<PAGE>
                       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 30, 2002
                         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.)


115 River Road, Building 10, Edgewater, New Jersey                07020
    (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: 138,215,800 shares outstanding
as of May 10, 2002.
<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 30, 2002 and December 29, 2001 .............................................      2

     Condensed Consolidated Statements of Income (Loss) - 13-weeks ended March
      30, 2002 and March 31, 2001 ......................................................      4

     Condensed Consolidated Statements of Cash Flows - 13-weeks ended March 30,
      2002 and March 31, 2001 ..........................................................      5

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

   Item 2.  Management's Discussion and Analysis of Consolidated Financial Condition and
      Results of Operations ............................................................     14

   Item 3.  Quantitative and Qualitative Disclosures about Market Risk .................     19

Part II - Other Information

   Item 1.  Legal Proceedings ..........................................................     20

   Item 5.  Other Information ..........................................................     23

   Item 6.  Exhibits and Reports on Form 8-K ...........................................     24


Signature ..............................................................................     25
</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)
                                 (Unaudited)

<TABLE>
<CAPTION>
                                                  March 30,     December 29,
                                                    2002           2001
                                                  ---------     ------------
<S>                                               <C>            <C>
                 ASSETS

CURRENT ASSETS:
    Cash and cash equivalents                     $   1,024      $   1,121
    Accounts receivable, net                         14,302         19,456
    Inventories                                      55,764         59,223
    Prepaid catalog costs                            16,663         14,620
    Deferred tax asset, net                           3,300          3,300
    Other current assets                              3,480          3,000
                                                  ---------      ---------
      Total Current Assets                           94,533        100,720
                                                  ---------      ---------
PROPERTY AND EQUIPMENT, AT COST:
    Land                                              4,509          4,509
    Buildings and building improvements              18,205         18,205
    Leasehold improvements                           12,352         12,466
    Furniture, fixtures and equipment                59,373         59,287
                                                  ---------      ---------
                                                     94,439         94,467
    Accumulated depreciation and amortization       (61,622)       (60,235)
                                                  ---------      ---------
    Property and equipment, net                      32,817         34,232
                                                  ---------      ---------
    Goodwill, net                                     9,278          9,278
    Deferred tax asset, net                          11,700         11,700
    Other assets                                      1,387          1,731
                                                  ---------      ---------
      Total Assets                                $ 149,715      $ 157,661
                                                  =========      =========
</TABLE>


          See notes to Condensed Consolidated Financial Statements.


                                       2
<PAGE>
                    HANOVER DIRECT, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
               (In thousands of dollars, except share amounts)
                                 (Unaudited)


<TABLE>
<CAPTION>
                                                                          March 30,     December 29,
                                                                             2002           2001
                                                                          ---------     ------------
<S>                                                                       <C>            <C>
       LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
   Current portion of long-term debt and capital lease obligations        $   3,101      $   3,162
   Accounts payable                                                          39,749         46,348
   Accrued liabilities                                                       20,900         25,132
   Customer prepayments and credits                                           6,427          5,143
                                                                          ---------      ---------
         Total Current Liabilities                                           70,177         79,785
                                                                          ---------      ---------
NON-CURRENT LIABILITIES:
   Long-term debt                                                            30,021         26,548
   Other                                                                      9,914         10,233
                                                                          ---------      ---------
         Total Non-current Liabilities                                       39,935         36,781
                                                                          ---------      ---------
         Total Liabilities                                                  110,112        116,566
                                                                          ---------      ---------
SERIES B PARTICIPATING PREFERRED STOCK, authorized,issued
      and outstanding 1,622,111 shares at March 30, 2002
      and December 29, 2001                                                  79,727         76,823
SHAREHOLDERS' EQUITY (DEFICIT):
   Common Stock, $.66 2/3 par value, 300,000,000 shares
     authorized; 140,336,729 shares issued at March 30,
     2002 and December 29, 2001                                              93,558         93,558
   Capital in excess of par value                                           348,971        351,558
   Accumulated deficit                                                     (479,307)      (477,497)
                                                                          ---------      ---------
                                                                            (36,778)       (32,381)
                                                                          ---------      ---------
Less:
   Treasury stock, at cost (2,120,929 shares at March 30,
      2002 and 2,100,929 shares at December 29, 2001)                        (2,996)        (2,942)
   Notes receivable from sale of Common Stock                                  (350)          (405)
                                                                          ---------      ---------
         Total Shareholders' Equity (Deficit)                               (40,124)       (35,728)
                                                                          ---------      ---------
         Total Liabilities and Shareholders' Equity (Deficit)             $ 149,715      $ 157,661
                                                                          =========      =========
</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 30,       March 31,
                                                                   2002           2001
                                                                ---------      ---------

<S>                                                             <C>            <C>
NET REVENUES                                                    $ 109,511      $ 144,294
                                                                ---------      ---------
OPERATING COSTS AND EXPENSES:
   Cost of sales and operating expenses                            71,163         92,411
   Special charges                                                    233          1,056
   Selling expenses                                                24,620         39,378
   General and administrative expenses                             12,420         15,296
   Depreciation and amortization                                    1,502          1,959
                                                                ---------      ---------
                                                                  109,938        150,100
                                                                ---------      ---------
(LOSS) FROM OPERATIONS                                               (427)        (5,806)
                                                                ---------      ---------

(LOSS) BEFORE INTEREST AND TAXES                                     (427)        (5,806)
   Interest expense, net                                            1,353          1,806
                                                                ---------      ---------
   (Loss) before income taxes                                      (1,780)        (7,612)
   Income tax provision                                                30             30
                                                                ---------      ---------

NET (LOSS) AND COMPREHENSIVE (LOSS)                                (1,810)        (7,642)
   Preferred stock dividends and accretion                          2,904          2,880
                                                                ---------      ---------

NET (LOSS) APPLICABLE TO COMMON SHAREHOLDERS                    $  (4,714)     $ (10,522)
                                                                =========      =========

NET (LOSS) PER COMMON SHARE:
   Net (loss) per common share - basic and diluted              $    (.03)     $    (.05)
                                                                =========      =========
   Weighted average common shares outstanding - basic
     (thousands)                                                  138,225        212,468
                                                                =========      =========
   Weighted average common shares outstanding - diluted
     (thousands)                                                  138,225        212,468
                                                                =========      =========
</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 30,     March 31,
                                                                  2002          2001
                                                                --------      --------
<S>                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)                                                      $ (1,810)     $ (7,642)
Adjustments to reconcile net (loss) to net cash (used) by
operating activities:
   Depreciation and amortization, including deferred fees          1,847         2,115
   Provision for doubtful accounts                                    --             2
   Special charges                                                    --         1,056
   Compensation expense related to stock options                     317           831
Changes in assets and liabilities, net of sale of business:
   Accounts receivable                                             5,154         5,155
   Inventories                                                     3,459         2,331
   Prepaid catalog costs                                          (2,043)         (554)
   Accounts payable                                               (6,599)       (5,769)
   Accrued liabilities                                            (4,232)      (10,188)
   Customer prepayments and credits                                1,284            47
   Other non-current liabilities                                    (319)           --
   Other, net                                                       (479)          (44)
                                                                --------      --------
Net cash (used) in operating activities                           (3,421)      (12,660)
                                                                --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisitions of property and equipment                            (88)         (483)
                                                                --------      --------
Net cash (used in) investing activities                              (88)         (483)
                                                                --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings under Congress revolving loan facility           4,239        16,592
   Net (payments) under Congress term loan facility                 (765)         (894)
   Net (payments) under capital lease obligations                    (62)           --
   Other, net                                                         --          (717)
                                                                --------      --------
Net cash provided by financing activities                          3,412        14,981
                                                                --------      --------
Net increase (decrease) in cash and cash equivalents                 (97)        1,838
Cash and cash equivalents at the beginning of the year             1,121         1,691
                                                                --------      --------
Cash and cash equivalents at the end of the period              $  1,024      $  3,529
                                                                ========      ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
   Interest                                                     $    831      $  1,600
                                                                ========      ========
   Income taxes                                                 $     75      $     33
                                                                ========      ========
Non-cash investing and financing activities:
   Series B Participating Preferred Stock redemption price
   increase                                                     $  2,904      $     --
                                                                ========      ========
   Stock dividend and accretion of Series A Cumulative
   Participating Preferred Stock                                $     --      $  2,880
                                                                ========      ========
</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 29, 2001. 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. Pursuant to
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the consolidated operations of Hanover Direct, Inc. are reported
as one segment for the 13-weeks ended March 30, 2002.

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 EARNINGS (LOSS) PER SHARE

      Net earnings (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 13-week
period ended March 30, 2002 was 138,225,031. For the 13-week period ended March
31, 2001 the weighted average number of shares used in the calculation for both
basic and diluted net (loss) per share was 212,468,419. 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 13-week
periods ended March 30, 2002 and March 31, 2001. The number of potentially
dilutive securities excluded from the calculation of diluted (loss) per share
were 1,990,310 and 1,606,246 common share equivalents for the 13-week periods
ended March 30, 2002 and March 31, 2001, respectively.

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) 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. 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 which was designated to be an `insurance' charge."
On August 21, 2001 the Company filed


                                       6
<PAGE>
an appeal of the order with the Oklahoma Court of Appeals and subsequently moved
to stay proceedings in the district court pending resolution of the appeal. No
schedule for briefing or hearing of the appeal has yet been set and the district
court has not yet ruled on the motion to stay. In January 2002, the Company
filed its brief in support of its appeal from the district court's class
certification order. 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. 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 when settled in a future period. Moreover, defense counsel to the
Company will seek to have the resolution of the five class action cases (Martin,
Teichman, Wilson, and the two Argonaut cases which are discussed below)
combined, or their effects lessened, in that there are common issues and a
substantially similar class sought to be defined in the five cases.

      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 $0.50 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. The motion to dismiss was re-set for hearing on April 4,
2002. 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, and in which
all causes of action related to state sales tax have been removed. With the
removal of sales tax issues, the Teichman case concerns issues identical to the
Martin case and may make it easier to stay the Teichman case pending the outcome
of the Martin case. 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. 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 when settled
in a future period. Moreover, defense counsel to the Company will seek to have
the resolution of the five class action cases (Martin, Teichman, Wilson, and the
two Argonaut cases which are discussed below) combined, or their effects
lessened, in that there are common issues and a substantially similar class
sought to be defined in the five cases.

      On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief
Executive Officer, 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 $149,325 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 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 on the
30th day following his termination of employment.

      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 Counterclaim to the Amended Complaint,
denying liability under each of Mr. Kaul's causes of action, 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


                                       7
<PAGE>
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
attorney's fees. The case is pending and the parties are engaged in discovery.
The deadline for completing discovery has been extended to May 17, 2002.

      In January 2000 and May 2001, the Company provided its full cooperation in
an investigation by the Federal Trade Commission ("FTC") into the marketing of
discount buying clubs to see whether any of the entities investigated 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. It was subsequently revealed to the
Company that the FTC was conducting an investigation into the activities of
entities owned or controlled by Ira Smolev. On October 24, 2001, the FTC made
final its "Stipulated Final Judgment And Order For Permanent Injunction And
Monetary Settlement" against Ira Smolev and named defendant companies in the
case of Federal Trade Commission v. Ira Smolev, et al. (USDC So.Dist. FL, Ft.
Lauderdale Div.) (the "Order"). The named defendants included The Shopper's
Edge, LLC (the Company's private label discount buying club which is owned by
Mr. Smolev), FAR Services, LLC (the Smolev-owned contracting party to the
Company's Marketing Agreement which was terminated in January 2001) and Consumer
Data Depot, LLC (the Smolev-owned contracting party to the Company's Paymentech
Processing Agreement). The Order will directly affect only those activities of
the Company, which are "in active concert or participation with the named
defendants [i.e., The Shopper's Edge, LLC, FAR Services, LLC and Consumer Data
Depot, LLC]." The most important implication of the Order was that the Company,
as bookkeeper to the club for sustaining members of The Shopper's Edge, may not
process payments from members of The Shopper's Edge club for membership renewals
where the purported authorization of the membership occurred prior to the
effective date of the Order, without first obtaining, within 60 days prior to
the date on which the consumer is billed, an "express verifiable authorization"
of such renewal that complies with the specifications of the Order. All choices
specified for "express verifiable authorization" contained in the Order are
effectively "positive opt-in," would have required some direct mail or
technology expenditures and would have severely hurt response rates, which could
have had a material impact on the Company's profits from discount buying club
membership revenues. The last renewals of Shopper's Edge memberships were
processed in October, 2001 by agreement between the Company and Ira Smolev.
During April 2002, the Company received an inquiry from the FTC asking for an
explanation of how the Company is complying with the Order and, if the Company
is asserting that it is not subject to the Order, to provide an explanation of
the basis for such assertion. The Company has replied in writing to the FTC that
it is not subject to the Order, and has provided an explanation of its
relationship with Mr. Smolev.

      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
Nevada case is scheduled to go to trial in November 2002. The Order for the stay
provides that the Company need not answer the complaint, although it has the
option to do so. The Company has been 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 Company is
currently in the process of analyzing the merits of the issues raised by the
complaint, notifying vendors of its receipt of the complaint and letter,
evaluating the merits of joining the joint-defense group, and having discussions
with attorneys for the Lemelson Foundation regarding the license offer. A
preliminary estimate of the royalties and attorneys' fees which the Company may
pay if it decides to accept the license offer from the Lemelson Foundation range
from about $125,000 to $400,000. The Company has decided to gather further
information, but will not agree to a settlement at this time.

      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 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. The
Company believes it has defenses against the claims but intends to file a motion
for summary judgement in the case. 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 when settled in a future period. Moreover,
defense counsel to the Company will seek to have the resolution of the five
class action cases (Martin, Teichman, Wilson, and the two Argonaut cases which
are discussed below) combined, or their effects lessened, in that there are
common issues and a substantially similar class sought to be defined in the five
cases.

      A class action lawsuit was commenced on February 20, 2002 entitled
Argonaut Consumer Rights Advocates Inc., suing on behalf of the General Public
v. Gump's By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the
State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include persons whose activities include the
direct sale of tangible personal property to California consumers including the
type of merchandise that Gump's -- the store and the catalog -- sell, by
telephone, mail order, and sales through the web sites www.gumpsbymail.com and
www.gumps.com. The complaint alleges that for at least four years members of the
class have been charged an unlawful, unfair, and fraudulent tax and "sales tax"
on their orders in violation of California law and court decisions, including
the state Revenue and Taxation Code, Civil Code, and the California Board of
Equalization; that Gump's


                                       8
<PAGE>
engages in unfair business practices; that Gump's engaged in untrue and
misleading advertising in that it was not lawfully required to collect tax and
sales tax from customers in California, is not lawfully required or permitted to
add tax and sales tax on separately stated shipping or delivery charges to
California consumers; and that it does not add the appropriate or applicable or
specific correct tax or sales tax to its orders. Plaintiff and the class seek
(i) restitution of all tax and sales tax charged by Gump's on each transaction
and/or restitution of tax and sales tax charged on the shipping charges; (ii) an
order enjoining Gump's from charging customers for tax on orders or from
charging tax on the shipping charges; and (iii) attorney's fees, pre-judgment
interest on the sums refunded, and costs of the suit. A status conference has
been set for July 26, 2002. On April 15, 2002, the Company filed an Answer and
Separate Affirmative Defenses to the complaint, generally denying the
allegations of the complaint and each and every cause of action alleged, and
denying that plaintiff has been damaged or is entitled to any relief whatsoever.
The Company believes it has defenses against the claims but intends to file a
motion for summary judgement in the case. 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 when settled in a future period.
Moreover, defense counsel to the Company will seek to have the resolution of the
five class action cases combined, or their effects lessened, in that there are
common issues and a substantially similar class sought to be defined in the five
cases.

      A class action lawsuit was commenced on March 5, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v.
Domestications LLC, and Does 1-100 ("Domestications"), in the Superior Court of
the State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include persons responsible for the conduct
alleged in the complaint, including the direct sale of tangible personal
property to California consumers including the type of merchandise that
Domestications sells, by telephone, mail order, and sales through the web site
as www.domestications.com. The plaintiff claims that for at least four years
members of the class have been charged an unlawful, unfair, and fraudulent tax
and sales tax for different rates and amounts on the catalog and internet orders
on the total amount of goods, tax and sales tax on shipping charges, which are
not subject to tax or sales tax under California law, in violation of California
law and court decisions, including the state Revenue and Taxation Code, Civil
Code, and the California Board of Equalization; that Domestications engages in
unfair business practices; and that Domestications engaged in untrue and
misleading advertising in that it was not lawfully required to collect tax and
sales tax from customers in California. Plaintiff and the class seek (i)
restitution of all sums, interest and other gains made on account of these
practices; (ii) prejudgment interest on all sums wrongfully collected; (iii) an
order enjoining Domestications from charging customers for tax on their orders
and/or from charging tax on the shipping charges; and (iv) attorney's fees and
costs of the suit. The Company's response is due by May 8, 2002. A status
conference has been set for August 2, 2002. The Company believes it has defenses
against the claims but intends to file a motion for summary judgment in the
case. 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 when settled in a future period. Moreover, defense counsel to the
Company will seek to have the resolution of the five class action cases
combined, or their effects lessened, in that there are common issues and a
substantially similar class sought to be defined in the five cases.

      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.

5.  SPECIAL CHARGES

      In December 2000, the Company began a strategic business realignment
program which resulted in the recording of special charges for severance,
facility exit costs and fixed asset write-offs. Special charges recorded in
fiscal years 2000 and 2001 relating to the strategic business realignment
program were $19.1 million and $11.3 million, respectively. 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 and return to
profitability.

      In the first quarter of 2002, special charges relating to the strategic
business realignment program was recorded in the amount of $0.2 million. These
charges consisted primarily of severance costs related to the elimination of an
additional 10 FTE positions and costs associated with the Company's decision to
close a product manufacturing facility located in San Diego, California.


                                       9
<PAGE>
      As of the end of the first quarter of 2002, a liability is included on the
Company's balance sheet related to future costs in connection with the Company's
strategic business realignment program consisting of:

      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 $1.4 million of these costs are recorded in accrued liabilities in
the accompanying Condensed Consolidated Balance Sheet at March 30, 2002.
Severance payments during the first quarter of 2002 amounted to approximately
$1.3 million.

      Facility Exit Costs and Fixed Asset Write-downs - These costs are
primarily related to the Company's decision to close its fulfillment center in
Maumelle, Arkansas, exit office space located in Weehawken, New Jersey and close
several of its retail outlets. Furthermore, costs associated with closing the
Always in Style business and terminating the Company's marketing agreement with
Compagnie de la Chine are included in the amount written off. Approximately $4.2
million of these costs are included in accrued liabilities at March 30, 2002,
and an additional $3.3 million is included in other non-current liabilities, as
they will not be paid until 2003 or later. Facility exit and fixed asset charges
against the accruals during the first quarter of 2002 were $1.1 million. In
October 2001, the Company determined it was more cost effective to relocate
certain of its operating and administrative functions from the first floor of
its facility in Weehawken, New Jersey to previously closed space in Edgewater,
New Jersey and to sublet the space vacated in Weehawken, New Jersey. Currently,
the Company does not anticipate the revised office facility utilization plan
will impact restructuring charges already incurred and reported.

      The Company has entered into an agreement with the landlord and the
sublandlord to terminate its sublease of the Company's closed 497,200 square
foot warehouse and telemarketing facility located in Maumelle, Arkansas. The
agreement provides for the payment by the Company to the sublandlord of
$1,600,000, plus taxes through April 30, 2002 in the amount of $198,000. The
Company is making the payments in 4 weekly installments commencing May 2, 2002,
with the last installment due on May 24. Upon the satisfaction by the Company of
all of its obligations under the agreement, the Company's sublease will
terminate and it will be released from all further obligations under the
sublease, other than as to certain damage, if any, to the building caused by the
Company during the sublease term. The Company's previously established reserves
for Maumelle, Arkansas are adequate based upon the terms of the final settlement
agreement.

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 agreed to provide
telemarketing and fulfillment services for the Improvements business under a
service agreement with the buyer for a period of three years.

      The asset purchase agreement between the Company and HSN provides that if
Keystone Internet Services, Inc. fails to perform its obligations during the
first two years of the services contract, the purchaser can 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, has been established for a period of two years
under the terms of an escrow agreement between LWI Holdings, Inc., HSN and The
Chase Manhattan Bank as a result of these contingencies. As of March 30, 2002,
the balance in the escrow fund is $2.6 million.

      The Company recognized a net gain on the sale of approximately $23.2
million, including a non-cash goodwill charge of $6.1 million, in fiscal year
2001, which represents the excess of the net proceeds from the sale over the net
assets assumed by HSN, the goodwill associated with the Improvements business
and expenses related to the transaction. The recognition of an additional gain
of up to approximately $2.5 million has been deferred until the contingencies
described above expire, which will not occur prior to the middle of the 2003
fiscal year.

7.  SALE OF KINDIG LANE PROPERTY

      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 ("Congress"), pursuant to
the terms of the Congress Credit Facility, and applied to a partial repayment of
the Tranche A Term Loan made by Congress 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 realized a net gain on the sale
of approximately $1.5 million, which included the sale price net of selling
expenses as well as the net book value of assets


                                       10
<PAGE>
sold. The Company has continued to use the Kindig Lane Property under a lease
agreement with the third party, 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.

8.  CHANGES IN EMPLOYMENT AGREEMENTS

      As of December 14, 2001, Mr. Shull, Meridian and the Company entered into
a Services Agreement (the "December 2001 Services Agreement"), which replaced
the August 2001 Services Agreement which was to expire in June 30, 2002. Under
the December 2001 Services Agreement, Meridian will provide for the benefit of
the Company the services of Mr. Shull. The term of the December 2001 Services
Agreement, and the term for the services of Mr. Shull began on December 14, 2001
and will terminate on March 31, 2003 (the "December 2001 Agreement Term"). On or
prior to February 1, 2003, the Company may extend the December 2001 Agreement
Term on a day to day basis upon written notice to Mr. Shull, and thereafter,
either Mr. Shull or the Company may terminate the December 2001 Services
Agreement and the December 2001 Agreement Term with 60 days notice to the other.

      Under the December 2001 Services Agreement, Meridian is to receive from
the Company $75,000 per month for the services of Mr. Shull (the "December 2001
Base Fee"). The Company also is required to pay Meridian up to $15,000 per month
during the December 2001 Agreement Term (the "December 2001 Flat Fee"). The
Company also reimburses Mr. Shull for reasonable out-of-pocket expenses incurred
on behalf of the Company.

      Under the December 2001 Services Agreement, the Company shall make a lump
sum cash payment of $450,000 to Meridian on June 30, 2002, provided the December
2001 Services Agreement is then in effect. This payment will be made by the end
of 2002.

      Under the December 2001 Services Agreement, the Company guaranteed Mr.
Shull a target bonus for the Company's 2001 fiscal year pursuant to the
Company's 2001 Management Incentive Plan equal to $300,000, which was paid
during the first quarter of 2002. In addition, Mr. Shull has earned a bonus for
the Company's 2001 fiscal year pursuant to the Company's 2001 Management
Incentive Plan equal to $600,000 (including the above-described target bonus).
This payment will be made by the end of 2002. Mr. Shull shall receive the same
bonus amount for fiscal 2002 under the Company's 2002 Management Incentive Plan
as all other Class 8 participants (as defined in such Plan) receive under such
Plan for such period, subject to all of the terms and conditions applicable
generally to Class 8 participants thereunder.

      The Company also acknowledged in the December 2001 Services Agreement that
it has extended the benefits of its Executive Plan, and its transaction bonus
program, to Mr. Shull.

      Hanover Direct, Inc. Key Executive Eighteen-Month Compensation
Continuation Plan, Key Executive Twelve-Month Compensation Continuation Plan and
Key Executive Six-Month Compensation Continuation Plan. The Company has modified
the definitions of "Change In Control" and "For Cause" contained in the Hanover
Direct, Inc. Key Executive Eighteen Month Compensation Continuation Plan, Key
Executive Twelve Month Compensation Plan and Key Executive Six Month
Compensation Continuation Plan.

      Hanover Direct, Inc. Directors Change In Control Plan.  The Company
has modified the definition of "Change In Control" contained in the Hanover
Direct, Inc. Directors Change In Control Plan.

      Appointment of Chairman.  On January 10, 2002, the Board of Directors
announced the appointment of Mr. Shull as Chairman of the Company's Board
of Directors.

      Resignation of Brian C. Harriss and Appointment of Edward M.
Lambert.  Effective January 28, 2002, Edward M. Lambert was appointed to
succeed Brian C. Harriss as Executive Vice President and Chief Financial
Officer of the Company and Mr. Harriss was appointed as Executive Advisor
to the Chairman of the Company coincident with his resignation as Executive
Vice President and Chief Financial Officer of the Company.


                                       11
<PAGE>
9.  AMERICAN STOCK EXCHANGE NOTIFICATION

      By letter dated May 2, 2001, the American Stock Exchange (the "AMEX")
notified the Company that it was below certain of the AMEX's continued listing
guidelines set forth in the AMEX Company Guide. The AMEX instituted a review of
the Company's eligibility for continuing listing of the Company's common stock
on the AMEX. On January 17, 2002, the Company received a letter dated January 9,
2002 from the AMEX confirming that the AMEX determined to continue the Company's
listing on the AMEX 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 AMEX
guidelines for continued listing and to the AMEX's periodic review of the
Company's Securities and Exchange Commission and other filings. The AMEX
requested certain additional financial information from the Company to be
delivered on or before April 15, 2002, which the Company has provided.

10.  RECENTLY ISSUED ACCOUNTING STANDARDS

      In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). FAS 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life).
Goodwill is comprised of the International Male and the Gump's brands and the
net balance at March 30, 2002 is $9.3 million. The Company adopted FAS 142
effective January 1, 2002 and, as a result, the first quarter ended March 30,
2002 does not include an amortization charge for goodwill. The Company is
currently evaluating whether there has been any goodwill transition impairment
and will disclose the results of this evaluation in the second quarter of fiscal
2002 as required by FAS 142.

       If the provisions under FAS 142 had been implemented for the first
quarter ended March 31, 2001 and the Company had not included an amortization
charge for goodwill, the Company's net (loss) would have decreased by $0.1
million to $(7.5) million. Net (loss) per share for the first quarter ended
March 31, 2001 would have remained unchanged at $(.05).

       In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long-lived Assets" ("FAS 144"). FAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 also extends the reporting requirements to report separately, as
discontinued operations, components of an entity that have either been disposed
of or classified as held-for-sale. The Company has adopted the provisions of FAS
144 in fiscal 2002, and such adoption had no effect on the Company's results of
operations or financial position.

11. AMENDMENT TO CONGRESS LOAN AND SECURITY AGREEMENT

      In March 2002, the Company amended the Congress Credit Facility to amend
the definition of Consolidated Net Worth such that, effective July 1, 2002, to
the extent that the goodwill or intangible assets of the Company and its
subsidiaries are impaired under the provisions of FAS 142, such write-off of
assets would not be considered a reduction of total assets for the purposes of
computing consolidated net worth. The consolidated net working capital,
consolidated net worth and earnings before interest, taxes, depreciation,
amortization and certain non-cash charges ("EBITDA") covenants were also
amended. In addition, the amendment required the payment of a fee of $100,000.
Achievement of the cost savings and other objectives of the Company's strategic
business realignment program is critical to the maintenance of adequate
liquidity as is compliance with the terms and provisions of the Congress Credit
Facility and the Company's ability to operate effectively during the remainder
of the 2002 fiscal year.

12.  SERIES B PARTICIPATING PREFERRED STOCK

      On December 19, 2001, the Company issued to Richemont Finance S.A.
("Richemont") 1,622,111 shares of Series B Participating Preferred Stock
("Series B Preferred Stock"). The Series B Preferred Stock has a par value of
$0.01 per share.


                                       12
<PAGE>
      The holders of the Series B Preferred Stock are entitled to ten votes per
share on any matter on which the Common Stock votes. In addition, in the event
that the Company defaults in its obligations under the Agreement with Richemont,
the Certificate of Designations of the Series B Preferred Stock or its
agreements with Congress, or in the event that the Company fails to redeem at
least 811,056 shares of Series B Preferred Stock by August 31, 2003, then the
holders of the Series B Preferred Stock, voting as a class, shall be 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 Preferred Stock are entitled to a liquidation
preference (the "Liquidation Preference") which was initially $47.36 per share
and which increases quarterly, commencing March 1, 2002. As of March 1, 2002,
the Liquidation Preference was $49.15 per share. As of June 1, 2002, September
1, 2002 and December 1, 2002, the Liquidation Preference will be $51.31, $53.89,
and $56.95 per share, respectively. As of March 1, 2003, June 1, 2003 and
September 1, 2003, the Liquidation Preference will be $60.54, $64.74 and $69.64
per share, respectively. As a result, beginning November 30, 2003, the aggregate
Liquidation Preference of the Series B Preferred Stock will be effectively equal
to the aggregate liquidation preference of the Class A Preferred Stock
previously held by Richemont. As of December 1, 2003, March 1, 2004, June 1,
2004, September 1, 2004 and December 1, 2004, the Liquidation Preference will be
$72.25, $74.96, $77.77, $80.69 and $83.72 per share, respectively. As of March
1, 2005 and June 1, 2005, the Liquidation Preference will be $86.85 and $90.11
per share, respectively.

       Dividends on the Series B Preferred Stock are required to be paid
whenever a dividend is declared on the Common Stock. The amount of any dividend
on the Series B Preferred Stock shall be determined by multiplying (i) the
amount obtained by dividing the amount of the dividend on the Common Stock by
the then current fair market value of a share of Common Stock and (ii) the
Liquidation Preference of the Series B Preferred Stock.

      The Series B Preferred Stock must be redeemed by the Company on August 23,
2005. The Company may redeem all or less than all of the then outstanding shares
of Series B Preferred Stock at any time prior to that date. At the option of the
holders thereof, the Company must redeem the Series B 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
Preferred Stock). The redemption price for the Series B Preferred Stock upon a
Change of Control or upon the consummation of an Asset Disposition or Equity
Sale is the then applicable Liquidation Preference of the Series B Preferred
Stock plus the amount of any declared but unpaid dividends on the Series B
Preferred Stock. The Company's obligation to redeem the Series B Preferred Stock
upon an Asset Disposition or an Equity Sale is subject to the satisfaction of
certain conditions set forth in the Certificate of Designations.

      The Certificate of Designations of the Series B Preferred Stock provides
that, for so long as Richemont is the holder of at least 25% of the then
outstanding shares of Series B Preferred Stock, it shall be entitled to appoint
a non-voting observer to attend all meetings of the Board of Directors and any
committees thereof. To date Richemont has not appointed such an observer.

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


                                       13
<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 30,   March 31,
                                            2002        2001
                                          ---------   ---------

<S>                                       <C>         <C>
Net revenues                                100.0%      100.0%
Cost of sales and operating expenses         65.0        64.0
Special charges                               0.2         0.7
Selling expenses                             22.5        27.3
General and administrative expenses          11.3        10.6
Depreciation and amortization                 1.4         1.4
(Loss) from operations                       (0.4)       (4.0)
Interest expense, net                         1.3         1.3
Net (loss) and comprehensive (loss)          (1.7)%      (5.3)%
</TABLE>

RESULTS OF OPERATIONS - 13-WEEKS ENDED MARCH 30, 2002 COMPARED WITH THE
13-WEEKS ENDED MARCH 31, 2001

      Net (Loss) and Comprehensive (Loss). The Company reported a net loss of
$(1.8) million for the 13-weeks ended March 30, 2002 compared with a net loss of
$(7.6) million for the comparable period last year. EBITDA increased by $4.4
million to $1.4 million for the 13-weeks ended March 30, 2002 as compared to
$(3.0) million for the comparable period in 2001. Net (loss) per share was
$(.03) for the 13-weeks ended March 30, 2002 and $(.05) for the 13-week period
ended March 31, 2001. The per share amounts were calculated after deducting the
Series B Preferred Stock redemption price increase of $2.9 million for the
13-weeks ended March 30, 2002 and the Series A Preferred Stock dividends and
accretion of $2.9 million for the comparable period in 2001. The weighted
average number of shares outstanding used in both the basic and diluted
calculation was 138,225,031 for the 13-week period ended March 30, 2002 and
212,468,419 for the 13-week period ended March 31, 2001. This decrease in
weighted average shares was primarily due to the transaction consummated with
Richemont in December 2001, where the Company repurchased and retired 74,098,769
shares of Common Stock then held by Richemont.

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

(i)   decreased special charges related to the Company's strategic business
      realignment program;

(ii)  decreased selling expenses; and

(iii) decreased general and administrative expenditures.

      Net Revenues. Net revenues decreased $34.8 million (24.1%) for the 13-week
period ended March 30, 2002 to $109.5 million from $144.3 million for the
comparable period in 2001. This decrease was due in part to the sale of the
Improvements business on June 29, 2001, which accounted for $18.9 million of the
reduction in revenues for the 13-week period ended March 30, 2002. The
discontinuance of the Domestications Kitchen & Garden, Kitchen & Home and Turiya
catalogs contributed $4.7 million in the reduction of net revenues for the
13-week period ended March 30, 2002. An additional portion of the drop in
revenues amounting to $1.2 million can be attributed to the Company's decision
to scale back on its third party fulfillment business by focusing only on
profitable operations. The remaining balance of the decrease in net revenues can
be attributable to softness in demand primarily related to certain brands and
planned reductions in unprofitable circulation.

      Cost of Sales and Operating Expenses. Cost of sales and operating expenses
increased to 65.0% of net revenues for the 13-week period ended March 30, 2002
as compared to 64.0% of net revenues for the comparable period in 2001. This
change is due to an increase in merchandise cost, which accounted for 0.7% of
the percentage increase and an increase in merchandise freight, accounting for
0.6% of the percentage increase. Also contributing to the increase was higher
operating costs relating to information systems, accounting for 1.0% of the
percentage increase. These increases


                                       14
<PAGE>
in costs, however, were partially offset by significant decreases in operating
costs that have resulted from actions taken in connection with the Company's
strategic business realignment program. These decreases occurred primarily in
the areas of fixed telemarketing and distribution costs associated with the
Company's fulfillment centers, which accounted for 1.0% of the offsetting
percentage decrease.

      Special Charges. In December 2000, the Company developed a plan to
strategically realign the business and direct the Company's resources primarily
towards a loss reduction and return to profitability. As a result of the
continued actions needed to execute the plan, the Company recorded special
charges of $1.1 million for the 13-week period ended March 31, 2001 to primarily
cover severance costs related to the elimination of 46 FTE positions across all
departments of the Company's business. The Company recorded an additional $0.2
million of special charges for the 13-week period ended March 30, 2002 relating
to the strategic business realignment program. These charges consisted primarily
of severance costs related to the elimination of an additional 10 FTE positions
in various levels of catalog operations and costs associated with the Company's
decision to close the San Diego product manufacturing facility.

      Selling Expenses. Selling expenses decreased by $14.8 million to $24.6
million for the 13-weeks ended March 30, 2002 as compared to $39.4 million for
the comparable period in 2001. As a percentage relationship to net revenues,
selling expenses decreased to 22.5% for the 13-weeks ended March 30, 2002 versus
27.3% for the comparable period in 2001. This decrease was due primarily to
reductions in catalog paper, catalog preparation costs and circulation. In
addition, decreases in catalog printing and postage costs also contributed to
the lower percentage relationship to net revenues.

      General and Administrative Expenses. General and administrative expenses
decreased by $2.9 million to $12.4 million for the 13-weeks ended March 30, 2002
as compared to $15.3 million for the comparable period last year. The reduction
in costs are primarily attributable to the elimination of a significant number
of FTE positions across all departments which began late in 2000 as part of the
Company's strategic business realignment program and has continued throughout
the 13-weeks ended March 30, 2002. As a percentage relationship to net revenues,
general and administrative expenses were 11.3% of net revenues for the 13-weeks
ended March 30, 2002 versus 10.6% of net revenues for the comparable period in
2001. This increase in percentage is primarily due to additional professional
and legal fees associated with the Company's engagement in legal proceedings as
mentioned in Note 5, Commitments and Contingencies, of the Notes to the
Condensed Consolidated Financial Statements.

      Depreciation and Amortization. Depreciation and amortization decreased by
$0.5 million for the 13-weeks ended March 30, 2002 versus the comparable period
in 2001. The decrease is primarily due to the elimination of goodwill
amortization resulting from the implementation of FAS 142 of $0.1 million and
the complete amortization of computer software during the 13-weeks ended March
30, 2002. As a percentage relationship to net revenues, depreciation and
amortization remained constant at 1.4% for the 13-weeks ended March 30, 2002 and
1.4% for the comparable period in 2001.

      Loss from Operations. The Company's loss from operations decreased by $5.4
million to $0.4 million for the 13-weeks ended March 30, 2002 from a loss of
$5.8 million for the comparable period in 2001.

      Interest Expense, Net. Interest expense, net decreased $0.5 million to
$1.4 million for the 13-weeks ended March 30, 2002 as compared to $1.8 million
for the same period last year. The decrease in interest expense in the first
quarter of 2002 is primarily due to lower average borrowings, coupled with lower
interest rates.

LIQUIDITY AND CAPITAL RESOURCES

      Net cash used in operating activities. During the 13-week period ended
March 30, 2002, net cash used in operating activities was $3.4 million. This was
primarily due to the reduction in accrued liabilities and accounts payable,
partially offset by a decrease in net accounts receivable. Net losses, when
adjusted for depreciation, amortization and other non-cash items, resulted in a
positive cash flow of $0.4 million for the period.

      Net cash used in investing activities. During the 13-week period ended
March 30, 2002, net cash used in investing activities was $0.1 million,
which was due to capital expenditures primarily relating to upgrades in
equipment located at the Roanoke, Virginia distribution center.


                                       15
<PAGE>
      Net cash provided by financing activities. During the 13-week period ended
March 30, 2002, net cash provided by financing activities was $3.4 million,
which was primarily due to net borrowings under the Congress revolving loan
facility, partially offset by payments made under the Congress term loan
facility.

      Congress Credit Facility. On March 24, 2000, the Company amended its
credit facility with 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 incidence of additional indebtedness and on the payment of
Common Stock dividends. As of March 30, 2002, the Company had $33.1 million of
borrowings outstanding under the amended Congress Credit Facility comprised of
$17.8 million under the revolving loan facility, and $10.0 million and $5.4
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.

      In March 2002, the Company amended the Congress Credit Facility to amend
the definition of Consolidated Net Worth such that, effective July 1, 2002, to
the extent that the goodwill or intangible assets of the Company and its
subsidiaries are impaired under the provisions of FAS 142, such write-off of
assets would not be considered a reduction of total assets for the purposes of
computing consolidated net worth. The consolidated net working capital,
consolidated net worth and EBITDA covenants were also amended. In addition, the
amendment required the payment of a fee of $100,000. Achievement of the cost
savings and other objectives of the Company's strategic business realignment
program is critical to the maintenance of adequate liquidity as is compliance
with the terms and provisions of the Congress Credit Facility and the Company's
ability to operate effectively during the remainder of the 2002 fiscal year.

      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 the buyer for a period of
three years.

      The asset purchase agreement between the Company and HSN provides that if
Keystone Internet Services, Inc. fails to perform its obligations during the
first two years of the services contract, the purchaser can 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, has been established for a period of two years
under the terms of an escrow agreement between LWI Holdings, Inc., HSN and The
Chase Manhattan Bank as a result of these contingencies. As of March 30, 2002,
the balance in the escrow fund is $2.6 million.

      The Company recognized a net gain on the sale of approximately $23.2
million, including a non-cash goodwill charge of $6.1 million, in fiscal year
2001, which represents the excess of the net proceeds from the sale over the net
assets assumed by HSN, the goodwill associated with the Improvements business
and expenses related to the transaction. The recognition of an additional gain
of up to approximately $2.5 million has been deferred until the contingencies
described above expire, which will not occur prior to the middle of the 2003
fiscal year.

       General. At March 30, 2002, the Company had $1.0 million in cash and cash
equivalents compared with $3.5 million at March 31, 2001. Working capital and
current ratios at March 30, 2002 were $24.4 million and 1.35 to 1 versus $26.8
million and 1.28 to 1 at March 31, 2001. Total cumulative borrowings, including
financing under capital lease obligations, as of March 30, 2002, aggregated
$33.1 million, $30.0 million of which is classified as long-term. Remaining
availability under the Congress Credit Facility as of March 30, 2002 was $13.1
million ($14.1 million including cash on hand). There were nominal capital
commitments (less than $0.1 million) at March 30, 2002. The Company has entered
into an agreement with the landlord and the sublandlord to terminate its
sublease of the Company's fulfillment center in Maumelle, Arkansas. The
agreement provides for the payment by the Company to the sublandlord of
$1,600,000, plus taxes through April 30, 2002 in the amount of $198,000. The
Company is making the payments in 4 weekly installments commencing May 2, 2002,
with the last installment due on May 24, 2002. On March 22, 2002, the Postal
Rate Commission approved a settlement that would allow postal rates to increase
an average of 7.7% as early as June 30, 2002. The Company has anticipated this
action in its 2002 planning process and will accommodate the increased cost as
part of normal business operations. The Company has implemented cost
conservation measures, such as reduced paper weights and trim size changes, as
ways of mitigating such cost increases. Management believes that the Company has
sufficient liquidity and availability under its credit agreements to fund its
planned operations through at least December 28, 2002. Achievement of the cost
saving and other objectives of the Company's strategic business realignment
program is critical to the maintenance of adequate liquidity as is compliance
with the terms and provisions of the Congress Credit Facility and the Company's
ability to operate effectively during the remainder of the 2002 fiscal year.


                                       16
<PAGE>
USES OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES

      During the first quarter ended March 30, 2002, there were no changes in
the Company's policies regarding the use of estimates and other critical
accounting policies. 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 29, 2001, for additional
information relating to the Company's uses of estimates and other critical
accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

      Effective January 1, 2002, the Company adopted FAS 142 and, as a result,
the first quarter ended March 30, 2002 does not include an amortization charge
for goodwill. The Company is currently evaluating whether there has been any
goodwill transition impairment and will disclose the results of this evaluation
in the second quarter of fiscal 2002 as required by FAS 142.

       If the provisions of FAS 142 had been implemented for the first quarter
ended March 31, 2001 and the Company had not included an amortization charge for
goodwill, the Company's net (loss) would have decreased by $0.1 million to
$(7.5) million. Net (loss) per share for the first quarter ended March 31, 2001
would have remained unchanged at $(.05).

      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 29, 2001 and Note 10 herein for
additional information relating to new accounting pronouncements which the
Company has adopted.

SEASONALITY

      The revenues and business for both the Hanover Brands and erizon
subsidiaries 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.

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 28, 2002."

CAUTIONARY STATEMENTS

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

      The recent 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.


                                       17
<PAGE>
      The ability of the Company to achieve projected levels of sales and the
ability of the Company to reduce costs commensurately 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 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.

      The recent 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.

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

      The ability of the Company to complete the Company's 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 obtain advance rates under the Congress
Credit Facility which are at least as favorable as those obtained in the past.


                                       18
<PAGE>
      The ability of the Company to transfer its own as well as its third party
fulfillment operations conducted at the fulfillment center located in 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.

      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 inability of the Company to sell assets at industry multiples or at
all due to market conditions generally, as a result of market conditions
following the events of September 11, 2001 and otherwise

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

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

      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.   QUANTITATIVE 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 Facility, which bear interest at variable rates. At March
30, 2002, outstanding principal balances under these facilities subject to
variable rates of interest were approximately $33.1 million. If interest rates
were to increase by one quarter of one percent from current levels, the
resulting increase in interest expense would not have a material impact on the
Company's results of operations taken as a whole.


                                       19
<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) 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. 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 which was designated to be an `insurance' charge."
On August 21, 2001 the Company filed an appeal of the order with the Oklahoma
Court of Appeals and subsequently moved to stay proceedings in the district
court pending resolution of the appeal. No schedule for briefing or hearing of
the appeal has yet been set and the district court has not yet ruled on the
motion to stay. In January 2002, the Company filed its brief in support of its
appeal from the district court's class certification order. 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. 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 when settled in a future
period. Moreover, defense counsel to the Company will seek to have the
resolution of the five class action cases (Martin, Teichman, Wilson, and the two
Argonaut cases which are discussed below) combined, or their effects lessened,
in that there are common issues and a substantially similar class sought to be
defined in the five cases.

      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 $0.50 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. The motion to dismiss was re-set for hearing on April 4,
2002. 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, and in which
all causes of action related to state sales tax have been removed. With the
removal of sales tax issues, the Teichman case concerns issues identical to the
Martin case and may make it easier to stay the Teichman case pending the outcome
of the Martin case. 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. 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 when settled
in a future period. Moreover, defense counsel to the Company will seek to have
the resolution of the five class action cases (Martin, Teichman, Wilson, and the
two Argonaut cases which are discussed below) combined, or their effects
lessened, in that there are common issues and a substantially similar class
sought to be defined in the five cases.


                                       20
<PAGE>
      On June 28, 2001, Rakesh K. Kaul, the Company's former President and Chief
Executive Officer, 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 $149,325 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 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 on the
30th day following his termination of employment.

      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 Counterclaim to the Amended Complaint,
denying liability under each of Mr. Kaul's causes of action, 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 attorney's fees. The case is pending and the parties are engaged in
discovery. The deadline for completing discovery has been extended to May 17,
2002.

      In January 2000 and May 2001, the Company provided its full cooperation in
an investigation by the Federal Trade Commission ("FTC") into the marketing of
discount buying clubs to see whether any of the entities investigated 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. It was subsequently revealed to the
Company that the FTC was conducting an investigation into the activities of
entities owned or controlled by Ira Smolev. On October 24, 2001 the FTC made
final its "Stipulated Final Judgment and Order For Permanent Injunction And
Monetary Settlement" against Ira Smolev and named defendant companies in the
case of Federal Trade Commission v. Ira Smolev, et al. (USDC So.Dist. FL, Ft.
Lauderdale Div.) (the "Order"). The named defendants included The Shopper's
Edge, LLC (the Company's private label discount buying club which is owned by
Mr. Smolev), FAR Services, LLC (the Smolev-owned contracting party to the
Company's Marketing Agreement which was terminated in January 2001) and Consumer
Data Depot, LLC (the Smolev-owned contracting party to the Company's Paymentech
Processing Agreement). The Order will directly affect only those activities of
the Company, which are "in active concert or participation with the named
defendants [i.e., The Shopper's Edge, LLC, FAR Services, LLC and Consumer Data
Depot, LLC]." The most important implication of the Order was that the Company,
as bookkeeper to the club for sustaining members of The Shopper's Edge, may not
process payments from members of The Shopper's Edge club for membership renewals
where the purported authorization of the membership occurred prior to the
effective date of the Order, without first obtaining, within 60 days prior to
the date on which the consumer is billed, an "express verifiable authorization"
of such renewal that complies with the specifications of the Order. All choices
specified for "express verifiable authorization" contained in the Order are
effectively "positive opt-in," would have required some direct mail or
technology expenditures and would have severely hurt response rates, which could
have had a material impact on the Company's profits from discount buying club
membership revenues. The last renewals of Shopper's Edge memberships were
processed in October, 2001 by agreement between the Company and Ira Smolev.
During April 2002, the Company received an inquiry from the FTC asking for an
explanation of how the Company is complying with the Order and, if the Company
is asserting that it is not subject to the Order, to provide an explanation of
the basis for such assertion. The Company has replied in writing to the FTC that
it is not subject to the Order, and has provided an explanation of its
relationship with Mr. Smolev.

      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
Nevada case is scheduled to go to trial in November 2002. The Order for the stay
provides that the Company need not answer the complaint, although it has the
option to do so. The Company has been 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 Company is
currently in the process of analyzing the merits of the issues raised by the
complaint, notifying vendors of its receipt of the complaint and letter,
evaluating the merits of joining the joint-defense group, and having discussions
with attorneys for the Lemelson Foundation regarding the license offer. A
preliminary estimate of the royalties and attorneys' fees which the Company may
pay if it decides to accept the license offer from the Lemelson Foundation range
from about $125,000 to $400,000. The Company has decided to gather further
information, but will not agree to a settlement at this time.

      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


                                       21
<PAGE>
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 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. The Company believes it has defenses against the claims but intends to
file a motion for summary judgement in the case. 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 when settled in a future
period. Moreover, defense counsel to the Company will seek to have the
resolution of the five class action cases (Martin, Teichman, Wilson, and the two
Argonaut cases which are discussed below) combined, or their effects lessened,
in that there are common issues and a substantially similar class sought to be
defined in the five cases.

      A class action lawsuit was commenced on February 20, 2002 entitled
Argonaut Consumer Rights Advocates Inc., suing on behalf of the General Public
v. Gump's By Mail, Inc. ("Gump's"), and Does 1-100 in the Superior Court of the
State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include persons whose activities include the
direct sale of tangible personal property to California consumers including the
type of merchandise that Gump's -- the store and the catalog -- sell, by
telephone, mail order, and sales through the web sites www.gumpsbymail.com and
www.gumps.com. The complaint alleges that for at least four years members of the
class have been charged an unlawful, unfair, and fraudulent tax and "sales tax"
on their orders in violation of California law and court decisions, including
the state Revenue and Taxation Code, Civil Code, and the California Board of
Equalization; that Gump's engages in unfair business practices; that Gump's
engaged in untrue and misleading advertising in that it was not lawfully
required to collect tax and sales tax from customers in California, is not
lawfully required or permitted to add tax and sales tax on separately stated
shipping or delivery charges to California consumers; and that it does not add
the appropriate or applicable or specific correct tax or sales tax to its
orders. Plaintiff and the class seek (i) restitution of all tax and sales tax
charged by Gump's on each transaction and/or restitution of tax and sales tax
charged on the shipping charges; (ii) an order enjoining Gump's from charging
customers for tax on orders or from charging tax on the shipping charges; and
(iii) attorney's fees, pre-judgment interest on the sums refunded, and costs of
the suit. A status conference has been set for July 26, 2002. On April 15, 2002,
the Company filed an Answer and Separate Affirmative Defenses to the complaint,
generally denying the allegations of the complaint and each and every cause of
action alleged, and denying that plaintiff has been damaged or is entitled to
any relief whatsoever. The Company believes it has defenses against the claims
but intends to file a motion for summary judgement in the case. 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 when settled in a
future period. Moreover, defense counsel to the Company will seek to have the
resolution of the five class action cases combined, or their effects lessened,
in that there are common issues and a substantially similar class sought to be
defined in the five cases.

      A class action lawsuit was commenced on March 5, 2002 entitled Argonaut
Consumer Rights Advocates Inc., suing on behalf of the General Public v.
Domestications LLC, and Does 1-100 ("Domestications"), in the Superior Court of
the State of California, City and County of San Francisco. The plaintiff is a
non-profit public benefit corporation suing under the California Business and
Profession Code. Does 1-100 would include persons responsible for the conduct
alleged in the complaint, including the direct sale of tangible personal
property to California consumers including the type of merchandise that
Domestications sells, by telephone, mail order, and sales through the web site
as www.domestications.com. The plaintiff claims that for at least four years
members of the class have been charged an unlawful, unfair, and fraudulent tax
and sales tax for different rates and amounts on the catalog and internet orders
on the total amount of goods, tax and sales tax on shipping charges, which are
not subject to tax or sales tax under California law, in violation of California
law and court decisions, including the state Revenue and Taxation Code, Civil
Code, and the California Board of Equalization; that Domestications engages in
unfair business practices; and that Domestications engaged in untrue and
misleading advertising in that it was not lawfully required to collect tax and
sales tax from customers in California. Plaintiff and the class seek (i)
restitution of all sums, interest and other gains made on account of these
practices; (ii) prejudgment interest on all sums wrongfully collected; (iii) an
order enjoining Domestications from charging customers for tax on their orders
and/or from charging tax on the shipping charges; and (iv) attorney's fees and
costs of the suit. The Company's response is due by May 8, 2002. A status
conference has been set for August 2, 2002. The Company believes it has defenses
against the claims but intends to file a motion for


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<PAGE>
summary judgment in the case. 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 when settled in a future period. Moreover,
defense counsel to the Company will seek to have the resolution of the five
class action cases combined, or their effects lessened, in that there are common
issues and a substantially similar class sought to be defined in the five cases.

      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.


ITEM 5.  OTHER INFORMATION

      By letter dated May 2, 2001, the American Stock Exchange (the "AMEX")
notified the Company that it was below certain of the AMEX's continued listing
guidelines set forth in the AMEX Company Guide. The AMEX instituted a review of
the Company's eligibility for continuing listing of the Company's common stock
on the AMEX. On January 17, 2002, the Company received a letter dated January 9,
2002 from the AMEX confirming that the AMEX determined to continue the Company's
listing on the AMEX 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 AMEX
guidelines for continued listing and to the AMEX's periodic review of the
Company's Securities and Exchange Commission and other filings. The AMEX
requested certain additional financial information from the Company to be
delivered on or before April 15, 2002, which the Company has provided.

      The Company has entered into an agreement with the landlord and the
sublandlord to terminate its sublease of the Company's closed 497,200 square
foot warehouse and telemarketing facility located in Maumelle, Arkansas. The
agreement provides for the payment by the Company to the sublandlord of
$1,600,000, plus taxes through April 30, 2002 in the amount of $198,000. The
Company is making the payments in 4 weekly installments commencing May 2, 2002,
with the last installment due on May 24, 2002. Upon the satisfaction by the
Company of all of its obligations under the agreement, the Company's sublease
will terminate and it will be released from all further obligations under the
sublease, other than as to certain damage, if any, to the building caused by the
Company during the sublease term. The Company's previously established reserves
for Maumelle, Arkansas are adequate based upon the terms of the final settlement
agreement.

      The Company has entered into a new lease for its 72,000 square foot
warehouse and fulfillment facility located at 340 Poplar Street in Hanover,
Pennsylvania. The new lease expires on December 31, 2004 and provides for a
reduction in annual rent from the prior lease. In connection with the execution
of the new lease, the Company has transferred to the landlord under the lease
title to two lots adjoining the 340 Poplar Street facility, subject to the
Company's right to continue to use a portion of the lots for parking for the
facility.

      The Board of Directors of the Company, upon recommendation of its Audit
Committee, has decided to end the engagement of Arthur Andersen LLP ("Arthur
Andersen") as the Company's independent public accountants, effective after
Arthur Andersen's review of the Company's financial results for the fiscal
quarter ended March 30, 2002 and the filing of this Quarterly Report on Form
10-Q for such quarter, and authorized the engagement of KPMG LLP ("KPMG") to
serve as the Company's independent public accountants for the fiscal year ending
December 28, 2002. Arthur Andersen's report on the Company's 2001 financial
statements was issued on March 16, 2002, in conjunction with the filing of the
Company's Annual Report on Form 10-K for the fiscal year ended December 29,
2001.


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<PAGE>
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


(a)         Exhibits
<TABLE>
<S>         <C>
10.1        Amendment No. 1 of Services Agreement made as of the 23rd day
            of April, 2002, by and among the Company, Thomas C. Shull and
            Meridian Ventures, LLC.

10.2        Amendment No. 1 to the Hanover Direct, Inc. Key Executive Six
            Month Compensation Continuation Plan, effective as of August 1,
            2001.

10.3        Amendment No. 1 to the Hanover Direct, Inc. Key Executive
            Twelve Month Compensation Continuation Plan, effective as of
            August 1, 2001.

10.4        Amendment No. 2 to the Hanover Direct, Inc. Key Executive
            Eighteen Month Compensation Continuation Plan, effective as of
            August 1, 2001.

10.5        Amendment No. 1 to the Hanover Direct, Inc. Directors Change of
            Control Plan, effective as of August 1, 2001.
</TABLE>


(b)         Reports on Form 8-K
<TABLE>
<S>         <C>
1.1         Form 8-K, filed January 10, 2002 -- reporting pursuant to Item 5 of
            such Form the appointment of Mr. Thomas C. Shull as Chairman of the
            Board of Directors of the Company, the election of Mr. E. Pendleton
            James as a member of the Board of Directors of the Company, the
            reduction of the number of Directors from six to five, and the time
            and place of the Company's 2002 Annual Shareholders Meeting.

1.2         Form 8-K, filed January 17, 2002 -- reporting pursuant to Item 5 of
            such Form the appointment of Mr. Edward M. Lambert as Executive Vice
            President & Chief Financial Officer of the Company effective January
            28, 2002.

1.3         Form 8-K, filed January 17, 2002 -- reporting pursuant to Item 5 of
            such Form the Company's receipt of a letter dated January 9, 2002
            from the American Stock Exchange.

1.4         Form 8-K, filed January 28, 2002 -- reporting pursuant to Item 5 of
            such Form the appointment of Mr. Brian C. Harriss as Executive
            Advisor to the Chairman of the Company coincident with his
            resignation as Executive Vice President & Chief Financial Officer of
            the Company effective January 28, 2002.

1.5         Form 8-K, filed March 27, 2002 -- reporting pursuant to Item 5
            of such Form scheduling information regarding its conference
            call with management to review the fiscal 2001 full year
            operating results.

1.6         Form 8-K, filed March 29, 2002 -- reporting pursuant to Item 5 of
            such Form operating results for the fiscal year ended December 29,
            2001.

1.7         Form 8-K, filed April 1, 2002 -- reporting pursuant to Item 5 of
            such Form an unofficial transcript of its conference call with
            management to review the fiscal year 2001 full year operating
            results.

1.8         Form 8-K, filed May 8, 2002 -- reporting pursuant to Item 5 of such
            Form scheduling information regarding its conference call with
            management to review the first quarter 2002 operating results.

1.9         Form 8-K, filed May 10, 2002 -- reporting pursuant to Item 5 of
            such Form the appointment of KPMG LLP as the Company's
            independent public accountants for the fiscal year ending
            December 28, 2002.
</TABLE>


                                       24
<PAGE>
                                 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/ Edward M. Lambert
                                         -------------------------------
                                              Edward M. Lambert
                                              Executive Vice President and
                                              Chief Financial Officer
                                              (On behalf of the Registrant and
                                              as principal financial officer)


Date: May 14, 2002


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