costs associated
with printing and mailing catalogs and fulfilling orders, effects of potential
slowdowns or other disruptions in postal service, dependence on customers'
seasonal buying patterns, fluctuations in foreign currency exchange rates, and
the ability of the Company to reduce unprofitable circulation and effectively
manage its customer lists.

ITEM 4. CONTROLS AND PROCEDURES

         DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is detailed in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
report it files or submits under the Exchange Act.

         INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

                                       27
<PAGE>
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         A class action lawsuit was commenced on March 3, 2000 entitled Edwin L.
Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no.
CJ2000-177 in the State Court of Oklahoma (District Court in and for Sequoyah
County). Plaintiff commenced the action on behalf of himself and a class of
persons who have at any time purchased a product from the Company and paid for
an "insurance charge." The complaint sets forth claims for breach of contract,
unjust enrichment, recovery of money paid absent consideration, fraud and a
claim under the New Jersey Consumer Fraud Act. The complaint alleges that the
Company charges its customers for delivery insurance even though, among other
things, the Company's common carriers already provide insurance and the
insurance charge provides no benefit to the Company's customers. Plaintiff also
seeks a declaratory judgment as to the validity of the delivery insurance. The
damages sought are (i) an order directing the Company to return to the plaintiff
and class members the "unlawful revenue" derived from the insurance charges,
(ii) declaring the rights of the parties, (iii) permanently enjoining the
Company from imposing the insurance charge, (iv) awarding threefold damages of
less than $75,000 per plaintiff and per class member, and (v) attorneys' fees
and costs. On April 12, 2001, the Court held a hearing on plaintiff's class
certification motion. Subsequent to the April 12, 2001 hearing on plaintiff's
class certification motion, plaintiff filed a motion to amend the definition of
the class. On July 23, 2001, plaintiff's class certification motion was granted,
defining the class as "All persons in the United States who are customers of any
catalog or catalog company owned by Hanover Direct, Inc. and who have at any
time purchased a product from such company and paid money that was designated to
be an insurance charge." On August 21, 2001, the Company filed an appeal of the
order with the Oklahoma Supreme Court and subsequently moved to stay proceedings
in the district court pending resolution of the appeal. The appeal has been
fully briefed. At a subsequent status hearing, the parties agreed that issues
pertaining to notice to the class would be stayed pending resolution of the
appeal, that certain other issues would be subject to limited discovery, and
that the issue of a stay for any remaining issues would be resolved if and when
such issues arise. On January 20, 2004, the plaintiff filed a motion for oral
argument with the Court. The Company believes it has defenses against the claims
and plans to conduct a vigorous defense of this action.

         On August 15, 2001, the Company was served with a summons and
four-count complaint filed in Superior Court for the City and County of San
Francisco, California, entitled Teichman v. Hanover Direct, Inc., Hanover
Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100. The complaint was
filed by a California resident, seeking damages and other relief for herself and
a class of all others similarly situated, arising out of the insurance fee
charged by catalogs and Internet sites operated by subsidiaries of the Company.
Defendants, including the Company, have filed motions to dismiss based on a lack
of personal jurisdiction over them. In January 2002, plaintiff sought leave to
name six additional entities: International Male, Domestications Kitchen &
Garden, Silhouettes, Hanover Company Store, Kitchen & Home, and Domestications
as co-defendants. On March 12, 2002, the Company was served with the First
Amended Complaint in which plaintiff named as defendants the Company, Hanover
Brands, Hanover Direct Virginia, LWI Holdings, Hanover Company Store, Kitchen
and Home, and Silhouettes. On April 15, 2002, the Company filed a Motion to Stay
the Teichman action in favor of the previously filed Martin action and also
filed a Motion to quash service of summons for lack of personal jurisdiction on
behalf of defendants Hanover Direct, Inc., Hanover Brands, Inc. and Hanover
Direct Virginia, Inc. On May 14, 2002, the Court (1) granted the Company's
Motion to quash service on behalf of Hanover Direct, Hanover Brands, and Hanover
Direct Virginia, leaving only LWI Holdings, Hanover Company Store, Kitchen &
Home, and Silhouettes, as defendants, and (2) granted the Company's Motion to
Stay the action in favor of the previously filed Oklahoma action, so nothing
will proceed on this case against the remaining entities until the Oklahoma case
is decided. The Company believes it has defenses against the claims. The Company
plans to conduct a vigorous defense of this action.

         A class action lawsuit was commenced on February 13, 2002 entitled Jacq
Wilson, suing on behalf of himself, all others similarly situated, and the
general public v. Brawn of California, Inc. dba International Male and
Undergear, and Does 1-100 ("Brawn") in the Superior Court of the State of
California, City and County of San Francisco. Does 1-100 are Internet and
catalog direct marketers offering a selection of men's clothing, sundries, and
shoes who advertise within California and nationwide. The complaint alleges that
for at least four years, members of the class have been charged an unlawful,
unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn;
that Brawn was engaged in untrue, deceptive and misleading advertising in that
it was not lawfully required or permitted to collect insurance, tax and sales
tax from customers in California; and that Brawn has engaged in acts of unfair
competition under the state's Business and Professions Code. Plaintiff and the
class seek (i) restitution and disgorgement of all monies wrongfully collected
and earned by Brawn, including interest and other gains made on account of these
practices, including reimbursement in the amount of the insurance, tax and sales
tax collected unlawfully, together with interest, (ii) an order enjoining Brawn
from charging customers insurance and tax on its order forms and/or from
charging tax on the delivery, shipping and insurance charges, (iii) an order
directing Brawn to notify

                                       28
<PAGE>
the California State Board of Equalization of the failure to pay the correct
amount of tax to the state and to take appropriate steps to provide the state
with the information needed for audit, and (iv) compensatory damages, attorneys'
fees, pre-judgment interest, and costs of the suit. The claims of the
individually named plaintiff and for each member of the class amount to less
than $75,000. On April 15, 2002, the Company filed a Motion to Stay the Wilson
action in favor of the previously filed Martin action. On May 14, 2002, the
Court denied the Motion to Stay. The Wilson case proceeded to trial before the
Honorable Diane Elan Wick of the Superior Court of California for the County of
San Francisco, and the Judge, sitting without a jury, heard evidence from April
15-17, 2003. On November 25, 2003, the Court, after hearing evidence and
considering post-trial submissions from the parties, entered judgment in
plaintiff's favor, requiring Brawn to refund insurance fees collected from
consumers for the period from February 13, 1998 through January 15, 2003 with
interest from the date paid by June 30, 2004. Plaintiff did not prevail on the
tax issues. On January 12, 2004, plaintiff filed a motion requesting
approximately $740,000 in attorneys' fees and costs. On February 27, 2004, the
Company filed its response to that motion. Plaintiff filed a reply brief on
March 13, 2004. A hearing was held on plaintiff's motion on March 18, 2004. The
judge ruled on that motion on April 14, 2004, awarding plaintiff's counsel
approximately $445,000. The Company has appealed the trial court's decision on
the merits of the insurance fees issue as well as the decision on the attorney's
fees issue. The two appeals will likely be consolidated with briefing expected
to begin in late May 2004. The Company will be required to post a bond in the
amount of approximately $750,000 while the appeal of the attorneys' fees award
is proceeding but its counsel does not believe the Company will be required to
do so while the appeal on the insurance fees decision is proceeding. The Company
plans to conduct a vigorous defense of this action. The potential estimated
exposure is in the range of $0 to $4.0 million. Based upon the Company's policy
of evaluating accruals for legal liabilities, the Company has not established a
reserve due to management determining that it is not probable that an
unfavorable outcome will result.

         A class action lawsuit was commenced on October 28, 2002 entitled John
Morris, individually and on behalf of all other persons & entities similarly
situated v. Hanover Direct, Inc., and Hanover Brands, Inc. (referred to here as
"Hanover"), No. L 8830-02 in the Superior Court of New Jersey, Bergen County --
Law Division. The plaintiff brings the action individually and on behalf of a
class of all persons and entities in New Jersey who purchased merchandise from
Hanover within six years prior to filing of the lawsuit and continuing to the
date of judgment. On the basis of a purchase made by plaintiff in August 2002 of
certain clothing from Hanover (which was from a men's division catalog, the only
ones which retained the insurance line item in 2002), Plaintiff claims that for
at least six years, Hanover maintained a policy and practice of adding a charge
for "insurance" to the orders it received and concealed and failed to disclose
its policy with respect to all class members. Plaintiff claims that Hanover's
conduct was (i) in violation of the New Jersey Consumer Fraud Act, as otherwise
deceptive, misleading and unconscionable; (ii) such as to constitute Unjust
Enrichment of Hanover at the expense and to the detriment of plaintiff and the
class; and (iii) unconscionable per se under the Uniform Commercial Code for
contracts related to the sale of goods. Plaintiff and the class seek damages
equal to the amount of all insurance charges, interest thereon, treble and
punitive damages, injunctive relief, costs and reasonable attorneys' fees, and
such other relief as may be just, necessary, and appropriate. On December 13,
2002, the Company filed a Motion to Stay the Morris action in favor of the
previously filed Martin action. Plaintiff then filed an Amended Complaint adding
International Male as a defendant. Hearing on the Motion to Stay took place on
June 5, 2003. The Court granted the Company's Motion to Stay the action and the
case was stayed first until December 31, 2003 and subsequently until March 31,
2004. The stay was lifted on March 31, 2004. On April 30, 2004, the Company
responded to plaintiff's Amended Complaint by filing a Motion for Summary
Judgment that is currently scheduled to be heard by the Court on June 11, 2004.
The Company plans to conduct a vigorous defense of this action.

         On June 28, 2001, Rakesh K. Kaul, the former President and Chief
Executive Officer of the Company, filed a five-count complaint (the "Complaint")
in New York State Court against the Company, seeking damages and other relief
arising out of his separation of employment from the Company, including
severance payments of $2,531,352 plus the cost of employee benefits, attorneys'
fees and costs incurred in connection with the enforcement of his rights under
his employment agreement with the Company, payment of $298,650 for 13 weeks of
accrued and unused vacation, damages in the amount of $3,583,800, or, in the
alternative, a declaratory judgment from the court that he is entitled to all
change of control benefits under the "Hanover Direct, Inc. Thirty-Six Month
Salary Continuation Plan," and damages in the amount of $1,396,066 or $850,000
due to the Company's purported breach of the terms of the "Long-Term Incentive
Plan for Rakesh K. Kaul" by failing to pay him a "tandem bonus" he alleges was
due and payable to him within the 30 days following his resignation. The Company
removed the case to the U.S. District Court for the Southern District of New
York on July 25, 2001. Mr. Kaul filed an Amended Complaint ("Amended Complaint")
in the U.S. District Court for the Southern District of New York on September
18, 2001. The Amended Complaint repeats many of the claims made in the original
Complaint and adds ERISA claims.

         On October 11, 2001, the Company filed its Answer, Defenses and
Counterclaims to the Amended Complaint, denying liability under each and every
of Mr. Kaul's causes of action, challenging all substantive assertions, raising
several defenses and stating nine counterclaims against Mr. Kaul. The
counterclaims include (1) breach of contract; (2) breach of the Non-Competition
and Confidentiality Agreement with the Company; (3) breach of fiduciary duty;
(4) unfair competition; and (5) unjust enrichment. The Company seeks damages,
including, without limitation, the $341,803 in severance pay and car allowance
Mr. Kaul received following his resignation, $412,336 for amounts paid

                                       29
<PAGE>
to Mr. Kaul for car allowance and related benefits, the cost of a long-term
disability policy, and certain payments made to personal attorneys and
consultants retained by Mr. Kaul during his employment, $43,847 for certain
services the Company provided and certain expenses the Company incurred,
relating to the renovation and leasing of office space occupied by Mr. Kaul's
spouse at 115 River Road, Edgewater, New Jersey, the Company's current
headquarters, $211,729 on a tax loan to Mr. Kaul outstanding since 1997 and
interest, compensatory and punitive damages and attorneys' fees. The Company
moved to amend its counterclaims, and the parties each moved for summary
judgment.

         The Company sought summary judgment: dismissing Mr. Kaul's claim for
severance under his employment agreement on the ground that he failed to provide
the Company with a general release of, among other things, claims for change of
control benefits; dismissing Mr. Kaul's claim for attorneys' fees on the grounds
that they are not authorized under his employment agreement; dismissing Mr.
Kaul's claims related to change in control benefits based on an administrative
decision that he is not entitled to continued participation in the plan or to
future benefits thereunder; dismissing Mr. Kaul's claim for a tandem bonus
payment on the ground that no payment is owing; dismissing Mr. Kaul's claim for
vacation payments based on Company policy regarding carry over vacation; and
seeking judgment on the Company's counterclaim for unjust enrichment based on
Mr. Kaul's failure to pay under a tax note. Mr. Kaul sought summary judgment:
dismissing the Company's defenses and counterclaims relating to a release on the
grounds that he tendered a release or that the Company is estopped from
requiring him to do so; dismissing the Company's defenses and counterclaims
relating to his alleged violations of his non-compete and confidentiality
obligations on the grounds that he did not breach the obligations as defined in
the agreement; and dismissing the Company's claims based on his alleged breach
of fiduciary duty, including those based on his monthly car allowance payments
and the leased space to his wife, on the grounds that he was entitled to the car
payments and did not involve himself in or make misrepresentations in connection
with the leased space. The Company concurrently moved to amend its Answer and
Counterclaims to state a claim that it had cause for terminating Mr. Kaul's
employment based on, among other things, after acquired evidence that Mr. Kaul
received a monthly car allowance and other benefits totaling $412,336 that had
not been authorized by the Company's Board of Directors and that his wife's
lease and related expense was not properly authorized by the Company's Board of
Directors, and to clarify or amend the scope of the Company's counterclaims for
reimbursement.

         On January 7, 2004, the Court granted summary judgment in favor of the
Company dismissing Mr. Kaul's claim for severance under his employment agreement
on the grounds that he failed to provide the Company with a general release;
granted in part the Company's motion for summary judgment on Mr. Kaul's claim
for attorneys' fees, finding as a matter of law that Mr. Kaul is not entitled to
fees incurred in prosecuting this lawsuit but finding an issue of fact as to the
amount of reasonable fees he may have incurred in seeking advice and
representation in connection with the termination of his employment; granted
summary judgment in favor of the Company dismissing Mr. Kaul's claims related to
change in control benefits on the grounds that Mr. Kaul's participation in the
plan was properly terminated when his employment was terminated, the plan was
properly terminated, and the administrator and appeals committee properly denied
Mr. Kaul's claim; granted summary judgment in favor of the Company dismissing
Mr. Kaul's claim for a tandem bonus payment on the ground that payment is not
owed to him; granted summary judgment in part and denied summary judgment in
part on Mr. Kaul's claims for vacation pay, deeming Mr. Kaul to have abandoned
claims for vacation pay in excess of five weeks but finding him entitled to four
weeks vacation pay based on the Company's policy and finding an issue of fact as
to Mr. Kaul's claim for an additional week of vacation pay in dispute for 2000;
and denied summary judgment on the Company's counterclaim for payment under a
tax note based on disputed issues of fact.

         The Court dismissed the Company's affirmative defenses as largely moot
and the Court granted summary judgment in favor of Mr. Kaul dismissing the
Company's counterclaims relating to his non-compete and confidentiality
obligations on the grounds that there is no evidence of actual damage to the
Company resulting from Mr. Kaul's alleged violations of those obligations;
granted summary judgment in favor of Mr. Kaul on the Company's breach of
contract and breach of fiduciary duty claims, including those based on his
monthly car allowance payments and the leased space to his wife, on the grounds
that he did not breach his fiduciary duties in accepting the car payments and
would not be unjustly enriched if he kept them, and on the ground that the
Company would not be able to prove fraud in connection with the leased space
based on the circumstances, including Mr. Kaul's disclosures.

         The Court denied in part and granted in part the Company's motion to
amend its Answer and Counterclaims. The Court denied the Company's motion for
leave to state a claim that it had acquired evidence of cause for terminating
Mr. Kaul's employment based on certain reimbursements on the grounds that the
payments were authorized, but granted the Company's motion with respect to its
claim for reimbursement of amounts paid to the Internal Revenue Service ("IRS")
on Mr. Kaul's behalf.

         The Opinion identifies three remaining issues in the case: (i) Mr.
Kaul's claim for attorneys' fees pursuant to Section 12 of the employment
agreement; (ii) Mr. Kaul's claim for an additional week of vacation pay in the
amount of

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<PAGE>
approximately $11,500; and (iii) the Company's counterclaim for $211,729 plus
interest paid to the IRS on Mr. Kaul's behalf.

         In an attempt to resolve the outstanding issues prior to the entry of a
final judgment, conferences were held with the Court on two separate occasions.
As a result of these conferences, the parties have tentatively reached a
settlement whereby the parties agree to dismiss the following claims: (1) Mr.
Kaul agrees to withdraw and release his claims concerning reimbursement of
certain attorneys' fees under Section 12 of the employment agreement (but
preserves and does not waive, release or limit his claim for attorneys' fees and
costs under Section 12 of the employment agreement incurred in connection with
the preparation for and litigation of this lawsuit) and reimbursement for an
additional week of vacation pay; and (2) the Company agrees to withdraw and
release its claims concerning reimbursement of certain attorneys' fees and costs
under ERISA, reimbursement of the $211,729 paid to the IRS on Mr. Kaul's behalf,
and reimbursement of the $341,803 of severance payments made to Mr. Kaul. The
parties also agree that Mr. Kaul shall not appeal that portion of the Opinion
concerning the dismissal of certain of Mr. Kaul's ERISA-based claims with
respect to the Plan and the Company shall not appeal that portion of the Opinion
concerning the dismissal of its claims relating to the leasing and build-out of
property or office space located in Edgewood, New Jersey to Mr. Kaul's wife. Mr.
Kaul has expressed his intent to now tender a general release to the Company. If
he does, in fact, do so, the Company will reject the tender on the grounds,
inter alia, that the time to do so has long passed and that the purpose for the
general release has been extinguished. After final judgment issues, each party
shall have the right to appeal any aspect of the judgment.

         The Company was named as one of 88 defendants in a patent infringement
complaint filed on November 23, 2001 by the Lemelson Medical, Education &
Research Foundation, Limited Partnership (the "Lemelson Foundation"). The
complaint, filed in the U.S. District Court in Arizona, was not served on the
Company until March 2002. In the complaint, the Lemelson Foundation accuses the
named defendants of infringing seven U.S. patents, which allegedly cover
"automatic identification" technology through the defendants' use of methods for
scanning production markings such as bar codes. The Company received a letter
dated November 27, 2001 from attorneys for the Lemelson Foundation notifying the
Company of the complaint and offering a license. The Court entered a stay of the
case on March 20, 2002, requested by the Lemelson Foundation, pending the
outcome of a related case in Nevada being fought by bar code manufacturers. The
order for the stay in the case involving the Company provides that the Company
need not answer the complaint, although it has the option to do so. The Company
was invited to join a common interest/joint-defense group consisting of
defendants named in the complaint as well as in other actions brought by the
Lemelson Foundation. The trial in the Nevada case began on November 18, 2002 and
ended on January 17, 2003. On January 23, 2004, following extensive briefing by
the parties, the Nevada Court entered judgment declaring that the claims of each
of the patents at issue in the Nevada case, including all seven patents asserted
by the Lemelson Foundation against the Company in the Arizona case, are
unenforceable under the doctrine of prosecution laches, are invalid for lack of
written description and enablement, and are not infringed by the bar code
equipment manufacturers. Subject to the results of any appeal that may be filed
by the parties to the Nevada litigation, the judgment of the Nevada court should
preclude assertion of each of the affected patents against all parties,
including the Company in the Arizona case. Counsel is now monitoring the Nevada
and Arizona cases in order to determine a suitable moment for moving for
dismissal of the Lemelson Foundation's claims. The Company has analyzed the
merits of the issues raised by the complaint, notified vendors of its receipt of
the complaint and letter, evaluated the merits of joining the joint-defense
group, and had discussions with attorneys for the Lemelson Foundation regarding
the license offer. The Company will not agree to a settlement at this time and
thus has not established a reserve.

         In early March 2003, the Company learned that one of its business units
had engaged in certain travel transactions that may have constituted violations
under the provisions of U.S. government regulations promulgated pursuant to 50
U.S.C. App. 1-44, which proscribe certain transactions related to travel to
certain countries. The Company immediately commenced an inquiry into the matter,
incurred resulting charges, made an initial voluntary disclosure to the
appropriate U.S. government agency under its program for such disclosures and
will submit to that agency a detailed report on the results of the inquiry. In
addition, the Company has taken steps to ensure that all of its business units
are acting in compliance with the travel and transaction restrictions and other
requirements of all applicable U.S. government programs. Although the Company is
uncertain of the extent of the penalties, if any, that may be imposed on it by
virtue of the transactions voluntarily disclosed, it does not currently believe
that any such penalties will have a material effect on its business or financial
condition.

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<PAGE>
         In addition, the Company is involved in various routine lawsuits of a
nature which is deemed customary and incidental to its businesses. In the
opinion of management, the ultimate disposition of these actions will not have a
material adverse effect on the Company's financial position or results of
operations.

ITEM 5. OTHER INFORMATION

         Board of Directors. Effective February 15, 2004, Martin L. Edelman
resigned from the Company's Board of Directors. Effective April 12, 2004, Paul
S. Goodman joined the Company's Board of Directors as a designee of Chelsey
Direct, LLC filling the vacancy created by the resignation of Martin L. Edelman.
On April 29, 2004, the Board of Directors elected (1) Wayne P. Garten to serve
as a member and as the Chairman of the Transactions Committee of the Board of
Directors to fill the vacancy created by the resignation of Martin L. Edelman
from such positions, (2) William B. Wachtel to serve as a member of the
Executive Committee of the Board of Directors to fill the vacancy created by the
resignation of Martin L. Edelman from such position, (3) Paul S. Goodman to
serve as a member of the Corporate Governance Committee of the Board of
Directors to fill the vacancy created by the resignation of Martin L. Edelman
from such position, and (4) Donald Hecht to serve as a member of the
Compensation Committee to fill the vacancy created by the contemporaneous
resignation of Wayne P. Garten from such position.

         President and Chief Executive Officer. Thomas C. Shull resigned as
Chairman of the Board, President and Chief Executive Officer of the Company on
May 5, 2004. William B. Wachtel was elected as Chairman of the Board and Wayne
P. Garten was elected as President and Chief Executive Officer of the Company
effective the same date. In connection with Mr. Shull's resignation, Mr. Shull
and the Company agreed in principle to enter into a severance agreement dated as
of May 5, 2004 providing for $900,000 of cash payments, $300,000 payable in May
2004 and the balance to be payable in 16 installments of $35,625 payable every
two weeks commencing May 21, 2004 with a final payment in the amount of $30,000
to be payable on or about December 31, 2004. The Company will accrue the
$900,000 of severance in the second quarter of 2004. In connection with Mr.
Garten's election, Mr. Garten and the Company have negotiated the principle
terms of an employment agreement for Mr. Garten which will be presented to the
Compensation Committee of the Board of Directors for approval shortly.

         Due to the recent changes in management, the Company intends to
postpone its 2004 Annual Meeting of Stockholders now scheduled for June 3, 2004
until later in the summer of 2004. At the rescheduled meeting, the Company
intends to submit proposals to stockholders to approve (1) an amendment to the
Company's Certificate of Incorporation that would reduce the par value of each
share of common stock from $0.66 2/3 per share to $0.01 per share and (2) an
amendment to the Company's Certificate of Incorporation that would increase the
number of shares of Additional Preferred Stock which the Company would have
authority to issue and make a corresponding change in the number of shares of
all classes of stock which the Company would have authority to issue as well as
(3) an amendment to the Company's Certificate of Incorporation that would effect
a one-for-ten reverse stock split of the Company's common stock, all as called
for by the Recapitalization Agreement dated as of November 18, 2003 between the
Company and Chelsey.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

3.1      Amendment to By-laws of the Company. Previously filed.

31.1     Certification signed by Wayne P. Garten.

31.2     Certification signed by Charles E. Blue.

32.1     Certification signed by Wayne P. Garten and Charles E. Blue.

(b)  Reports on Form 8-K:

1.1      Form 8-K, filed March 29, 2004 -- reporting pursuant to Item 5 of such
         Form the filing of a Form 12b-25 Notification of Late Filing for its
         Annual Report on Form 10-K for the fiscal year ended December 27, 2003.

1.2      Form 8-K, filed April 2, 2004 -- reporting pursuant to Item 5 of such
         Form certain letters sent to Chelsey Direct, LLC.

1.3      Form 8-K, filed April 12, 2004 -- reporting pursuant to Item 7 of such
         Form (information furnished pursuant to Item 12 of such Form) the
         issuance of a press release announcing operating results for the fiscal
         year ended December 27, 2003.

1.4      Form 8-K, filed April 12, 2004 -- reporting pursuant to Item 5 of such
         Form the appointment of Paul S. Goodman as a director.

1.5      Form 8-K, filed April 13, 2004 - reporting pursuant to Item 9 of such
         Form a statement of guidance as to where the Company sees fiscal year
         2004.

1.6      Form 8-K, filed April 16, 2004 - reporting pursuant to Item 9 of such
         Form an unofficial transcript of its conference call with management to
         review the operating results for the fiscal year ended December 27,
         2003.

1.7      Form 8-K, filed May 6, 2004 - reporting pursuant to Item 5 of such Form
         the resignation of Thomas C. Shull as Chairman of the Board, President
         and Chief Executive Officer of the Company and the election of William
         B. Wachtel as Chairman of the Board and Wayne P. Garten as President
         and Chief Executive Officer effective immediately.

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                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Amendment No.1 to report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                   HANOVER DIRECT, INC.

                                   Registrant

                                   By:     /s/ Charles E. Blue
                                   ---------------------------------------------
                                               Charles E. Blue

                                          Senior Vice President and
                                           Chief Financial Officer
                                     (On behalf of the Registrant and as
                                        principal financial officer)

Date: May 13, 2004

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