<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                   FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                         COMMISSION FILE NUMBER 1-12082

                              HANOVER DIRECT, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      13-0853260
           (STATE OF INCORPORATION)                  (IRS EMPLOYER IDENTIFICATION NO.)

 1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY                      07087
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                 (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  [ ]

     Common stock, par value $.66 2/3 per share: 212,186,331 shares outstanding
as of May 11, 2001.

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<PAGE>   2

                              HANOVER DIRECT, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Part I -- Financial Information
  Item 1. Financial Statements
     Condensed Consolidated Balance Sheets -- March 31, 2001
      and December 30, 2000.................................    2
     Condensed Consolidated Statements of Income
      (Loss) -- 13-weeks ended March 31, 2001 and March 25,
      2000..................................................    3
     Condensed Consolidated Statements of Cash
      Flows -- 13-weeks ended March 31, 2001 and March 25,
      2000..................................................    4
     Notes to Condensed Consolidated Financial Statements...    5
  Item 2. Management's Discussion and Analysis of Financial
     Condition and Results of Operations....................   11
  Item 3. Quantitative and Qualitative Disclosures about
     Market Risk............................................   15
Part II -- Other Information
  Item 1. Legal Proceedings.................................   16
  Item 5. Other Information.................................   16
  Item 6. Exhibits and Reports on Form 8-K..................   16
  Signature.................................................   18
</TABLE>

                                        1
<PAGE>   3

                        PART I -- FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                     HANOVER DIRECT, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              MARCH 31,   DECEMBER 30,
                                                                2001          2000
                                                              ---------   ------------
<S>                                                           <C>         <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   3,529    $   1,691
  Accounts receivable, net..................................     22,550       27,703
  Inventories...............................................     67,281       69,612
  Prepaid catalog costs.....................................     23,638       23,084
  Deferred tax asset, net...................................      3,300        3,300
  Other current assets......................................      3,160        3,056
                                                              ---------    ---------
          Total Current Assets..............................    123,458      128,446
                                                              ---------    ---------
PROPERTY AND EQUIPMENT, AT COST:
  Land......................................................      4,724        4,724
  Buildings and building improvements.......................     23,446       23,442
  Leasehold improvements....................................     12,284       12,624
  Furniture, fixtures and equipment.........................     59,959       59,773
  Construction in progress..................................        278          647
                                                              ---------    ---------
                                                                100,691      101,210
  Accumulated depreciation and amortization.................    (56,456)     (55,570)
                                                              ---------    ---------
  Property and equipment, net...............................     44,235       45,640
                                                              ---------    ---------
  Goodwill, net.............................................     15,685       15,816
  Deferred tax asset, net...................................     11,700       11,700
  Other assets..............................................      1,257        1,417
                                                              ---------    ---------
          Total Assets......................................  $ 196,335    $ 203,019
                                                              =========    =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Current portion of long-term debt and capital lease
     obligations............................................  $   3,660    $   3,718
  Accounts payable..........................................     62,089       67,858
  Accrued liabilities.......................................     25,311       34,443
  Customer prepayments and credits..........................      5,639        5,592
                                                              ---------    ---------
          Total Current Liabilities.........................     96,699      111,611
                                                              ---------    ---------
NON-CURRENT LIABILITIES:
  Long-term debt............................................     51,016       35,318
  Other.....................................................      8,238        8,914
                                                              ---------    ---------
          Total Non-current Liabilities.....................     59,254       44,232
                                                              ---------    ---------
          Total Liabilities.................................    155,953      155,843
                                                              ---------    ---------
SERIES A CUMULATIVE PARTICIPATING PREFERRED STOCK, mandatory
  redemption at $50 per share ($70,000), 2,345,000 shares
  authorized, 1,530,829 shares issued at March 31, 2001 and
  1,475,498 shares issued at December 30, 2000..............     74,525       71,628
SHAREHOLDERS' EQUITY (DEFICIT):
  Common Stock, $.66 2/3 par value, 300,000,000 shares
     authorized; 214,425,498 shares issued at March 31, 2001
     and December 30, 2000..................................    142,951      142,951
  Capital in excess of par value............................    305,546      307,595
  Accumulated deficit.......................................   (479,293)    (471,651)
                                                              ---------    ---------
                                                                (30,796)     (21,105)
                                                              ---------    ---------
Less:
  Treasury stock, at cost (2,239,167 shares at March 31,
     2001 and 729,167 shares at December 30, 2000)..........     (2,930)      (2,223)
  Notes receivable from sale of Common Stock................       (417)      (1,124)
                                                              ---------    ---------
          Total Shareholders' Equity (Deficit)..............    (34,143)     (24,452)
                                                              ---------    ---------
          Total Liabilities and Shareholders' Equity
          (Deficit).........................................  $ 196,335    $ 203,019
                                                              =========    =========
</TABLE>

           See notes to Condensed Consolidated Financial Statements.
                                        2
<PAGE>   4

                     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 31,    MARCH 25,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
NET REVENUES................................................  $144,294     $130,150
                                                              --------     --------
OPERATING COSTS AND EXPENSES:
  Cost of sales and operating expenses......................    92,411       88,230
  Special charges...........................................     1,056           --
  Selling expenses..........................................    39,378       31,967
  General and administrative expenses.......................    15,296       17,853
  Depreciation and amortization.............................     1,959        2,459
                                                              --------     --------
                                                               150,100      140,509
                                                              --------     --------
(LOSS) FROM OPERATIONS......................................    (5,806)     (10,359)
                                                              --------     --------
(LOSS) BEFORE INTEREST AND TAXES............................    (5,806)     (10,359)
  Interest expense, net.....................................     1,806        3,014
                                                              --------     --------
  (Loss) before income taxes................................    (7,612)     (13,373)
  Income tax provision......................................        30           75
                                                              --------     --------
NET (LOSS) AND COMPREHENSIVE (LOSS).........................    (7,642)     (13,448)
  Preferred stock dividends and accretion...................     2,880           87
                                                              --------     --------
NET (LOSS) APPLICABLE TO COMMON SHAREHOLDERS................  $(10,522)    $(13,535)
                                                              ========     ========
NET (LOSS) PER COMMON SHARE:
  Net (loss) per common share -- basic and diluted..........  $   (.05)    $   (.06)
                                                              ========     ========
  Weighted average common shares outstanding -- basic and
    diluted (thousands).....................................   212,468      211,930
                                                              ========     ========
</TABLE>

           See notes to Condensed Consolidated Financial Statements.
                                        3
<PAGE>   5

                     HANOVER DIRECT, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS OF DOLLARS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                              FOR THE 13-WEEKS ENDED
                                                              ----------------------
                                                              MARCH 31,    MARCH 25,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)..................................................  $ (7,642)    $(13,448)
Adjustments to reconcile net (loss) to net cash (used) by
  operating activities:
  Depreciation and amortization, including deferred fees....     2,115        4,143
  Provision for doubtful accounts...........................         2          784
  Special charges...........................................     1,056           --
  Compensation expense related to stock options.............       831          797
Changes in assets and liabilities:
  Accounts receivable.......................................     5,155        1,683
  Inventories...............................................     2,331       (1,076)
  Prepaid catalog costs.....................................      (554)      (4,397)
  Accounts payable..........................................    (5,769)      (3,876)
  Accrued liabilities.......................................   (10,188)       1,356
  Customer prepayments and credits..........................        47          329
  Other, net................................................       (44)          26
                                                              --------     --------
Net cash (used) by operating activities.....................   (12,660)     (13,679)
                                                              --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisitions of property and equipment....................      (483)        (623)
  Proceeds from sale of Blue Ridge Associates...............        --          838
                                                              --------     --------
Net cash provided (used) by investing activities............      (483)         215
                                                              --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings under Congress revolving loan facility.....    16,592       23,252
  Net borrowings (payments) under Congress term loan
     facility...............................................      (894)      12,325
  Borrowing under Richemont line of credit facility.........        --        5,000
  Redemption of Term financing facility.....................        --      (16,000)
  Redemption of Industrial Revenue Bonds....................        --       (8,000)
  Payment of debt issuance costs............................        --       (1,899)
  Proceeds from issuance of Common Stock....................        --          301
  Series B Convertible Additional Preferred Stock
     dividends..............................................        --         (920)
  Other, net................................................      (717)         (68)
                                                              --------     --------
Net cash provided by financing activities...................    14,981       13,991
                                                              --------     --------
Net increase in cash and cash equivalents...................     1,838          527
Cash and cash equivalents at the beginning of the year......     1,691        2,849
                                                              --------     --------
Cash and cash equivalents at the end of the period..........  $  3,529     $  3,376
                                                              ========     ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
  Interest..................................................  $  1,600     $  1,488
                                                              ========     ========
  Income taxes..............................................  $     33     $     88
                                                              ========     ========
Non-cash investing and financing activities:
  Redemption of Series B Convertible Additional Preferred
     Stock..................................................  $     --     $  6,349
                                                              ========     ========
  Stock dividend and accretion of Series A Cumulative
     Participating Preferred Stock..........................  $  2,880     $     --
                                                              ========     ========
  Capital lease obligations.................................  $     --     $     84
                                                              ========     ========
</TABLE>

           See notes to Condensed Consolidated Financial Statements.
                                        4
<PAGE>   6

                     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 30, 2000. 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. Certain prior year amounts
have been reclassified to conform to the current year presentation.

2. RETAINED EARNINGS 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 (LOSS) PER SHARE

     Net (loss) per share is computed using the weighted average number of
common shares outstanding in accordance with the provisions of SFAS No. 128,
"Earnings Per Share." The weighted average number of shares used in the
calculation for both basic and diluted net (loss) per share for the quarterly
periods ended March 31, 2001 and March 25, 2000 was 212,468,419 and 211,929,722
shares, respectively. Diluted earnings per share equals basic earnings per share
as the dilutive calculation would have an anti-dilutive impact as a result of
the net losses incurred during the quarterly periods ended March 31, 2001 and
March 25, 2000, respectively. The number of potentially dilutive securities
excluded from the calculation of diluted earnings per share were 4,006 and
7,806,734 common share equivalents for the quarterly periods ended March 31,
2001 and March 25, 2000, respectively.

4. SEGMENT REPORTING

     In prior years the Company reported two separate operating and reporting
segments: direct commerce and business to business ("B-to-B") e-commerce
transaction services. In conjunction with the Company's previously announced
strategic business realignment program, the Company has (1) terminated an inter-
company services agreement between erizon and Hanover Brands effective December
30, 2000, (2) ceased the Desius LLC business operations of erizon and (3)
announced the expected closure of erizon's leased fulfillment and telemarketing
facility in Maumelle, Arkansas. As a result of these actions, the Company's
business to business revenues in fiscal 2001 and beyond will be materially
reduced and for the foreseeable future will be limited to third party clients
serviced by Keystone Internet Services. Taken in conjunction with the Company's
announced intention to direct resources primarily towards growth in core brands,
these actions have caused the Company, pursuant to SFAS 131, to report results
for the consolidated operations of Hanover Direct, Inc. as one segment
commencing in fiscal year 2001.

5. 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."

                                        5
<PAGE>   7
                     HANOVER DIRECT, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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) attorney's fees and costs. The Company's
motion to dismiss is pending and discovery has commenced. The plaintiff has
deposed a number of individuals. On April 12, 2001, the Court held a hearing on
plaintiff's class certification motion. A ruling on plaintiff's motion is
expected during the Company's third quarter. The Company believes it has
defenses against the claims; however, it is too early to determine the outcome
or range of potential settlement which could have a material impact on the
Company's results of operations if settled in a future period.

     At the end of January 2000, the Company received a letter from the Federal
Trade Commission ("FTC") conducting an inquiry into the marketing of The
Shopper's Edge club to determine whether, in connection with such marketing, any
entities have engaged in (1) unfair or deceptive acts or practices in violation
of Section 5 of the FTC Act and/or (2) deceptive or abusive telemarketing acts
or practices in violation of the FTC's Telemarketing Sales Rule. The inquiry was
undertaken pursuant to the provisions of Sections 6, 9 and 10 of the FTC Act.
Following such an investigation, the FTC may initiate an enforcement action if
it finds "reason to believe" that the law is being violated. When there is
"reason to believe" that a law violation has occurred, the FTC may issue a
complaint setting forth its charges. If the respondent elects to settle charges,
it may sign a consent agreement (without admitting liability) by which it
consents to entry of a final order and waives all right to judicial review. If
the FTC accepts such a proposed consent, it places the order on the record for
sixty days of public comment before determining whether to make the order final.
The Company believes that it complied with all enumerated aspects of the
investigation. It has not received notice of an enforcement action or a
complaint against it.

     Pursuant to a contract with Triad Marketing Group, Inc. ("Triad"), the
Company maintains the books and records for The Shopper's Edge up-sell program
which includes responsibility for collecting revenues and paying both Triad and
the Company their appropriate fees and profits. In the first quarter of 2001,
all up-sell activities related to The Shopper's Edge program ceased, and the
services provided have been limited to the renewal of exiting members. As a
result of a Florida Temporary Restraining Order ("TRO"), directed at an
individual associated with Triad and not the Company, all fees and profits were
frozen with the result that there was a receivable from Triad during the
quarterly period ended March 31, 2001, representing amounts due the Company for
solicitation fees earned. The Company's outside counsel entered into discussions
with the Florida Attorney General's office. Following such discussions, on or
about March 30, 2001, these funds were released with the result that the Company
recovered the amount due it for fees earned.

     The Company is involved in negotiations with Rakesh K. Kaul, the Company's
former President and Chief Executive Officer, regarding the amount of cash and
benefits to which Mr. Kaul is entitled as a result of his resignation on
December 5, 2000. The Company agrees with certain claims made on behalf of Mr.
Kaul, including Mr. Kaul's entitlement to receive in excess of $3,000,000 as
payment of short-term bonus, severance payable to Mr. Kaul under his Employment
Agreement, and benefits continuation. The Company disagrees with other claims
made on behalf of Mr. Kaul including that Mr. Kaul is entitled to benefits under
the Key Executive Thirty Six Month Salary Continuation Plan, the valuation of
Mr. Kaul's options in erizon, Inc., and whether Mr. Kaul is entitled to a bonus
in connection with the Tandem Plan. The Company does not intend to make any
payments to Mr. Kaul, other than salary and benefits continuation, until all
outstanding issues are resolved and Mr. Kaul executes a general release in favor
of the Company. No legal proceedings have been commenced to date with respect to
this matter.

                                        6
<PAGE>   8
                     HANOVER DIRECT, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition, the Company is involved in various routine lawsuits of a
nature, which are 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.

6. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS

     On April 25, 2001, Brian C. Harriss, the Senior Vice President and Chief
Financial Officer of the Company, was elevated to the positions of Executive
Vice President and Chief Financial Officer of the Company; Michael D. Contino,
the Senior Vice President and Chief Information Officer of the Company, was
elevated to the positions of Executive Vice President and Chief Operating
Officer of the Company; Charles F. Messina, the Senior Vice President, Human
Resources of the Company, was elevated to the positions of Executive Vice
President and Chief Administrative Officer and Secretary of the Company; Jeffrey
Potts, the Senior Vice President, D-Commerce and New Ventures of the Company,
was elevated to the position of President of Home Brands of the Company; and
Charles Blue was elected to the position of Senior Vice President of Finance of
the Company.

     During the quarter ended March 31, 2001, Richard B. Hoffman resigned as
President and Chief Operating Officer of Hanover Brands, Inc., Ralph J. Bulle
resigned as Senior Vice President, Human Resources of the Company, Curt B.
Johnson resigned as Senior Vice President and General Counsel and Secretary of
the Company and Michael G. Lutz resigned as Executive Vice President and Chief
Operating Officer of the Company.

     Effective April 27, 2001, the Company terminated the Hanover Direct, Inc.
Key Executive Thirty-Six Month Compensation Continuation Plan and the Hanover
Direct, Inc. Key Executive Twenty-Four Month Compensation Plan. Effective April
27, 2001, the Company established the Hanover Direct, Inc. Key Executive
Eighteen Month Compensation Continuation Plan (the "Executive Plan") for its
Chief Executive Officer, corporate executive vice presidents, corporate senior
vice presidents, strategic unit presidents, and other employees selected by its
Chief Executive Officer. The purpose of the Executive Plan is to attract and
retain key management personnel by reducing uncertainty and providing greater
personal security in the event of a Change of Control. For purposes of the
Executive Plan, a "Change of Control" will occur: (i) when any person becomes,
through an acquisition, the beneficial owner of shares of the Company having at
least 50% of the total number of votes that may be cast for the election of
directors of the Company (the "Voting Shares"); provided, however, that the
following acquisitions shall not constitute a Change of Control: (a) if a person
owns less than 50% of the voting power of the Company and that person's
ownership increases above 50% solely by virtue of an acquisition of stock by the
Company, then no Change of Control will have occurred, unless and until that
person subsequently acquires one or more additional shares representing voting
power of the Company; or (b) any acquisition by a person who as of the date of
the establishment of the Executive Plan owned at least 33% of the Voting Shares;
(ii)(a) notwithstanding the foregoing, a Change of Control will occur when the
shareholders of the Company approve any of the following (each, a
"Transaction"): (I) any reorganization, merger, consolidation or other business
combination of the Company; (II) any sale of 50% or more of the Company's
assets; or (III) a complete liquidation or dissolution of the Company; (b)
notwithstanding (ii)(a), shareholder approval of either of the following types
of Transactions will not give rise to a Change of Control: (I) a Transaction
involving only the Company and one or more of its subsidiaries; or (II) a
Transaction immediately following which the shareholders of the Company
immediately prior to the Transaction continue to have a majority of the voting
power in the resulting entity; (iii) when, within any 24 month period, persons
who were directors of the Company (each, a "Director") immediately before the
beginning of such period (the "Incumbent Directors") cease (for any reason other
than death or disability) to constitute at least a majority of the Board of
Directors or the board of directors of any successor to the Company (For
purposes of (iii), any Director who was not a Director as of the effective date
of the Executive Plan will be deemed to be an Incumbent Director if such
Director was elected to the Board of Directors by, or on the recommendation of,
or with the approval of, at least a majority of the members of the Board of

                                        7
<PAGE>   9
                     HANOVER DIRECT, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Directors or the nominating committee who, at the time of the vote, qualified as
Incumbent Directors either actually or by prior operation of (iii), and any
persons (and their successors from time to time) who are designated by a holder
of 33% or more of the Voting Shares to stand for election and serve as Directors
in lieu of other such designees serving as Directors on the effective date of
the Executive Plan shall be considered Incumbent Directors. Notwithstanding the
foregoing, any director elected to the Board of Directors to avoid or settle a
threatened or actual proxy contest shall not, under any circumstances, be deemed
to be an Incumbent Director); or (iv) when the Company sells, assigns or
transfers more than 50% of its interest in, or the assets of, one or more of its
subsidiaries (each, a "Sold Subsidiary" and, collectively, the "Sold
Subsidiaries"); provided, however, that such a sale, assignment or transfer will
constitute a Change of Control only for: (a) the Executive Plan participants who
are employees of that Sold Subsidiary; and (b) the Executive Plan participants
who are employees of a direct or indirect parent company of one or more Sold
Subsidiaries, and then only if: (I) the gross assets of such parent company's
Sold Subsidiaries constitute more than 50% of the gross assets of such parent
company (calculated on a consolidated basis with the direct and indirect
subsidiaries of such parent company and with reference to the most recent
balance sheets of the Sold Subsidiaries and the parent company); (II) the
property, plant and equipment of such parent company's Sold Subsidiaries
constitute more than 50% of the property, plant and equipment of such parent
company (calculated on a consolidated basis with the direct and indirect
subsidiaries of such parent company and with reference to the most recent
balance sheets of the Sold Subsidiaries and the parent company); or (III) in the
case of a publicly-traded parent company, the ratio (as of the date a binding
agreement for the sale is entered) of (x) the capitalization (based on the sale
price) of such parent company's Sold Subsidiaries, to (y) the market
capitalization of such parent company, is greater than 0.50. (For purposes of
(iv), a Transaction shall be deemed to involve the sale of more than 50% of a
company's assets if: (a) the gross assets being sold constitute more than 50% of
the gross assets of the company as stated on the most recent balance sheet of
the company; (b) the property, plant and equipment being sold constitute more
than 50% of the property, plant and equipment of the company as stated on the
most recent balance sheet of the company; or (c) in the case of a
publicly-traded company, the ratio (as of the date a binding agreement for the
sale is entered) of (x) the capitalization (based on the sale price) of the
division, subsidiary or business unit being sold, to (y) the market
capitalization of the company, is greater than 0.50. For purposes of this (iv),
no Change of Control will be deemed to have occurred if, immediately following a
sale, assignment or transfer by the Company of more than 50% of its interest in,
or the assets of, a Sold Subsidiary, any shareholder of the Company owning 33%
or more of the voting power of the Company immediately prior to such
transactions, owns no less than the equivalent percentage of the voting power of
the Sold Subsidiary.)

     An Executive Plan participant shall be entitled to Change of Control
Benefits under the Executive Plan solely if there occurs a Change of Control and
thereafter the Company terminates his/her employment other than For Cause (as
defined in the Executive Plan) or the participant voluntarily terminates his/her
employment with the Company For Good Reason (as defined in the Executive Plan),
in either case, solely during the 2 year period immediately following the Change
of Control. A participant will not be entitled to Change of Control Benefits
under the Executive Plan if: (i) he/she voluntarily terminates his/her
employment with the Company or has his/her employment with the Company
terminated by the Company, in either case, prior to a Change of Control, (ii)
he/she voluntarily terminates employment with the Company following a Change of
Control but other than For Good Reason, (iii) he/she is terminated by the
Company following a Change of Control For Cause, (iv) has his/her employment
with the Company terminated solely on account of his/her death, (v) he/she
voluntarily or involuntarily terminates his/her employment with the Company
following a Change of Control as a result of his/her Disability (as defined in
the Executive Plan), or (vi) his/her employment with the Company is terminated
by the Company upon or following a Change of Control but where he/she receives
an offer of comparable employment, regardless of whether the participant accepts
the offer of comparable employment.

                                        8
<PAGE>   10
                     HANOVER DIRECT, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Change of Control Benefits under the Executive Plan are as follows: (i)
an amount equal to 18 months of the participant's annualized base salary; (ii)
an amount equal to the product of 18 multiplied by the applicable monthly
premium that would be charged by the Company for COBRA continuation coverage for
the participant, the participant's spouse and the dependents of the participant
under the Company's group health plan in which the participant was participating
and with the coverage elected by the participant, in each case immediately prior
to the time of the participant's termination of employment with the Company;
(iii) an amount equal to 18 months of the participant's car allowance then in
effect as of the date of the termination of the participant's employment with
the Company; and (iv) an amount equal to the cost of 12 months of
executive-level outplacement services at a major outplacement services firm.

     On April 30, 2001, Thomas C. Shull, the Company's Chief Executive Officer,
Meridian Ventures, LLC and the Company entered into a letter agreement (the
"Letter Agreement") specifying Mr. Shull's rights under the Company's Key
Executive Eighteen Month Compensation Continuation Plan (the "Executive Plan"),
which is discussed above. Under the Letter Agreement, Mr. Shull and Meridian
agreed that, so long as the Executive Plan is in effect and Mr. Shull is a
Participant thereunder, Meridian and Mr. Shull will accept the Change in Control
Benefits provided for in the Executive Plan in lieu of the compensation
contemplated by the Services Agreement between them (which benefits amounts will
not be offset against the Flat Fee provided for in the Services Agreement and
shall be payable at such times and in such amounts as provided in the Executive
Plan rather than in a lump sum payable within five business days after the
termination date of the Services Agreement as contemplated by the Services
Agreement). For purposes of the Change in Control Benefits under the Executive
Plan and the Letter Agreement, Mr. Shull's annualized base salary is $600,000.
In addition to the benefits provided by the Services Agreement, Mr. Shull and
those persons named in the Services Agreement shall also be entitled to the
optional cash out of stock options as provided in the Executive Plan. Under the
Letter Agreement, Mr. Shull is also entitled to payment of one year annual base
salary in the event he is terminated without cause during any period of his
continued employment as the Chief Executive Officer of the Company following the
termination of the Services Agreement. The participation and benefits to which
Mr. Shull is entitled under the Executive Plan shall also survive the
termination of the Services Agreement pursuant to the terms thereof in the event
that Mr. Shull is still employed as the Chief Executive Officer of the Company
and is a Participant under the Executive Plan. Should the Executive Plan no
longer be in effect or Mr. Shull no longer be a Participant thereunder, Meridian
and Mr. Shull shall continue to be entitled to the compensation contemplated by
the Services Agreement.

     Effective May 3, 2001, the Company's Board of Directors established the
Hanover Direct, Inc. Directors Change of Control Plan (the "Directors Plan") for
all directors of the Company (each, a "Director") except for (i) any Director
who is also an employee of the Company for purposes of the Federal Insurance
Contributions Act; or (ii) any persons (and their successors from time to time)
who are designated by a holder of thirty-three percent (33%) or more of the
Voting Shares to stand for election and serve as a Director. For purposes of the
Directors Plan, a "Change of Control" will occur upon the occurrence of any of
the events specified in item (i), (ii) or (iii) of the definition of "Change in
Control" under the Executive Plan, as discussed above.

     A participant in the Directors Plan shall be entitled to receive a Change
of Control Payment under the Directors Plan if there occurs a Change of Control
and he/she is a Director on the effective date of such Change of Control. A
Change of Control Payment under the Directors Plan shall be an amount equal to
the greater of (i) $40,000 or (ii) 150% of the sum of the annual retainer fee,
meeting fees and per diem fees paid to a Director for his/her service on the
Board of Directors of the Company during the 12-month period immediately
preceding the effective date of the Change of Control.

7. SPECIAL CHARGES

     In December 2000, the Company recorded special charges aggregating
approximately $19.1 million. These charges consist of severance ($5.0 million),
facility exit costs ($5.9 million) and fixed asset write-offs

                                        9
<PAGE>   11
                     HANOVER DIRECT, INC. AND SUBSIDIARIES

      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

($8.2 million, of which $7.2 million is non-cash) related to the Company's
previously announced strategic business realignment program which included (1)
the elimination of approximately 285 full time employee ("FTE") positions across
all its business units; (2) the closure of the Company's Always in Style
business; (3) the discontinuance by Hanover Brands of the under-performing
Turiya, Kitchen & Home and Domestications Kitchen & Garden catalogs while
incorporating some of the product offerings within continuing catalogs; (4) the
termination by Hanover Brands of its marketing agreement with Compagnie de la
Chine; (5) the closure by Hanover Brands of certain retail outlets and a
satellite facility in New Jersey; (6) the expected closure by erizon of its
leased fulfillment and telemarketing facility in Maumelle, Arkansas; and (7) the
immediate cessation by erizon of the operations of Desius LLC.

     Such actions were taken in an effort to direct the Company's resources
primarily towards continued profitable growth in Hanover Brands, such as The
Company Store, Domestications, Improvements and Silhouettes brands, while
reducing costs in all areas of the business and eliminating investments
activities that had not yet generated sufficient revenue to produce profitable
returns. erizon intends to consolidate the Maumelle operations within its
remaining facilities and intends to provide the bulk of its fulfillment services
for third party clients of its Keystone Internet Services, Inc. ("Keystone")
subsidiary within its existing operations. The consolidation of Keystone's
activities in other facilities is intended to provide a better opportunity to
focus resources, particularly customer service support, on clients to service
their needs.

     In the first quarter of 2001 an additional amount for special charges was
recorded in the amount of $1.1 million which consisted primarily of severance
costs related to the elimination of an additional 46 FTE positions across all
divisions of the Company's business as part of the strategic realignment
program. Payments applied against the reserve during this period included $1.9
million of severance and $1.1 million of facility exit costs which was in line
with management's expectations.

     As of the end of the quarter, a liability is included on the Company's
balance sheet related to future costs in connection with the Company's strategic
business realignment program:

     Severance -- The cost of employee severance includes termination benefits
for line and supervisory personnel in fulfillment, telemarketing, MIS,
merchandising, and various levels of corporate and catalog management.
Approximately $4.0 million of these costs are recorded in accrued liabilities in
the accompanying Consolidated Balance Sheet at March 31, 2001.

     Facility Exit Costs and Fixed Asset Write-offs -- These costs are primarily
related to the Company's decision to close its fulfillment center in Maumelle,
Arkansas, exit office space located in Edgewater, New Jersey and close several
of its retail outlets. Furthermore, costs associated with closing the Always in
Style business and terminating its marketing agreement with Compagnie de la
Chine are included in the amount written off. Approximately $3.3 million of
these costs is included in accrued liabilities at March 31, 2001, and an
additional $2.3 million is included in non-current other liabilities, as they
will not be paid until 2002 or later.

8. SUBSEQUENT EVENTS

     On May 3, 2001, as part of the Company's strategic business realignment
program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania
(the "Kindig Lane Property") and certain equipment located therein for $4.7
million to an unrelated third party. Substantially all of the net proceeds of
the sale were paid to Congress Financial Corporation and applied to a repayment
in full of the Tranche A Term Loan made to Hanover Direct Pennsylvania, Inc., an
affiliate of the Company, and to a partial repayment of the indebtedness under
the Congress Credit Facility. The Company will continue to use the Kindig Lane
Property under a lease agreement with the third party until summer 2001, and
will lease a portion of the Kindig Lane Property until August 2002. The Company
intends to transition the activities of the Kindig Lane Property into the
Company's fulfillment center in Roanoke, Virginia.

                                        10
<PAGE>   12

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 31,    MARCH 25,
                                                           2001         2000
                                                         ---------    ---------
<S>                                                      <C>          <C>
Net revenues...........................................    100.0%       100.0%
Cost of sales and operating expenses...................     64.0         67.8
Special charges........................................      0.7          0.0
Selling expenses.......................................     27.3         24.6
General and administrative expenses....................     10.6         13.7
Depreciation and amortization..........................      1.4          1.9
(Loss) from operations.................................     (4.0)        (8.0)
Interest expense, net..................................      1.3          2.3
Net (loss) and comprehensive (loss)....................     (5.3)%      (10.3)%
</TABLE>

RESULTS OF OPERATIONS -- 13-WEEKS ENDED MARCH 31, 2001 COMPARED WITH THE
13-WEEKS ENDED MARCH 25, 2000

     Net (Loss) and Comprehensive (Loss).  The Company reported a net loss of
$7.6 million or $(.05) per share for the 13-weeks ended March 31, 2001 compared
with a net loss of $13.4 million or $(.06) per share for the comparable period
last year. The per share amounts were calculated based on weighted average
shares outstanding of 212,468,419 and 211,929,722 for the current and prior year
periods, respectively. This increase in weighted average shares was due to the
conversion of 1,510,000 common shares into treasury shares.

     Compared to the comparable period last year, the $5.8 million decrease in
net loss was primarily due to:

(i)  increased net revenues;

(ii)  improvement in cost of sales and operating expenses as a percentage of net
      revenues;

(iii) reduction in general and administrative expenses; and

(iv)  reduction in interest expense, net;

partially offset by:

(i)  increased special charges associated with the Company's strategic
     realignment program; and

(ii) increased selling expenses.

     Net Revenues.  Net revenues increased $14.1 million (10.9%) for the 13-week
period ended March 31, 2001 to $144.3 million from $130.1 million for the
comparable period in 2000. This increase was primarily due to improved demand
across four core brands, Domestications, Improvements, Silhouettes and The
Company Store. The number of customers who made a purchase from the Company's
catalogs during the 12 months preceding March 31, 2001 was 5.3 million as
compared with 4.9 million during the 12 months preceding March 25, 2000. The
Company circulated approximately 72.4 million catalogs during the 2001 period
versus approximately 69.3 million catalogs during the 2000 period.

     Cost of Sales and Operating Expenses.  Cost of sales and operating expenses
decreased to 64.0% of net revenues for the 13-week period ended March 31, 2001
as compared to 67.8% of net revenues for the comparable period in 2000. This
change is primarily due to an increase in the amount of direct import
merchandise, which has a favorable impact on merchandise cost as compared to net
revenue. Also contributing to the decrease are the reduced overhead costs in
information technology and the distribution centers related to the Company's
strategic business realignment program.

     Selling Expenses.  Selling expenses increased to 27.3% of revenues for the
13-weeks ended March 31, 2001 from 24.6% for the comparable period in 2000,
primarily due to the roll out of a new catalog mailing, which was tested during
the fourth quarter of 2000.

                                        11
<PAGE>   13

     General and Administrative Expenses.  General and administrative expenses
were 10.6% of net revenues for the 13-weeks ended March 31, 2001 versus 13.7% of
net revenues for the comparable period in 2000. The 14.3% decrease reflects the
Company's strategic realignment activities.

     Depreciation and Amortization.  Depreciation and amortization decreased to
1.4% of net revenues for the 13-weeks ended March 31, 2001 from 1.9% for the
comparable period in 2000. The decrease is a result of the complete amortization
of a major computer system in the year 2000.

     Loss from Operations.  The Company's loss from operations decreased by $4.6
million to $5.8 million for the 13-weeks ended March 31, 2001 from a loss of
$10.4 million for the comparable period in 2000.

     Interest Expense, Net.  Interest expense, net decreased $1.2 million to
$1.8 million for the 13-weeks ended March 31, 2001 as compared to the same
period last year. The first quarter of 2000 contained a one-time commitment fee
and the accelerated amortization of deferred financing costs due to refinancing
the credit facility with Congress Financial Corporation. The absence of these
costs for the 13-weeks ended March 31, 2001 was partially offset by higher
interest costs in the first quarter of 2001 resulting from an increase in
average borrowings.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash used by operating activities.  During the quarterly period ended
March 31, 2001, net cash used by operating activities was $12.7 million. This
was primarily due to net losses which, when adjusted for depreciation,
amortization and other non-cash items, comprised $5.0 million of operating cash
used in the period. Additionally, cash outflows resulted from the reduction in
accrued liabilities and accounts payable partially offset by decreases in net
accounts receivable and inventories.

     Net cash used by investing activities.  During the quarterly period ended
March 31, 2001, net cash used by investing activities was $0.5 million, which
was due to capital expenditures primarily for computer software.

     Net cash provided by financing activities.  During the quarterly period
ended March 31, 2001, net cash provided by financing activities was $15.0
million, which was primarily due to net borrowings under the Congress revolving
loan facility.

     Congress Credit Facility.  On March 24, 2000, the Company amended its
credit facility with Congress Financial Corporation ("Congress") to provide the
Company with a maximum credit line, subject to certain limitations, of up to
$82.5 million (the "Congress Credit Facility"). The Congress Credit Facility, as
amended, expires on January 31, 2004 and is comprised of a revolving loan
facility, a $17.5 million Tranche A Term Loan and a $7.5 million Tranche B Term
Loan. Total cumulative borrowings, however, are subject to limitations based
upon specified percentages of eligible receivables and eligible inventory, and
the Company is required to maintain $3.0 million of excess credit availability
at all times. The Congress Credit Facility, as amended, is secured by all the
assets of the Company and places restrictions on the incurrence of additional
indebtedness and on the payment of Common Stock dividends. As of March 31, 2001,
the Company had $53.8 million of borrowings outstanding under the amended
Congress Credit Facility comprised of $32.3 million under the revolving loan
facility, and $14.0 million and $7.5 million of Tranche A Term Loans and Tranche
B Term Loans, respectively. The Company may draw upon the amended Congress
Credit Facility to fund working capital requirements as needed.

     The amended Congress Credit Facility replaced the original $65.0 million
revolving line of credit facility with Congress, as well as the Company's $16.0
million Term Financing Facility and $8.0 million of Industrial Revenue Bonds.
Both the Term Financing Facility and the Industrial Revenue Bonds were supported
by letters of credit issued by UBS, AG and guaranteed by Richemont Finance S.A.,
which letters of credit were scheduled to expire on March 31, 2000. The Company
utilized $24.0 million of proceeds under the amended Congress Credit Facility to
reimburse UBS, AG for drawings on the letters of credit made by the trustees of
the Term Financing Facility and the Industrial Revenue Bonds, both of which were
required to be redeemed upon the expiration of the letters of credit.

     On May 3, 2001, as part of the Company's strategic business realignment
program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania
(the "Kindig Lane Property") and certain equipment located therein for $4.7
million to an unrelated third party. Substantially all of the net proceeds of
the sale were paid to

                                        12
<PAGE>   14

Congress Financial Corporation and applied to a repayment in full of the Tranche
A Term Loan made to Hanover Direct Pennsylvania, Inc., an affiliate of the
Company, and to a partial repayment of the indebtedness under the Congress
Credit Facility.

     The Company has received a letter from the American Stock Exchange (the
"AMEX") notifying the Company that the Company is below certain of the AMEX's
continued listing guidelines set forth in the AMEX Company Guide. The AMEX has
instituted a review of the Company's eligibility for continuing listing of the
Company's common stock on the AMEX. The Company is in discussions with the AMEX.

     General.  At March 31, 2001, the Company had $3.5 million in cash and cash
equivalents compared with $3.4 million at March 25, 2000. Working capital and
current ratios at March 31, 2001 were $26.8 million and 1.28 to 1 versus $19.6
million and 1.20 to 1 at March 25, 2000. Total cumulative borrowings, including
financing under capital lease obligations, as of March 31, 2001, aggregated
$54.7 million, $51.0 million of which is classified as long-term. Remaining
availability under the Congress Revolving Credit Facility, as of March 31, 2001,
was $28.7 million ($32.2 million including cash on hand). Capital commitments at
March 31, 2001 totaled approximately $0.5 million, principally for computer
software. Management believes that the Company has sufficient liquidity and
availability under its credit agreements to fund its planned operations through
at least December 29, 2001. Achievement of the cost saving and other objectives
of the Company's strategic business realignment plan is critical to the
maintenance of adequate liquidity.

SEASONALITY

     The revenues and business for the Company are seasonal. The Company
processes and ships more catalog orders during the fourth quarter holiday season
than in any other quarter of the year. Accordingly, the Company recognizes a
disproportionate share of annual revenue during the last three months of the
year.

RECENTLY ISSUED ACCOUNTING STANDARDS

     The Company was required to adopt the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its related
amendment in SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," as of December 31, 2000. These pronouncements
require companies to reflect the fair value of all derivative instruments,
including those embedded in other contracts, as assets or liabilities in a
company's financial statements. Changes in fair value of derivative instruments
is generally reflected in earnings, with the exception of certain hedging
transactions, for which the change in fair value may be accounted for as a
component of other comprehensive income, provided certain criteria are met as
specified in these pronouncements. The Company currently does not utilize
derivative instruments or engage in hedging transactions, nor are there any
embedded derivative instruments as of March 31, 2001 that must be recognized
pursuant to these statements.

FORWARD-LOOKING STATEMENTS

     The following statement from above constitutes a forward-looking statement
within the meaning of the Private Securities Litigation Reform Act of 1995:

     "Management believes that the Company has sufficient liquidity and
availability under its credit agreements to fund its planned operations through
at least December 29, 2001."

CAUTIONARY STATEMENTS

     The following material identifies important factors that could cause actual
results to differ materially from those expressed in such forward-looking
statement:

     The current 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.

                                        13
<PAGE>   15

     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;
dependence on customers' seasonal buying patterns; and fluctuations in foreign
currency exchange rates.

     The ability of the Company to achieve projected levels of sales and
reducing costs commensurately. Increase in postage, printing and paper prices
and/or the inability of the Company to reduce expenses generally as required
and/or increase prices of the Company's merchandise.

     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 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 recently announced restructuring
plan to perform the responsibilities of their new positions.

     The current 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 and 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.
Vendors beginning to withhold shipments of merchandise to the Company. 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 ability of the Company to continue to make borrowings under the
Congress Credit Facility is subject to the Company's continued compliance with
certain financial and other covenants contained therein, including net worth,
net working capital, capital expenditure and EBITDA covenants. Borrowings under
the Congress Credit Facility are also subject to 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. The enforcement by Congress of such covenants and limitations.

     The Company has a history of operating losses. Continuation of the
operating losses, and the incidence of costs associated with the Company's
recently announced strategic business realignment program, may result 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.

     The ability of the Company to complete the Company's recently announced
strategic business realignment program, within the time periods anticipated by
the Company. 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 transfer third party fulfillment operations
conducted at the fulfillment centers located in Maumelle, Arkansas and Kindig
Lane, Hanover, Pennsylvania to other facilities in a timely manner while
satisfying its contractual obligations to provide fulfillment services for third
party clients and itself.

                                        14
<PAGE>   16

     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 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 Company's dependence up to August 24, 2000 on Richemont and its
affiliates for financial support and the fact that they are not under any
obligation ever to provide any additional support in the future.

     The ability of the Company to maintain the listing of its Common Stock on
the American Stock Exchange.

     The Company undertakes no obligation to publicly update any forward-looking
statement whether as a result of new information, future events or otherwise.
Readers are advised, however, to consult any further disclosures the Company may
make on related subjects in its Forms 10-Q, 8-K, 10-K or any other reports filed
with the Securities and Exchange Commission.

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 Credit Facility, which bear
interest at variable rates. At March 31, 2001, outstanding principal balances
under the Congress Credit Facility subject to variable rates of interest were
approximately $32.3 million. If interest rates were to increase by one quarter
of one percent from current levels, the resulting increase in interest expense
of approximately $0.1 million would not have a material impact on the Company's
results of operations taken as a whole.

                                        15
<PAGE>   17

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     See Note 5. Commitments and Contingencies, of the Notes to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this report for
a discussion of legal proceedings pending against the Company and its
subsidiaries.

ITEM 5.  OTHER INFORMATION

     The Board of Directors has amended the Company's Bylaws, effective on the
date of the 2001 Annual Meeting of Shareholders of the Company (currently
scheduled to be held on May 31, 2001), to reduce the size of the Board of
Directors to six (6) Directors.

     On May 3, 2001, as part of the Company's strategic business realignment
program, the Company sold its fulfillment warehouse in Hanover, Pennsylvania
(the "Kindig Lane Property") and certain equipment located therein for $4.7
million to an unrelated third party. Substantially all of the net proceeds of
the sale were paid to Congress Financial Corporation and applied to a repayment
in full of the Tranche A Term Loan made to Hanover Direct Pennsylvania, Inc., an
affiliate of the Company, and to a partial repayment of the indebtedness under
the Congress Credit Facility. The Company will continue to use the Kindig Lane
Property under a lease agreement with the third party until summer 2001, and
will lease a portion of the Kindig Lane Property until August 2002. The Company
intends to transition the activities of the Kindig Lane Property into the
Company's fulfillment center in Roanoke, Virginia.

     The Company has received a letter from the American Stock Exchange (the
"AMEX") notifying the Company that the Company is below certain of the AMEX's
continued listing guidelines set forth in the AMEX Company Guide. The AMEX has
instituted a review of the Company's eligibility for continuing listing of the
Company's Common Stock on the AMEX. The Company is in discussions with the AMEX.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

<TABLE>
<S>   <C>
10.1  First Amendment of Services Agreement made as of the 23rd
      day of April 2001, by and among the Company, Thomas C. Shull
      and Meridian Ventures, LLC
10.2  Letter Agreement dated as of April 30, 2001 between the
      Company, Thomas C. Shull and Meridian Ventures, LLC
10.3  Hanover Direct, Inc. Key Executive Eighteen Month
      Compensation Continuation Plan
10.4  Hanover Direct, Inc. Key Executive Twelve Month Compensation
      Continuation Plan
10.5  Hanover Direct, Inc. Key Executive Six Month Compensation
      Continuation Plan
10.6  Hanover Direct, Inc. Directors Change of Control Plan
</TABLE>

     (b) Reports on Form 8-K

     Form 8-K, filed April 3, 2001 -- reporting pursuant to Item 9 of such Form
and Regulation FD (i) the issuance by the Company of a press release discussing
the fiscal 2000 operating results, expansion of its strategic realignment
program and retention of Newmark Retail Financial Advisors LLC to explore
certain asset sales and (ii) the issuance by the Company of an internal
memorandum to all HDI Associates from the President and Chief Executive Officer
discussing the ongoing strategic restructuring initiatives, including the
retention of Newmark Retail Financial Advisors LLC to explore certain asset
sales.

     Form 8-K, filed April 3, 2001 -- reporting pursuant to Item 9 of such Form
and Regulation FD a statement of guidance as to where the Company ended 2000 and
where it sees the 2001 fiscal year, which was provided by the Company during a
conference call on Tuesday, April 3, 2001 to review the fiscal 2000 results and
related matters with participants.

     Form 8-K/A1, filed April 4, 2001 -- amending the Company's Current Report
on Form 8-K filed on April 3, 2001 by replacing the press release attached as
Exhibit 20.1 thereto to correct certain minor typographical errors principally
in the Consolidated Balance Sheets and the Consolidated Statements of Cash Flow.

                                        16
<PAGE>   18

     Form 8-K, filed April 4, 2001 -- reporting pursuant to Item 9 of such Form
and Regulation FD an unofficial transcript of a conference call held by the
Company on Tuesday, April 3, 2001 to review the fiscal 2000 results and related
matters with participants.

     Form 8-K, filed April 26, 2001 -- reporting pursuant to Item 5 of such Form
(i) the approval on April 25, 2001 of the following changes in the executive
officers of the Company (a) Brian C. Harriss, the Senior Vice President and
Chief Financial Officer of the Company, was elevated to the position of
Executive Vice President and Chief Financial Officer of the Company, (b) Michael
D. Contino, the Senior Vice President and Chief Information Officer of the
Company and the President of Keystone Internet Services, Inc., was elevated to
the position of Executive Vice President and Chief Operating Officer of the
Company, (c) Charles F. Messina, the Senior Vice President, Human Resources of
the Company, was elevated to the position of Executive Vice President and Chief
Administrative Officer of the Company, and (d) Jeffrey Potts, the Senior Vice
President, D-Commerce and New Ventures of the Company, and the former President
of The Company Store, was elevated to the position of President of Home Brands
of the Company, and (ii) that since January 1, 2001, Richard B. Hoffmann has
resigned as President and Chief Operating Officer of Hanover Brands, Inc., Ralph
J. Bulle has resigned as Senior Vice President, Human Resources of the Company,
Curt B. Johnson has resigned as Senior Vice President and General Counsel of the
Company and Michael G. Lutz has resigned as Executive Vice President and Chief
Operating Officer of the Company.

     Form 8-K, filed May 4, 2001 -- reporting pursuant to Item 5 of such Form
(i) the sale of the Company's fulfillment warehouse on Kindig Lane in Hanover
Pennsylvania, (ii) the date and place of the Company's Annual Shareholders'
Meeting, and (iii) information regarding its conference call with management to
review the first quarter 2001 operating results and ongoing strategic
initiatives.

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<PAGE>   19

                                   SIGNATURES

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

                                        HANOVER DIRECT, INC.
                                        Registrant

                                        By: /s/     BRIAN C. HARRISS
                                           -------------------------------------
                                                     Brian C. Harriss
                                               Executive Vice President and
                                                  Chief Financial Officer
                                            (On behalf of the Registrant and as
                                               principal financial officer)

Date: May 15, 2001

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