Document:

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Exhibit 10.3

                                                             [Execution Version]

              THIRTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT

      THIS THIRTY-FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of July 8, 2004, is entered into by and among CONGRESS
FINANCIAL CORPORATION, a Delaware corporation ("Lender"), BRAWN OF CALIFORNIA,
INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware
corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), HANOVER
REALTY, INC., a Virginia corporation ("Hanover Realty"), THE COMPANY STORE
FACTORY, INC., a Delaware corporation ("TCS Factory"), THE COMPANY OFFICE, INC.,
a Delaware corporation ("TCS Office"), SILHOUETTES, LLC, a Delaware limited
liability company ("Silhouettes LLC"), HANOVER COMPANY STORE, LLC, a Delaware
limited liability company ("HCS LLC"), DOMESTICATIONS, LLC, a Delaware limited
liability company ("Domestications LLC"), KEYSTONE INTERNET SERVICES, LLC, a
Delaware limited liability company ("KIS LLC"), and THE COMPANY STORE GROUP,
LLC, a Delaware limited liability company ("CSG LLC"; and, together with Brawn,
GBM, Gump's, Hanover Realty, TCS Factory, TCS Office, Silhouettes LLC, HCS LLC,
Domestications LLC and KIS LLC, collectively, "Borrowers" and each,
individually, a "Borrower"), HANOVER DIRECT, INC., a Delaware corporation
("Hanover"), HANOVER HOME FASHIONS GROUP, LLC, a Delaware limited liability
company ("HHFG LLC"), CLEARANCE WORLD OUTLETS, LLC, a Delaware limited liability
company ("Clearance World"), SCANDIA DOWN, LLC, a Delaware limited liability
company ("Scandia Down LLC"), LACROSSE FULFILLMENT, LLC, a Delaware limited
liability company ("LaCrosse LLC"), D.M. ADVERTISING, LLC, a Delaware limited
liability company ("DM Advertising LLC"), AMERICAN DOWN & TEXTILE, LLC, a
Delaware limited liability company ("ADT LLC"), and HANOVER GIFTS, INC., a
Virginia corporation ("Hanover Gifts"; and, together with Hanover, HHFG LLC,
Clearance World, Scandia Down LLC, LaCrosse LLC, DM Advertising LLC and ADT LLC,
collectively, "Guarantors" and each, individually, a "Guarantor").

                              W I T N E S S E T H:

      WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and
Security Agreement, dated November 14, 1995, as amended by the First Amendment
to Loan and Security Agreement, dated February 22, 1996, the Second Amendment to
Loan and Security Agreement, dated April 16, 1996, the Third Amendment to Loan
and Security Agreement, dated May 24, 1996, the Fourth Amendment to Loan and
Security Agreement, dated May 31, 1996, the Fifth Amendment to Loan and Security
Agreement, dated September 11, 1996, the Sixth Amendment to Loan and Security
Agreement, dated as of December 5, 1996, the Seventh Amendment to Loan and
Security Agreement, dated as of December 18, 1996, the Eighth Amendment to Loan
and Security Agreement, dated as of March 26, 1997, the Ninth Amendment to Loan
and Security Agreement, dated as of April 18, 1997, the Tenth Amendment to Loan
and Security Agreement, dated as of October 31, 1997, the Eleventh Amendment to
Loan and Security Agreement, dated as of March 25, 1998, the Twelfth Amendment
to Loan and

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Security Agreement, dated as of September 30, 1998, the Thirteenth Amendment to
Loan and Security Agreement, dated as of September 30, 1998, the Fourteenth
Amendment to Loan and Security Agreement, dated as of February 28, 2000, the
Fifteenth Amendment to Loan and Security Agreement, dated as of March 24, 2000,
the Sixteenth Amendment to Loan and Security Agreement, dated as of August 8,
2000, the Seventeenth Amendment to Loan and Security Agreement, dated as of
January 5, 2001, the Eighteenth Amendment to Loan and Security Agreement, dated
as of November 12, 2001, the Nineteenth Amendment to Loan and Security
Agreement, dated as of December 18, 2001 (as amended hereby, the "Nineteenth
Amendment to Loan Agreement"), the Twentieth Amendment to Loan and Security
Agreement, dated as of March 5, 2002, the Twenty-First Amendment to Loan and
Security Agreement, dated as of March 21, 2002, the Twenty-Second Amendment to
Loan and Security Agreement, dated as of August 16, 2002, the Twenty-Third
Amendment to Loan and Security Agreement, dated as of December 27, 2002, the
Twenty-Fourth Amendment to Loan and Security Agreement, dated as of February 27,
2003, the Twenty-Fifth Amendment to Loan and Security Agreement, dated as of
April 21, 2003, the Twenty-Sixth Amendment to Loan and Security Agreement, dated
as of August 29, 2003, the Twenty-Seventh Amendment to Loan and Security
Agreement, dated as of October 31, 2003, the Twenty-Eighth Amendment to Loan and
Security Agreement, dated as of November 4, 2003, the Twenty-Ninth Amendment to
Loan and Security Agreement, dated as of November 25, 2003 (as amended hereby,
the "Twenty-Ninth Amendment to Loan Agreement"), and the Thirtieth Amendment to
Loan and Security Agreement (the "Thirtieth Amendment to Loan and Security
Agreement"), dated as of March 25, 2004 (as so amended, the "Loan Agreement"),
pursuant to which Lender has made loans and advances to Borrowers;

      WHEREAS, Borrowers and Guarantors have requested that Lender (a) consent
to the issuance by Hanover of the Common Stock Warrant (as hereinafter defined),
the Series D Preferred Warrant (as hereinafter defined), the common stock
pursuant to the Common Stock Warrant and the Series D Preferred Stock pursuant
to the Series D Preferred Warrant, (b) consent to the filing of the Certificate
of Designation of the Series D Preferred Stock, (c) consent to the Reverse Split
(as hereinafter defined) and to Hanover making payments in cash to holders of
Hanover's common stock to repurchase fractional shares of such shareholder as
contemplated by the Reverse Split, (d) consent to certain amendments to
Hanover's Certificate of Incorporation, (e) consent to the issuance by Hanover
of Capital Stock consisting of common stock to Chelsey Finance, LLC ("Chelsey",
as hereinafter further defined) in lieu of cash as payment of a waiver fee as
contemplated by the Chelsey Commitment Letter (as hereinafter defined) on the
closing of the Chelsey Term Loans (as hereinafter defined), (f) reduce the
amount of the Maximum Credit, the amount of the Revolving Loan Limit and the
amount of the Inventory and Accounts sublimits of Revolving Loan Borrowers, (g)
release certain existing Availability Reserves and remove the Excess Loan
Availability covenant, (h) temporarily defer the payment of principal with
respect to the Tranche A Term Loan, (i) permit certain secured indebtedness to
Chelsey arising under term loans to be made by Chelsey to Borrowers in the
principal amount of $20,000,000, a portion of which proceeds shall be used to
repay in full the Tranche B Term Loan, (j) modify certain provisions of the
Financing Agreements with respect to Asset Sales and the application of proceeds
thereof by Borrowers, (k) extend the term of the Loan Agreement until July 8,
2007, and (l) amend certain other provisions of the Loan Agreement; and

      WHEREAS, Lender is willing to enter into such amendments and grant such
waivers subject to the terms and conditions and to the extent set forth herein;

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      NOW, THEREFORE, in consideration of the premises and covenants set forth
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:

      1.    Definitions.

            (a)   Additional Definitions. As used herein or in any of the other
Financing Agreements, the following terms shall have the meanings given to them
below, and the Loan Agreement shall be deemed and is hereby amended to include,
in addition and not in limitation, the following definitions:

                  (i)   "Amendments to Hanover Certificate of Incorporation"
shall mean the amendments to the Certificate of Incorporation of Hanover to be
entered into upon approval of the shareholders of Hanover (A) to effect the
Reverse Split, (B) reduce the par value of each share of common stock from $0.66
2/3 per share to $0.01 per share and reclassify the outstanding shares of common
stock into such lower par value shares, (C) increase the number of shares of
Additional Preferred Stock which Hanover would have authority to issue from
5,000,000 shares to 15,000,000 shares and make a corresponding change in the
aggregate number of shares of all classes of stock in the aggregate which
Hanover has authority to issue, and (D) after giving effect to the Reverse
Split, increase the number of shares of common stock which Hanover would have
authority to issue from 30,000,000 shares to 50,000,000 shares and make a
corresponding change to the aggregate number of shares of all classes of stock
in the aggregate which Hanover has authority to issue.

                  (ii)  "Certificate of Designation of the Series D Preferred
Stock" shall mean the Certificate of the Designations, Powers, Preferences and
Rights of Series D Participating Preferred Stock, dated as of July 8, 2004, of
Hanover Direct, Inc., as the same now exists or may hereafter be amended,
modified, supplemented, extended, renewed, restated or replaced.

                  (iii) "Chelsey" shall mean Chelsey Finance, LLC, a Delaware
limited liability company, and its successors and assigns.

                  (iv)  "Chelsey Commitment Letter" shall mean that certain
letter agreement, dated June 16, 2004, between Hanover and Chelsey Direct, LLC.

                  (v)   "Chelsey Common Warrant" shall mean the Common Stock
Purchase Warrant, dated as of the date hereof, by Hanover in favor of Chelsey,
as the same now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.

                  (vi)  "Chelsey Intercreditor Agreement" shall mean the
Intercreditor and Subordination Agreement, dated as of the date hereof, between
Lender and Chelsey, as acknowledged by Borrowers and Guarantors, as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.

                  (vii) "Chelsey Series D Warrant" shall mean the Series D
Preferred Stock Purchase Warrant, dated as of the date hereof, by Hanover in
favor of Chelsey with respect to the issuance of the Series D Preferred Warrant
and the exchange of the Series D Preferred Warrant

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for the Common Stock Warrant, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.

                  (viii) "Chelsey Term Loans" shall mean the term loans made by
Chelsey to Borrowers pursuant to the Chelsey Term Loan Documents in the original
principal amount of $20,000,000.

                  (ix)  "Chelsey Term Loan Agreement" shall mean the Loan and
Security Agreement, dated as of the date hereof, by and among Chelsey, Borrowers
and Guarantors, as the same now exists or may hereafter be further amended,
modified, supplemented, extended, renewed, restated or replaced.

                  (x)   "Chelsey Term Loan Documents" shall mean, collectively,
the following (as the same now exist or may hereafter exist upon the execution
and delivery thereof and may hereafter or thereafter, as the case may be, be
amended, modified, supplemented, extended, renewed, restated or replaced): (A)
the Chelsey Term Loan Agreement, (B) each of the documents listed on the
Schedule 1(a)(x) attached hereto, and (C) all agreements, documents,, and
instruments executed or delivered in connection with any of the foregoing.

                  (xi)  "Chelsey Warrants" shall mean, collectively (as the same
now exist or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced): (A) the Chelsey Series D Warrant, (B) the
Chelsey Common Warrant, and (C) the related agreements, documents and
instruments to be executed, delivered or filed in connection therewith or with
respect to the Common Stock Warrant or the Series D Preferred Warrant

                  (xii) "Common Stock Warrant" shall mean the warrant to acquire
shares of Capital Stock of Hanover consisting of common stock at an exercise
price of $.01 per share in an amount equal to thirty (30%) percent of the
outstanding shares of common stock of Hanover on a fully diluted basis.

                  (xiii) "Reverse Split" shall mean the one-for-ten reverse
split of Hanover's Capital Stock consisting of common stock referred to in the
Revised Preliminary Proxy Statement of Hanover filed with the SEC on June 23,
2004.

                  (xiv) "Series D Preferred Warrant" shall mean the warrant to
acquire shares of Series D Preferred Stock at an exercise price of $.01 per
share.

                  (xv)  "Series D Preferred Stock" shall mean the Capital Stock
of Hanover consisting of the Series D Participating Preferred Stock issued
pursuant to the Series D Preferred Warrant and the Certificate of Designation of
the Series D Preferred Stock.

                  (xvi) "Solvent" shall mean, at any time with respect to any
Person, that at such time such Person (A) is able to pay its debts as they
mature and has (and has a reasonable basis to believe it will continue to have)
sufficient capital (and not unreasonably small capital) to carry on its business
consistent with its practices as of the date hereof, and (B) the assets and
properties of such Person at a fair valuation (and including as assets for this
purpose at a fair valuation all rights of subrogation, contribution or
indemnification arising pursuant to any guarantees given by such Person) are
greater than the Indebtedness of such Person, and including subordinated

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and contingent liabilities computed at the amount which, such person has a
reasonable basis to believe, represents an amount which can reasonably be
expected to become an actual or matured liability (and including as to
contingent liabilities arising pursuant to any guarantee the face amount of such
liability as reduced to reflect the probability of it becoming a matured
liability).

            (b)   Amendment to Definitions.

                  (i)   Banking Days. All references to the term "Banking Days"
in the Loan Agreement and the other Financing Agreements shall be deemed and
each such reference is hereby redesignated "Business Days" and hereby amended to
mean any day other than a Saturday, Sunday, or other day on which commercial
banks are authorized or required to close under the laws of the State of New
York or the State of North Carolina, and a day on which Lender is open for the
transaction of business, except that if a determination of a Business Day shall
relate to any Eurodollar Rate Loans, the term Business Day shall also exclude
any day on which banks are closed for dealings in dollar deposits in the London
interbank market or other applicable Eurodollar Rate market.

                  (ii)  Eligible Fulfillment Contract Receivables. Section
1(a)(vi) of the Fifteenth Amendment to Loan Agreement is hereby amended by
deleting clauses (M) and (N) in their entirety and replacing them with the
following:

                  "(M)  such Fulfillment Contract Receivables of a single
      account debtor, other than Home Shopping Network, Inc., do not constitute
      more than twenty (20%) percent of all otherwise Eligible Fulfillment
      Contract Receivables (but the portion of the Fulfillment Contract
      Receivables not in excess of such percentage may be deemed Eligible
      Fulfillment Contract Receivables);

                  (N)   such Fulfillment Contract Receivables of Home Shopping
      Network, Inc. do not constitute more than forty (40%) percent of all
      otherwise Eligible Fulfillment Contract Receivables (but the portion of
      the Fulfillment Contract Receivables not in excess of such percentage may
      be deemed Eligible Fulfillment Contract Receivables);"

                  (iii) Interest Rate. With respect to interest accruing on or
after July 1, 2004, all references to the term "Interest Rate" in the Loan
Agreement and the other Financing Agreements shall be deemed and each such
reference is hereby amended to mean (A) as to Prime Rate Revolving Loans, a rate
of one-half of one (.5%) percent per annum in excess of the Prime Rate, (B) as
to Prime Rate Term Loans, a rate of one-half of one (.5%) percent per annum in
excess of the Prime Rate, (C) as to Eurodollar Rate Revolving Loans, a rate of
two and one-half (2.5%) percent per annum in excess of the Adjusted Eurodollar
Rate, and (D) as to Eurodollar Rate Term Loans, a rate of three (3.0%) percent
per annum in excess of the Adjusted Eurodollar Rate (in each case under clauses
(C) or (D), based on the Eurodollar Rate applicable for the Interest Period
selected by or on behalf of the applicable Borrower as in effect three (3)
Business Days prior to the commencement of such Interest Period for such
Eurodollar Rate Loans in accordance with the terms of the Loan Agreement as
amended hereby, whether such rate is higher or lower than any rate previously
quoted to or for such Borrower); provided, that, the Interest Rate, as to Prime
Rate Loans and Eurodollar Rate Loans, shall mean the rate two percent (2%) per
annum more than the otherwise applicable variable Interest Rate provided under
clause (A), (B), (C), (D) or (E) above (as applicable), at Lender's option,
without notice, for the period

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from and after the date of the occurrence of any Event of Default, and for so
long as such Event of Default is continuing, or after termination or non-renewal
of the Loan Agreement and the other Financing Agreements. If the aggregate
amount of Revolving Loans and Letter of Credit Accommodations to one or more
Revolving Loan Borrowers exceeds the amounts determined by Lender to be
available pursuant to the Revolving Loan Formulas, net of reserves and subject
to the applicable lending sublimits as to each Revolving Loan Borrower, and
subject to the Revolving Loan Limit as to all Revolving Loan Borrowers
considered together, the Interest Rate, as to Prime Rate Revolving Loans and
Eurodollar Rate Revolving Loans, shall mean the rate two percent (2%) per annum
more than the otherwise applicable Interest Rate provided under clause (A) or
(D) above (as applicable) as to the amount of any such excess(es) (whether or
not such excess(es) arise or are made with or without Lender's knowledge or
consent and whether made before or after an Event of Default); provided, that,
if such excess(es) arise solely by reason of the exercise of Lender's discretion
under the Loan Agreement to reduce the Revolving Loan Formulas in the absence of
an Event of Default that is continuing, the Interest Rate, shall not be so
increased as to the amount of any such excess(es) for a period of five (5) days
after Lender notifies the affected Revolving Loan Borrowers of such
discretionary reduction in the Revolving Loan Formulas and, at and after the
expiration of such period of five (5) days, the Interest Rate, may be so
increased by Lender as to the amount of any such excess(es) then remaining.

                  (iv)  Maximum Credit. Section 1.83 of the Loan Agreement is
hereby deleted and replaced with the following:

                  "1.83 `Maximum Credit' shall mean the aggregate principal
            amount of $39,974,000."

                  (v)   Net Orderly Liquidation Value. All references to the
term "Net Orderly Liquidation Value" in the Loan Agreement and the other
Financing Agreements shall be deemed, and each such reference is hereby amended,
to mean (A) as to Eligible Inventory other than Gump's Eligible Inventory or TCS
Eligible Inventory consisting of raw materials, an amount equal to eighty-five
(85%) percent of the gross proceeds that could be realized in cash if such
Inventory were sold within a six (6) to nine (9) month period in an orderly
liquidation sale, and (B) as to TCS Eligible Inventory consisting of raw
materials, an amount equal to eighty-five (85%) percent of the gross proceeds
that could be realized in cash if such Inventory were sold within a six (6) to
nine (9) month period in an orderly liquidation sale minus, in each case under
clauses (A) and (B), the estimated costs, expenses, fees, including reasonable
attorneys' fees, taxes and other charges which would be incurred in connection
with such sales, and estimated returns, all as set forth in, or calculated
using, the most recent Appraisal.

                  (vi)  Net GOB Value. All references to the term "Net GOB
Value" in the Loan Agreement and the other Financing Agreements shall be deemed,
and each such reference is hereby amended, to mean, as to Gump's Eligible
Inventory, an amount equal to eighty-five percent (85%) of the gross proceeds
that could be realized in cash if such Inventory were sold within a ninety (90)
day period in a going out of business liquidation sale, as set forth or
calculated in the most recent Appraisal, minus the estimated costs, expenses,
fees, including reasonable attorneys' fees, taxes and other charges which would
be incurred in connection with such sale, and estimated returns, all as set
forth in, or calculated using, the most recent Appraisal.

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                  (vii) Revolving Loan Limit. Section 1.119 of the Loan
Agreement is hereby deleted and replaced with the following:

                  "1.119 `Revolving Loan Limit' shall mean, at any time, the
            amount equal to $34,500,000."

                  (viii) Term Loans. All references to the "Term Loans" or the
"Tranche A Term Loans" in the Loan Agreement and the other Financing Agreements
are hereby redesignated "Term Loans" and hereby amended to mean, individually
and collectively, the Obligations evidenced by the Second Restated Hanover
Realty Term Note, the Restated TCS Factory Term Note and the Restated TCS Office
Term Note.

            (c)   Interpretation. All capitalized terms used herein and not
defined herein shall have the meanings given to such terms in the Loan
Agreement.

      2.    Consent to Issuance of Series D Preferred Warrant and Exchange of
Series D Preferred Warrant for Common Stock Warrant.

            (a)   Subject to the terms and conditions contained in this
Amendment and the Loan Agreement, Lender hereby consents to the issuance of the
Series D Preferred Warrant, the filing of the Certificate of Designation of the
Series D Preferred Stock, the issuance of Series D Preferred Stock upon the
exercise of the Series D Preferred Warrant, the exchange of the Series D
Preferred Warrant for the Common Stock Warrant pursuant to the Chelsey Series D
Warrant, and the issuance of Capital Stock consisting of common stock upon the
exercise of the Common Stock Warrant, so long as each of the following
conditions shall have been satisfied as determined by Lender:

                  (i)   the terms and conditions of the Certificate of
Designation of the Series D Preferred Stock, the Series D Preferred Warrant and
the Common Stock Warrant are satisfactory to Lender;

                  (ii)  Lender shall have received, in form and substance
satisfactory to Lender, true, correct and complete photocopies of the
Certificate of Designation of the Series D Preferred Stock, the Chelsey Series D
Warrant and a form of the Chelsey Common Warrant prior to the date hereof;

                  (iii) neither the execution and delivery of the Chelsey
Warrants or any other agreements, documents or instruments in connection
therewith, nor the consummation of the transactions therein contemplated, nor
compliance with the provisions thereof (A) shall violate any Federal or State
securities laws or any other law or regulation or any order or decree of any
court or governmental instrumentality in any respect, or (B) shall conflict with
or result in the breach of, or constitute a default in any respect under any
mortgage, deed of trust, security agreement, agreement or instrument to which
any Borrower or Guarantor is a party or may be bound, or (C) shall violate any
provision of the Certificate of Incorporation or By-Laws of any Borrower or
Guarantor;

                  (iv)  Lender shall have received, in form and substance
satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of
Directors' Resolutions evidencing the

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adoption and subsistence of corporate resolutions approving the execution,
delivery and performance by Hanover with respect to the Certificate of
Designation of the Series D Preferred Stock and the Chelsey Warrants;

                  (v)   on or before the consummation of the issuance of the
Series D Preferred Warrant, each of Borrowers and Guarantors shall have
delivered, or have caused to be delivered, to Lender a true and correct copy of
any consent, waiver or approval to or of the Series D Preferred Warrant, which
any Borrower or Guarantor is required to obtain from any Person other than
Lender in connection with the transactions contemplated by the Chelsey Warrants,
and such consent, approval or waiver shall be in a form reasonably acceptable to
Lender;

                  (vi)  as of the date of the consummation of the issuance of
the Series D Preferred Warrant, and after giving effect to such issuance, no
Event of Default or Incipient Default shall exist or have occurred and be
continuing; and

                  (vii) the closing of the issuance of the Series D Preferred
Warrant shall have occurred on the date hereof and the exchange of the Series D
Preferred Warrant for the Common Stock Warrant shall have occurred on or before
September 30, 2004, or such later date as Lender may agree to in writing.

            (b)   Effective on the effective date Lender determines that the
conditions set forth in Section 2(a) hereof have been satisfied, Borrowers and
Guarantors hereby acknowledge, confirm and agree that, notwithstanding anything
to the contrary that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan
Agreement or in any other provisions of the Loan Agreement or in any of the
other Financing Agreements, or in any of the Chelsey Warrants, without the prior
written consent of Lender, Borrowers and Guarantors shall not, and shall not
permit any of their Subsidiaries, directly or indirectly, to make any loans,
advances, dividends, redemptions or other payments in respect of the Capital
Stock of Hanover with respect to the Common Stock Warrant or the Series D
Preferred Warrant, whether in cash, property or otherwise; provided, that,
Hanover may make dividend payments in Capital Stock, but not cash, to Chelsey
with respect to the Common Stock Warrant or the Series D Preferred Warrant, so
long as each of the following conditions shall have been satisfied as determined
by Lender:

                  (i)   at the time of and after giving effect to both the
declaration and payment of such dividends, neither the declaration not the
payment of such dividend (A) shall violate any Federal or State securities laws
or any other law or regulation or any order or decree of any court or
governmental authority, (B) shall conflict with or result in the breach of, or
constitute a default under any mortgage, deed of trust, security agreement,
agreement or instrument to which any Borrower or Guarantor is a party or may be
bound, or (C) shall violate any provision of the Certificate of Incorporation or
By-Laws of any Borrower or Guarantor;

                  (ii)  at the time of and after giving effect to both the
declaration and payment of such dividends, Borrowers and Guarantors are and
shall continue to be Solvent; and

                  (iii) as of the date of the declaration and payment of such
dividends and after giving effect thereto, no Event of Default or Incipient
Default shall exist or have occurred and be continuing.

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      3.    Consent to Reverse Split.

            (a)   Subject to the terms and conditions contained in this
Amendment and the Loan Agreement, Lender hereby consents to the Reverse Split,
so long as each of the following conditions shall have been satisfied as
determined by Lender:

                  (i)   the terms and conditions of the Reverse Split are
satisfactory to Lender;

                  (ii)  Lender shall have received, in form and substance
satisfactory to Lender, true, correct and complete forms of certain of the
agreements, documents and instruments related to the Reverse Split prior to the
date hereof and Lender shall have received, in form and substance satisfactory
to Lender, true, correct and complete photocopies of all of the agreements,
documents and instruments to be executed and delivered in connection with the
Reverse Split prior to the execution and delivery thereof;

                  (iii) neither the consummation of the transactions
contemplated by the Reverse Split, nor compliance with the provisions thereof
(A) shall violate any Federal or State securities laws or any other law or
regulation or any order or decree of any court or governmental instrumentality
in any respect, or (B) shall conflict with or result in the breach of, or
constitute a default in any respect under any mortgage, deed of trust, security
agreement, agreement or instrument to which any Borrower or Guarantor is a party
or may be bound, or (C) shall violate any provision of the Certificate of
Incorporation or By-Laws of any Borrower or Guarantor;

                  (iv)  Lender shall have received, in form and substance
satisfactory to Lender, Secretary's or Assistant Secretary's Certificates of
Directors' Resolutions evidencing the adoption and subsistence of corporate
resolutions approving the performance by Hanover of the Reverse Split;

                  (v)   on or before the consummation of the Reverse Split,
Hanover shall have delivered, or have caused to be delivered, to Lender a true
and correct copy of any consent, waiver or approval to or of the Reverse Split,
which Hanover is required to obtain from any Person other than Lender in
connection with the transactions contemplated by the Reverse Split, and such
consent, approval or waiver shall be in a form reasonably acceptable to Lender;
and

                  (vi)  the closing of the Reverse Split shall have occurred on
or before September 30, 2004, or such later date as Lender may agree to in
writing.

            (b)   Effective on the effective date Lender determines that the
conditions set forth in Section 3(a) hereof have been satisfied, Hanover hereby
acknowledges, confirms and agrees that, notwithstanding anything to the contrary
that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan Agreement or in
any other provisions of the Loan Agreement or in any of the other Financing
Agreements, without the prior written consent of Lender, Hanover shall not, and
shall not permit any of its Subsidiaries, directly or indirectly, to make any
loans, advances, dividends, redemptions or other payments in respect of the
Capital Stock of Hanover in connection with the Reverse Split, whether in cash,
property or otherwise; provided, that, Hanover may make

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payments to holders of Capital Stock of Hanover consisting of common stock to
repurchase the fractional shares of Hanover contemplated by and upon the
consummation of the Reverse Split, so long as each of the following conditions
shall have been satisfied as determined by Lender:

                  (i)   the aggregate amount of such payments to repurchase such
fractional shares in cash shall not exceed $9,000 in the aggregate; and

                  (ii)  at the time of and after giving effect to such payment,
such payment (A) shall not violate any Federal or State securities laws or any
other law or regulation or any order or decree of any court or governmental
authority, (B) shall not conflict with or result in the breach of, or constitute
a default under any mortgage, deed of trust, security agreement, agreement or
instrument to which any Borrower or Guarantor is a party or may be bound, or (C)
shall not violate any provision of the Certificate of Incorporation or By-Laws
of any Borrower or Guarantor.

      4.    Consent to Amendments to Hanover Certificate of Incorporation.

            (a)   Subject to the terms and conditions contained in this
Amendment and the Loan Agreement, Lender hereby consents to the Amendments to
the Hanover Certificate of Incorporation so long as each of the following
conditions shall have been satisfied as determined by Lender:

                  (i)   the terms and conditions of the Amendments to the
Hanover Certificate of Incorporation are satisfactory to Lender;

                  (ii)  Lender shall have received, in form and substance
satisfactory to Lender, true, correct and complete forms of certain of the
agreements, documents and instruments to be executed and delivered in connection
with the Amendments to the Hanover Certificate of Incorporation prior to the
date hereof and Lender shall have received, in form and substance satisfactory
to Lender, true, correct and complete photocopies of all of the agreements,
documents and instruments to be executed and delivered in connection with the
Amendments to the Hanover Certificate of Incorporation prior to the filing
thereof with the Secretary of State of the State of Delaware;

                  (iii) neither the execution and delivery of the agreements,
documents and instruments to be executed and delivered in connection with the
Amendments to the Hanover Certificate of Incorporation, nor the consummation of
the transactions therein contemplated, nor compliance with the provisions
thereof (A) shall violate any Federal or State securities laws or any other law
or regulation or any order or decree of any court or governmental
instrumentality in any respect, or (B) shall conflict with or result in the
breach of, or constitute a default in any respect under any mortgage, deed of
trust, security agreement, agreement or instrument to which any Borrower or
Guarantor is a party or may be bound, or (C) shall violate any provision of the
Certificate of Incorporation as so amended or By-Laws of any Borrower or
Guarantor;

                  (iv)  Lender shall have received, in form and substance
satisfactory to Lender Secretary's or Assistant Secretary's Certificates of
Directors' Resolutions evidencing the adoption and subsistence of corporate
resolutions approving the execution, delivery and performance by Hanover with
respect to the agreements, documents and instruments to be

                                       10

<PAGE>

executed and delivered in connection with the Amendments to the Hanover
Certificate of Incorporation;

                  (v)   on or before the effectiveness of the Amendments to the
Hanover Certificate of Incorporation, each of Borrowers and Guarantors shall
have delivered, or have caused to be delivered, to Lender a true and correct
copy of any consent, waiver or approval to or of the Amendments to the Hanover
Certificate of Incorporation, which any Borrower or Guarantor is required to
obtain from any Person other than Lender in connection with the transactions
contemplated by the Amendments to the Hanover Certificate of Incorporation, and
such consent, approval or waiver shall be in a form reasonably acceptable to
Lender; and

                  (vi)  the closing of the transactions contemplated by the
Amendments to the Hanover Certificate of Incorporation shall have occurred on or
before September 30, 2004, or such later date as Lender may agree to in writing.

            (b)   To the extent that Lender determines that conditions set forth
in Section 4(a) hereof have been satisfied and after giving effect to the
Amendments to the Hanover Certificate of Incorporation, nothing contained in
this Section 4 shall modify or alter the applicability of any of the covenants
or other provisions of the Loan Agreement and the other Financing Agreements to
any of the Capital Stock of Hanover or its Subsidiaries.

      5.    Consent to Payment of Waiver Fee to Chelsey. Subject to the terms
and conditions contained in this Amendment and the Loan Agreement, Lender hereby
consents to the issuance by Hanover of Capital Stock consisting of common stock
to Chelsey Direct, LLC as payment in lieu of cash of a waiver fee as
contemplated by the Chelsey Commitment Letter on the closing of the Chelsey Term
Loans.

      6.    Release of Availability Reserves; Removal of Excess Loan
Availability Test.

            (a)   Borrowers and Guarantors acknowledge and agree that Lender has
heretofore established and maintained Availability Reserves from time to time
against the amount of Revolving Loans and Letter of Credit Accommodations
otherwise determined by Lender to be available to Revolving Loan Borrowers under
the Loan Agreement and the other Financing Agreements. Borrowers and Guarantors
have requested that Lender release a portion of such Availability Reserves of
Borrowers at this time in the amount of $6,850,000. Lender hereby releases
Availability Reserves in the amount of $6,850,000.

            (b)   Section 6.32 of the Loan Agreement regarding the requirement
that Borrowers at all times maintain Excess Loan Availability of not less than
$3,000,000 is hereby deleted and replaced with the following: "6.32
[Intentionally Omitted]".

            (c)   Notwithstanding anything to the contrary contained herein with
respect to the release of the Availability Reserve in the amount of $6,850,000
or the deletion of the requirement that Borrowers maintain Excess Loan
Availability of not less than $3,000,000, Lender shall have the right to
continue to establish and maintain from time to time any other and further
reserves against the availability of Revolving Loans and Letter of Credit
Accommodations under the Loan Agreement and the other Financing Agreements.

                                       11

<PAGE>

      7.    Lending Sublimits. Section 2.2 of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:

            "(a)  Subject to, and upon the terms and conditions contained
      herein, the aggregate principal amount of Revolving Inventory Loans and
      Letter of Credit Accommodations made available to Brawn shall not exceed
      Two Million Dollars ($2,000,000) at any one time outstanding.

            (b)   Subject to, and upon the terms and conditions contained
      herein, the aggregate principal amount of Revolving Inventory Loans and
      Letter of Credit Accommodations made available to GBM shall not exceed One
      Million Five Hundred Thousand Dollars ($1,500,000) at any one time
      outstanding.

            (c)   Subject to, and upon the terms and conditions contained
      herein, the aggregate principal amount of Revolving Inventory Loans and
      Letter of Credit Accommodations made available to Gump's shall not exceed
      Two Million Dollars ($2,000,000) at any one time outstanding.

            (d) Subject to, and upon the terms and conditions contained herein,
      the aggregate principal amount of Revolving Inventory Loans and Letter of
      Credit Accommodations made available to HCS LLC shall not exceed Ten
      Million Dollars ($10,000,000) at any one time outstanding.

            (e) Subject to, and upon the terms and conditions contained herein,
      the aggregate principal amount of Revolving Inventory Loans and Letter of
      Credit Accommodations made available to Domestications LLC shall not
      exceed Nine Million Dollars ($9,000,000) at any one time outstanding.

            (f) Subject to, and upon the terms and conditions contained herein,
      the aggregate principal amount of Revolving Inventory Loans and Letter of
      Credit Accommodations made available to Silhouettes LLC shall not exceed
      Three Million Dollars ($3,000,000) at any one time outstanding.

            (g) Subject to, and upon the terms and conditions contained herein,
      the aggregate principal amount of Revolving Inventory Loans and Letter of
      Credit Accommodations made available to CSG LLC shall not exceed Zero
      Dollars (-$0-) at any one time outstanding.

            (h) Subject to, and upon the terms and conditions contained herein,
      the aggregate principal amount of Revolving Inventory Loans and Letter of
      Credit Accommodations made available to KIS LLC shall not exceed Zero
      Dollars (-$0-) at any one time outstanding.

            (i) Without limiting the foregoing lending sublimits, (i) the
      aggregate amount of Revolving Loans shall not at any one time outstanding
      exceed the Revolving Loan Limit for all Revolving Loan Borrowers and (ii)
      the aggregate amount of Revolving Accounts Loans for all Deferred Billing
      Borrowers, Installment Billing Borrowers, Fulfillment Contract Borrowers
      and any other applicable Revolving Loan Borrowers shall not at any

                                       12

<PAGE>

      one time outstanding exceed $7,000,000. Lender shall have the right, from
      time to time, to establish and revise Revolving Accounts Loan sublimits
      for each Deferred Billing Borrower, Installment Billing Borrower,
      Fulfillment Contract Borrower and each other applicable Revolving Loan
      Borrower within the overall $7,000,000 sublimit applicable to all
      Revolving Accounts Loans."

      8.    Unused Line Fee. Section 2.7(c) of the Loan Agreement is hereby
deleted in its entirety and replaced with the following:

            "(c)  Unused Line Fee. With respect to each calendar month (or part
      thereof) during the Term, Borrowers shall pay to Lender monthly an unused
      line fee, fully earned and payable on the first day of each month, at a
      rate equal to one half of one percent (.5%) per annum, calculated upon the
      excess, if any, of (i) Thirty-Four Million Five Hundred Thousand Dollars
      ($34,500,000) over (ii) the average of the daily aggregate principal
      balances of the outstanding Revolving Loans and Letter of Credit
      Accommodations during the preceding month (or part thereof); provided,
      however, that if Lender, solely on the basis of the exercise of its
      discretion, reduces any Inventory Loan Formula for any calendar month (or
      part thereof) in the absence of an Event of Default or Incipient Default
      which is continuing, the amount of the unused line fee shall be calculated
      for such month by decreasing the base amount of Thirty-Four Million Five
      Hundred Thousand Dollars ($34,500,000) set forth in clause (i) by a
      percentage thereof equal to the difference between the Inventory Loan
      Formula otherwise applicable under Section 2.1(b) hereof and the Inventory
      Loan Formula as so reduced solely by virtue of Lender's discretion."

      9.    Modifications to Asset Sales Provisions.

            (a)   Asset Sale Lending Adjustments. Notwithstanding anything to
the contrary contained in the Nineteenth Amendment to Loan Agreement and the
Twenty-Ninth Amendment to Loan Agreement, subject to the terms and conditions
contained herein, the Asset Sale Lending Adjustments shall no longer be
applicable to Assets Sales and shall have no further force and effect.

            (b)   Amendments to Permitted Redemptions of Series C Participating
Preferred Stock. Notwithstanding anything to the contrary contained in Section
2(b) of the Twenty-Ninth Amendment to Loan Agreement, Borrowers and Guarantors
hereby acknowledge, confirm and agree that, notwithstanding anything to the
contrary that may be contained in Sections 6.3, 6.5 and 6.6 of the Loan
Agreement or in any other provisions of the Loan Agreement or in any of the
other Financing Agreements, or in any of the Series C Participating Preferred
Agreements, without the prior written consent of Lender, Borrowers and
Guarantors shall not, and shall not permit any of their Subsidiaries, directly
or indirectly, to make any loans, advances, dividends, redemptions or other
payments in respect of the Capital Stock of Hanover consisting of the Series C
Participating Preferred Stock, whether in cash, property or otherwise; provided,
that,

                  (i)   Hanover may make dividend payments in Capital Stock, but
not cash, to the holders of the Series C Participating Preferred Stock, so long
as each of the following conditions shall have been satisfied as determined by
Lender:

                                       13

<PAGE>

                        (A)   neither the declaration nor payment of such
dividends (1) shall violate any Federal or State securities laws or any other
law or regulation or any order or decree of any court or governmental authority,
(2) shall conflict with or result in the breach of, or constitute a default
under any mortgage, deed of trust, security agreement, agreement or instrument
to which any Borrower or Guarantor is a party or may be bound, or (3) shall
violate any provision of the Certificate of Incorporation or By-Laws of any
Borrower or Guarantor;

                        (B)   at the time of and after giving effect to both the
declaration and payment of such dividends, Borrowers and Guarantors are and
shall continue to be Solvent; and

                        (C)   as of the date of the declaration and payment of
such dividends and after giving effect thereto, no Event of Default or Incipient
Default shall exist or have occurred and be continuing.

                  (ii)  Hanover may, subject to the terms and conditions
contained herein, repurchase, redeem or retire in cash, Capital Stock consisting
of the Series C Participating Preferred Stock, so long as each of the following
conditions shall have been satisfied as determined by Lender:

                        (A)   Lender shall have received at least ten (10)
Business Days' prior written notice of the intention of Hanover to repurchase,
redeem or retire any of the Series C Participating Preferred Stock, which notice
shall set forth the proposed number of shares Hanover intends to repurchase,
redeem or retire, the price per share, the aggregate purchase price of such
shares and such other information related thereto that Lender may reasonably
request;

                        (B)   Excess Availability of Borrowers for each of the
immediately preceding thirty (30) days before any such repurchase, redemption or
retirement shall have been not less than $7,000,000 and on the date of any such
repurchase, redemption or retirement and after giving effect thereto, Excess
Availability of Borrowers shall be not less than $7,000,000;

                        (C)   Borrowers and Guarantors shall furnish to Lender,
upon Lender's request, any agreements, documents or instruments evidencing or
relating to any such repurchases, redemptions or retirements of Series C
Participating Preferred Stock;

                        (D)   any such repurchase, redemption or retirement of
Series C Participating Preferred Stock shall be paid using only Net Proceeds of
Asset Sales and not any other funds of any Borrower or Guarantor and shall be
paid with legally available funds therefor;

                        (E)   at the time of and after giving effect to any such
repurchase, redemption or retirement of Series C Participating Preferred Stock,
Borrowers and Guarantors are and shall continue to be Solvent;

                        (F)   the aggregate amount of all repurchases,
redemptions and retirements of such Capital Stock shall not exceed the amount of
the Net Proceeds derived from the Asset Sales after application of the Net
Proceeds in accordance with the terms and conditions of Section 10 hereof;

                        (G)   any such repurchase, redemption or retirement (1)
shall not violate any Federal or State securities laws or any other law or
regulation or any order or decree of any court

                                       14

<PAGE>

or governmental authority, (2) shall not conflict with or result in the breach
of, or constitute a default under any mortgage, deed of trust, security
agreement, agreement or instrument to which any Borrower or Guarantor is a party
or may be bound, or (3) shall not violate any provision of the Certificate of
Incorporation or By-Laws of any Borrower or Guarantor; and

                        (H)   as of the date of any such repurchase, redemption
or retirement of such Capital Stock and after giving effect thereto, no Event of
Default or Incipient Default shall exist or have occurred and be continuing.

                  (iii) Borrowers, Hanover and the other Guarantors shall not
amend, modify or supplement any of the Series C Participating Preferred
Agreements without the prior written consent of Lender.

      10.   Amendments to Application of Proceeds from Asset Sales.
Notwithstanding anything to the contrary contained in Section 3 of the
Twenty-Ninth Amendment to Loan Agreement,

            (a)   Upon receipt of the Net Proceeds of any Asset Sale, Lender
shall prior to an Event of Default that has occurred and is continuing apply
such Net Proceeds as follows:

                  (i)   first, to pay the Obligations of the Borrower or
Guarantor whose assets are being sold pursuant to such Asset Sale in the amount
equal to the amount of the Obligations consisting of Revolving Loans then
outstanding of such Borrower or Guarantor and, subject to Section 10(b) hereof,
to hold as cash collateral for the Obligations of such Borrower or Guarantor an
amount equal to one hundred and ten percent (110%) (or such greater amount in
accordance with Lender's policies and practices) of the Letter of Credit
Accommodations then outstanding of such Borrower or Guarantor;

                  (ii)  second, to pay the Obligations of Borrowers and
Guarantors in such order and manner as Lender may determine in its sole
discretion (other than a prepayment of any of the Term Loans), and immediately
thereafter, the full remaining amount of such proceeds after application
pursuant to clause (i) of this Section 10 shall be credited on a dollar for
dollar basis to the loan account(s) of Revolving Loan Borrowers for purposes of
determining the amount of Revolving Loans that may be made available to
Revolving Loan Borrowers in accordance with the terms and conditions of the Loan
Agreement to then be used, subject to the conditions set forth in Section 9
hereof and in the Loan Agreement and the other Financing Agreements, for the
purpose of repurchasing, redeeming or retiring shares of the Series C
Participating Preferred Stock held by Chelsey in accordance with the terms and
conditions of the Series C Participating Preferred Agreements as in effect on
the date of execution and delivery thereof; and

                  (iii) third, to pay the Obligations of Borrowers and
Guarantors in such order and manner as Lender may determine in its sole
discretion (other than a prepayment of any of the Term Loans), and immediately
thereafter, the full remaining amount of such proceeds after application
pursuant to clauses (i) and (ii) of this Section 10 shall be credited on a
dollar for dollar basis to the loan account(s) of Revolving Loan Borrowers for
purposes of determining the amount of Revolving Loans that may be made available
to Revolving Loan Borrowers in accordance with the terms and conditions of the
Loan Agreement to then be used, subject to the conditions set forth in Section 9
hereof and Section 6.4(j) of the Loan Agreement and the other Financing
Agreements, for the purpose of prepaying the principal amount of Indebtedness in

                                       15

<PAGE>

respect of the Chelsey Term Loan Agreement and the other Term Loan Agreements as
in effect on the date of execution and delivery thereof.

            (b)   If Lender holds cash collateral with respect to any Letter of
Credit Accommodations as of the date of an Asset Sale as provided in Section
10(a)(i) hereof, then to the extent that the letters of credit with respect to
such Letter of Credit Accommodations expire and no reimbursement obligation on
the part of any Borrower or Guarantor (or Lender on behalf of any Borrower or
Guarantor) remains with respect to such letters of credit as determined by
Lender in its discretion, then the amount of such cash collateral shall be
released and made available for purposes of redeeming the Series C Participating
Preferred Stock in accordance with the terms and conditions of Section 10(a)(ii)
hereof and the other terms and conditions of the Loan Agreement. If such cash
collateral is so released, then the conditions set forth in Section 9 hereof
shall be satisfied as of the date of the release of such cash collateral.

            (c)   After an Event of Default that has occurred and is continuing,
Lender may apply Net Proceeds of any Asset Sales to any of the Obligations of
Borrowers and Guarantors in whatever order and manner Lender may in its
discretion determine.

      11.   Indebtedness. Section 6.3 of the Loan Agreement is hereby amended by
deleting the word "and" appearing at the end of Section 6.3(i), replacing the
period with a semicolon and the word "and" appearing at the end of Section
6.3(j) and adding a new Section 6.3(k) immediately thereafter as follows:

            "(j)  Indebtedness of Borrowers and Guarantors to Chelsey consisting
      of the Chelsey Term Loans evidenced by or arising under the Chelsey Term
      Loan Documents; provided, that,

            (i)   the principal amount of such Indebtedness shall not in the
      aggregate exceed $20,000,000,

            (ii)  such Indebtedness is and shall be subject and subordinate in
      right of payment to the right of Lender to receive the prior indefeasible
      payment in full of all of the Obligations in accordance with the terms and
      conditions of the Chelsey Intercreditor Agreement;

            (iii) Borrowers and Guarantors shall not, directly or indirectly,
      make any payments in respect of such Indebtedness, including, but not
      limited to, any prepayments or other non-mandatory payments; provided,
      that,

                  (A)   Borrowers may pay to Chelsey on July 8, 2004 the closing
      fee in the amount of $200,000 out of the proceeds of the Chelsey Term
      Loans;

                  (B)   Borrowers may make regularly scheduled payments of
      interest in respect of such Indebtedness in accordance with the terms and
      conditions of the Chelsey Term Loan Agreement so long as no Incipient
      Default or Event of Default shall exist or have occurred.

                  (B)   during any fiscal quarter of Hanover and its
      Subsidiaries commencing with the fiscal quarter of Hanover and its
      Subsidiaries ending September 25, 2004,

                                       16

<PAGE>

      Borrowers may make payments of principal in cash in respect of such
      Indebtedness in accordance with the terms and conditions of the Chelsey
      Term Loan Agreement, so long as each of the following conditions shall
      have been satisfied as determined by Lender:

                        (1)   as of the date of any such payment and after
      giving effect thereto, the aggregate amount of the Excess Availability of
      Borrowers on such date and the immediately preceding thirty (30)
      consecutive days before such payment shall be not less than $7,000,000;

                        (2)   the cumulative EBITDA of Hanover and its
      Subsidiaries calculated based on the immediately preceding four (4) fiscal
      quarters immediately preceding the quarter in which the date of such
      payment occurs and for which fiscal quarter Lender has received financial
      statements of Hanover and its Subsidiaries, shall be not less than
      $14,000,000;

                        (3)   the aggregate amount of such principal prepayments
      shall not exceed $2,000,000 in any such fiscal quarter;

                        (4)   any such payment shall not be made earlier than
      the date that is five (5) Business Days after receipt by Lender of
      quarterly financial statements of Hanover and its Subsidiaries for such
      immediately preceding fiscal quarter delivered to Lender in accordance
      with the terms and conditions of Section 6.18(a)(ii) of the Loan
      Agreement;

                        (5)   as of the date of such payment and after giving
      effect thereto, Borrowers and Guarantors are and shall continue to be
      Solvent; and

                        (6)   as of the date of such payment and after giving
      effect thereto, no Incipient Default or Event of Default shall exist or
      have occurred;

                  (C)   Borrowers may make payments of principal in cash in
      respect of such Indebtedness in accordance with the terms and conditions
      of the Chelsey Term Loan Agreement using Net Proceeds of Asset Sales, so
      long as each of the following conditions shall have been satisfied as
      determined by Lender:

                        (1)   Lender shall have received at least ten (10)
      Business Days' prior written notice of the intention of Hanover to repay
      such Indebtedness, which notice shall set forth the proposed amount of
      principal to be repaid and such other information related thereto that
      Lender may reasonably request;

                        (2)   Excess Availability of Borrowers for each of the
      immediately preceding thirty (30) days before any such repayment shall
      have been not less than $7,000,000 and on the date of any such repayment
      and after giving effect thereto, Excess Availability of Borrowers shall be
      not less than $7,000,000;

                        (3)   any such repayment of such Indebtedness under this
      clause (iii)(C) shall be paid using only Net Proceeds of Asset Sales and
      not any other funds of Borrowers or Guarantors;

                                       17

<PAGE>

                        (4)   all of the Series C Preferred Participating
      Preferred Stock shall have been repurchased, redeemed or retired in
      accordance with the terms and conditions of Section 10 hereof and the
      aggregate amount of all repurchases, redemptions and retirements of such
      Capital Stock shall not exceed the amount of the Net Proceeds derived from
      the Asset Sales after application of the Net Proceeds in accordance with
      the terms and conditions of Section 10 hereof;

                        (5)   as of the date of such payment and after giving
      effect thereto, Borrowers and Guarantors are and shall continue to be
      Solvent; and

                        (6)   as of the date of any such repayment and after
      giving effect thereto, no Event of Default or Incipient Default shall
      exist or have occurred and be continuing;

                  (D)   Borrowers may make payments of reasonable fees and
      expenses as determined by Lender in its discretion in respect of such
      Indebtedness in accordance with the terms and conditions of the Chelsey
      Term Loan Documents, so long as each of the following conditions shall
      have been satisfied as determined by Lender:

                        (1)   Lender shall have received at least five (5)
      Business Days' prior written notice of the intention of Borrowers to pay
      such fees, which notice shall set forth the proposed amount of the fees,
      and reason for the incurrence of such fees and such other information
      related thereto that Lender may reasonably request; and

                        (2)   as of the date of any such payment and after
      giving effect thereto, no Event of Default or Incipient Default shall
      exist or have occurred and be continuing;

            (iv)  such Indebtedness shall only be secured by security interests
      in and liens upon the assets of Borrowers and Guarantor to the extent
      permitted under Section 6.4(j) hereof;

            (v)   Borrowers and Guarantors shall not, directly or indirectly,
      amend, modify, alter or change any terms of such Indebtedness or any
      agreement, document or instrument related thereto, except, that, Borrowers
      and Guarantors may, only after prior written notice to Lender, amend,
      modify, alter or change the terms thereof so as to extend the maturity
      thereof or defer the timing of any payments in respect thereof, or to
      forgive or cancel any portion of such Indebtedness (other than pursuant to
      payments thereof), or to reduce the interest rate or any fees in
      connection therewith, or to release any liens or security interests in any
      assets and properties of Borrowers and Guarantors, or to make any
      covenants contained therein less restrictive or burdensome as to Borrowers
      and Guarantors or otherwise more favorable to Borrowers and Guarantors or
      redeem, retire, defease, purchase or otherwise acquire such Indebtedness,
      or set aside or otherwise deposit or invest any sums for such purpose, and

            (vi)  Borrowers and Guarantors shall furnish to Lender all notices,
      demands or other materials concerning such Indebtedness either received by
      any of Borrowers or Guarantors or on its or their behalf, promptly after
      receipt thereof, or sent by any of

                                       18

<PAGE>

      Borrowers or Guarantors or on its or their behalf, concurrently with the
      sending thereof, as the case may be."

      12.   Encumbrances. Section 6.4 of the Loan Agreement is hereby amended by
deleting the word "and" appearing at the end of Section 6.4(h), replacing the
period with a semicolon and the word "and" appearing at the end of Section
6.4(i) and adding new Section 6.4(j) immediately thereafter, as follows:

            "(j)  liens and security interests in favor of Chelsey on the assets
      and properties of Borrowers and Guarantors under the Chelsey Term Loan
      Documents as in effect on July 8, 2004; provided, that, (i) such security
      interests in and mortgages and liens in favor of Chelsey shall at all
      times be subject to the terms and conditions set forth in the Chelsey
      Intercreditor Agreement, in form and substance satisfactory to Lender."

      13.   Appraisals. Section 6.15 of the Loan Agreement is hereby deleted and
replaced with the following:

                  "6.15 Appraisals

                        (a)   Borrowers shall, at Borrowers' expense, upon the
      request of Lender not more than once during any three (3) month period,
      and at any time or times as Lender may request on and after an Event of
      Default, deliver to Lender appraisals by the Appraiser of any or all of
      the Inventory of Borrowers, in form, scope and methodology acceptable to
      Lender, and including, but not limited to, a report as to the Net Orderly
      Liquidation Value of the Inventory of Borrowers, other than Inventory of
      Gump's at the Gump's Main Store, and of the Net GOB Value of the Inventory
      of Gump's at the Gump's Main Store.

                        (b)   Upon Lender's request, Borrowers shall, at their
      expense, once in any calendar year during the Term (excluding any such
      reports or appraisals delivered in connection with the closing hereunder)
      and at any time or times as Lender may request on or after an Event of
      Default, deliver or cause to be delivered to Lender written reports or
      appraisals as to their Real Property or Equipment, in form, scope and
      methodology acceptable to Lender and by an appraiser acceptable to
      Lender."

      14.   Second Restated Hanover Realty Term Note.

            (a)   Each of Borrowers and Guarantors hereby acknowledges, confirms
and agrees that Hanover Realty is indebted to Lender as of July 8, 2004, in
respect of the Obligations evidenced by the Second Restated Hanover Realty Term
Note in the aggregate principal amount of $ 3,885,714 (the "Existing Hanover
Realty Term Loan Balance"), together with interest accrued and accruing thereon
and costs, expenses, fees (including attorneys' fees and legal expenses) and
other charges now or hereafter owed by Borrowers to Lender attributable to the
Existing Hanover Realty Term Loan Balance, all of which are unconditionally
owing by Hanover Realty to Lender, without offset, defense or counterclaim of
any kind, nature and description whatsoever.

                                       19

<PAGE>

            (b)   Effective as of the date hereof, the Second Restated Hanover
Realty Term Note is hereby amended to provide that, unless sooner payable in
accordance with the terms and conditions of the Loan Agreement, the Second
Restated Hanover Realty Term Note and any other Financing Agreement, Hanover
Realty shall pay to Lender principal in respect of the Second Restated Hanover
Realty Term Note on the dates and in the amounts as follows:

<TABLE>
<CAPTION>
        Principal                        Principal
      Payment Date                       Amount Due
---------------------------              ----------
<S>                                      <C>
August 1, 2004                              $-0-
September 1, 2004                           $-0-
October 1, 2004                             $-0-
November 1, 2004 and each
month thereafter                            $121,429
</TABLE>

            (c)   Principal in respect of the Hanover Realty Term Loan Second
Amended and Restated Note shall be paid in immediately available funds and in
the manner of payment otherwise provided in the Second Amended and Restated
Note. All principal and interest (together with any fees, costs, expenses and
other charges in respect of the Hanover Realty Term Loan payable by Borrowers to
Lender) shall be automatically, without notice or demand, absolutely and
unconditionally due and payable on July 8, 2007.

            (d)   The amendment of the Second Restated Hanover Realty Term Note
as set forth herein, shall not, in any manner, be construed to constitute
payment of, or impair, limit, cancel or extinguish, or constitute a novation in
respect of, any of the obligations, liabilities or indebtedness evidenced by or
arising under the Second Restated Hanover Realty Term Note. Interest accrued and
accruing shall continue to be paid as provided in the Second Restated Hanover
Realty Term Note. The liens and security interests securing such obligations,
liabilities or indebtedness shall not in any manner be impaired, limited,
terminated, waived or released hereby and the Second Restated Hanover Realty
Term Note shall continue to be secured by all the Collateral.

      15.   Restated TCS Factory Term Note.

            (a)   Each of Borrowers and Guarantors hereby acknowledges, confirms
and agrees that TCS Factory is indebted to Lender as of July 8, 2004, in respect
of the Obligations evidenced by the Second Restated TCS Factory Term Note in the
aggregate principal amount of $1,062,857 (the "Existing TCS Factory Term Loan
Balance"), together with interest accrued and accruing thereon and costs,
expenses, fees (including attorneys' fees and legal expenses) and other charges
now or hereafter owed by TCS Factory to Lender attributable to the Existing TCS
Factory Term Loan Balance, all of which are unconditionally owing by TCS Factory
to Lender, without offset, defense or counterclaim of any kind, nature and
description whatsoever.

            (b)   Effective as of the date hereof, the Restated TCS Factory Term
Note is hereby amended to provide that, unless sooner payable in accordance with
the terms and conditions of the Loan Agreement, the Restated TCS Factory Term
Note and any other Financing Agreement, TCS Factory shall pay to Lender
principal in respect of the Restated TCS Factory Term Note on the dates and in
the amounts as follows:

                                       20

<PAGE>

<TABLE>
<CAPTION>
       Principal                         Principal
      Payment Date                       Amount Due
-------------------------                ----------
<S>                                      <C>
August 1, 2004                              $-0-
September 1, 2004                           $-0-
October 1, 2004                             $-0-
November 1, 2004 and each
month  thereafter                           $33,215
</TABLE>

            (c)   Principal in respect of the TCS Factory Term Loan shall be
paid in immediately available funds and in the manner of payment otherwise
provided in the Restated TCS Factory Term Note. All principal and interest
(together with any fees, costs, expenses and other charges in respect of the TCS
Factory Term Loan payable by TCS Factory to Lender) shall be automatically,
without notice or demand, absolutely and unconditionally due and payable on July
8, 2007.

            (d)   The amendment of the Restated TCS Factory Term Note as set
forth herein, shall not, in any manner, be construed to constitute payment of,
or impair, limit, cancel or extinguish, or constitute a novation in respect of,
any of the obligations, liabilities or indebtedness evidenced by or arising
under the Restated TCS Factory Term Note. Interest accrued and accruing shall
continue to be paid as provided in the Restated TCS Factory Term Note. The liens
and security interests securing such obligations, liabilities or indebtedness
shall not in any manner be impaired, limited, terminated, waived or released
hereby and the Restated TCS Factory Term Note shall continue to be secured by
all the Collateral.

      16.   Restated TCS Office Term Note.

            (a)   Each of Borrowers and Guarantors hereby acknowledges, confirms
and agrees that TCS Office is indebted to Lender as of July 8, 2004, in respect
of the Obligations evidenced by the Second Restated TCS Office Term Note in the
aggregate principal amount of $360,000 (the "Existing TCS Office Term Loan
Balance"), together with interest accrued and accruing thereon and costs,
expenses, fees (including attorneys' fees and legal expenses) and other charges
now or hereafter owed by TCS Office to Lender attributable to the Existing TCS
Office Term Loan Balance, all of which are unconditionally owing by TCS Office
to Lender, without offset, defense or counterclaim of any kind, nature and
description whatsoever.

            (b)   Effective as of the date hereof, the Restated TCS Office Term
Note is hereby amended to provide that, unless sooner payable in accordance with
the terms and conditions of the Loan Agreement, the Restated TCS Office Term
Note and any other Financing Agreement, TCS Office shall pay to Lender principal
in respect of the Restated TCS Office Term Note on the dates and in the amounts
as follows:

<TABLE>
<CAPTION>
       Principal                          Principal
      Payment Date                       Amount Due
-------------------------                ----------
<S>                                      <C>
August 1, 2004                              $-0-
September 1, 2004                           $-0-
October 1, 2004                             $-0-
</TABLE>

                                       21

<PAGE>

<TABLE>
<S>                                      <C>
November 1, 2004 and each
month  thereafter                           $11,250
</TABLE>

            (c)   Principal in respect of the TCS Office Term Loan shall be paid
in immediately available funds and in the manner of payment otherwise provided
in the Restated Factory Term Note. All principal and interest (together with any
fees, costs, expenses and other charges in respect of the TCS Office Term Loan
payable by TCS Office to Lender) shall be automatically, without notice or
demand, absolutely and unconditionally due and payable on July 8, 2007.

            (d)   The amendment of the Restated TCS Office Term Note as set
forth herein, shall not, in any manner, be construed to constitute payment of,
or impair, limit, cancel or extinguish, or constitute a novation in respect of,
any of the obligations, liabilities or indebtedness evidenced by or arising
under the Restated TCS Office Term Note. Interest accrued and accruing shall
continue to be paid as provided in the Restated TCS Office Term Note. The liens
and security interests securing such obligations, liabilities or indebtedness
shall not in any manner be impaired, limited, terminated, waived or released
hereby and the Restated TCS Office Term Note shall continue to be secured by all
the Collateral.

      17.   Term. The first sentence of Section 9.1(a) of the Loan Agreement is
hereby deleted in its entirety and replaced with the following:

            "(a)  This Agreement and the other Financing Agreements shall become
      effective as of the date hereof and this Agreement shall continue in full
      force and effect for a term ending on July 8, 2007 (the "Renewal Date"),
      and from year-to-year thereafter, unless sooner terminated pursuant to the
      terms hereof."

            (b)   The first sentence of Section 9.1(f) of the Loan Agreement is
      hereby deleted and replaced with the following, effective with respect to
      any termination after the date hereof:

            "(f)  If Lender terminates this Agreement or the other Financing
      Agreements after the occurrence and during the continuance of an Event of
      Default or at the request of Borrowers prior to the Renewal Date, in view
      of the impracticality and extreme difficulty of ascertaining actual
      damages, and by mutual agreement of the parties as to a reasonable
      calculation of Lender's lost profits as a result thereof, Borrowers hereby
      agree to pay to Lender, upon the effective date of such termination, a fee
      (the "Early Termination Fee") in the amount equal to:

<TABLE>
<CAPTION>
          Amount                                          Period
          ------                                          ------
<S>                               <C>
(i)   3% of Maximum Credit        From the date hereof through and including July 7, 2005
(ii)  1% of Maximum Credit        From and after July 8, 2005 through and including July  7, 2006
</TABLE>

                                       22

<PAGE>

<TABLE>
<S>                               <C>
(iii) 1% of Maximum Credit        From and after July 8, 2006 to but not including July 8, 2007"
</TABLE>

      18.   Fees. In addition to all other fees, charges, interest and expenses
payable by Borrowers to Lender under the Loan Agreement and the other Financing
Agreements, Borrowers shall pay to Lender, contemporaneously herewith, an
amendment fee in the amount of $400,000, which fee is fully earned as of the
date hereof and may be charged into the loan account(s) of any Borrower.

      19.   Use of Chelsey Term Loans Proceeds. Borrowers shall use and hereby
direct Lender to apply the initial proceeds of the Chelsey Term Loans provided
by Chelsey: (a) to repay in full the outstanding Obligations in respect of the
Tranche B Term Loan, and (b) for general operating, working capital, and other
proper corporate purposes of Borrowers and Guarantors not otherwise prohibited
by the terms of the Loan Agreement, including fees and expenses of the
transactions contemplated hereunder set forth in the Chelsey Commitment Letter.

      20.   Representations, Warranties and Covenants. Borrowers and Guarantors
represent, warrant and covenant with and to Lender as follows, which
representations, warranties and covenants (other than the representation,
warranty and covenant contained in Section 20(e) hereof, which is made as of the
date hereof) are continuing and shall survive the execution and delivery hereof,
the truth and accuracy of, or compliance with each, together with the
representations, warranties and covenants in the other Financing Agreements,
being a condition of the effectiveness of this Amendment and a continuing
condition of the making or providing of any Revolving Loans or Letter of Credit
Accommodations by Lender to Borrowers:

            (a)   This Amendment and each other agreement or instrument to be
executed and delivered by each Borrower or Guarantor hereunder have been duly
authorized, executed and delivered by all necessary action on the part of each
Borrower and each Guarantor which is a party hereto and thereto and, if
necessary, their respective stockholders (with respect to any corporation) or
members (with respect to any limited liability company), and is in full force
and effect as of the date hereof, as the case may be, and the agreements and
obligations of each Borrower and Guarantor, as the case may be, contained herein
and therein constitute legal, valid and binding obligations of each Borrower and
Guarantor, as the case may be, enforceable against them in accordance with their
terms.

            (b)   No action of, or filing with, or consent of any governmental
or public body or authority, and no consent of any party other than Chelsey, is
required to authorize, or is otherwise required in connection with, the
execution, delivery and performance of this Amendment and each other agreement
or instrument to be executed and delivered pursuant hereto and thereto.

            (c)   Neither the execution and delivery of this Agreement, the
Chelsey Warrants, the Chelsey Term Loan Documents, the Amendments to the Hanover
Certificate of Incorporation, the Certification of Designation of Series D
Preferred Stock, or any other agreements, documents or instruments in connection
therewith, nor the consummation of the transactions herein and therein
contemplated, nor compliance with the provisions thereof (i) has violated or
shall violate any Federal or State securities laws or any other law or
regulation or any

                                       23

<PAGE>

order or decree of any court or governmental instrumentality in any respect, or
(ii) does, or shall conflict with or result in the breach of, or constitute a
default in any respect under any mortgage, deed of trust, security agreement,
agreement or instrument to which any Borrower or Guarantor is a party or may be
bound, or (iii) does or shall violate any provision of the Certificate of
Incorporation or By-Laws of any Borrower or Guarantor.

            (d)   Notwithstanding anything to the contrary that may be contained
in any of the Chelsey Warrants, the Certification of Designation of Series D
Preferred Stock or the Amendments to the Hanover Certificate of Incorporation,
Borrowers and Guarantors shall not, and shall not permit any of their
Subsidiaries, directly or indirectly, to make any loans, advances, dividends,
redemptions or other payments in respect of the Capital Stock of Hanover with
respect to the Common Stock Warrant, the Certification of Designation of Series
D Preferred Stock or the Series D Preferred Warrant, or in connection with the
Reverse Split, whether in cash, property or otherwise, except for the payments
in the form of Capital Stock permitted hereunder or payments in cash permitted
hereunder in connection with the repurchase of the fractional shares held by
shareholders of Hanover pursuant to the Reverse Split.

            (e)   To the best knowledge of Borrowers and Guarantors as of the
date hereof, no court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the issuance of
the Chelsey Warrants, the Certification of Designation of Series D Preferred
Stock, the Amendments to the Hanover Certificate of Incorporation, the Chelsey
Term Loan Documents and the transactions related thereto and, except as
previously disclosed to Lender in writing pursuant to the letter dated as of
July 8, 2004, no governmental or other action or proceeding has been threatened
or commenced against Borrowers or Guarantors, seeking any injunction,
restraining order or other order which seeks to avoid or otherwise modify the
transactions contemplated by the Chelsey Warrants, the Amendments to the Hanover
Certificate of Incorporation, the Certification of Designation of Series D
Preferred Stock or the Chelsey Term Loan Documents.

            (f)   Neither the execution and delivery of the Chelsey Warrants,
the Amendments to the Hanover Certificate of Incorporation, the Certification of
Designation of Series D Preferred Stock or the Chelsey Term Loan Documents, nor
the consummation of the transactions contemplated by the Chelsey Warrants, the
Amendments to the Hanover Certificate of Incorporation, the Certification of
Designation of Series D Preferred Stock or the Chelsey Term Loan Documents, nor
compliance with the provisions thereof, shall result in the creation or
imposition of any lien, charge or encumbrance upon any of the Collateral, other
than pursuant to the Chelsey Term Loan Documents to the extent permitted herein
and in the Chelsey Intercreditor Agreement.

            (g)   The Chelsey Warrants and the Certification of Designation of
Series D Preferred Stock have been duly authorized, issued and delivered by
Hanover and the transactions contemplated thereunder shall be performed in
accordance with their terms by the respective parties thereto in all respects,
including the fulfillment (not merely the waiver) of all conditions precedent
set forth therein.

            (h)   The Chelsey Term Loan Documents have been duly authorized,
executed and delivered by Borrowers and Guarantors, as the case may be, and the
transactions contemplated thereunder shall be performed in accordance with their
terms by the respective parties thereto in

                                       24

<PAGE>

all respects, including the fulfillment (not merely the waiver) of all
conditions precedent set forth therein.

            (i)   The Amendments to the Hanover Certificate of Incorporation
shall be duly authorized, executed and delivered by Hanover and the transactions
contemplated thereunder shall be performed in accordance with their terms by the
respective parties thereto in all respects, including the fulfillment (not
merely the waiver) of all conditions precedent set forth therein.

            (j)   All actions and proceedings required by the Chelsey Warrants,
the Amendments to the Hanover Certificate of Incorporation, the Certification of
Designation of Series D Preferred Stock, the Chelsey Term Loan Documents, and
applicable law or regulations, including, without limitation, all Securities
Laws, shall have been taken, and the transaction required thereunder shall have
been duly and validly taken and consummated, other than with respect to the
exchange of the Series D Preferred Warrant for the Common Stock Warrant and the
Amendments to the Hanover Certificate of Incorporation on or before September
30, 2004 (at which time all such actions and proceedings shall have been taken,
and the transaction required thereunder shall have been duly and validly taken
and consummated).

            (k)   All of the representations and warranties set forth in the
Loan Agreement as amended hereby, and the other Financing Agreements, are true
and correct in all material respects after giving effect to the provisions of
this Amendment, except to the extent any such representation or warranty is made
as of a specified date, in which case such representation or warranty shall have
been true and correct as of such date.

            (l)   After giving effect to the provisions of this Agreement, the
consummation of the transactions contemplated by the Chelsey Warrants, the
Certification of Designation of Series D Preferred Stock, the Chelsey Term Loan
Documents, the Amendments to the Hanover Certificate of Incorporation, or any
other agreements, documents or instruments in connection therewith, when
consummated will not constitute an Incipient Event of Default or Event of
Default.

            (m)   After the date hereof, the Chelsey Warrants, the Chelsey Term
Loan Documents (except as permitted under the Loan Agreement as amended hereby),
the Amendments to the Hanover Certificate of Incorporation, or any other
agreements, documents or instruments in connection therewith, shall not be
amended, modified, supplemented, extended, renewed, restated or replaced with
the prior written consent of Lender.

            (n)   Notwithstanding the provisions of Section 8(d) of the
Thirtieth Amendment to Loan Agreement or the letter agreement, dated as of May
11, 2004, by Lender in favor of Brawn and Hanover, Borrowers and Guarantors
shall enter into, on or before August 15, 2004, an Amended and Restated Loan and
Security Agreement among Lender, Borrowers and Guarantors and an amendment and
restatement of such other Financing Agreements or amendments to or amendments
and restatements of any existing Financing Agreements as Lender shall request in
connection with the amendment and restatement of the Loan Agreement.

            (o)   After giving effect to the provisions of this Amendment, no
Event of Default or Incipient Default exists or has occurred and is continuing.

                                       25

<PAGE>

      21.   Conditions Precedent. Concurrently with the execution and delivery
hereof (except to the extent otherwise indicated below), and as a further
condition to the effectiveness of this Amendment and the agreement of Lender to
the modifications and amendments set forth in this Amendment:

            (a)   Lender shall have received a photocopy of an executed original
or executed original counterparts of this Amendment by facsimile (with the
originals to be delivered within five (5) Business Days after the date hereof),
as the case may be, duly authorized, executed and delivered by Borrowers and
Guarantors;

            (b)   Lender shall have received, in form and substance satisfactory
to Lender, true and complete copies of all of the Chelsey Term Loan Documents,
the Certificate of Designation of the Series D Preferred Stock, the Chelsey
Series D Warrant and the form of the Amendments to the Hanover Certificate of
Incorporation;

            (c)   Lender shall have received, in form and substance satisfactory
to Lender, the Chelsey Intercreditor Agreement;

            (d)   Lender shall have received at the payment direction of
Borrowers for the account of Borrowers, the proceeds of the Chelsey Term Loans
in the amount of not less than $19,800,000 from Chelsey, a portion of which loan
proceeds shall be used to repay in full Tranche B Term Loan;

            (e)   as of the closing and after giving effect to the transactions
contemplated by this Amendment, Borrowers shall have Excess Availability of not
less than $20,000,000;

            (f)   Lender shall have received, in form and substance satisfactory
to Lender, Secretary's or Assistant Secretary's Certificates of Directors'
Resolutions and Shareholders' Consent evidencing the adoption and subsistence of
corporate resolutions approving the execution, delivery and performance by
Borrowers and Guarantors (other than the consent of the shareholders of Hanover)
that are corporations of this Amendment and the agreements, documents and
instruments to be delivered pursuant to this Amendment;

            (g)   Lender shall have received, in form and substance satisfactory
to Lender, the consent of all Participants to this Amendment and the
transactions contemplated hereby; and

            (h)   each of Borrowers and Guarantors shall deliver, or cause to be
delivered, to Lender a true and correct copy of any consent, waiver or approval
to or of this Amendment that any Borrower or Guarantor is required to obtain
from any other Person, and such consent, approval or waiver shall be in a form
reasonably acceptable to Lender.

      22.   Effect of this Amendment. This Amendment constitutes the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all prior oral or written communications, memoranda, proposals,
negotiations, discussions, term sheets and commitments with respect to the
subject matter hereof. Except as expressly provided herein, no other changes or
modifications to the Loan Agreement or any of the other Financing Agreements, or
waivers of or consents under any provisions of any of the foregoing, are
intended or implied by this Amendment, and in all other respects the Financing
Agreements are hereby

                                       26

<PAGE>

specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent that any provision of the Loan Agreement or
any of the other Financing Agreements conflicts with any provision of this
Amendment, the provision of this Amendment shall control.

      23.   Further Assurances. Borrowers and Guarantors shall execute and
deliver such additional documents and take such additional action as may be
reasonably requested by Lender to effectuate the provisions and purposes of this
Amendment.

      24.   Governing Law. The validity, interpretation and enforcement of this
Amendment in any dispute arising out of the relationship between the parties
hereto, whether in contract, tort, equity or otherwise shall be governed by the
internal laws of the State of New York, without regard to any principle of
conflict of laws or other rule of law that would result in the application of
the law of any jurisdiction other than the State of New York.

      25.   Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.

      26.   Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       27

<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on the day and year first written.

                               CONGRESS FINANCIAL CORPORATION

                               By: /s/ Eric Storz
                                   -------------------------------------
                               Title: A/V/P

                               BRAWN OF CALIFORNIA, INC.

                               By: /s/ Steven Seymour
                                   -------------------------------------
                               Name: Steven Seymour
                               Title: President

                               GUMP'S BY MAIL, INC.

                               By: /s/ Jed Pogran
                                   -------------------------------------
                               Name: Jed Pogran
                               Title: President

                               GUMP'S CORP.

                               By: /s/ Jed Pogran
                                   -------------------------------------
                               Name: Jed Pogran
                               Title: President

                               HANOVER REALTY, INC.

                               By: /s/ Doug Mitchell
                                   -------------------------------------
                               Name: Doug Mitchell
                               Title: President

                               THE COMPANY STORE FACTORY, INC.

                               By: /s/ David Pipkorn
                                   -------------------------------------
                               Name: David Pipkorn
                               Title: President

                     [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                       28

<PAGE>

                    [SIGNATURES CONTINUED FROM PREVIOUS PAGE]

                               THE COMPANY OFFICE, INC.

                               By: /s/ David Pipkorn
                                   -------------------------------------
                               Name: David Pipkorn
                               Title: President

                               SILHOUETTES, LLC

                               By: /s/ Charles E. Blue
                                   -------------------------------------
                               Name: Charles E. Blue
                               Title: President

                               HANOVER COMPANY STORE, LLC

                               By: /s/ Charles E. Blue
                                   -------------------------------------
                               Name: Charles E. Blue
                               Title: President

                               DOMESTICATIONS, LLC

                               By: /s/ Charles E. Blue
                                   -------------------------------------
                               Name: Charles E. Blue
                               Title: Vice President

                               KEYSTONE INTERNET SERVICES, LLC

                               By: /s/ Charles E. Blue
                                   -------------------------------------
                               Name: Charles E. Blue
                               Title: Vice President

                               THE COMPANY STORE GROUP, LLC

                               By: /s/ Charles E. Blue
                                   -------------------------------------
                               Name: Charles E. Blue
                               Title: President

                     [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                       29

<PAGE>

                    [SIGNATURES CONTINUED FROM PREVIOUS PAGE]

                By their signatures below, the
                undersigned Guarantors acknowledge
                and agree to be bound by the
                applicable provisions of this
                Amendment:

                HANOVER DIRECT, INC.

                By: /s/ Charles E. Blue
                    -------------------------------
                Name: Charles E. Blue
                Title: Senior Vice President and
                Chief Financial Officer

                HANOVER HOME FASHIONS GROUP, LLC

                By: /s/ Charles E. Blue
                    -------------------------------
                Name: Charles E. Blue
                Title: Vice President

                CLEARANCE WORLD OUTLETS, LLC

                By: /s/ Charles E. Blue
                    -------------------------------
                Name: Charles E. Blue
                Title: President

                SCANDIA DOWN, LLC

                By: /s/ David Pipkorn
                    -------------------------------
                Name: David Pipkorn
                Title: President

                LA CROSSE FULFILLMENT, LLC

                By: /s/ Charles E. Blue
                    -------------------------------
                Name: Charles E. Blue
                Title: President

                     [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                       30

<PAGE>

                    [SIGNATURES CONTINUED FROM PREVIOUS PAGE]

                D.M. ADVERTISING, LLC

                By: /s/ Charles E. Blue
                    -------------------------------
                Name: Charles E. Blue
                Title: President

                AMERICAN DOWN & TEXTILE, LLC

                By: /s/ David Pipkorn
                    -------------------------------
                Name: David Pipkorn
                Title: President

                HANOVER GIFTS, INC.

                By: /s/ Doug Mitchell
                    -------------------------------
                Name: Doug Mitchell
                Title: President

                                       31<PAGE>

Exhibit 10.4

THIS SERIES D PREFERRED STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE
PURCHASED HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS SERIES D PREFERRED
STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE
SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION
UNDER APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE
PROPOSED TRANSACTION DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE
STATE SECURITIES LAWS.

                              HANOVER DIRECT, INC.
                    SERIES D PREFERRED STOCK PURCHASE WARRANT

Date of Issuance:  July 8, 2004                             Certificate No. PW-1

      THIS IS TO CERTIFY that CHELSEY DIRECT, LLC, a Delaware limited liability
company, and its transferees, successors and assigns (the "Holder"), for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, is entitled to purchase from HANOVER DIRECT, INC., a Delaware
corporation (the "Company"), at the price of $0.01 per share (the "Exercise
Price"), at any time after September 30, 2004 (the "Commencement Date") and
expiring on July 8, 2014 unless sooner exchanged pursuant to Section 1(c) hereof
(the "Expiration Date"), one hundred (100) shares of the fully paid and
nonassessable Series D Preferred Stock (as defined in Section 9 hereof), of the
Company (as such number may be adjusted as provided herein). The one hundred
(100) shares of Series D Preferred Stock which may be purchased pursuant to this
Warrant, as the same may be adjusted pursuant to Section 6, are referred to
herein as the "Aggregate Number."

      Capitalized terms used herein shall have the meanings ascribed to such
terms in Section 9 hereof unless otherwise defined herein.

SECTION 1. THE WARRANT; TRANSFER AND EXCHANGE.

            (a)   The Warrant. This Series D Preferred Stock Purchase Warrant
(the "Warrant") is issued in connection with the Junior Secured Term Loan
Agreement. This Warrant and the rights and privileges of the Holder and the
Company hereunder may be exercised by the Holder in whole or in part as provided
herein; shall survive any termination of the Junior Secured Term Loan Agreement;
and, as more fully set forth in Sections 1(b) and 8 hereof, may be transferred
by the Holder to any other Person or Persons at any time or from time to time,
in whole or in part, regardless of whether the Holder retains any or all rights
under the Junior Secured Term Loan Agreement.

<PAGE>

            (b)   Transfer and Exchanges. The Company shall initially record
this Warrant on a register to be maintained by the Company with its other stock
books and, subject to Section 8 hereof, from time to time thereafter shall
reflect the transfer of this Warrant on such register when surrendered for
transfer in accordance with the terms hereof and properly endorsed, accompanied
by appropriate instructions, and further accompanied by payment in cash or by
check, bank draft or money order payable to the order of the Company, in United
States currency, of an amount equal to any stamp or other tax or governmental
charge or fee required to be paid in connection with the transfer thereof. Upon
any such transfer, a new warrant or warrants shall be issued to the transferee
and the Holder (in the event the Warrant is only partially transferred) and the
surrendered warrant shall be canceled. This Warrant may be exchanged at the
option of the Holder, when surrendered at the Principal Office of the Company,
for another warrant or other warrants of like tenor and representing in the
aggregate the right to purchase a like number of shares of Series D Preferred
Stock.

            (c)   Mandatory Exchange of Warrant. Notwithstanding any other
provision of this Warrant, upon (x) the approval by the stockholders of the
Company, at the Company's next meeting of stockholders, of the issuance of
equity securities of the Company to the Holder (the "Stockholder Approval") and
(y) the filing with the Secretary of State of the State of Delaware of an
amendment to the Certificate of Incorporation of the Company as contemplated by
the Stockholder Approval (the "Required Filing"), this Warrant shall be
automatically exchanged for a warrant in the form attached hereto as Exhibit A
(the "Common Stock Purchase Warrant") to purchase 30.00% of the issued and
outstanding shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company on a Fully Diluted basis (which for these purposes
assumes the full exercise of the Common Stock Purchase Warrant) at an exercise
price of $0.01 per share of Common Stock. Upon the Company's receipt of the
Stockholder Approval and the completion of the Required Filing, the Holder shall
surrender this Warrant at the Principal Office of the Company and receive in
consideration therefor the Common Stock Purchase Warrant.

SECTION 2. EXERCISE.

            (a)   Right to Exercise. At any time after the Commencement Date and
on or before the Expiration Date unless sooner exchanged pursuant to
Section 1(c) hereof, the Holder, in accordance with the terms hereof, may
exercise this Warrant, in whole at any time or in part from time to time, by
delivering this Warrant to the Company during normal business hours on any
Business Day at the Company's Principal Office, together with the Election to
Purchase, in the form attached hereto as Exhibit B and made a part hereof (the
"Election to Purchase"), duly executed, and payment of the Exercise Price per
share for the number of shares to be purchased (the "Exercise Amount"), as
specified in the Election to Purchase. If the Expiration Date is not a Business
Day, then this Warrant may be exercised on the next succeeding Business Day.

            (b)   Payment of Exercise Price. Payment of the Exercise Price shall
be made to the Company as follows (or any combination thereof): (i) in cash or
other immediately available funds or (ii) as provided in Section 2(c). In the
case of payment of all or a portion of the Exercise Price pursuant to Section
2(c), the direction by the Holder to make a "Cashless Exercise" shall serve as
accompanying payment for that portion of the Exercise Price. The amount of the
Exercise Price to be paid shall equal the product of (i) the Exercise Amount
multiplied by (ii) the Exercise Price per share.

                                       2

<PAGE>

            (c)   Cashless Exercise. The Holder shall have the right to pay all
or a portion of the Exercise Price by making a "Cashless Exercise" pursuant to
this Section 2(c), in which case the portion of the Exercise Price to be so paid
shall be paid by reducing the number of shares of Series D Preferred Stock
otherwise issuable pursuant to the Election to Purchase (the "Exercised Shares")
by an amount (the "Cashless Exercise Shares") equal to (i) the Exercise Price
multiplied by the Exercised Shares and divided by (ii) the Fair Market Value Per
Share. The number of shares of Series D Preferred Stock to be issued to the
Holder as a result of a Cashless Exercise will therefore be equal to the
Exercised Shares minus the Cashless Exercise Shares.

            (d)   Issuance of Shares of Series D Preferred Stock. Upon receipt
by the Company of this Warrant at its Principal Office in proper form for
exercise, and accompanied by payment of the Exercise Price as aforesaid, the
Holder shall be deemed to be the holder of record of the shares of Series D
Preferred Stock issuable upon such exercise, notwithstanding that certificates
representing such shares of Series D Preferred Stock may not then be actually
delivered. Upon such surrender of this Warrant and payment of the Exercise Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to, or upon the written order of, the Holder (and in such
name or names as the Holder may designate) a certificate or certificates for the
Exercise Amount, subject to any reduction as provided in Section 2(c) for a
Cashless Exercise.

            (e)   Fractional Shares. The Company shall not be required to
deliver fractions of shares of Series D Preferred Stock upon exercise of this
Warrant. If any fraction of a share of Series D Preferred Stock would be
deliverable upon an exercise of this Warrant, the Company may, in lieu of
delivering such fraction of a share of Series D Preferred Stock, make a cash
payment to the Holder in an amount equal to the same fraction of the Fair Market
Value Per Share determined as of the Business Day immediately preceding the date
of exercise of this Warrant.

            (f)   Partial Exercise. In the event of a partial exercise of this
Warrant, the Company shall issue to the Holder a Warrant in like form for the
unexercised portion thereof.

                                       3

<PAGE>

SECTION 3. PAYMENT OF TAXES. The Company shall pay all stamp taxes attributable
to the initial issuance of shares or other securities issuable upon the exercise
of this Warrant or issuable pursuant to Section 6 hereof, excluding any tax or
taxes which may be payable because of the transfer involved in the issuance or
delivery of any certificates for shares or other securities in a name other than
that of the Holder in respect of which such shares or securities are issued.

SECTION 4. REPLACEMENT WARRANT. In case this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue and deliver in exchange and substitution
for and upon cancellation of the mutilated Warrant, or in lieu of and in
substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction of such Warrant and upon receipt of indemnity reasonably
satisfactory to the Company (provided, that if the Holder is a financial
institution or other institutional investor its personal undertaking to provide
an indemnity is hereby deemed to be reasonably satisfactory to the Company;
provided, further, the form of such undertaking shall be reasonably satisfactory
to the Company).

SECTION 5. RESERVATION OF SERIES D PREFERRED STOCK AND OTHER COVENANTS.

            (a)   Reservation of Authorized Series D Preferred Stock. The
Company shall at all times reserve and keep available out of the aggregate of
its authorized but unissued shares, free of preemptive rights, such number of
its duly authorized shares of Series D Preferred Stock, or other stock or
securities deliverable pursuant to Section 6 hereof, as shall be sufficient to
enable the Company at any time to fulfill all of its obligations under this
Warrant.

            (b)   Affirmative Actions to Permit Exercise and Realization of
Benefits. If any shares of Series D Preferred Stock reserved or to be reserved
for the purpose of the exercise of this Warrant, or any shares or other
securities reserved or to be reserved for the purpose of issuance pursuant to
Section 6 hereof, require registration with or approval of any governmental
authority under any federal or state law (other than securities laws) before
such shares or other securities may be validly delivered upon exercise of this
Warrant, then the Company covenants that it will, at its sole expense, secure
such registration or approval, as the case may be (including but not limited to
approvals or expirations of waiting periods required under the Hart Scott Rodino
Antitrust Improvements Act).

            (c)   Regulatory Requirements and Restrictions. In the event of any
reasonable determination by the Holder that, by reason of any existing or future
federal or state law, statute, rule, regulation, guideline, order, court or
administrative ruling, request or directive (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful)
(collectively, a "Regulatory Requirement"), the Holder is effectively restricted
or prohibited from holding this Warrant or the Warrant Shares (including any
shares of capital stock or other securities distributable to the Holder in any
merger, reorganization, readjustment or other reclassification), or otherwise
realizing upon or receiving the benefits intended under this Warrant, the
Company shall, and shall use its reasonable best efforts to have its
shareholders, take such action as the Holder and the Company shall jointly agree
in good faith to be reasonably necessary to permit the Holder to comply with
such Regulatory Requirement. The reasonable

                                       4

<PAGE>

costs of taking such action, whether by the Company, the Holder or otherwise,
shall be borne by the Holder.

            (d)   Validly Issued Shares. The Company covenants that all shares
of Series D Preferred Stock that may be delivered upon exercise of this Warrant,
assuming full payment of the Exercise Price, (including those issued pursuant to
Section 6 hereof), shall upon delivery by the Company be duly authorized and
validly issued, fully paid and nonassessable, free from all stamp taxes, liens
and charges with respect to the issue or delivery thereof and otherwise free of
all other security interests, encumbrances and claims of any nature whatsoever
other than such security interests, encumbrances and claims granted by the
Holder.

            (e)   No Additional Issuances of Series D Preferred Stock. The
Company covenants that it shall not issue or sell any shares of Series D
Preferred Stock, or securities convertible into or exercisable for Series D
Preferred Stock, in excess of the Aggregate Number. Under certain conditions,
the Aggregate Number is subject to adjustment as set forth in this Section 6.

SECTION 6. ADJUSTMENTS TO AGGREGATE NUMBER.

            (a)   Equitable Adjustments. In case the Company shall (i) subdivide
its outstanding shares of Series D Preferred Stock into a larger number of
shares of Series D Preferred Stock, including without limitation by means of a
stock split, (ii) combine its outstanding shares of Series D Preferred Stock
into a smaller number of shares of Series D Preferred Stock, or (iii) take or
propose to take any other action that may have a dilutive effect on the Warrant
Shares issuable upon exercise of this Warrant, as reasonably determined by the
Board of Directors of the Company, the Aggregate Number in effect immediately
prior thereto shall be equitably adjusted so as to prevent the dilution of the
Warrant Shares issuable upon exercise of this Warrant. No adjustments shall be
made under this Section 6 as a result of the issuance by the Company of the
Warrant Shares upon exercise of this Warrant.

            (b)   Changes in Series D Preferred Stock. In case at any time the
Company shall initiate any transaction or be a party to any transaction
(including, without limitation, a merger, consolidation, share exchange, sale,
lease or other disposition of all or substantially all of the Company's assets,
liquidation, recapitalization or reclassification of the Series D Preferred
Stock) in connection with which the outstanding Series D Preferred Stock shall
be changed into or exchanged for different securities of the Company or capital
stock or other securities of another corporation or interests in a non-corporate
entity or other property (including cash) or any combination of the foregoing
(each such transaction being herein called a "Transaction"), then, as a
condition of the consummation of the Transaction, lawful, enforceable and
adequate provision shall be made so that the Holder shall be entitled to elect,
by written notice to the Company, to receive (i) a new warrant in form and
substance similar to, and in exchange for, this Warrant to purchase all or a
portion of such securities or other property or (ii) upon exercise of this
Warrant at any time on or after the consummation of the Transaction, in lieu of
the Warrant Shares issuable upon such exercise prior to such consummation, the
securities or other property (including cash) to which such Holder would have
been entitled upon consummation of the Transaction if such Holder had exercised
this Warrant immediately prior thereto (subject to adjustments from and after
the consummation date as nearly equivalent as possible to the

                                       5

<PAGE>

adjustments provided for in this Section 6). The Company will not effect any
Transaction unless prior to the consummation thereof each corporation or other
entity (other than the Company) which may be required to deliver any new
warrant, securities or other property as provided herein shall assume, by
written instrument delivered to the Holder, the obligation to deliver to such
Holder such new warrant, securities or other property as in accordance with the
foregoing provisions such Holder may be entitled to receive and such corporation
or entity shall have similarly delivered to the Holder an opinion of counsel for
such corporation or entity, satisfactory to the Holder, which opinion shall
state that all of the terms of the new warrant or this Warrant shall be
enforceable against the Company and such corporation or entity in accordance
with the terms hereof and thereof, together with such other matters as the
Holder may reasonably request. The foregoing provisions of this Section 6(b)
shall similarly apply to successive Transactions.

            (c)   Notices.

                  (i)   Notice of Proposed Actions. In case the Company shall
propose (A) to pay any dividend payable in stock of any class to the holders of
its Capital Stock or to make any other distribution to the holders of its
Capital Stock, (B) to offer to the holders of its Capital Stock rights to
subscribe for or to purchase any Convertible Securities or additional shares of
Capital Stock or shares of stock of any class or any other securities, warrants,
rights or options (other than the exercise of pre-emptive rights by a Holder)
(C) to effect any reclassification of its Capital Stock, (D) to effect any
recapitalization, stock subdivision, stock combination or other capital
reorganization, (E) to effect any consolidation or merger, share exchange, or
sale, lease or other disposition of all or substantially all of its property,
assets or business, (F) to effect the liquidation, dissolution or winding up of
the Company or (G) to effect any other action which would require an adjustment
under this Section 6, then in each such case the Company shall give to the
Holder written notice of such proposed action, which shall specify the date on
which a record is to be taken for the purposes of such stock dividend, stock
subdivision, stock combination, distribution or rights, or the date on which
such reclassification, recapitalization, reorganization, consolidation, merger,
share exchange, sale, lease, transfer, disposition, liquidation, dissolution,
winding up or other transaction is to take place and the date of participation
therein by the holders of Capital Stock, if any such date is to be fixed, or the
date on which the transfer of Capital Stock is to occur, and shall also set
forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action on the Capital Stock and on the Aggregate
Number after giving effect to any adjustment which will be required as a result
of such action. Such notice shall be so given in the case of any action covered
by clause (A) or (B) above at least 30 days prior to the record date for
determining holders of the Capital Stock for purposes of such action and, in the
case of any other such action, at least 30 days prior to the earlier of the date
of the taking of such proposed action or the date of participation therein by
the holders of Capital Stock.

                  (ii)  Adjustment Notice. Whenever the Aggregate Number is to
be adjusted pursuant to this Section 6, unless otherwise agreed by the Holder,
the Company shall promptly (and in any event within 10 Business Days after the
event requiring the adjustment) prepare a certificate signed by the chief
financial officer of the Company, setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment is to be
calculated. The certificate shall set forth, if applicable, a description of the
basis on which

                                       6

<PAGE>

the Board of Directors in good faith determined, as applicable, the Fair Market
Value Per Share, the fair market value of any evidences of indebtedness, shares
of stock, other securities, warrants, other subscription or purchase rights, or
other property or the equitable nature of any adjustment under Section 6(b)
hereof, the new Aggregate Number and, if applicable, any new securities or
property to which the Holder is entitled. The Company shall promptly cause a
copy of such certificate to be delivered to the Holder. The Company shall keep
at its Principal Office copies of all such certificates and cause the same to be
available for inspection at said office during normal business hours by the
Holder or any prospective purchaser of the Warrant (in whole or in part) if so
designated by the Holder.

SECTION 7. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, share exchange, dissolution or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, including without limitation the adjustments
required under Section 6 hereof, and will at all times in good faith assist in
the carrying out of all such terms and in taking of all such action as may be
necessary or appropriate to protect the rights of the Holder against dilution or
other impairment. Without limiting the generality of the foregoing and
notwithstanding any other provision of this Warrant to the contrary (including
by way of implication), the Company (a) will not increase the par value of any
shares of Series D Preferred Stock receivable on the exercise of this Warrant
above the amount payable therefor on such exercise or (b) will take all such
action as may be necessary or appropriate so that the Company may validly and
legally issue fully paid and nonassessable shares of Series D Preferred Stock on
the exercise of this Warrant.

SECTION 8. TRANSFERS OF THE WARRANT.

            (a)   Generally. Subject to the restrictions set forth in this
Section 8, the Holder may at any time and from time to time freely transfer this
Warrant and the Warrant Shares in whole or in part. This Warrant and the Warrant
Shares are issued or issuable subject to the provisions and conditions contained
herein, and every Holder hereof by accepting the same agrees with the Company to
such provisions and conditions, and represents to the Company that this Warrant
has been acquired and the Warrant Shares will be acquired for the account of the
Holder for investment and not with a view to or for sale in connection with any
distribution thereof.

            (b)   Compliance with Securities Laws. The Holder agrees that the
Warrant and the Warrant Shares may not be sold or otherwise disposed of except
pursuant to an effective registration statement under the Securities Act and
applicable state securities laws or pursuant to an applicable exemption from the
registration requirements of the Securities Act and such state securities laws.
In the event that the Holder transfers this Warrant or the Warrant Shares
pursuant to an applicable exemption from registration, the Company may request,
at its expense, an opinion of counsel that the proposed transfer does not
violate the Securities Act and applicable state securities laws.

            (c)   Restrictive Securities Legend. The certificate representing
the shares of Series D Preferred Stock issued upon the exercise of the Warrant
shall bear the restrictive legends set forth below:

                                       7

<PAGE>

            "The shares represented by this certificate have not been registered
            under the Securities Act of 1933, as amended, or the securities laws
            of any State and may not be sold or otherwise disposed of except
            pursuant to an effective registration statement under such Act and
            applicable State securities laws or pursuant to an applicable
            exemption from the registration requirements of such Act and such
            laws."

SECTION 9. DEFINITIONS.

      As used herein, in addition to the terms defined elsewhere herein, the
following terms shall have the following meanings.

      "Affiliate" means, with respect to any Person, a Person (a) directly or
indirectly controlling, controlled by, or under common control with, such
Person, (b) directly or indirectly owning or holding ten percent (10%) or more
of any equity interest in such Person or (c) ten percent (10%) or more of whose
voting stock or other equity interest is directly or indirectly owned or held by
such Person. For purposes of this definition, "control" (including with
correlative meanings, the terms "controlling," controlled by" and "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.

      "Aggregate Number" has the meaning set forth in the Preamble.

      "Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in The City of New York, New York are authorized or
required by law or executive order to close.

      "Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests or equivalents in capital stock
(whether voting or nonvoting, and whether common or preferred) of such
corporation, and (ii) with respect to any Person that is not a corporation, any
and all partnership, membership, limited liability company or other equity
interests of such Person that confer on a Person the right to receive a share of
the profits and losses of, or the distribution of assets of, the issuing Person;
and in each case, any and all warrants, rights or options to purchase any of the
foregoing.

      "Cashless Exercise Shares" has the meaning set forth in Section 2(c).

      "Certificate of Incorporation" means, as to a Person, unless the context
in which it is used shall otherwise require, the Certificate of Incorporation
(or equivalent or similar organizational documents) of such Person as in effect
on the Commencement Date.

      "Commencement Date" has the meaning set forth in the Preamble.

      "Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act.

      "Common Stock" has the meaning set forth in Section 1(c).

      "Common Stock Purchase Warrant" has the meaning set forth in Section 1(c).

      "Company" has the meaning set forth in the Preamble.

                                       8

<PAGE>

      "Convertible Securities" means evidences of indebtedness, shares of stock
or other securities (including, but not limited to options and warrants) which
are directly or indirectly convertible, exercisable or exchangeable, with or
without payment of additional consideration in cash or property, for shares of
Series D Preferred Stock, either immediately or upon the onset of a specified
date or the happening of a specified event.

      "Election to Purchase" has the meaning set forth in Section 2(a).

      "Exercise Amount" has the meaning set forth in Section 2(a).

      "Exercise Price" has the meaning set forth in the Preamble.

      "Exercised Shares" has the meaning set forth in Section 2(c).

      "Expiration Date" has the meaning set forth in the Preamble.

      "Fair Market Value Per Share" means, per share of Series D Preferred Stock
on any date: (a) the fair market value of the outstanding Series D Preferred
Stock based upon an arm's length sale of the Company on such date (including its
ownership interest in all Persons) as an entirety, such sale being between a
willing buyer and a willing seller and determined without reference to any
discount for minority interest, restrictions on transfer, disparate voting
rights among classes of capital stock or lack of marketability with respect to
capital stock divided by (b) the aggregate number of shares of Series D
Preferred Stock outstanding. The Fair Market Value Per Share shall be determined
by the Board of Directors of the Company in good faith within 10 days of any
event for which such determination is required and such determination (including
the basis therefor) shall be promptly provided to the Holder. Such determination
shall be binding on the Holder unless the Holder objects thereto in writing
within 10 Business Days of receipt. In the event the Company and the Holder
cannot agree on the Fair Market Value Per Share within 10 Business Days of the
date of the Holder's objection, the Fair Market Value Per Share shall be
determined by a disinterested appraiser (which shall be a nationally recognized
investment banking firm) mutually selected by the Company and the Holder, the
fees and expenses of which shall be paid 50% by the Company and 50% by the
Holder unless such determination results in a Fair Market Value Per Share more
than 110% of the Fair Market Value Per Share initially determined by the Company
in which case such fees and expenses shall be borne by the Company. Any
selection of a disinterested appraiser shall be made in good faith within seven
Business Days after the end of the last 10 Business Day period referred to above
and any determination of Fair Market Value Per Share by a disinterested
appraiser shall be made within 30 days of the date of selection.

      "Fully Diluted" means, with respect to the Series D Preferred Stock as of
a particular time (taking into account the transaction in respect of which the
"Fully Diluted" basis is being calculated at such time), the total number of
outstanding shares of Series D Preferred Stock as of such time as determined by
treating all outstanding and then exercisable options, warrants and other rights
for the purchase or other acquisition of Series D Preferred Stock as having been
exercised and by treating all outstanding Convertible Securities which at the
time of such calculation may be converted as having been so converted.

      "Holder" or "Holders" means any holder of an interest in the Warrant or
the outstanding Warrant Shares.

                                       9

<PAGE>
      "Junior Secured Term Loan Agreement" means that certain Loan and Security
Agreement, dated as of July 8, 2004, by and among Chelsey Finance, LLC, Hanover
Direct, Inc. and the other borrowers named therein as the same may be amended,
modified, supplemented or restated.

      "Person" means any individual, firm, corporation, partnership, limited
liability company, joint venture, incorporated or unincorporated association,
joint stock company, governmental authority, or other entity of any kind, and
shall include any successor (by merger or otherwise) of such entity.

      "Principal Office" means the Company's principal office as set forth in
Section 14 hereof or such other principal office of the Company in the United
States of America, the address of which first shall have been set forth in a
notice to the Holder.

      "Regulatory Requirement" has the meaning set forth in Section 5(c).

      "Required Filing" has the meaning set forth in Section 1(c).

      "Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations thereunder as the same
shall be in effect at the time.

      "Series D Preferred Stock" means the Series D Preferred Stock, par value
$0.01 per share, of the Company or any other Capital Stock of the Company into
which such stock is reclassified or reconstituted.

      "Stockholder Approval" has the meaning set forth in Section 1(c).

      "Subsidiary(ies)" means, with respect to any Person, a corporation,
partnership, limited liability company or other entity of which shares of stock
or other ownership interests having ordinary voting power (other than stock or
such other ownership interests having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation, partnership or other entity are at the time owned,
or the management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by such Person.

      "Transaction" has the meaning set forth in Section 6(b).

      "Twenty Day Average" means, with respect to any prices and in connection
with the calculation of Fair Market Value Per Share, the average of such prices
over the twenty Business Days ending on the Business Day immediately prior to
the day as of which "Fair Market Value Per Share" is being determined.

      "Warrant" has the meaning set forth in Section 1(a).

      "Warrant Securities" means the Warrant and the Warrant Shares,
collectively.

      "Warrant Shares" means (a) the shares of Series D Preferred Stock issued
or issuable upon exercise of this Warrant in accordance with its terms and (b)
all other shares of the Company's capital stock issued with respect to such
shares by way of stock dividend, stock split or other reclassification or in
connection with any merger, consolidation, recapitalization or other
reorganization affecting the Company's capital stock.

                                       10

<PAGE>

SECTION 10. SURVIVAL OF PROVISIONS. Notwithstanding the full exercise by the
Holder of its rights to purchase Series D Preferred Stock hereunder, the
provisions of Sections 5(c), 5(d) and 11 through 21 of this Warrant shall
survive such exercise and the Expiration Date.

SECTION 11. DELAYS, OMISSIONS AND INDULGENCES. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the Holder upon any
breach or default of the Company under this Warrant shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Holder's part of any breach or default under this
Warrant, or any waiver on the Holder's part of any provisions or conditions of
this Warrant must be in writing and that all remedies, either under this
Warrant, or by law or otherwise afforded to the Holder, shall be cumulative and
not alternative.

SECTION 12. RIGHTS OF TRANSFEREES. Subject to Section 8, the rights granted to
the Holder hereunder of this Warrant shall pass to and inure to the benefit of
all subsequent transferees of all or any portion of the Warrant (provided that
the Holder and any transferee shall hold such rights in proportion to their
respective ownership of the Warrant and Warrant Shares) until extinguished
pursuant to the terms hereof.

SECTION 13. CAPTIONS. The titles and captions of the Sections and other
provisions of this Warrant are for convenience of reference only and are not to
be considered in construing this Warrant.

SECTION 14. NOTICES. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopy, overnight
courier service or personal delivery:

            (a) if to the Company:

            Hanover Direct, Inc.
            115 River Road, Building 10
            Edgewater, New Jersey 07020
            Attention: Chief Executive Officer
            Facsimile No.: (201) 272-3465

            with a copy to:

            Brown Raysman Millstein Felder & Steiner LLP
            900 Third Avenue
            New York, New York 10022
            Attention: Sarah Hewitt, Esq.
            Facsimile No.: (212) 895-2900

            (b) if to the Holder:

                                       11

<PAGE>

            Chelsey Direct, LLC
            712 Fifth Avenue, 45th Floor
            New York, New York 10019
            Attention: Stuart Feldman
            Facsimile No.: (212) 765-3112

            with a copy to:

            Swidler Berlin Shereff Friedman, LLP
            405 Lexington Avenue
            New York, New York 10174
            Attention: Richard A. Goldberg, Esq.
            Facsimile No.: (212) 891-9598

All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; five Business Days after
being deposited in the mail, postage prepaid, if mailed; and when receipt is
acknowledged, if telecopied.

SECTION 15. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure
to the benefit of the parties hereto and their respective successors or heirs
and personal representatives and permitted assigns; provided, that the Company
shall have no right to assign its rights, or to delegate its obligations,
hereunder without the prior written consent of the Holder.

SECTION 16. GOVERNING LAW. THIS WARRANT IS TO BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.

SECTION 17. JURISDICTION, JURY TRIAL WAIVER, ETC.

            (a)   THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY AGREE THAT ANY
LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND EACH HEREBY EXPRESSLY SUBMITS
TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF
AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS
ARE AN INCONVENIENT FORUM. THE COMPANY AND THE HOLDER EACH HEREBY IRREVOCABLY
CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED
OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN THIS AGREEMENT,
SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.

            (b)   THE COMPANY AND THE HOLDER EACH HEREBY WAIVES ITS RIGHT TO A
JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT

                                       12

<PAGE>

OF ANY DISPUTE IN CONNECTION WITH THIS WARRANT, ANY RIGHTS OR OBLIGATIONS
HEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. THE COMPANY (I)
CERTIFIES THAT NO HOLDER OR ATTORNEY OR OTHER REPRESENTATIVE OF THE HOLDER HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT THE
HOLDER HAS BEEN INDUCED TO PURCHASE THIS WARRANT BY, AMONG OTHER THINGS, THE
WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

            (c)   FINAL JUDGMENT AGAINST THE COMPANY, IN ANY ACTION, SUIT OR
PROCEEDING HEREUNDER SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER
JURISDICTIONS (I) BY SUIT, ACTION, OR PROCEEDING ON THE CONCLUSIVE EVIDENCE OF
THE FACT AND OF THE AMOUNT OF ANY LIABILITY OF THE COMPANY THEREIN DESCRIBED OR
(II) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER
JURISDICTION; PROVIDED, HOWEVER, THAT ANY HOLDER MAY AT ITS OPTION BRING SUIT,
OR INSTITUTE OTHER JUDICIAL PROCEEDING, TO ENFORCE A FINAL JUDGMENT AGAINST THE
COMPANY OR ANY OF ITS PROPERTIES IN THE STATE OR FEDERAL COURT OF THE UNITED
STATES OR OF ANY COUNTRY OR PLACE WHERE THE COMPANY OR ITS PROPERTIES MAY BE
FOUND.

SECTION 18. SEVERABILITY. If any one or more of the provisions contained herein,
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof. The parties hereto further agree to replace such
invalid, illegal or unenforceable provision of this Warrant with a valid, legal
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such invalid, illegal or unenforceable
provision.

SECTION 19. ENTIRE AGREEMENT. This Warrant contains the entire agreement among
the parties with respect to the subject matter hereof and thereby supercedes all
prior and contemporaneous agreements or understandings with respect thereto.

SECTION 20. HEADINGS.

The headings in this Warrant are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

                                       13

<PAGE>
SECTION 21. NO STRICT CONSTRUCTION. The Company and the Holder each acknowledge
that they have been represented by counsel in connection with this Warrant. The
Company and the Holder have participated jointly in the negotiation and drafting
of this Warrant. In the event an ambiguity or question of intent or
interpretation arises under any provision of this Warrant, this Warrant shall be
construed as if drafted jointly by the parties thereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Warrant.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       14
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Warrant to be issued and
executed in its corporate name by its duly authorized officers as of the date
below written.

DATED:  JULY 8, 2004                          HANOVER DIRECT, INC.

                                              By: /s/ Wayne P. Garten
                                                  ______________________________
                                                  Name: Wayne P. Garten
                                                  Title: President and Chief
                                                         Executive Officer

ATTEST:

By: /s/ Charles E. Blue
    ___________________________________
Name:  Charles E. Blue
Title: Senior Vice President and Chief
       Financial Officer

<PAGE>

                                    EXHIBIT A

                      FORM OF COMMON STOCK PURCHASE WARRANT

                                                                       EXHIBIT A

THIS COMMON STOCK PURCHASE WARRANT AND THE SHARES THAT MAY BE PURCHASED
HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS COMMON STOCK PURCHASE WARRANT
AND THE SHARES THAT MAY BE PURCHASED HEREUNDER MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND REGISTRATION OR QUALIFICATION UNDER APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL THAT THE PROPOSED TRANSACTION
DOES NOT VIOLATE THE SECURITIES ACT OF 1933, AND APPLICABLE STATE SECURITIES
LAWS.

                              HANOVER DIRECT, INC.
                          COMMON STOCK PURCHASE WARRANT

Date of Issuance:  [______], 2004                            Certificate No. W-1

      THIS IS TO CERTIFY that CHELSEY FINANCE, LLC, a Delaware limited liability
company, and its transferees, successors and assigns (the "Holder"), for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, is entitled to purchase from HANOVER DIRECT, INC., a Delaware
corporation (the "Company"), at the price of $0.01 per share (the "Exercise
Price"), at any time after the date hereof (the "Commencement Date") and
expiring on [____], 2014 (the "Expiration Date"), [__________] shares of the
fully paid and nonassessable Common Stock (as defined in Section 9 hereof) of
the Company (as such number may be adjusted as provided herein). The
[__________] shares of Common Stock which may be purchased pursuant to this
Warrant are referred to herein as the "Aggregate Number," which represents the
number of shares that as of the date hereof would constitute 30.00% of all
issued and outstanding shares of Common Stock of the Company on a Fully Diluted
basis, which for these purposes assumes the full exercise of this Warrant.

      Capitalized terms used herein shall have the meanings ascribed to such
terms in Section 9 hereof unless otherwise defined herein.

SECTION 22. THE WARRANT; TRANSFER AND EXCHANGE.

            (a)   The Warrant. This Common Stock Purchase Warrant (the
"Warrant") is issued in connection with the Junior Secured Term Loan Agreement.
This Warrant and the rights and privileges of the Holder and the Company
hereunder may be exercised by the Holder in whole or in part as provided herein;
shall survive any termination of the Junior Secured Term

                                       1
<PAGE>

Loan Agreement; and, as more fully set forth in Sections 1(b) and 8 hereof, may
be transferred by the Holder to any other Person or Persons at any time or from
time to time, in whole or in part, regardless of whether the Holder retains any
or all rights under the Junior Secured Term Loan Agreement.

            (b)   Transfer and Exchanges. The Company shall initially record
this Warrant on a register to be maintained by the Company with its other stock
books and, subject to Section 8 hereof, from time to time thereafter shall
reflect the transfer of this Warrant on such register when surrendered for
transfer in accordance with the terms hereof and properly endorsed, accompanied
by appropriate instructions, and further accompanied by payment in cash or by
check, bank draft or money order payable to the order of the Company, in United
States currency, of an amount equal to any stamp or other tax or governmental
charge or fee required to be paid in connection with the transfer thereof. Upon
any such transfer, a new warrant or warrants shall be issued to the transferee
and the Holder (in the event the Warrant is only partially transferred) and the
surrendered warrant shall be canceled. This Warrant may be exchanged at the
option of the Holder, when surrendered at the Principal Office of the Company,
for another warrant or other warrants of like tenor and representing in the
aggregate the right to purchase a like number of shares of Common Stock.

SECTION 23. EXERCISE.

            (a)   Right to Exercise. At any time after the Commencement Date and
on or before the Expiration Date, the Holder, in accordance with the terms
hereof, may exercise this Warrant, in whole at any time or in part from time to
time, by delivering this Warrant to the Company during normal business hours on
any Business Day at the Company's Principal Office, together with the Election
to Purchase, in the form attached hereto as Exhibit A and made a part hereof
(the "Election to Purchase"), duly executed, and payment of the Exercise Price
per share for the number of shares to be purchased (the "Exercise Amount"), as
specified in the Election to Purchase. If the Expiration Date is not a Business
Day, then this Warrant may be exercised on the next succeeding Business Day.

            (b)   Payment of Exercise Price. Payment of the Exercise Price shall
be made to the Company as follows (or any combination thereof): (i) in cash or
other immediately available funds or (ii) as provided in Section 2(c). In the
case of payment of all or a portion of the Exercise Price pursuant to Section
2(c), the direction by the Holder to make a "Cashless Exercise" shall serve as
accompanying payment for that portion of the Exercise Price. The amount of the
Exercise Price to be paid shall equal the product of (i) the Exercise Amount
multiplied by (ii) the Exercise Price per share.

            (c)   Cashless Exercise. The Holder shall have the right to pay all
or a portion of the Exercise Price by making a "Cashless Exercise" pursuant to
this Section 2(c), in which case the portion of the Exercise Price to be so paid
shall be paid by reducing the number of shares of Common Stock otherwise
issuable pursuant to the Election to Purchase (the "Exercised Shares") by an
amount (the "Cashless Exercise Shares") equal to (i) the Exercise Price
multiplied by the Exercise Shares and divided by (ii) the Fair Market Value Per
Share. The number of shares of Common Stock to be issued to the Holder as a
result of a Cashless Exercise will therefore be equal to the Exercised Shares
minus the Cashless Exercise Shares.

                                       2
<PAGE>

            (d)   Issuance of Shares of Common Stock. Upon receipt by the
Company of this Warrant at its Principal Office in proper form for exercise, and
accompanied by payment of the Exercise Price as aforesaid, the Holder shall be
deemed to be the holder of record of the shares of Common Stock issuable upon
such exercise, notwithstanding that certificates representing such shares of
Common Stock may not then be actually delivered. Upon such surrender of this
Warrant and payment of the Exercise Price as aforesaid, the Company shall issue
and cause to be delivered with all reasonable dispatch to, or upon the written
order of, the Holder (and in such name or names as the Holder may designate) a
certificate or certificates for the Exercise Amount, subject to any reduction as
provided in Section 2(c) for a Cashless Exercise.

            (e)   Fractional Shares. The Company shall not be required to
deliver fractions of shares of Common Stock upon exercise of this Warrant. If
any fraction of a share of Common Stock would be deliverable upon an exercise of
this Warrant, the Company may, in lieu of delivering such fraction of a share of
Common Stock, make a cash payment to the Holder in an amount equal to the same
fraction of the Fair Market Value Per Share determined as of the Business Day
immediately preceding the date of exercise of this Warrant.

            (f)   Partial Exercise. In the event of a partial exercise of this
Warrant, the Company shall issue to the Holder a Warrant in like form for the
unexercised portion thereof.

SECTION 24. PAYMENT OF TAXES. The Company shall pay all stamp taxes attributable
to the initial issuance of shares or other securities issuable upon the exercise
of this Warrant or issuable pursuant to Section 6 hereof, excluding any tax or
taxes which may be payable because of the transfer involved in the issuance or
delivery of any certificates for shares or other securities in a name other than
that of the Holder in respect of which such shares or securities are issued.

SECTION 25. REPLACEMENT WARRANT. In case this Warrant is mutilated, lost, stolen
or destroyed, the Company shall issue and deliver in exchange and substitution
for and upon cancellation of the mutilated Warrant, or in lieu of and in
substitution for the Warrant lost, stolen or destroyed, a new Warrant of like
tenor and representing an equivalent right or interest, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction of such Warrant and upon receipt of indemnity reasonably
satisfactory to the Company (provided, that if the Holder is a financial
institution or other institutional investor its personal undertaking to provide
an indemnity is hereby deemed to be reasonably satisfactory to the Company;
provided, further, the form of such undertaking shall be reasonably satisfactory
to the Company).

SECTION 26. RESERVATION OF COMMON STOCK AND OTHER COVENANTS.

            (a)   Reservation of Authorized Common Stock. The Company shall at
all times reserve and keep available out of the aggregate of its authorized but
unissued shares, free of preemptive rights, such number of its duly authorized
shares of Common Stock, or other stock or securities deliverable pursuant to
Section 6 hereof, as shall be sufficient to enable the Company at any time to
fulfill all of its obligations under this Warrant.

                                       3
<PAGE>

            (b)   Affirmative Actions to Permit Exercise and Realization of
Benefits. If any shares of Common Stock reserved or to be reserved for the
purpose of the exercise of this Warrant, or any shares or other securities
reserved or to be reserved for the purpose of issuance pursuant to Section 6
hereof, require registration with or approval of any governmental authority
under any federal or state law (other than securities laws) before such shares
or other securities may be validly delivered upon exercise of this Warrant, then
the Company covenants that it will, at its sole expense, secure such
registration or approval, as the case may be (including but not limited to
approvals or expirations of waiting periods required under the Hart Scott Rodino
Antitrust Improvements Act).

            (c)   Regulatory Requirements and Restrictions. In the event of any
reasonable determination by the Holder that, by reason of any existing or future
federal or state law, statute, rule, regulation, guideline, order, court or
administrative ruling, request or directive (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful)
(collectively, a "Regulatory Requirement"), the Holder is effectively restricted
or prohibited from holding this Warrant or the Warrant Shares (including any
shares of capital stock or other securities distributable to the Holder in any
merger, reorganization, readjustment or other reclassification), or otherwise
realizing upon or receiving the benefits intended under this Warrant, the
Company shall, and shall use its reasonable best efforts to have its
shareholders, take such action as the Holder and the Company shall jointly agree
in good faith to be reasonably necessary to permit the Holder to comply with
such Regulatory Requirement. The reasonable costs of taking such action, whether
by the Company, the Holder or otherwise, shall be borne by the Holder.

            (d)   Validly Issued Shares. The Company covenants that all shares
of Common Stock that may be delivered upon exercise of this Warrant, assuming
full payment of the Exercise Price (including those issued pursuant to Section 6
hereof), shall upon delivery by the Company be duly authorized and validly
issued, fully paid and nonassessable, free from all stamp taxes, liens and
charges with respect to the issue or delivery thereof and otherwise free of all
other security interests, encumbrances and claims of any nature whatsoever other
than such security interests, encumbrances and claims granted by the Holder.

SECTION 27. ADJUSTMENTS TO AGGREGATE NUMBER.

      Under certain conditions, the Aggregate Number is subject to adjustment as
set forth in this Section 6. No adjustments shall be made under this Section 6
as a result of (a) the issuance by the Company of the Warrant Shares upon
exercise of this Warrant or (b) the issuance of shares of Common Stock (or
options related thereto) upon the granting of any shares of Common Stock or upon
the exercise of options granted or to be granted under the Company's current and
future stock option and incentive plans (representing in the aggregate the right
to receive or purchase shares aggregating up to [__________] (with all such
adjustments for issuances in excess of such number of shares to be covered by,
and subject to, Section 6(c)(ii)) (subject to adjustment for any of the
circumstances described in Sections 6(a)(i)(A), (B) and (C)) shares of Common
Stock) (collectively, the "Exempt Issuances").

                                       4
<PAGE>

            (a)   Adjustments. The Aggregate Number, after taking into
consideration any prior adjustments pursuant to this Section 6, shall be subject
to adjustment from time to time as follows and, thereafter, as adjusted, shall
be deemed to be the Aggregate Number hereunder.

                  (i)   Stock Dividends; Subdivisions and Combinations. In case
at any time or from time to time the Company shall:

                        (A)   issue to the holders of its Common Stock a
dividend payable in, or other distribution of, Common Stock (a "Stock
Dividend"),

                        (B)   subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, including without limitation by
means of a stock split (a "Stock Subdivision"), or

                        (C)   combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, other than the Reverse Stock
Split (a "Stock Combination"),

then the Aggregate Number in effect immediately prior thereto shall be (1)
proportionately increased in the case of a Stock Dividend or a Stock Subdivision
and (2) proportionately decreased in the case of a Stock Combination. In the
event the Company shall declare or pay, without consideration, any dividend on
the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Company shall be deemed to have made a Stock Dividend in
an amount of shares equal to the maximum number of shares issuable upon exercise
of such rights to acquire Common Stock.

                  (ii)  Other Distributions. In case at any time or from time to
time the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive any dividend or other distribution
(collectively, a "Distribution") of:

                        (A)   cash;

                        (B)   any evidences of its indebtedness (other than
Convertible Securities), any shares of its capital stock (other than additional
shares of Common Stock or Convertible Securities) or any other securities or
property of any nature whatsoever (other than cash); or

                        (C)   any options, warrants or other rights to subscribe
for or purchase any of the following: any evidences of its indebtedness (other
than Convertible Securities), any shares of its capital stock (other than
additional shares of Common Stock or Convertible Securities) or any other
securities or property of any nature whatsoever,

then the Holder shall be entitled to elect by written notice to the Company to
receive (1) immediately and without further payment the cash, evidences of
indebtedness, stock, securities, other property, options, warrants and/or other
rights (or any portion thereof) to which the Holder would have been entitled by
way of such Distribution as if the Holder had fully exercised this Warrant
immediately prior to such Distribution or (2) upon the exercise of this Warrant
at any time on or after the taking of such record, the number of Warrant Shares
to be received upon

                                       5
<PAGE>

exercise of this Warrant determined as stated herein and, in addition and
without further payment, the cash, evidences of indebtedness, stock, securities,
other property, options, warrants and/or other rights (or any portion thereof)
to which the Holder would have been entitled by way of such Distribution and
subsequent dividends and distributions through the date of exercise as if such
Holder (x) had fully exercised this Warrant immediately prior to such
Distribution and (y) had retained the Distribution in respect of the Common
Stock and all subsequent dividends and distributions of any nature whatsoever in
respect of any stock or securities paid as dividends and distributions and
originating directly or indirectly from such Common Stock.

      A reclassification of the Common Stock into shares of Common Stock and
shares of any other class of stock shall be deemed a Distribution by the Company
to the holders of its Common Stock of such shares of such other class of stock
and, if the outstanding shares of Common Stock shall be changed into a larger or
smaller number of shares of Common Stock as a part of such reclassification,
such event shall be deemed a Stock Subdivision or Stock Combination, as the case
may be, of the outstanding shares of Common Stock within the meaning of Section
6(a)(i) hereof.

                  (iii) Issuance of Common Stock. If at any time or from time to
time the Company shall (except as hereinafter provided in this Section
6(a)(iii)) issue or sell any additional shares of Common Stock for a
consideration per share less than the Fair Market Value Per Share, then,
effective on the date specified below, the Aggregate Number shall be adjusted by
multiplying (A) the Aggregate Number immediately prior thereto by (B) a
fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock (calculated on a Fully Diluted basis), the number of
shares of Common Stock issuable upon the conversion or exercise of options,
warrants, rights or other Convertible Securities (but only to the extent that
such Convertible Securities are "in the money" and then exercisable but in any
event subject to adjustment as provided in Section 6(a)(vii)(F)), and the number
of such additional shares of Common Stock so issued and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
prior to the issuance of such additional shares of Common Stock (calculated on a
Fully Diluted basis), the number of shares of Common Stock issuable upon the
conversion or exercise of options, warrants, rights or other Convertible
Securities (but only to the extent that such Convertible Securities are "in the
money" and then exercisable but in any event subject to adjustment as provided
in Section 6(a)(vii)(F)), and the number of shares of Common Stock which the
aggregate consideration for the total number of such additional shares of Common
Stock so issued would purchase at the Fair Market Value Per Share. The date as
of which the Fair Market Value Per Share shall be computed shall be the earlier
of the date on which the Company shall enter into a firm contract or commitment
for the issuance of such additional shares of Common Stock or the date of actual
issuance of such additional shares of Common Stock.

      The provisions of this Section 6(a)(iii) shall not apply to any issuance
of additional shares of Common Stock for which an adjustment is otherwise
provided under Section 6(a)(i) hereof. No adjustment of the Aggregate Number
shall be made under this Section 6(a)(iii) upon the issuance of any additional
shares of Common Stock which are issued pursuant to (1) the exercise of this
Warrant in whole or in part or pursuant to any other Exempt Issuances, (2) the
exercise of other subscription or purchase rights or (3) the exercise of any
conversion or exchange rights in

                                       6
<PAGE>

any Convertible Securities, provided that for purposes of clauses (2) or (3) an
adjustment shall previously have been made upon the issuance of such other
rights or upon the issuance of such Convertible Securities (or upon the issuance
of any warrants or other rights therefor) pursuant to Section 6(a)(iv) or (v)
hereof.

                  (iv)  Warrants and Options. If at any time or from time to
time the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a distribution of, or shall in any manner
(whether directly, by assumption in a merger in which the Company is the
surviving corporation and in which the shareholders of the Company immediately
prior to the merger continue to own more than 50% of the Outstanding Common
Stock immediately after the merger and for a period of 180 days thereafter, or
otherwise) issue or sell any warrants, options or other rights to subscribe for
or purchase (A) any shares of Common Stock or (B) any Convertible Securities,
whether or not the rights to subscribe, purchase, exchange or convert thereunder
are immediately exercisable, and the consideration per share for which
additional shares of Common Stock may at any time thereafter be issuable
pursuant to such warrants, options or other rights or pursuant to the terms of
such Convertible Securities shall be less than the Fair Market Value Per Share,
then the Aggregate Number shall be adjusted as provided in Section 6(a)(iii)
hereof on the basis that (1) the maximum number of additional shares of Common
Stock issuable pursuant to all such warrants, options or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of the date of the
determination of the Fair Market Value Per Share as hereinafter provided and (2)
the aggregate consideration for such maximum number of additional shares of
Common Stock shall be deemed to be the minimum consideration received and
receivable by the Company for the issuance of such additional shares of Common
Stock pursuant to the terms of such warrants, options or other rights or such
Convertible Securities. For purposes of this Section 6(a)(iv), the effective
date of such adjustment and the date as of which the Fair Market Value Per Share
shall be computed shall be the earliest of (A) the date on which the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive any such warrants, options or other rights, (B) the
date on which the Company shall enter into a firm contract or commitment for the
issuance of such warrants, options or other rights and (C) the date of actual
issuance of such warrants, options or other rights.

      No adjustment of the Aggregate Number shall be made under this Section
6(a)(iv) upon the issuance of any warrants, options or other rights which are
issued pursuant to the exercise of any Convertible Securities if an adjustment
shall have been made or is contemporaneously made or if no such adjustment shall
have been required upon the issuance of such Convertible Securities, pursuant to
Section 6(a)(v) hereof.

                  (v)   Convertible Securities. If at any time or from time to
time the Company shall take a record of the holders of its Common Stock for the
purpose of entitling them to receive a distribution of or shall in any manner
(whether directly, by assumption in a merger in which the Company is the
surviving corporation and in which the shareholders of the Company immediately
prior to the merger continue to own more than 50% of the Outstanding Common
Stock immediately after the merger and for a period of 180 days thereafter, or
otherwise) issue or sell Convertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the
consideration per share for the additional shares

                                       7
<PAGE>

of Common Stock which may at any time thereafter be issuable pursuant to the
terms of such Convertible Securities shall be less than the Fair Market Value
Per Share, then the Aggregate Number shall be adjusted as provided in Section
6(a)(iii) hereof on the basis that (A) the maximum number of additional shares
of Common Stock necessary to effect the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued as of the date of the
determination of the Fair Market Value Per Share as herein provided and (B) the
aggregate consideration for such maximum number of additional shares of Common
Stock shall be deemed to be the minimum consideration received and receivable by
the Company for the issuance of such additional shares of Common Stock pursuant
to the terms of such Convertible Securities. For purposes of this Section
6(a)(v), the effective date of such adjustment and the date as of which the Fair
Market Value Per Share shall be computed shall be the earliest of (1) the date
on which the Company shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such Convertible Securities, (2)
the date on which the Company shall enter into a firm contract or commitment for
the issuance of such Convertible Securities and (3) the date of actual issuance
of such Convertible Securities.

      No adjustment of the Aggregate Number shall be made under this Section
6(a)(v) upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants, options or other subscription or
purchase rights if an adjustment shall previously have been made or is
contemporaneously made or if no such adjustment shall have been required upon
the issuance of such warrants, options or other rights pursuant to Section
6(a)(iv) hereof.

                  (vi)  [Intentionally Omitted.]

                  (vii) Subsequent Adjustments. If at any time after any
adjustment of the Aggregate Number shall have been made pursuant to Section 6(a)
(iv) or (v) hereof on the basis of the issuance of warrants, options or other
rights or the issuance of Convertible Securities, or after any new adjustments
of the Aggregate Number shall have been made pursuant to this Section 6(a)(vii),
then:

                        (A)   such warrants, options or rights or the right of
conversion or exchange in such Convertible Securities shall expire, and a
portion of such warrants, options or rights, or the right of conversion or
exchange in respect of a portion of such Convertible Securities, as the case may
be, shall not have been exercised prior to such expiration, and

                        (B)   in the case of adjustments made pursuant to
Section 6(a)(iv) or (v), the consideration per share for which shares of Common
Stock are issuable pursuant to such warrants, options or rights per the terms of
such Convertible Securities shall be irrevocably increased (provided, no
remuneration was paid therefor), and such previous adjustment shall be rescinded
and annulled and the additional shares of Common Stock which were deemed to have
been issued by virtue of the computation made in connection with such adjustment
shall no longer be deemed to have been issued by virtue of such computation.
Simultaneously therewith, a recomputation shall be made of the effect of such
warrants, options or rights or Convertible Securities on the determination of
the Aggregate Number, which shall be made on the basis of:

                                       8
<PAGE>

            (1)   treating the number of additional shares of Common Stock, if
                  any, theretofore actually issued pursuant to the previous
                  exercise of such warrants, options or rights or such right of
                  conversion or exchange as having been issued on the date or
                  dates of such exercise and, in the case of a recomputation of
                  a calculation originally made pursuant to Section 6(a)(iv) or
                  (v), for the consideration actually received and receivable
                  therefor, and

            (2)   in the case of a recomputation of a calculation originally
                  made pursuant to Section 6(a)(iv) or (v), treating any such
                  warrants, options or rights or any such Convertible Securities
                  which then remain outstanding as having been granted or issued
                  immediately after the time of such irrevocable increase of the
                  consideration per share for which shares of Common Stock are
                  issuable under such warrants, options or rights or Convertible
                  Securities;

and, if and to the extent called for by the foregoing provisions of Section
6(a)(vii) on the basis aforesaid, a new adjustment of the Aggregate Number shall
be made, such new adjustment shall supersede the previous adjustment so
rescinded and annulled.

                  (viii) Miscellaneous. The following provisions shall be
applicable to the making of adjustments of the Aggregate Number provided above
in this Section 6(a):

                        (A)   The sale or other disposition of any issued shares
of Common Stock owned or held by or for the account of the Company or any of its
Subsidiaries shall be deemed an issuance thereof for the purposes of this
Section 6(a).

                        (B)   To the extent that any additional shares of Common
Stock or any Convertible Securities or any warrants, options or other rights to
subscribe for or purchase any additional shares of Common Stock or any
Convertible Securities (1) are issued solely for cash consideration, the
consideration received by the Company therefor shall be deemed to be the amount
of the cash received by the Company therefor, (2) are offered by the Company for
subscription, the consideration received by the Company shall be deemed to be
the subscription price or (3) are sold to underwriters or dealers for public
offering, the aggregate consideration received by the Company shall be deemed to
be the consideration received by the Company therefor, in any such case
excluding any amounts paid or receivable for accrued interest or accrued
dividends. To the extent that such issuance shall be for a consideration other
than cash, or partially for cash and partially for other consideration, then,
except as otherwise expressly provided herein, the amount of such consideration
shall be deemed to be the fair market value of such other consideration plus, if
applicable, the amount of such cash at the time of such issuance, determined in
the manner set forth in Section 6(d)(ii). In case any additional shares of
Common Stock or any Convertible Securities or any warrants, options or other
rights to subscribe for or purchase such additional shares of Common Stock or
Convertible Securities shall be issued in connection with any merger in which
the Company is the survivor and issues any securities, the amount of
consideration therefor shall be deemed to be the fair market value of such
additional shares of Common Stock, Convertible Securities, warrants, options or
other rights, as the case may be, determined in the manner set forth in Section
6(d)(ii).

                                       9
<PAGE>

      The consideration for any shares of Common Stock issuable pursuant to the
terms of any Convertible Securities shall be equal to (x) the consideration
received by the Company for issuing any warrants, options or other rights to
subscribe for or purchase such Convertible Securities, plus (y) the
consideration paid or payable to the Company in respect of the subscription for
or purchase of such Convertible Securities, plus (z) the consideration, if any,
payable to the Company upon the exercise of the right of conversion or exchange
of such Convertible Securities.

      In case of the issuance at any time of any additional shares of Common
Stock or Convertible Securities in payment or satisfaction of any dividends upon
any class of stock other than Common Stock, the Company shall, be deemed to have
received for such additional shares of Common Stock or Convertible Securities a
consideration equal to the amount of such dividend so paid or satisfied.

                        (C)   The adjustments required by the preceding
paragraphs of this Section 6(a) shall be made whenever and as often as any
specified event requiring an adjustment shall occur, except that no adjustment
of the Aggregate Number that would otherwise be required shall be made (except
in the case of a Stock Subdivision or Stock Combination, as provided for in
Section 6(a)(i) hereof) unless and until such adjustment either by itself or
with other adjustments not previously made adds or subtracts at least one
one-hundredth of one share to or from the Aggregate Number immediately prior to
the making of such adjustment. Any adjustment representing a change of less than
such minimum amount (except as aforesaid) shall be carried forward and made as
soon as such adjustment, together with other adjustments required by this
Section 6(a) and not previously made, would result in a minimum adjustment. For
the purpose of any adjustment, any specified event shall be deemed to have
occurred at the close of business on the date of its occurrence.

                        (D)   In computing adjustments under this Section 6(a),
fractional interests in Common Stock shall be taken into account to the nearest
one-thousandth of a share.

                        (E)   If the Company shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive a dividend or
distribution or subscription or purchase rights and shall, thereafter and before
the distribution to shareholders thereof, legally abandon its plan to pay or
deliver such dividend, distribution, subscription or purchase rights, then no
adjustment shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and annulled.

                        (F)   In making any adjustment, at the time of actual
exercise of the Warrant, to the extent not already taken into account,
securities convertible into capital stock which were not exercisable or
in-the-money that are so exercisable and in the money or previously have been
exercised shall be taken into account, at the time of the exercise of the
Warrant, in the calculation of Fully Diluted shares of Common Stock.

            (b)   Changes in Common Stock. In case at any time the Company shall
initiate any transaction or be a party to any transaction (including, without
limitation, a merger, consolidation, share exchange, sale, lease or other
disposition of all or substantially all of the

                                       10
<PAGE>

Company's assets, liquidation, recapitalization or reclassification of the
Common Stock) in connection with which the previous Outstanding Common Stock
shall be changed into or exchanged for different securities of the Company or
capital stock or other securities of another corporation or interests in a
non-corporate entity or other property or any combination of the foregoing (each
such transaction being herein called a "Transaction"), then, as a condition of
the consummation of the Transaction, lawful, enforceable and adequate provision
shall be made so that the Holder shall be entitled to elect, by written notice
to the Company, to receive (i) a new warrant in form and substance similar to,
and in exchange for, this Warrant to purchase all or a portion of such
securities or other property or (ii) upon exercise of this Warrant at any time
on or after the consummation of the Transaction, in lieu of the Warrant Shares
issuable upon such exercise prior to such consummation, the securities or other
property to which such Holder would have been entitled upon consummation of the
Transaction if such Holder had exercised this Warrant immediately prior thereto
(subject to adjustments from and after the consummation date as nearly
equivalent as possible to the adjustments provided for in this Section 6).
Notwithstanding the foregoing, in the event the Company shall initiate any
Transaction or be a party to any Transaction in connection with which the
previous Outstanding Common Stock shall be changed into or exchanged for cash,
then upon consummation of such transaction, this Warrant shall automatically be
converted into the right to receive a cash amount equal to (A) the Aggregate
Number (subject to the adjustments provided for in this Section 6) multiplied by
(B) the positive difference, if any between the Fair Market Value Per Share and
the Exercise Price. The Company will not effect any Transaction unless prior to
the consummation thereof each corporation or other entity (other than the
Company) which may be required to deliver any new warrant, securities or other
property as provided herein shall assume, by written instrument delivered to the
Holder, the obligation to deliver to such Holder such new warrant, securities or
other property as in accordance with the foregoing provisions such Holder may be
entitled to receive and such corporation or entity shall have similarly
delivered to the Holder an opinion of counsel for such corporation or entity,
satisfactory to the Holder, which opinion shall state that all of the terms of
the new warrant or this Warrant shall be enforceable against the Company and
such corporation or entity in accordance with the terms hereof and thereof,
together with such other matters as the Holder may reasonably request. The
foregoing provisions of this Section 6(b) shall similarly apply to successive
Transactions.

            (c)   Other Action Affecting Common Stock. In case at any time or
from time to time the Company shall take any action of the type contemplated in
Section 6(a) or (b) hereof but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features) other than cash
bonuses, then, unless in the opinion of the Company's board of directors such
action will not have a material adverse effect upon the rights of the Holder
(taking into consideration, if necessary, any prior actions which the Board of
Directors deemed not to materially adversely affect the rights of the Holder),
the Aggregate Number shall be adjusted in such manner and at such time as the
Board of Directors of the Company may in good faith determine to be equitable in
the circumstances.

            (d)   Notices.

                  (i)   Notice of Proposed Actions. In case the Company shall
propose (A) to pay any dividend payable in stock of any class to the holders of
its Common Stock or to

                                       11
<PAGE>

make any other distribution to the holders of its Common Stock, (B) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Convertible Securities or additional shares of Common Stock or shares of stock
of any class or any other securities, warrants, rights or options (other than
the exercise of pre-emptive rights by a Holder), (C) to effect any
reclassification of its Common Stock, (D) to effect any recapitalization, stock
subdivision, stock combination or other capital reorganization, (E) to effect
any consolidation or merger, share exchange, or sale, lease or other disposition
of all or substantially all of its property, assets or business, (F) to effect
the liquidation, dissolution or winding up of the Company or (G) to effect any
other action which would require an adjustment under this Section 6, then in
each such case the Company shall give to the Holder written notice of such
proposed action, which shall specify the date on which a record is to be taken
for the purposes of such stock dividend, stock subdivision, stock combination,
distribution or rights, or the date on which such reclassification,
recapitalization, reorganization, consolidation, merger, share exchange, sale,
lease, transfer, disposition, liquidation, dissolution, winding up or other
transaction is to take place and the date of participation therein by the
holders of Common Stock, if any such date is to be fixed, or the date on which
the transfer of Common Stock is to occur, and shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action on the Common Stock and on the Aggregate Number after giving effect
to any adjustment which will be required as a result of such action. Such notice
shall be so given in the case of any action covered by clause (A) or (B) above
at least 30 days prior to the record date for determining holders of the Common
Stock for purposes of such action and, in the case of any other such action, at
least 30 days prior to the earlier of the date of the taking of such proposed
action or the date of participation therein by the holders of Common Stock.

                  (ii)  Adjustment Notice. Whenever the Aggregate Number is to
be adjusted pursuant to this Section 6, unless otherwise agreed by the Holder,
the Company shall promptly (and in any event within 10 Business Days after the
event requiring the adjustment) prepare a certificate signed by the chief
financial officer of the Company, setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment is to be
calculated. The certificate shall set forth, if applicable, a description of the
basis on which the Board of Directors in good faith determined, as applicable,
the Fair Market Value Per Share, the fair market value of any evidences of
indebtedness, shares of stock, other securities, warrants, other subscription or
purchase rights, or other property or the equitable nature of any adjustment
under Section 6(b) or (c) hereof, the new Aggregate Number and, if applicable,
any new securities or property to which the Holder is entitled. The Company
shall promptly cause a copy of such certificate to be delivered to the Holder.
The Company shall keep at its Principal Office copies of all such certificates
and cause the same to be available for inspection at said office during normal
business hours by the Holder or any prospective purchaser of the Warrant (in
whole or in part) if so designated by the Holder.

SECTION 28. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, share exchange, dissolution or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, including without limitation the adjustments
required under Section 6 hereof, and will at all times in good faith assist in
the carrying out of all such terms and in taking of all such action as may be
necessary or appropriate to protect the rights of the Holder against dilution or
other impairment. Without

                                       12
<PAGE>

limiting the generality of the foregoing and notwithstanding any other provision
of this Warrant to the contrary (including by way of implication), the Company
(a) will not increase the par value of any shares of Common Stock receivable on
the exercise of this Warrant above the amount payable therefor on such exercise
or (b) will take all such action as may be necessary or appropriate so that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock on the exercise of this Warrant.

SECTION 29. TRANSFERS OF THE WARRANT.

                  (a)   Generally. Subject to the restrictions set forth in this
Section 8, the Holder may at any time and from time to time freely transfer this
Warrant and the Warrant Shares in whole or in part. This Warrant and the Warrant
Shares are issued or issuable subject to the provisions and conditions contained
herein, and every Holder hereof by accepting the same agrees with the Company to
such provisions and conditions, and represents to the Company that this Warrant
has been acquired and the Warrant Shares will be acquired for the account of the
Holder for investment and not with a view to or for sale in connection with any
distribution thereof.

                  (b)   Compliance with Securities Laws. The Holder agrees that
the Warrant and the Warrant Shares may not be sold or otherwise disposed of
except pursuant to an effective registration statement under the Securities Act
and applicable state securities laws or pursuant to an applicable exemption from
the registration requirements of the Securities Act and such state securities
laws. In the event that the Holder transfers this Warrant or the Warrant Shares
pursuant to an applicable exemption from registration, the Company may request,
at its expense, an opinion of counsel that the proposed transfer does not
violate the Securities Act and applicable state securities laws. It is expressly
acknowledged that the Warrant Shares are Registrable Securities, within the
meaning of that certain Registration Rights Agreement, dated as of November 30,
2003, by and among the Company, Chelsey Direct, LLC and Stuart Feldman.

                  (c)   Restrictive Securities Legend. The certificate
representing the shares of Common Stock issued upon the exercise of the Warrant
shall bear the restrictive legend set forth below:

                  "The shares represented by this certificate have not been
                  registered under the Securities Act of 1933, as amended, or
                  the securities laws of any State and may not be sold or
                  otherwise disposed of except pursuant to an effective
                  registration statement under such Act and applicable State
                  securities laws or pursuant to an applicable exemption from
                  the registration requirements of such Act and such laws."

SECTION 30. DEFINITIONS.

      As used herein, in addition to the terms defined elsewhere herein, the
following terms shall have the following meanings.

                                       13
<PAGE>

      "Affiliate" means, with respect to any Person, a Person (a) directly or
indirectly controlling, controlled by, or under common control with, such
Person, (b) directly or indirectly owning or holding ten percent (10%) or more
of any equity interest in such Person or (c) ten percent (10%) or more of whose
voting stock or other equity interest is directly or indirectly owned or held by
such Person. For purposes of this definition, "control" (including with
correlative meanings, the terms "controlling," controlled by" and "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.

      "Aggregate Number" has the meaning set forth in the Preamble.

      "Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in The City of New York, New York are authorized or
required by law or executive order to close.

      "Capital Stock" means (i) with respect to any Person that is a
corporation, any and all shares, interests or equivalents in capital stock
(whether voting or nonvoting, and whether common or preferred) of such
corporation, and (ii) with respect to any Person that is not a corporation, any
and all partnership, membership, limited liability company or other equity
interests of such Person that confer on a Person the right to receive a share of
the profits and losses of, or the distribution of assets of, the issuing Person;
and in each case, any and all warrants, rights or options to purchase any of the
foregoing.

      "Certificate of Incorporation" means, as to a Person, unless the context
in which it is used shall otherwise require, the Certificate of Incorporation
(or equivalent or similar organizational documents) of such Person as in effect
on the Commencement Date.

      "Commencement Date" has the meaning set forth in the Preamble.

      "Commission" means the Securities and Exchange Commission or any similar
agency then having jurisdiction to enforce the Securities Act.

      "Common Stock" means the common stock, par value $0.01 per share, of the
Company or any other Capital Stock of the Company into which such stock is
reclassified or reconstituted.

      "Company" has the meaning set forth in the Preamble.

      "Convertible Securities" means evidences of indebtedness, shares of stock
or other securities (including, but not limited to options and warrants) which
are directly or indirectly convertible, exercisable or exchangeable, with or
without payment of additional consideration in cash or property, for shares of
Common Stock, either immediately or upon the onset of a specified date or the
happening of a specified event.

      "Distribution" has the meaning set forth in Section 6(a)(ii).

      "Election to Purchase" has the meaning set forth in Section 2(a).

                                       14
<PAGE>

      "Exempt Issuances" has the meaning set forth in Section 6.

      "Exercise Amount" has the meaning set forth in Section 2(a).

      "Exercise Price" has the meaning set forth in the Preamble.

      "Expiration Date" has the meaning set forth in the Preamble.

      "Fair Market Value Per Share" means, per share of Common Stock, the Twenty
Day Average of the average closing prices of the Common Stock's sales on all
domestic securities exchanges on which the Common Stock may at the time be
listed, or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day, or, if on any day the Common Stock is not so listed, the
average of the representative bid and asked prices quoted in the NASDAQ National
Market System (including the NASDAQ Small Cap Market) as of 4:00 P.M., New York
City time, on such day, or, if on any day the Common Stock is not quoted in the
NASDAQ National Market System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
OTC Bulletin Board, or if not so reported, by the Pink Sheets LLC, or any
similar or successor organization (and in each such case excluding any trades
that are not bona fide, arm's length transactions). If at any time the Common
Stock is not listed on any domestic securities exchange or quoted in the NASDAQ
National Market System or the domestic over-the-counter market, the "Fair Market
Value Per Share" of the Common Stock shall be the fair market value thereof as
determined (i) jointly by the Company and the Holder or (ii) if Company and the
Holder cannot so agree, by a nationally recognized investment banking firm
selected by the Holder and reasonably acceptable to the Company.

      "Fully Diluted" means, with respect to the Common Stock as of a particular
time (taking into account the transaction in respect of which the "Fully
Diluted" basis is being calculated at such time), the total number of
outstanding shares of Common Stock as of such time as determined by treating all
outstanding and then exercisable options, warrants and other rights for the
purchase or other acquisition of Common Stock as having been exercised and by
treating all outstanding Convertible Securities which at the time of such
calculation may be converted as having been so converted.

      "Holder" or "Holders" means any holder of an interest in the Warrant or
the outstanding Warrant Shares.

      "Junior Secured Term Loan Agreement" means that certain Loan and Security
Agreement, dated as July 8, 2004, by and among Chelsey Finance, LLC, Hanover
Direct, Inc. and the other borrowers named therein, as the same may be amended,
modified, supplemented or restated.

      "Outstanding Common Stock" of the Company means, as of the date of
determination, the sum (without duplication) of the following: (a) the number of
shares of Common Stock then outstanding at the date of determination, (b) the
number of shares of Common Stock then issuable upon the exercise of the Warrant
(as such number of shares may be adjusted pursuant to the terms hereof) and (c)
the number of shares of Common Stock then issuable upon the exercise or
conversion of Convertible Securities and any warrants, options or other rights
to subscribe for

                                       15
<PAGE>

or purchase Common Stock or Convertible Securities (but excluding any unvested
options and securities not then exercisable for or convertible into Common
Stock).

      "Person" means any individual, firm, corporation, partnership, limited
liability company, joint venture, incorporated or unincorporated association,
joint stock company, governmental authority, or other entity of any kind, and
shall include any successor (by merger or otherwise) of such entity.

      "Principal Office" means the Company's principal office as set forth in
Section 14 hereof or such other principal office of the Company in the United
States of America, the address of which first shall have been set forth in a
notice to the Holder.

      "Regulatory Requirement" has the meaning set forth in Section 5(c).

      "Reverse Stock Split" means the one for ten reverse stock split voted upon
by the stockholders of the Company at its August 12, 2004 meeting of
stockholders, as the same may be adjourned to a later date which stock split has
already been reflected in this issuance.

      "Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations thereunder as the same
shall be in effect at the time.

      "Stock Combination" has the meaning set forth in Section 6(a)(i)(C).

      "Stock Dividend" has the meaning set forth in Section 6(a)(i)(A).

      "Stock Subdivision" has the meaning set forth in Section 6(a)(i)(B).

      "Subsidiary(ies)" means, with respect to any Person, a corporation,
partnership, limited liability company or other entity of which shares of stock
or other ownership interests having ordinary voting power (other than stock or
such other ownership interests having such power only by reason of the happening
of a contingency) to elect a majority of the board of directors or other
managers of such corporation, partnership or other entity are at the time owned,
or the management of which is otherwise controlled, directly or indirectly
through one or more intermediaries, or both, by such Person.

      "Transaction" has the meaning set forth in Section 6(b).

      "Twenty Day Average" means, with respect to any prices and in connection
with the calculation of Fair Market Value Per Share, the average of such prices
over the twenty Business Days ending on the Business Day immediately prior to
the day as of which "Fair Market Value Per Share" is being determined.

      "Warrant" has the meaning set forth in Section 1(a).

      "Warrant Securities" means the Warrant and the Warrant Shares,
collectively.

      "Warrant Shares" means (a) the shares of Common Stock issued or issuable
upon exercise of this Warrant in accordance with its terms and (b) all other
shares of the Company's

                                       16
<PAGE>

capital stock issued with respect to such shares by way of stock dividend, stock
split or other reclassification or in connection with any merger, consolidation,
recapitalization or other reorganization affecting the Company's capital stock.

SECTION 31. SURVIVAL OF PROVISIONS. Notwithstanding the full exercise by the
Holder of its rights to purchase Common Stock hereunder, the provisions of
Sections 5(c), 5(d) and 11 through 21 of this Warrant shall survive such
exercise and the Expiration Date.

SECTION 32. DELAYS, OMISSIONS AND INDULGENCES. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the Holder upon any
breach or default of the Company under this Warrant shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Holder's part of any breach or default under this
Warrant, or any waiver on the Holder's part of any provisions or conditions of
this Warrant must be in writing and that all remedies, either under this
Warrant, or by law or otherwise afforded to the Holder, shall be cumulative and
not alternative.

SECTION 33. RIGHTS OF TRANSFEREES. The rights granted to the Holder hereunder of
this Warrant shall pass to and inure to the benefit of all subsequent
transferees of all or any portion of the Warrant (provided that the Holder and
any transferee shall hold such rights in proportion to their respective
ownership of the Warrant and Warrant Shares) until extinguished pursuant to the
terms hereof.

SECTION 34. CAPTIONS. The titles and captions of the Sections and other
provisions of this Warrant are for convenience of reference only and are not to
be considered in construing this Warrant.

SECTION 35. NOTICES. All notices, demands and other communications provided for
or permitted hereunder shall be made in writing and shall be by registered or
certified first-class mail, return receipt requested, telecopy, overnight
courier service or personal delivery:

                  (a)   if to the Company:

                  Hanover Direct, Inc.
                  115 River Road, Building 10
                  Edgewater, New Jersey 07020
                  Attention: Chief Financial Officer
                  Facsimile No.: (201) 272-3465

                  with a copy to:

                  Brown Raysman Millstein Felder & Steiner LLP
                  900 Third Avenue
                  New York, New York 10022

                                       17
<PAGE>

                  Attention: Sarah Hewitt, Esq.
                  Facsimile No.: (212) 895-2900

                  (b)   if to the Holder:

                  Chelsey Direct, LLC
                  712 Fifth Avenue, 45th Floor
                  New York, New York 10019
                  Attention: Stuart Feldman
                  Facsimile No.: (212) 765-3112

                  with a copy to:

                  Swidler Berlin Shereff Friedman, LLP
                  405 Lexington Avenue
                  New York, New York 10174
                  Attention: Richard A. Goldberg, Esq.
                  Facsimile No.: (212) 891-9598

All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; when delivered by courier, if
delivered by commercial overnight courier service; five Business Days after
being deposited in the mail, postage prepaid, if mailed; and when receipt is
acknowledged, if telecopied.

SECTION 36. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure
to the benefit of the parties hereto and their respective successors or heirs
and personal representatives and permitted assigns; provided, that the Company
shall have no right to assign its rights, or to delegate its obligations,
hereunder without the prior written consent of the Holder.

SECTION 37. GOVERNING LAW. THIS WARRANT IS TO BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK AND WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF SUCH STATE.

SECTION 38. JURISDICTION, JURY TRIAL WAIVER, ETC.

                  (a)   THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY AGREE THAT
ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND EACH HEREBY EXPRESSLY SUBMITS
TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS FOR THE PURPOSES THEREOF
AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND ANY CLAIM THAT SUCH COURTS
ARE AN INCONVENIENT FORUM. THE COMPANY AND THE HOLDER EACH HEREBY IRREVOCABLY
CONSENT TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED
OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN THIS

                                       18
<PAGE>

AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.

                  (b)   THE COMPANY AND THE HOLDER EACH HEREBY WAIVES ITS RIGHT
TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE
IN CONNECTION WITH THIS WARRANT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE
PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. THE COMPANY (I) CERTIFIES THAT NO
HOLDER OR ATTORNEY OR OTHER REPRESENTATIVE OF THE HOLDER HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVERS AND (II) ACKNOWLEDGES THAT THE HOLDER HAS
BEEN INDUCED TO PURCHASE THIS WARRANT BY, AMONG OTHER THINGS, THE WAIVERS AND
CERTIFICATIONS CONTAINED HEREIN.

                  (c)   FINAL JUDGMENT AGAINST THE COMPANY, IN ANY ACTION, SUIT
OR PROCEEDING HEREUNDER SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER
JURISDICTIONS (I) BY SUIT, ACTION, OR PROCEEDING ON THE CONCLUSIVE EVIDENCE OF
THE FACT AND OF THE AMOUNT OF ANY LIABILITY OF THE COMPANY THEREIN DESCRIBED OR
(II) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER
JURISDICTION; PROVIDED, HOWEVER, THAT ANY HOLDER MAY AT ITS OPTION BRING SUIT,
OR INSTITUTE OTHER JUDICIAL PROCEEDING, TO ENFORCE A FINAL JUDGMENT AGAINST THE
COMPANY OR ANY OF ITS PROPERTIES IN THE STATE OR FEDERAL COURT OF THE UNITED
STATES OR OF ANY COUNTRY OR PLACE WHERE THE COMPANY OR ITS PROPERTIES MAY BE
FOUND.

SECTION 39. SEVERABILITY. If any one or more of the provisions contained herein,
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provisions held
invalid, illegal or unenforceable shall substantially impair the benefits of the
remaining provisions hereof. The parties hereto further agree to replace such
invalid, illegal or unenforceable provision of this Warrant with a valid, legal
and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such invalid, illegal or unenforceable
provision.

SECTION 40. ENTIRE AGREEMENT. This Warrant contains the entire agreement among
the parties with respect to the subject matter hereof and thereby supercedes all
prior and contemporaneous agreements or understandings with respect thereto.

SECTION 41.       HEADINGS.

      The headings in this Warrant are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.

SECTION 42. NO STRICT CONSTRUCTION. The Company and the Holder each acknowledge
that they have been represented by counsel in connection with this Warrant. The
Company and

                                       19
<PAGE>

the Holder have participated jointly in the negotiation and drafting
of this Warrant. In the event an ambiguity or question of intent or
interpretation arises under any provision of this Warrant, this Warrant shall be
construed as if drafted jointly by the parties thereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Warrant.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       20
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Warrant to be issued
and executed in its corporate name by its duly authorized officers as of the
date below written.

DATED:  [______], 2004                      HANOVER DIRECT, INC.

                                            By: _______________________________
                                                Name:  Wayne P. Garten
                                                Title: President and
                                                       Chief Executive Officer

ATTEST:

By:___________________________
Name: Charles E. Blue
Title: Senior Vice President and Chief Financial Officer

<PAGE>

                                    EXHIBIT A

                               NOTICE OF EXERCISE

To: ____________________________
    ____________________________
    ____________________________
    ____________________________

      1.    The undersigned, pursuant to the provisions of the attached Warrant,
hereby elects to exercise this Warrant with respect to ________ shares of Common
Stock (the "Exercise Amount"). Capitalized terms used but not otherwise defined
herein have the meanings ascribed thereto in the attached Warrant.

      2.    The undersigned herewith tenders payment for such shares in the
following manner (please check type, or types, of payment and indicate the
portion of the Exercise Price to be paid by each type of payment):

      _____ Exercise for Cash
      _____ Cashless Exercise

      3.    Please issue a certificate or certificates representing the shares
issuable in respect hereof under the terms of the attached Warrant, as follows:

                                           _____________________________________
                                           (Name of Record Holder/Transferee)

and deliver such certificate or certificates to the following address:

                                           _____________________________________
                                           (Address of Record Holder/Transferee)

      4.    The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.

      5.    If the Exercise Amount is less than all of the shares of Common
Stock purchasable hereunder, please issue a new warrant representing the
remaining balance of such shares, as follows:

                                           _____________________________________
                                           (Name of Record Holder/Transferee)

<PAGE>

and deliver such warrant to the following address:

                                           _____________________________________
                                           (Address of Record Holder/Transferee)

                                           _____________________________________
                                           (Signature)

_____________________________________
(Date)

                                       2

<PAGE>

                                    EXHIBIT B

                               NOTICE OF EXERCISE

To:   ________________________________
      ________________________________
      ________________________________
      ________________________________

      1.    The undersigned, pursuant to the provisions of the attached Warrant,
hereby elects to exercise this Warrant with respect to ________ shares of Series
D Preferred Stock (the "Exercise Amount"). Capitalized terms used but not
otherwise defined herein have the meanings ascribed thereto in the attached
Warrant.

      2.    The undersigned herewith tenders payment for such shares in the
following manner (please check type, or types, of payment and indicate the
portion of the Exercise Price to be paid by each type of payment):

      _____ Exercise for Cash
      _____ Cashless Exercise

      3.    Please issue a certificate or certificates representing the shares
issuable in respect hereof under the terms of the attached Warrant, as follows:

                                           _____________________________________
                                          (Name of Record Holder/Transferee)

and deliver such certificate or certificates to the following address:

                                           _____________________________________
                                           (Address of Record Holder/Transferee)

      4.    The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.

      5.    If the Exercise Amount is less than all of the shares of Series D
Preferred Stock purchasable hereunder, please issue a new warrant representing
the remaining balance of such shares, as follows:

                                           _____________________________________
                                           (Name of Record Holder/Transferee)

<PAGE>

and deliver such warrant to the following address:

                                           _____________________________________
                                          (Address of Record Holder/Transferee)

                                           _____________________________________
                                           (Signature)

_____________________________________
(Date)

                                       2

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