10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from To

Commission file number 1-08056

HANOVER DIRECT, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-0853260
(State of incorporation)	(IRS Employer Identification No.)
1500 Harbor Boulevard, Weehawken, New Jersey	07086
(Address of principal executive offices)	(Zip Code)
(201) 863-7300
(Telephone number)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

Common stock, par value $0.01per share: 22,426,296 shares outstanding as of November 13, 2006.

HANOVER DIRECT, INC.

TABLE OF CONTENTS

	Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2006, December 31, 2005 and September 24, 2005	2
Condensed Consolidated Statements of Income (Loss) – 13 and 39- weeks ended September 30, 2006 and September 24, 2005	4
Condensed Consolidated Statements of Cash Flows – 39- weeks ended September 30, 2006 and September 24, 2005	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24
Item 4. Controls and Procedures	24
Part II - Other Information
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 6. Exhibits	26
Signature Page	27

1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share amounts)

	September 30, 2006	December 31, 2005	September 24, 2005
	(Unaudited)		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$                      61	$                 275	$                 134
Accounts receivable, net of allowance for doubtful accounts of $742, $916 and $911, respectively	13,085	16,518	10,837
Inventories, principally finished goods	58,558	51,356	57,315
Prepaid catalog costs	18,997	17,567	21,017
Other current assets	3,650	2,744	2,777
Total Current Assets	94,351	88,460	92,080
PROPERTY AND EQUIPMENT, AT COST:
Land	4,418	4,378	4,361
Buildings and building improvements	18,214	18,194	18,192
Leasehold improvements	1,332	1,115	1,118
Furniture, fixtures and equipment	53,680	51,532	51,322
Construction in progress	165	--	--
	77,809	75,219	74,993
Accumulated depreciation and amortization	(56,447)	(55,030)	(54,337)
Property and equipment, net	21,362	20,189	20,656
Goodwill	8,649	8,649	8,649
Deferred tax assets	2,890	2,890	2,350
Other assets	606	1,989	2,232
Total Assets	$            127,858	$          122,177	$          125,967

Continued on next page.

2

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands of dollars, except share amounts)

	September 30, 2006	December 31, 2005	September 24, 2005
	(Unaudited)		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY
CURRENT LIABILITIES:
Short-term debt and capital lease obligations (including debt to a related party see note 6)	$                  32,095	$               10,105	$           13,749
Accounts payable	20,593	27,043	26,079
Accrued liabilities	14,029	12,341	10,235
Customer prepayments and credits	14,572	10,074	14,828
Deferred tax liability	2,890	2,890	2,350
Total Current Liabilities	84,179	62,453	67,241
NON-CURRENT LIABILITIES:
Long-term debt (including debt to a related party see note 6)	259	12,543	12,083
Series C Participating Preferred Stock, authorized, issued and outstanding 564,819 shares; liquidation preference of $56,482 as of September 24, 2005 and December 31, 2005 and $59,499 as of September 30, 2006	72,689	72,689	72,689
Other	80	40	18
Total Non-current Liabilities	73,028	85,272	84,790
Total Liabilities	157,207	147,725	152,031
SHAREHOLDERS’ DEFICIENCY:
Common Stock, $0.01 par value, authorized 50,000,000 shares at September 30, 2006, December 31, 2005 and September 24, 2005; 22,426,296 shares issued and outstanding at September 30, 2006, December 31, 2005 and September 24, 2005	225	225	225
Capital in excess of par value	460,952	460,891	460,857
Accumulated deficit	(490,526)	(486,664)	(487,146)
Total Shareholders’ Deficiency	(29,349)	(25,548)	(26,064)
Total Liabilities and Shareholders’ Deficiency	$                127,858	$             122,177	$         125,967

See Notes to Condensed Consolidated Financial Statements.

3

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In thousands of dollars, except per share amounts)

(Unaudited)

	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005
NET REVENUES	$        93,737	$     96,839	$   302,759	$   286,752
OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses	59,273	59,795	189,398	174,797
Special charges	--	(25)	--	(7)
Selling expenses	25,385	24,119	81,842	72,169
General and administrative expenses	8,069	3,275	26,502	23,108
Depreciation and amortization	619	681	1,708	2,208
	93,346	87,845	299,450	272,275
INCOME BEFORE INTEREST AND INCOME TAXES	391	8,994	3,309	14,477
Interest expense, net (including interest expense to a related party see note 6)	2,586	2,208	7,165	5,963
INCOME (LOSS) BEFORE INCOME TAXES	(2,195)	6,786	(3,856)	8,514
Provision (benefit) for Federal income taxes	3	(16)	3	19
Provision for state income taxes	13	6	3	16
Provision (benefit) for income taxes	16	(10)	6	35
INCOME (LOSS) FROM CONTINUING OPERATIONS	(2,211)	6,796	(3,862)	8,479
Gain from discontinued operations of Gump’s, netof $22 of income tax benefit, including a gain including a gain on disposal of $3,576 for the 39- weeks ended September 24, 2005	--	--	--	2,996
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)	(2,211)	6,796	(3,862)	11,475
Earnings applicable to Preferred Stock	--	167	--	282
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS	$     (2,211)	$       6,629	$      (3,862)	$     11,193

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NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations – basic	$           (0.10)	$          0.30	$         (0.17)	$          0.37
From continuing operations – diluted	$           (0.10)	$          0.20	$         (0.17)	$          0.25
From discontinued operations – basic	$              0.00	$          0.00	$            0.00	$          0.13
From discontinued operations – diluted	$              0.00	$          0.00	$            0.00	$          0.09
Net income (loss) per common share – basic	$           (0.10)	$          0.30	$         (0.17)	$          0.50
Net income (loss) per common share – diluted	$           (0.10)	$          0.20	$         (0.17)	$          0.34
Weighted average common shares outstanding – basic (thousands)	22,426	22,426	22,426	22,426
Weighted average common shares outstanding – diluted (thousands)	22,426	32,593	22,426	32,580

See Notes to Condensed Consolidated Financial Statements.

5

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)

	For the 39- Weeks Ended
	September 30, 2006	September 24, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$         (3,862)	$       11,475
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including deferred fees	2,256	2,853
Provision for doubtful accounts	357	368
Special charges	--	(7)
Gain on the sale of Gump’s	--	(3,576)
Gain on the sale of property and equipment	(2)	(70)
Compensation expense related to stock options	61	115
Accretion of debt discount	3,432	2,426
Changes in assets and liabilities:
Accounts receivable	3,076	4,539
Inventories	(7,202)	(10,156)
Prepaid catalog costs	(1,430)	(6,433)
Accounts payable	(6,450)	(965)
Accrued liabilities	1,688	(9,000)
Customer prepayments and credits	4,498	3,345
Other, net	(31)	1,673
Net cash used by operating activities	(3,609)	(3,413)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment	(2,554)	(1,483)
Proceeds from disposal of property and equipment	2	79
Proceeds from the sale of Gump’s	--	8,921
Net cash provided (used) by investing activities	(2,552)	7,517
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under Wachovia revolving loan facility	7,490	(2,740)
Payments under Wachovia Tranche A term loan facility	(1,493)	(1,493)
Payments of capital lease obligations and vehicle loans	(50)	(247)
Net cash provided (used) by financing activities	5,947	(4,480)
Net decrease in cash and cash equivalents	(214)	(376)
Cash and cash equivalents at the beginning of the period	275	510
Cash and cash equivalents at the end of the period	$                 61	$            134
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest	$            3,063	$         3,037
Income taxes	$                   4	$            160
Non-cash investing activities:
Acquisitions of property and equipment by capital lease and vehicle loans	$               327	$                --

See Notes to Condensed Consolidated Financial Statements.

6

HANOVER DIRECT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. Reference should be made to the annual financial statements, including the footnotes thereto, included in the Hanover Direct, Inc. (the “Company”) Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The condensed consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements. The condensed consolidated financial statements include all subsidiaries of the Company, and all intercompany transactions and balances have been eliminated. Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46(R)”), requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity should be included in the consolidated financial statements of the entity. The Company has reviewed its operations and has determined there to be no significant unconsolidated variable interest entities as of September 24, 2005, December 31, 2005 or September 30, 2006. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition, results of operations and cash flows of the Company and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year.

Sale of Gump’s Business

On March 14, 2005, the Company sold all of the stock of Gump’s Corp. and Gump’s By Mail, Inc. (collectively, “Gump’s”) (See Note 5). The Condensed Consolidated Statements of Income (Loss) for the 39- Weeks Ended September 24, 2005 reflects the Gump’s operating results and gain on sale as discontinued operations. In addition, in the Condensed Consolidated Statement of Cash Flows for the 39- Weeks Ended September 24, 2005, the change in assets and liabilities reflects Gump’s as discontinued operations.

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) 123R, “Share-Based Payment” (“SFAS 123R”), under the modified prospective method. Since the Company had previously accounted for stock-based compensation plans under the fair value provisions of SFAS 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), adoption did not significantly impact the Company’s financial position or results of operations. Under SFAS 123R, actual tax benefits recognized in excess of tax benefits previously established upon grant are reported as a financing cash inflow. Prior to adoption, such excess tax benefits were reported as an increase to operating cash flows. As of September 30, 2006, there were no tax benefits recognized in excess of tax benefits previously established upon grant.

The Company accounts for its stock options issued under its stock compensation plans under the fair value method of accounting using a Black-Scholes valuation model to measure stock option expense at the date of grant. All stock option grants have an exercise price equal to the fair market value of the Company’s common stock on the date of grant and generally have a 10-year term. The fair value of stock option grants is amortized to expense over the vesting period, generally 24 to 48 months. As of September 30, 2006, 2.9 million shares were available for future stock-based compensation grants. The Company issues new shares on the open market upon the exercise of stock options. For the 13- weeks ended September 30, 2006 and September 24, 2005, the Company recognized stock-based compensation expense of less than $0.1 million in each period. For the 39- weeks ended September 30, 2006 and September 24, 2005, the Company recognized stock-based compensation expense of $0.1 million in each period.

7

The weighted average Black-Scholes fair value assumptions for stock options issued during the 13 and 39- weeks ended September 30, 2006 and September 24, 2005 are as follows (no stock options were granted for the 13 and 39- weeks ended September 30, 2006 and 13- weeks ended September 24, 2005):

	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005
Expected term (in years)	—	—	—	4
Risk free interest rate	—	—	—	3.96%
Expected volatility	—	—	—	87.55%
Expected dividend yield	—	—	—	0%

A summary of option activity during the 39- weeks ended September 30, 2006 is presented below:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
Options outstanding, beginning of period	1,169,600	$ 4.65	4.9	$ 61,070
Granted	—	—
Exercised	—	—
Forfeited	(617,700)	5.24
Options outstanding, end of period	551,900	$ 4.00	7.0	$ 43,000
Options exercisable, end of period	488,535	$ 4.36	6.9	$ 28,666
Weighted average fair value of options granted	$        —

As of September 30, 2006, there are 8,666 outstanding options that will not vest due to the July 18, 2006 resignation of three members of the Company’s Board of Directors. These options expired on October 18, 2006, three months after the date of their resignation. All remaining stock options outstanding are either vested or expected to vest.

A summary of the status of the Company’s nonvested shares as of September 30, 2006, and changes during the 39- weeks ended September 30, 2006, is presented below:

	Shares	Weighted Average Grant-Date Fair Value
Nonvested options outstanding, beginning of period	175,507	$1.00
Granted	—	—
Vested	(112,142)	1.15
Forfeited	—	—
Nonvested options outstanding, end of period	63,365	$0.76

As of September 30, 2006, there was less than $0.1 million of total unrecognized compensation cost related to nonvested share-based compensation stock option plans of the Company. That cost is expected to be recognized over a weighted-average period of 0.8 years.

Uses of Estimates and Other Critical Accounting Policies

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

8

See “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,” found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for additional information relating to the Company’s use of estimates and other critical accounting policies.

Audit Committee Investigation; SEC Inquiry

In response to the discovery during the second half of 2004 of errors in the Company’s accounting treatment of certain items, it was determined in the third quarter of 2004 that the Company needed to restate previously filed financial statements (“Restatement”). Shortly thereafter, the Audit Committee of the Board of Directors launched an independent investigation relating to the Restatement and other accounting-related matters and engaged Wilmer Cutler Pickering Hale & Dorr LLP (“Wilmer Hale”) to conduct the investigation. The Company was notified in January 2005 by the Securities and Exchange Commission (“SEC”) that it was conducting an informal inquiry into the Company’s financial results and financial reporting since 1998. At this point in time, the SEC informal inquiry is ongoing. On October 20, 2005, the Audit Committee dismissed KPMG LLP (“KPMG”) as the Company’s independent auditors and thereafter engaged Goldstein Golub Kessler LLP (“GGK”). GGK completed its audit of the Company’s 2004, 2003 and 2002 fiscal year end financial statements and its review of the Company’s quarterly financial statements for the third fiscal quarter of 2004 and the first three quarters of 2005 on February 8, 2006. On February 21, 2006, the Company filed the past due periodic reports with the SEC. Since those filings, the Company has filed its periodic reports on a timely basis.

Significant Shareholder; Going Private Proposal and Related Litigation

The Company has a significant shareholder, Chelsey Direct, LLC. Chelsey and its related affiliates (“Chelsey”) beneficially own approximately 69% of the Company’s issued and outstanding common stock (“Common Stock”) and approximately 77% of the Common Stock after giving effect to the exercise of all of Chelsey’s outstanding options and warrants. In addition, Chelsey holds all 564,819 shares of the Company’s Series C Participating Preferred Stock (“Series C Preferred”), which has 100 votes per share. Including the Series C Preferred and the outstanding options and warrants beneficially owned by Chelsey, Chelsey holds approximately 92% of the voting rights of the Company.

The Company received a proposal from Chelsey to acquire the shares of Common Stock that Chelsey does not already own for a cash purchase price of $1.25 per share in a letter dated February 23, 2006. The letter indicated Chelsey's belief that the Company should become privately owned due to the financial drain imposed by remaining public as well as the limited benefits of remaining public. The letter stated that Chelsey or an affiliate proposed to enter into a cash merger agreement with the Company and to commence a cash tender promptly after the execution of that agreement.

Shortly after receipt of the letter, the Board of Directors met and formed a special committee (“Special Committee”) comprised of A. David Brown, Robert H. Masson and Donald Hecht, the three directors who were not Company employees or affiliated with Chelsey; Mr. Masson was appointed as the Special Committee’s Chairman. The Special Committee appointed Wilmer Hale as its independent counsel and engaged Houlihan Lokey Howard & Zukin (“Houlihan Lokey”) as its financial advisor.

On May 25, 2006, the Company was advised that discussions between Chelsey Direct LLC and the Special Committee concerning Chelsey's proposal to take the Company private at $1.25 per share had been terminated and as a result, the offer had been withdrawn.

As a result of the going private proposal, three substantially identical complaints had been filed against the Company, Chelsey and each of the Company’s directors (see Note 3 below).

Segment Reporting

We have one reportable segment, “Direct Marketing” but are presenting separate information on our “Other Activities.” The Direct Marketing segment contains the following catalog and product categories: The Company Store, Company Kids, Domestications, Silhouettes, International Male, Undergear and Scandia website as well as the operations of our retail outlets. Our “Other Activities” include business-to-business services which provide third

9

parties end to end, fulfillment, logistics, telemarketing and information technology services. We have included in Other Activities’ income (loss) before income taxes an allocation of certain fixed expenses for the fulfillment, logistics, telemarketing and information technology areas based on the ratio of business-to-business activities to those of the entire Company.

Amounts in thousands	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005
Net Revenues
Direct Marketing	$      88,461	$        89,606	$    282,304	$      265,194
Other Activities	5,276	7,233	20,455	21,558
Total Net Revenues	$      93,737	$        96,839	$    302,759	$      286,752
Income (Loss) Before Income Taxes
Direct Marketing	$           411	$          8,814	$        3,924	$        13,862
Other Activities	(20)	180	(615)	615
Unallocated Interest (Expense)	(2,586)	(2,208)	(7,165)	(5,963)
Total Income (Loss) Before Income Taxes	$     (2,195)	$          6,786	$     (3,856)	$          8,514

Amounts in thousands	September 30, 2006	December 31, 2005	September 24, 2005
Total Assets
Direct Marketing	$      124,965	$    114,956	$       123,180
Other Activities	1,893	7,221	2,787
Total Assets	$      127,858	$    122,177	$       125,967

2. NET INCOME (LOSS) PER COMMON SHARE

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

	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005
Net income (loss)	$   (2,211)	$         6,796	$      (3,862)	$       11,475
Less:
Earnings applicable to preferred stock	--	167	--	282
Net income (loss) applicable to common Shareholders	$   (2,211)	$         6,629	$      (3,862)	$       11,193
Basic net income (loss) per common share	$     (0.10)	$           0.30	$        (0.17)	$           0.50
Weighted-average common shares outstanding	22,426	22,426	22,426	22,426
Diluted net income (loss)	$   (2,211)	$         6,629	$      (3,862)	$       11,193

10

Diluted net income (loss) per common share	$     (0.10)	$           0.20	$        (0.17)	$           0.34
Weighted-average common shares outstanding	22,426	22,426	22,426	22,426
Effect of Dilution:
Stock warrants (issued July 8, 2004)	--	10,167	--	10,154
Weighted-average common shares outstanding assuming dilution	22,426	32,593	22,426	32,580

Diluted net income (loss) per common share excluded incremental weighted-average shares of 10,207,205 and 10,220,395 for the 13 and 39- weeks ended September 30, 2006, respectively. These incremental weighted-average shares were related to employee stock options and common stock warrants and were excluded due to their anti-dilutive effect. Options for which the exercise price was greater than the average market price of common shares as of the 13 and 39- weeks ended September 30, 2006 and September 24, 2005 were not included in the computation of diluted earnings per share, as the effect would be antidilutive. These consisted of options totaling 451,900 shares and 1,068,600 shares relating to the 13- week periods, respectively, and 403,900 shares and 1,118,600 shares relating to the 39- week periods, respectively.

3. CONTINGENCIES

Litigation Related to Going Private Proposal:

As a result of the going private proposal (see Note 1 above), three substantially identical complaints have been filed against the Company, Chelsey and each of the Company’s directors: the first complaint was filed in Delaware Chancery Court by Glenn Freedman and L.I.S.T., Inc. as plaintiffs on March 1, 2006; the second complaint was filed in Delaware Chancery Court by Howard Lasker as plaintiff on March 7, 2006; and the third complaint was filed in Superior Court of New Jersey Chancery Division by Feivel Gottlieb as plaintiff on March 3, 2006. In each complaint, the plaintiffs challenge Chelsey’s going private proposal and allege, among other things, that the consideration to be paid in the going private proposal is unfair and grossly inadequate, that the Special Committee cannot be expected to act independently, that Chelsey has manipulated the financial statements of the Company and its public statements in order to depress the stock price of the Company and that the proposal would freeze out the purported class members and capture the true value of the Company for Chelsey. In each complaint, plaintiffs seek class action certification, preliminary and permanent injunctive relief, rescission of the transaction if the offer is consummated and unspecified damages.

The plaintiffs in each of the cases agreed to extend the time by which the defendants were required to respond pending the recommendation of the Special Committee regarding the fairness of the transaction from a financial perspective. On May 25, 2006, Chelsey withdrew its going private proposal.

The Company believes that the complaints are without merit and intends to defend its interests vigorously.

On June 30, 2006, counsel to Glenn Freidman sent a letter to the Company seeking to inspect certain of the Company’s books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). The Company has agreed in principal to comply with plaintiff’s counsel’s request.

On September 15, 2006 Glenn Friedman filed an action in Chancery Court to compel the Company to hold an annual shareholders’ meeting under DGCL Section 211. The Company filed an answer, and on October 30, 2006, the plaintiff filed a Motion for Summary Judgment. The Company expects to hold its annual shareholders’ meeting within the next several months.

SEC Informal Inquiry:

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See Note 1 to the consolidated financial statements for a discussion of the informal inquiry being conducted by the SEC relating to the Company’s financial results and financial reporting since 1998.

Claims for Post-Employment Benefits

The Company was involved in four lawsuits instituted by former employees arising from the Company’s denial of change in control (“CIC”) benefits under compensation continuation plans following the termination of employment. One of these lawsuits was settled during the second fiscal quarter of 2006 and another during the fourth fiscal quarter of 2006.   The remaining two cases arose from the circumstances surrounding the Restatement: 

Charles Blue v. Hanover Direct, Inc., William Wachtel, Stuart Feldman, Wayne Garten and Robert Masson, No.: L-5153-05 (Super. Ct. N.J., Law Div. Hudson Cty, filed Oct. 24, 2005) is an action instituted by the Company’s former Chief Financial Officer who was terminated for cause on March 8, 2005.  The complaint seeks compensatory and punitive damages and attorney’s fees and alleges retaliation, mental anguish and reputational damage, loss of earnings and employment and racial discrimination.  The Company is mounting a vigorous defense in the action, which is in the discovery phase, and believes that Mr. Blue was properly terminated for cause and that his claims are groundless.  The parties to the lawsuit are engaging in discovery with depositions scheduled to begin in December 2006.

Frank Lengers v. Hanover Direct, Inc., Wayne Garten, William Wachtel, A. David Brown, Stuart Feldman, Paul S. Goodman, Donald Hecht and Robert Masson, No.: L-5795-05 (Super. Ct. N.J., Law Div. Hudson Cty, filed Nov. 16, 2005) was brought as a result of the Company terminating the employment of its former Vice President, Treasury Operations & Risk Management, on March 8, 2005 for cause.  The complaint seeks compensatory and punitive damages and attorney’s fees and alleges improper denial of CIC benefits, age and disability discrimination, handicap discrimination, aiding and abetting and breach of contract.  The Company is mounting a vigorous defense in the action, which is in the discovery phase, and believes that Mr. Lengers was properly terminated for cause and that his claims are groundless. The parties to the lawsuit are engaging in discovery.

The Company believes that it properly denied CIC benefits with respect each of these two former employees and that it has meritorious defenses in the cases and plans a vigorous defense.

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

4. SPECIAL CHARGES

2004 Plan

On June 30, 2004, the Company announced its plan to consolidate the operations of the LaCrosse, Wisconsin fulfillment center and storage facility into the Roanoke, Virginia fulfillment center by June 30, 2005. The LaCrosse fulfillment center and the storage facility were closed in June 2005 and August 2005, upon the expiration of their respective leases. The Company substantially completed the consolidation into the Roanoke, Virginia fulfillment center by the end of June 2005. The Company has incurred approximately $0.8 million in facility exit costs from the date of the announcement through September 30, 2006. The Company accrued $0.5 million in severance and related costs during 2004 associated with the LaCrosse operations and the elimination of 149 full and part-time positions, of which 96 employees have been or are being provided severance benefits by the Company. Since the consolidation of the fulfillment centers, the Company’s Roanoke fulfillment center has experienced high levels of employee turnover and lower productivity that has negatively impacted fulfillment costs and the Company’s overall performance. This trend of high levels of employee turnover and lower productivity has continued through the 39- weeks ended September 30, 2006 and is expected to continue for the remainder of 2006.

On November 9, 2004, the Company decided to relocate its International Male and Undergear catalog operations to its offices in New Jersey. The Company completed the relocation on February 28, 2005. The relocation was done primarily to consolidate operations, reduce costs, and leverage its catalog expertise in New Jersey. The Company accrued a total of $0.9 million in severance and related costs during the fourth quarter 2004 associated with the elimination of 32 California based full-time equivalent positions.

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As of September 30, 2006, a current liability of less than $0.1 million was included within Accrued Liabilities relating to future payments of severance and personnel costs in connection with the Company’s 2004 plan. This amount will be settled by December 2006.

5. SALE OF GUMP’S BUSINESS

On March 14, 2005, the Company sold all of the stock of Gump’s to Gump’s Holdings, LLC (“Purchaser”) for $8.9 million, including a purchase price adjustment of $0.4 million, pursuant to the terms of a February 11, 2005 Stock Purchase Agreement. The Company recognized a gain of approximately $3.6 million in the quarter ended March 26, 2005. Chelsey Direct, LLC (“Chelsey”), as the holder of all of the Series C Participating Preferred Stock (“Series C Preferred”), consented to the application of the sales proceeds to reduce the outstanding balance of the credit facility provided by Wachovia National Bank (“Wachovia”) in lieu of the current redemption of a portion of the Series C Preferred. Chelsey expressly retained its right to require redemption of approximately $6.9 million of the Series C Preferred subject to Wachovia’s approval.

After the sale, the Company continued as the guarantor of one of the two leases for the San Francisco building where the store is located (the Company was released from liability on the other lease). The Purchaser was required to use its commercially reasonable efforts to secure the Company’s release from the guarantee within a year of the closing. If the Purchaser could not secure the Company’s release within a year of the closing, an affiliate of the Purchaser was required to either (i) transfer a percentage interest in its business so that the Company will own, indirectly, 5% interest of the Purchaser’s common stock, or (ii) provide the Company with a $2.5 million stand-by letter of credit or other form of compensation acceptable to the Company to reimburse the Company for any liabilities the Company may incur under the guarantee until the Company is released from the guarantee or the lease is terminated. The Purchaser did not secure the Company’s release of the guarantee. The Company agreed to accept a secured $2.5 million promissory note from one of the principal investors in the Purchaser. The note is secured by a pledge of equity which indirectly represents 5% of the Purchaser’s common stock. The Company may draw on the note if the Company incurs any liability to the landlord under the lease guarantee or as a result of a default on the other lease. As of October 31, 2006, there are $5.7 million (net of $0.5 million in expected sublease income) in lease commitments for which the Company is the guarantor. Based on its evaluation, the Company has concluded it is unlikely any payments will be required under the guarantee, thus has not established a guarantee liability as of the March 14, 2005 sale date or as of September 30, 2006.

The Company entered into a Direct Marketing Services Agreement with the Purchaser to provide telemarketing and fulfillment services for the Gump’s catalog and direct marketing businesses for 18 months. This agreement expired in October 2006 and was not renewed.

Listed below are the revenues and income before income taxes included in the Condensed Consolidated Statements of Income (Loss) (these results exclude certain corporate overhead charges allocated to Gump’s for services provided by the Company to run the business) for the 39- weeks ended September 24, 2005:

In thousands (000’s)	39- Weeks Ended September 24, 2005
Net revenues	$              7,241
Income before income taxes	$             2,974a

a) Includes a gain on disposal of $3,576 at September 24, 2005

6. DEBT

The Company has two credit facilities: a senior secured credit facility (the “Wachovia Facility”) provided by Wachovia and a $20.0 million junior secured facility (the “Chelsey Facility”), provided by Chelsey Finance, LLC (“Chelsey Finance”), of which the entire $20.0 million was borrowed by the Company. Chelsey Finance is an affiliate of Chelsey, the Company’s principal shareholder.

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As of September 30, 2006, December 31, 2005 and September 24, 2005, debt consisted of the following (in thousands):

	September 30, 2006	December 31, 2005	September 24, 2005
Wachovia Facility:
Tranche A term loans – Current portion, weighted average interest rate of 7.33% at September 30, 2006, 7.5% at December 31, 2005 and 7.0% at September 24, 2005	$      1,493	$      1,992	$      1,992
Revolver, weighted average interest rate of 7.68% at September 30, 2006, 7.5% at December 31, 2005 and 7.0% at September 24, 2005	15,556	8,066	11,668
Chelsey Facility – stated interest rate of 13.25% (5.0% above prime rate) at September 30, 2006.	14,977	--	--
Capital lease obligations and other debt – Current portion	69	47	89
Short-term debt	32,095	10,105	13,749
Wachovia Facility:
Tranche A term loans, interest rate of 7.5% at December 31, 2005 and 7.0% at September 30, 2005	--	994	1,492
Chelsey Facility – stated interest rate of 12.0% (5.0% above prime rate) at December 31, 2005 and 11.5% (5.0% above prime rate) at September 24, 2005	--	11,545	10,585
Capital lease obligations and other debt	259	4	6
Long-term debt	259	12,543	12,083
Total debt	$   32,354	$   22,648	$   25,832

Wachovia Facility

Wachovia and the Company are parties to a Loan and Security Agreement dated November 14, 1995 (as amended by the First through Thirty-Sixth Amendments, the “Wachovia Loan Agreement”) pursuant to which Wachovia provided the Company with the Wachovia Facility which has included, since inception, one or more term loans and a revolving credit facility (“Revolver”). The Wachovia Facility expires on July 8, 2007.

Currently, the Wachovia facility has a Tranche A term loan outstanding which has a principal balance of $1.5 million as of September 30, 2006, all of which is classified as short term on the Condensed Consolidated Balance Sheet. Prior to the reduction in interest rates provided for in the Thirty-Fifth Amendment, the Tranche A term loan bore interest at 0.5% over the Wachovia prime rate and required monthly principal payments of approximately $166,000. The interest rate on the Tranche A term loan, as provided for in the Thirty-Fifth Amendment, is the Wachovia prime rate or the Eurodollar rate plus 2% during the 13- weeks ended September 30, 2006. As of September 30, 2006, the weighted average interest rate on the Tranche A term loan was 7.33%.

The Revolver has a maximum loan limit of $34.5 million, subject to inventory and accounts receivable sublimits, that limit the credit available to the Company’s subsidiaries, which are borrowers under the Revolver. The interest rate on the Revolver, as provided for in the Thirty-Fifth Amendment, is the Wachovia prime rate or the Eurodollar rate plus 2% during the 13- weeks ended September 30, 2006. As of September 30, 2006, the weighted average interest rate on the Revolver was 7.68%.

The Wachovia Loan Agreement contains affirmative and negative covenants typical for loan agreements for asset-based lending of this type including financial covenants requiring the Company to maintain specified levels of Consolidated Net Worth, Consolidated Working Capital and EBITDA, as those terms are defined in the Wachovia Loan Agreement. As of September 30, 2006, the Company was required to maintain Consolidated Working Capital of not less than $9.0 million and Consolidated Net Worth of not less than ($42.0 million) and not permit Cumulative Minimum EBITDA for the nine months ended September 30, 2006 to fall below $5.0 million.

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The Company was in compliance with its financial covenants as of September 30, 2006. Were it not in compliance with one or more of these covenants, Wachovia would have the right, among other remedies, to require immediate repayment of the Wachovia Facility.

Remaining availability under the Wachovia Facility as of September 30, 2006 was $9.2 million.

2006 Amendments to Wachovia Loan Agreement

The Thirty Fifth Amendment to the Wachovia Loan Agreement, which took effect March 28, 2006, reduced the interest rate by 0.5% on the Wachovia Facility to the Wachovia prime rate plus 0% or the Eurodollar rate plus 2%, eliminated the annual Revolver fee, reduced the required minimum levels of EBITDA covenant and consented to certain transactions between the Company’s subsidiaries. There were no fees paid in connection with this amendment.

Effective August 10, 2006, the Company and Wachovia entered into the Thirty-Sixth Amendment to the Wachovia Loan Agreement which reduced the required minimum levels of EBITDA covenant for the third and fourth fiscal quarters of 2006. There were no fees paid in connection with this amendment.

Effective November 8, 2006, the Company and Wachovia entered into the Thirty-Seventh Amendment to the Wachovia Loan Agreement which reduced the required minimum levels of EBITDA covenant for the fourth fiscal quarter of 2006 and the first and second fiscal quarters of 2007. There were no fees paid in connection with this amendment.

On March 28, 2006, August 10, 2006 and November 8, 2006, the Company and Chelsey Finance entered into similar amendments of the Chelsey Facility, which reduced the required minimum levels of the EBITDA covenant and consented to certain transactions.

Chelsey Facility

The Chelsey Facility is a $20.0 million junior secured credit facility with Chelsey Finance that was initially recorded at $7.1 million, net of an un-accreted debt discount of $12.9 million. The Chelsey Facility has a three-year term, subject to earlier maturity upon the occurrence of a change in control or sale of the Company (as defined), and carries a stated interest rate of 5% above the prime rate publicly announced by Wachovia. The Company is not obligated to make principal payments until July 8, 2007, except if there is a change in control or sale of the Company. The Chelsey Facility has a three-year term, subject to earlier maturity upon the occurrence of a change in control or sale of the Company (as defined), and carries a stated interest rate of 5.0% above the prime rate publicly announced by Wachovia. The financial and non-financial covenants contained in the Chelsey Facility mirror those in the Wachovia Facility except that the quantitative measures for the consolidated working capital and EBITDA covenants are 10.0% less restrictive and the consolidated net worth covenant is 5.0% less restrictive than the comparable financial covenants in the Wachovia Facility. The Chelsey Facility is secured by a second priority lien on substantially all of the assets of the Company. The Chelsey Facility contains a cross default provision under which a default under the Wachovia Facility would also be a default under the Chelsey Facility. As part of this transaction, Chelsey Finance entered into an intercreditor and subordination agreement with Wachovia. As of September 30, 2006, the Company was required to maintain Consolidated Working Capital of not less than $8.1 million and Consolidated Net Worth of not less than ($44.1 million) and not permit its Cumulative Minimum EBITDA for the nine months ending September 30, 2006 to fall below $4.5 million under the Chelsey Facility. The Company was in compliance with its financial covenants as of September 30, 2006. Were it not in compliance with one or more of the covenants, subject to certain limitations contained in an intercreditor agreement between Wachovia and Chelsey under which Chelsey’s rights and remedies are subordinate and junior to those of Wachovia, Chelsey would have the right, among other remedies to require immediate repayment of the Chelsey Facility after the Wachovia facility was repaid in full.

At September 30, 2006, the amount recorded as debt on the Condensed Consolidated Balance Sheet was $15.0 million, net of the un-accreted debt discount of $5.0 million.

In accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB 14”), proceeds received from the sale of debt with detachable

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stock purchase warrants should be allocated to both the debt and warrants, with the portion allocable to the warrants to be accounted for as Capital in excess of par value with the remaining portion, or $7.1 million, classified as debt. The fair value of the Common Stock Warrant of $12.9 million was determined using the Black-Scholes option pricing model and is being treated as debt discount, which will be accreted as interest expense utilizing the interest method over the 36-month term of the Chelsey Facility. The assumptions used for the Black-Scholes option pricing model were as follows: risk-free interest rate of 4.5%, expected volatility of 80.59%, an expected life of ten years and no expected dividends. A summary of the debt relating to the Chelsey Facility is as follows (in thousands):

	September 30, 2006	December 31, 2005	September 24, 2005
Amount Borrowed Under the Chelsey Facility	$            20,000	$            20,000	$             20,000
Fair Value of Common Stock Warrant (Recorded as Capital in excess of par value)	(12,939)	(12,939)	(12,939)
Accretion of Debt Discount (Recorded as Interest Expense)	7,916	4,484	3,524
	$            14,977	$            11,545	$             10,585

7. NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage. The Company has adopted the provisions of SFAS 151 effective January 1, 2006 and such adoption did not have a material effect on the Company’s results of operations or financial position for the 39- weeks ended September 30, 2006.

In December 2004, the FASB issued SFAS No. 123R, “Share Based Payment” (“SFAS 123R”). SFAS 123R requires measurement and recording of compensation expense for all employee share-based compensation awards using a fair value method. The Company currently accounts for its stock-based compensation to employees using the fair value-based methodology under SFAS 123. The Company has adopted the provisions of SFAS 123R effective January 1, 2006 and such adoption did not have a material effect on the Company’s results of operations or financial position for the 13 and 39- weeks ended September 30, 2006. See Note 1 to the condensed consolidated financial statements for additional disclosures for SFAS 123R.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which changes the requirements for the accounting for and reporting of a change in accounting principle. The Company is required to adopt the provisions of SFAS 154 effective January 1, 2006. The Company has adopted the provisions of SFAS 154 and such adoption did not have a material effect on the Company’s results of operations or financial position for the 13 and 39- weeks ended September 30, 2006.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the end of our 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under

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the guidance in SAB 108. We are currently evaluating the impact of adopting SAB 108 to determine its effects, if any, on our results of operations or financial position.

In September 2006, the FASB issued SFAS 157 Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact of adopting SFAS 157 to determine its effects, if any, on our results of operations or financial position.

8. CHANGES IN MANAGEMENT

Management and Compensation

Effective April 14, 2006, Michael D. Contino resigned as the Company’s Executive Vice President and Chief Operating Officer. The Company has entered into a severance agreement with Mr. Contino to provide severance payments for 18 months of salary and other related costs. The Company has accrued an aggregate of $0.6 million during the first quarter of 2006 for severance and other related costs due to Mr. Contino’s resignation.

The employment agreements of the Chief Executive Officer and Chief Financial Officer both expired on May 5, 2006 and have been extended on a day-to-day basis.  While both continue to provide employment services to the Company, there can be no assurance that they will continue to do so.

9. SUBSEQUENT AND OTHER EVENTS

United Marketing Group, LLC. On March 22, 2006 we replaced our then incumbent membership program provider with Encore Marketing International (“Encore”) under an agreement where we marketed membership programs on a retail basis. Both parties were disappointed with the results of the sale of Encore membership programs and we mutually elected to terminate the agreement. On October 18, 2006, we replaced Encore and began marketing membership programs on a wholesale basis under an agreement with United Marketing Group, LLC (“UMG”). Under our Encore agreement, we were paid a commission for customers who initially agreed to purchase a membership program and a commission if a purchaser was still an active member when the customer’s membership was up for renewal at the end of a membership year. Under the UMG agreement, we purchase membership kits and program benefits from UMG and then resell them to our customers. As a result of switching from selling memberships on a retail basis to a wholesale basis and the different economic arrangements under the two agreements, there will be lag in revenue recognition from membership programs sold and we will be amortizing the revenue from membership sales over the life of the memberships. By way of contrast, under our agreement with Encore, we recognized commissions when customers agreed to purchase a membership program.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

	13- Weeks Ended				39- Weeks Ended
	September 30, 2006		September 24, 2005		September 30, 2006		September 24, 2005
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and operating expenses	63.2		61.7		62.6		60.9
Selling expenses	27.1		24.9		27.0		25.2
General and administrative expenses	8.6		3.4		8.8		8.0
Depreciation and amortization	0.7		0.7		0.6		0.8
Income before interest and income taxes	0.4		9.3		1.1		5.1
Interest expense, net	2.8		2.3		2.4		2.1
Provision (benefit) for Federal and state income taxes	--		--		--		--
Income (loss) from continuing operations	(2.4)		7.0		(1.3)		3.0
Gain from discontinued operations of Gump’s	--		--		--		1.0
Net income (loss) and comprehensive income (loss)	(2.4)		7.0		(1.3)		4.0
Earnings applicable to Preferred Stock	--		0.2		--		0.1
Net income (loss) applicable to common shareholders	(2.4)	%	6.8	%	(1.3)	%	3.9	%

Executive Summary

During the first nine months of 2006, net revenues increased $16.0 million (5.6%) for the 39-week period ended September 30, 2006 to $302.8 million from $286.8 million for the first nine months of 2005. This increase was primarily driven by an increase in catalog circulation levels. In addition, net revenues grew because of higher postage and handling rates, which we put into effect to offset an increase in United States Postal Service (“USPS”) rates that occurred in early January 2006. These increases were partially offset by lower average order sizes. We experienced higher demand in our Domestications and Silhouettes catalogs, lower demand in The Company Store catalog and flat demand in our men’s division which consists of the International Male and Undergear catalogs.

During the first nine months of 2006, income before interest and income taxes decreased by approximately $11.2 million to $3.3 million from $14.5 million in the first nine months of 2005. The principal factors which negatively impacted the operating results for the nine months of 2006 included:

• the continuation of diminished productivity in our distribution center, which started in the fall of 2005 and has led to higher product fulfillment costs;

• higher outbound merchandise shipping costs caused by the bankruptcy of a consolidator utilized by the Company to deliver packages into the USPS system in mid March 2006, which caused the Company to utilize more expensive methods of delivery within the USPS system. While we expect this bankruptcy will continue to significantly increase our merchandise shipping costs for the remainder of 2006, the incremental increase in outbound merchandise shipping costs will diminish over the second half of the year;

• higher catalog paper and postage costs, which started in the fall of 2005; and

• higher general and administrative expenses due to the reversal in September 2005 of a $4.5 million accrual related to Rakesh Kaul, a former CEO who pursued claims against the Company.

Results of Operations – 13- weeks ended September 30, 2006 compared with the 13- weeks ended September 24, 2005

Net Income (Loss). The Company reported a net loss applicable to common shareholders of $2.2 million, or $0.10 basic and diluted net loss per share, for the 13- weeks ended September 30, 2006 compared with net income applicable to common shareholders of $6.6 million, or $0.30 basic earnings per share and $0.20 diluted earnings per share, for the comparable period in 2005.

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The decrease in net income (loss) applicable to common shareholders was primarily a result of the following:

• a decline in operating profit primarily driven by higher outbound merchandise shipping, product fulfillment, catalog paper and postage costs which aggregated $2.4 million; and

• higher general and administrative expenses due to the reversal in September 2005 of a $4.5 million accrual related to Rakesh Kaul, a former CEO who pursued claims against the Company;

Partially offset by:

• lower product costs due to improved sourcing of merchandise of $0.7 million.

Net Revenues. Net revenues decreased $3.1 million (3.2%) for the 13-week period ended September 30, 2006 to $93.7 million from $96.8 million for the comparable period in 2005. This decrease was primarily driven by lower catalog product shipments in the month of September 2006 due to the Company performing a physical inventory count of its inventory in mid to late September 2006. In addition, the Company generated lower revenues related to its third party fulfillment operations as a result of one customer’s paying directly their outbound shipping costs instead of reimbursing the Company. Partially offsetting these declines was an increase in net revenues because of higher postage and handling rates, which we put into effect to offset an increase in USPS rates that occurred in early January 2006. We experienced higher demand in our Domestications, Silhouettes and International Male catalogs, and lower demand in The Company Store catalog. Internet sales increased and comprised 46.3% of combined Internet and catalog revenues for the 13- weeks ended September 30, 2006 compared with 40.0% for the comparable period in 2005, and have increased by approximately $6.8 million, or 20.9%, to $39.4 million for the 13-week period ended September 30, 2006 from $32.6 million for the comparable period in 2005.

Cost of Sales and Operating Expenses. Cost of sales and operating expenses decreased by $0.5 million to $59.3 million for the 13- weeks ended September 30, 2006 as compared with $59.8 million for the comparable period in 2005. Cost of sales and operating expenses increased to 63.2% of net revenues for the 13-week period ended September 30, 2006 as compared with 61.7% of net revenues for the comparable period in 2005. The $0.5 million decrease was primarily due to approximately $1.7 million (0.7% of net revenues) in lower merchandise costs related to the decline in net revenues and improved sourcing of merchandise and approximately $1.9 million (1.9% of net revenues) in lower expenses related to our third party fulfillment operations as a result of one of customers paying their outbound shipping costs directly, partially offset by a $1.3 million (1.7% of net revenues) increase in outbound merchandise transportation and USPS charges, a $1.4 million (1.7% of net revenues) increase in product fulfillment costs, each of which is discussed below and a $0.4 million (0.6% of net revenues) increase in telemarketing expenses.

We ship a majority of our merchandise by USPS which increased postal rates by 5.4% in January 2006. We also experienced fuel surcharges from freight consolidators that also increased our merchandise shipping costs. In mid March 2006, a consolidator utilized by the Company that enabled the Company to bypass USPS regional bulk mail centers, thereby reducing transportation and USPS charges, filed a petition in bankruptcy and ceased operation. This caused the Company to incur increased outbound merchandise transportation and USPS charges ($1.3 million in higher costs in the second quarter of 2006 and $1.0 million in higher costs in the third quarter of 2006). While we expect this bankruptcy will continue to significantly increase our merchandise shipping costs for the remainder of 2006, we expect the incremental increase in outbound merchandise shipping costs will continue to diminish in the fourth quarter.

Since the consolidation of our fulfillment centers, our Roanoke fulfillment center has experienced lower productivity as a result of high levels of employee turnover and space constraints which has resulted in higher product fulfillment costs of approximately $1.4 million for the 13- weeks ended September 30, 2006. The lower productivity started in the third quarter of 2005 and has continued through the third quarter of 2006. In the spring of 2006, we installed new management in the fulfillment center to address these issues. To date, however, we have not seen an improvement in productivity or lower costs. To free up space in our distribution center, we ceased providing fulfillment services to one our third party fulfillment customers at the end of the third quarter of 2006 and

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expect to stop providing these services to our two other third party customers during 2007 when their current contracts expire.

Selling Expenses. Selling expenses increased by $1.3 million to $25.4 million for the 13- weeks ended September 30, 2006 as compared with $24.1 million for the comparable period in 2005. Selling expenses increased to 27.1% of net revenues for the 13- weeks ended September 30, 2006 from 24.9% for the comparable period in 2005. The $1.3 million (1.4% of net revenues) increase was primarily due to increased internet marketing expenditures as well as higher catalog paper and postage costs which had a negative 0.8% of net revenues impact.

General and Administrative Expenses. General and administrative expenses increased by $4.8 million to $8.1 million for the 13- weeks ended September 30, 2006 as compared with $3.3 million for the comparable period in 2005. General and administrative expenses increased to 8.6% of net revenues for the 13- weeks ended September 30, 2006 from 3.4% for the comparable period in 2005. The $4.8 million increase was attributable primarily to the reversal of a $4.5 million accrual established in fiscal 2000 pertaining to Rakesh Kaul, a former CEO of the Company. The accrual was reversed due to the expiration of Mr. Kaul’s rights to pursue his claims against the Company. In addition, compensation costs increased by an aggregate of $0.8 million due primarily to an increased number of employees.

Depreciation and Amortization. Depreciation and amortization expense decreased approximately $0.1 million to approximately $0.6 million for the 13- weeks ended September 30, 2006, from $0.7 million for the comparable period in 2005. The decrease was primarily due to property and equipment that have become fully depreciated, partially offset by the depreciation of newly purchased property and equipment.

Income before interest and income taxes. The Company’s income before interest and income taxes decreased by approximately $8.6 million to $0.4 million for the 13- weeks ended September 30, 2006, from $9.0 million for the comparable period in 2005.

Interest Expense, Net. Interest expense, net, increased $0.4 million to $2.6 million for the 13- weeks ended September 30, 2006, from $2.2 million for the comparable period in fiscal 2005. This increase in interest expense is primarily due to $0.4 million in higher accretion of the debt discount for the 13- weeks ended September 30, 2006.

Income Taxes: The provision for federal and state income taxes is approximately (0.7)% of the loss before income taxes for the 13- week period ended September 30, 2006.

Results of Operations – 39- weeks ended September 30, 2006 compared with the 39- weeks ended September 24, 2005

Net Income (Loss). The Company reported a net loss applicable to common shareholders of $3.9 million, or $0.17 basic and diluted net loss per share, for the 39- weeks ended September 30, 2006 compared with net income applicable to common shareholders of $11.2 million, or $0.50 basic earnings per share and $0.34 diluted earnings per share, for the comparable period in 2005.

The decrease in net income (loss) applicable to common shareholders was primarily a result of the following:

• a decline in operating profit primarily driven by higher outbound merchandise shipping, fulfillment, catalog paper and postage costs which aggregated $7.8 million;

• An unfavorable impact of $3.0 million from discontinued operations due to the sale of Gump’s in the first quarter of 2005;

• a $0.7 million increase in compensation and fringe benefits; and

• a $0.6 million increase in general and administrative expenses attributable to severance recorded in 2006 related to the departure of the Company’s Chief Operating Officer;

Partially offset by:

• lower product costs due to improved sourcing of merchandise of $2.4 million;

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• a $1.8 million reduction in general and administrative expenses, primarily professional fees, as a result of the completion during 2005 of the independent investigation conducted by the Audit Committee of the Board of Directors related to the restatement of the Company’s consolidated financial statements and other accounting-related matters; and

• a $0.6 million reduction in general and administrative expenses related to reduced rent in 2006 as a result of the 2005 consolidation of the Company’s headquarters.

Net Revenues. Net revenues increased $16.0 million (5.6%) for the 39-week period ended September 30, 2006 to $302.8 million from $286.8 million for the comparable period in 2005. This increase was primarily driven by an increase in catalog circulation levels. In addition, net revenues grew because of higher postage and handling rates, which we put into effect to offset an increase in United States Postal Service (“USPS”) rates that occurred in early January 2006. These increases were partially offset by lower average order sizes. We experienced higher demand in our Domestications and Silhouettes catalogs, and lower demand in The Company Store catalog and flat demand in the International Male catalog. Internet sales increased and comprised 44.2% of combined Internet and catalog revenues for the 39- weeks ended September 30, 2006 compared with 38.6% for the comparable period in 2005, and have increased by approximately $22.1 million, or 22.6%, to $120.2 million for the 39-week period ended September 30, 2006 from $98.1 million for the comparable period in 2005.

Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased by $14.6 million to $189.4 million for the 39- weeks ended September 30, 2006 as compared with $174.8 million for the comparable period in 2005. Cost of sales and operating expenses increased to 62.6% of net revenues for the 39-week period ended September 30, 2006 as compared with 60.9% of net revenues for the comparable period in 2005. The $14.6 million increase was primarily due to approximately $3.7 million in higher merchandise costs related to the increase in net revenues as well as approximately $2.3 million (0.8% of net revenues) in increased outbound merchandise transportation and USPS charges and approximately $4.3 million (1.4% of net revenues) in higher product fulfillment costs, each of which is discussed below.

We ship a majority of our merchandise by USPS which increased postal rates by 5.4% in January 2006. We also experienced fuel surcharges from freight consolidators that also increased our merchandise shipping costs. In mid March 2006, a consolidator utilized by the Company that enabled the Company to bypass USPS regional bulk mail centers, thereby reducing transportation and USPS charges, filed a petition in bankruptcy and ceased operation. This caused the Company to incur increased outbound merchandise transportation and USPS charges ($1.3 million in higher costs in the second quarter of 2006 and $1.0 million in higher costs in the third quarter of 2006). While we expect this bankruptcy will continue to significantly increase our merchandise shipping costs for the remainder of 2006, we expect the incremental increase in outbound merchandise shipping costs will continue to diminish in the fourth quarter.

Since the consolidation of our fulfillment centers, our Roanoke fulfillment center has experienced lower productivity as a result of high levels of employee turnover and space constraints which has resulted in higher product fulfillment costs of approximately $4.3 million for the 39- weeks ended September 30, 2006. The lower productivity started in the third quarter of 2005 and has continued through the third quarter of 2006. In the spring of 2006, we installed new management in the fulfillment center to address these issues. To date, however, we have not seen an improvement in productivity or lower costs. To free up space in our distribution center, we ceased providing fulfillment services to one our third party fulfillment customers at the end of the third quarter of 2006 and expect to stop providing these services to our two other third party customers during 2007 when their current contracts expire.

Partially offsetting these increases are approximately $2.4 million in lower merchandise costs through improved sourcing of merchandise and approximately $0.5 million in lower expenses related to our third party fulfillment operations consistent with the decline in third party fulfillment revenues.

Selling Expenses. Selling expenses increased by $9.6 million to $81.8 million for the 39- weeks ended September 30, 2006 as compared with $72.2 million for the comparable period in 2005. Selling expenses increased to 27.0% of net revenues for the 39- weeks ended September 30, 2006 from 25.2% for the comparable period in 2005. The $9.7 million increase was primarily due to approximately $4.9 million in costs related to higher catalog

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circulation, approximately $2.4 million (0.8% of net revenues) in increased internet marketing expenditures and approximately $2.4 million (0.8% of net revenues) in higher paper and postage costs.

General and Administrative Expenses. General and administrative expenses increased by $3.4 million to $26.5 million for the 39- weeks ended September 30, 2006 as compared with $23.1 million for the comparable period in 2005. General and administrative expenses increased to 8.8% of net revenues for the 39- weeks ended September 30, 2006 from 8.0% for the comparable period in 2005. The $3.4 million increase was attributable primarily to the reversal of a $4.5 million accrual established in fiscal 2000 pertaining to Rakesh Kaul, a former CEO of the Company. The accrual was reversed due to the expiration of Mr. Kaul’s rights to pursue his claims against the Company. In addition, compensation and fringe benefits expenses increased by an aggregate of $1.9 million due to an increased number of employees and higher medical costs, $0.6 million in severance costs related to the departure of the Company’s Chief Operating Officer in 2006 and $0.6 million in professional fees related to the Going Private proposal in 2006. Partially offsetting these increases were $1.8 million in professional fees incurred in 2005 that related to the Audit Committee investigation and other accounting-related matters. In addition there is a $0.6 million reduction in general and administrative expenses related to reduced rent in 2006 as a result of the 2005 consolidation of the Company’s headquarters, $0.5 million in lower insurance costs and $0.5 million in lower external auditing fees.

Depreciation and Amortization. Depreciation and amortization expense decreased approximately $0.5 million to approximately $1.7 million for the 39- weeks ended September 30, 2006, from $2.2 million for the comparable period in 2005. The decrease was primarily due to property and equipment that have become fully depreciated, partially offset by the depreciation of newly purchased property and equipment.

Income before interest and income taxes. The Company’s income before interest and income taxes decreased by approximately $11.2 million to $3.3 million for the 39- weeks ended September 30, 2006, from $14.5 million for the comparable period in 2005.

Interest Expense, Net. Interest expense, net, increased $1.2 million to $7.2 million for the 39- weeks ended September 30, 2006, from $6.0 million for the comparable period in fiscal 2005. This increase in interest expense is primarily due to $1.0 million in higher accretion of the debt discount and higher interest rates related to the Wachovia and Chelsey Facilities during the 39- weeks ended September 30, 2006. These increases were partially offset by a decrease in interest expense due to lower average cumulative borrowings relating to the Wachovia Facility.

Income Taxes: The provision for federal and state income taxes is approximately (0.2)% of the loss before income taxes for the 39- week period ended September 30, 2006 (which represents the anticipated effective tax rate for the full year 2006).

Gain from discontinued operations of Gump’s: On March 14, 2005, the Company sold all of the stock of Gump’s to Gump’s Holdings, LLC, an unrelated third party. The Company recognized a gain on the sale of approximately $3.6 million in the quarter ended March 26, 2005, offset by losses from Gump’s on-going operations through the sale date of approximately $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our borrowings under our Wachovia revolving loan facility have increased from $8.1 million at December 31, 2005 to $15.6 million at September 30, 2006.

Net cash used by operating activities. During the 39-week period ended September 30, 2006, net cash used by operating activities was $3.6 million. This was due primarily to higher inventory positions compared to December 31, 2005 and payments made by the Company to reduce accounts payable, partially offset by receipts on accounts receivable and increased customer prepayments and credits.

Net cash used by investing activities. During the 39-week period ended September 30, 2006, net cash used by investing activities was $2.6 million for capital expenditures, consisting primarily of purchases and upgrades to

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various information technology hardware and software, expenditures associated with our new retail store in Roanoke, Virginia and other miscellaneous equipment throughout the Company.

Net cash provided by financing activities. During the 39-week period ended September 30, 2006, net cash provided by financing activities was $5.9 million, which was primarily due to net borrowings of $6.0 million under the Wachovia Facility.

Financing Activities

See Note 6 to the condensed consolidated financial statements for information relating to the Company’s debt and financing activities.

Other Activities

General. At September 30, 2006, the Company had less than $0.1 million in cash and cash equivalents, compared with $0.3 million at December 31, 2005 and $0.1 million at September 24, 2005. Working capital and current ratio at September 30, 2006 were $10.2 million and 1.12 to 1, respectively, compared to $26.0 million and 1.42 to 1, respectively, at December 31, 2005. Total recorded borrowings, net of the un-accreted debt discount of $5.0 million and the Series C Preferred, as of September 30, 2006, aggregated $32.4 million, $32.1 million of which is classified as short term and $0.3 million of which is classified as long term. Remaining availability under the Wachovia Facility as of September 30, 2006 was $9.2 million, compared with $7.2 million at September 24, 2005.

Because both the Wachovia and the Chelsey Facilities become due in July 2007, the Company will be forced to seek extensions of these facilities or seek replacement financing from other sources before the maturity date. While management believes that it will be able to replace both of these credit facilities, no assurances can be given that the Company will be able to do so. Even if the Company is able to secure a new credit facility, it is possible that the terms of any replacement facility could be less favorable than the existing credit facilities. Were that to occur, the Company’s results of operations in the future would be adversely affected.

USES OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES

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

See “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,” found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for additional information relating to the Company’s use of estimates and other critical accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

See “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,” found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, and Note 7 of the Condensed Consolidated Financial Statements for additional information relating to new accounting pronouncements that the Company has adopted.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” and “believes,” among others, generally identify forward-looking statements. Forward-looking statements are predictions of future trends and events and as such, there are substantial risks and uncertainties associated with forward-looking statements, many of which are beyond management’s control. Some of the more material risks and uncertainties are

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identified in “Risk Factors” contained in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. We do not intend, and disclaim any obligation, to update any forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rates: The Company’s exposure to market risk relates to interest rate fluctuations for borrowings under the Wachovia Facility, including the term loans, which bear interest at variable rates, and the Chelsey Facility, which bears interest at 5% above the prime rate publicly announced by Wachovia Bank, N.A. At September 30, 2006, outstanding principal balances under the Wachovia Facility and Chelsey Facility subject to variable rates of interest were approximately $17.0 million and $20.0 million, respectively. If interest rates were to increase by one percent from current levels, the resulting increase in interest expense, based upon the amount outstanding at September 30, 2006, would be approximately $0.4 million on an annual basis.

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded, based on an evaluation performed as of September 30, 2006, that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) were effective as of September 30, 2006 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the 13- weeks ended September 30, 2006, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 3 to the condensed consolidated financial statements for information relating to the Company’s legal proceedings.

ITEM 1A. RISK FACTORS

The following sets forth material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005:

We have a majority shareholder who controls the Board and is also a secured lender and has filed a proposal to take the Company private.

Chelsey, together with its affiliates, owns approximately 69% of the Company’s issued and outstanding Common Stock (including the January 10, 2005 purchase of 3,799,735 shares) and controls approximately 92% of the voting power (after giving effect to the exercise of all outstanding options and warrants to purchase Common

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Stock beneficially owned by Chelsey and the Series C Preferred voting rights). Chelsey has appointed a majority of our Board of Directors including our Chairman, and Chelsey Finance is the Company’s junior secured lender.

On February 23, 2006, Chelsey offered to purchase the remaining Common Stock that it did not already own and take the Company private. Shortly after receipt of the offer, the Board of Directors met and formed a special committee (“Special Committee”) comprised of A. David Brown, Robert H. Masson and Donald Hecht, the three directors who were not Company employees or affiliated with Chelsey; Mr. Masson was appointed as the Special Committee’s Chairman. The Special Committee appointed Wilmer Hale as its independent counsel and engaged Houlihan Lokey Howard & Zukin as its financial advisor.

On May 25, 2006, the Company was advised that discussions between Chelsey and the Special Committee concerning Chelsey's proposal to take the Company private at $1.25 per share had been terminated and as a result, the offer had been withdrawn.

As a result of Chelsey’s proposal, the Company, Chelsey and the Board members were sued in both Delaware Chancery Court and Superior Court of New Jersey Chancery Division. On July 18, 2006, the three independent members of the Board of Directors who were also the members of the Special Committee resigned with the result that none of the members of the Board are independent. In September, one of the plaintiffs also commenced an action to compel the Company to hold an annual meeting of stockholders.

It should also be noted that Chelsey has sufficient voting power to approve extraordinary transactions such as a sale of the Company or its assets or a going private transaction without the vote of the other Company’s shareholders. In certain transactions, these shareholders would have statutory appraisal rights under the Delaware General Corporation Law.

Our management team is critical to our success.

Our success depends to a significant extent upon our ability to attract and retain key personnel. Moreover, virtually all of our senior management team has been with the Company for less than three years. Our current employment agreements with our CEO and CFO each expired in May 2006 and have been extended on a day-to-day basis.  While both continue to provide employment services to the Company, there can be no assurance that they will continue to do so. Our success is dependent on the ability of our senior management to manage successfully our business and the individual catalogs. The loss of the services of one or more of our current members of senior management, or our failure to attract talented new employees, could have a material adverse effect on our business.

We receive a material portion of our operating profits from our sale of third party membership services and derive a material portion of our revenues by providing fulfillment services to third parties.

In 2005, we received approximately $10.7 million in revenues from our sale of Vertrue membership programs, which generates a material portion of our operating profit. We replaced our agreement with Vertrue in March 2006 with an agreement with Encore Marketing International (“Encore”) under which we sold Encore membership programs on a retail basis and were paid a commission. Both parties were disappointed with the results of the sale of Encore membership programs and we mutually elected to terminate the agreement. On October 18, 2006, we entered into an agreement with United Marketing Group, LLC (“UMG”) under which we sell UMG supplied membership programs on a wholesale basis. We expect that because of the different accounting treatment accorded revenues from the sale of memberships as a result of the different economic arrangements under the UMG and Encore agreements, that our membership income will be lower than would be the case had we continued to sell memberships on a retail basis with Encore for the fourth quarter of 2006 and 2007. There can be no assurances that our revenues from sales of membership programs will not decrease as a result of the change to a new membership program provider and/or the change from selling memberships on a wholesale versus a retail basis. Were this revenue stream to diminish or were we to lose it entirely, our operating results would be adversely affected. In addition, our membership program revenues may be adversely affected as more of our business transitions to the Internet where customer response rates are lower than the response rates for customers who place phone orders.

We also derive a material portion of our revenues by providing order processing and product fulfillment services to third parties. These revenues offset some of our fixed costs associated with operating our distribution facility and our call centers. Our services agreement with Gump’s expired in October 2006, our services agreement with National Geographic Society will terminate no later than May 30, 2007 and our services agreement with Improvements will expire in August 2007. While we expect to absorb this capacity through the growth of our own direct marketing operations, our results would be adversely affected if our direct marketing operations fail to make up for the lost revenues.

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ITEM 6. EXHIBITS

10.91	Thirty-Seventh Amendment to Loan and Security Agreement, dated as of November 8, 2006, by and among Wachovia Bank, National Association and the Borrowers and Guarantors named therein.
10.92	Sixth Amendment to Loan And Security Agreement dated as of November 8, 2006, by and among Chelsey Finance, LLC and the Borrowers and Guarantors named therein.
10.93	Agreement between Hanover Direct, Inc. and United Marketing Group, LLC dated September 26, 2006.
31.1	Rule 13a-14(a) Certification signed by Wayne P. Garten.
31.2	Rule 13a-14(a) Certification signed by John W. Swatek.
32.1	Certification signed by Wayne P. Garten and John W. Swatek pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	HANOVER DIRECT, INC.
	(Registrant)
	By:	/s/ John W. Swatek
		John W. Swatek
		Senior Vice President, Chief Financial Officer and Treasurer (On behalf of the Registrant and as principal financial officer)
Date: November 13, 2006

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EX-10.91

Exhibit 10.91

THIRTY-SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS THIRTY-SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of November 8, 2006, is entered into by and among WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association (“Lender”), BRAWN, LLC, a Delaware limited liability company (“Brawn LLC”), 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 LLC, 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”), CLEARANCE WORLD OUTLETS, LLC, a Delaware limited liability company (“Clearance World”), SCANDIA DOWN, LLC, a Delaware limited liability company (“Scandia Down LLC”), D.M. ADVERTISING, LLC, a Delaware limited liability company (“DM Advertising LLC”), HANOVER DIRECT MANUFACTURING, LLC, a Delaware limited liability company, formerly known as American Down & Textile, LLC, (“HDM LLC”), HANOVER GIFTS, INC., a Virginia corporation (“Hanover Gifts”), HANOVER DIRECT MEMBERSHIPS, INC., a Delaware corporation (“HDMI”) and SCANDIA DOWN ONLINE, LLC (“Scandia Online”, together with Hanover, Clearance World, Scandia Down LLC, DM Advertising LLC, HDM LLC, Hanover Gifts and HDMI, collectively “Guarantors” and each, individually, a “Guarantor”).

WITNESSETH:

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 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, 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-Third Amendment to Loan Agreement”), 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, the Thirtieth Amendment to Loan and Security Agreement, dated as of March 25, 2004, the Thirty-First Amendment to Loan and Security Agreement, dated as of July 8, 2004, the Thirty-Second Amendment to Loan and Security Agreement, dated as of December 30, 2004, the Thirty-Third Amendment to Loan and Security Agreement, dated as of March 11, 2005, the Thirty-Fourth Amendment to Loan and Security Agreement, dated as of July 29, 2005, the Thirty-Fifth Amendment to Loan and Security Agreement, dated as of March 28, 2006, and the Thirty-Sixth Amendment to Loan and Security Agreement, dated as of August 10, 2006 (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers;

WHEREAS, Borrowers and Guarantors have requested that Lender revise the amounts of EBITDA that Borrowers are required to maintain in the fourth fiscal quarter of the fiscal year ending December 30, 2006 and the first and second fiscal quarters of Borrowers for the fiscal year ending December 29, 2007;

WHEREAS, the parties hereto desire to enter into this Amendment to evidence and effectuate such amendment subject to the terms and conditions and to the extent set forth herein;

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:

Section 1.           Definitions. All capitalized terms used herein and not defined herein shall have the meanings given to such terms in the Loan Agreement.

Section 2. Amendments and Modifications to Loan Agreement.

2.1          EBITDA. Section 6.31 (g) of the Loan Agreement is hereby replaced with the following:

“(g) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2006 of Hanover and its Subsidiaries, permit EBITDA of Hanover and

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its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:

Fiscal Quarter End YTD Periods for Fiscal Year 2006	Cumulative Minimum EBITDA
(i)          January 1, 2006 through April 1, 2006	$400,000
(ii)        January 1, 2006 through July 1, 2006	$4,000,000
(iii)       January 1, 2006 through September 30, 2006	$5,000,000
(iv)       January 1, 2006 through December 30, 2006	$6,000,000

(h) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2007 of Hanover and its Subsidiaries and for each fiscal quarter thereafter and in any fiscal year thereafter, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:

Fiscal Quarter End YTD Periods for Fiscal Year 2007	Cumulative Minimum EBITDA
(i)          December 31, 2006 through March 31, 2007	($1,000,000)
(ii)        December 31, 2006 through June 30, 2007 and thereafter	$1,000,000”

Section 3.    Representations, Warranties and Covenants. Borrowers and Guarantors represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants 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:

3.1          This Amendment and each other agreement or instrument to be executed and delivered by Borrowers or Guarantors hereunder have been duly authorized, executed and

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delivered by all necessary action on the part of Borrowers and Guarantors 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 Borrowers or Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms.

3.2          No action of, or filing with, or consent of any governmental or public body or authority, other than the filing of UCC financing statements, and no approval or consent of any other party, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment.

3.3          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.

3.4          After giving effect to the waivers and consents set forth in this Amendment, no Incipient Default or Event of Default exists or has occurred on the date hereof.

Section 4.    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:

4.1          Lender shall have received a photocopy of an executed original or executed original counterparts of this Amendment by electronic mail or 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;

4.2          each Borrower and Guarantor shall have delivered, or cause to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of this Amendment, which any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a reasonably acceptable to Lender;

4.3          Borrowers and Guarantors shall have delivered, in form and substance acceptable to Lender, a copy of an amendment to the Chelsey Term Loan Agreement revising the amounts of the minimum EBITDA that Borrowers are required to maintain under the Chelsey Term Loan Agreement; and

4.4          as of the date of this Amendment and after giving effect hereto, no Incipient Default or Event of Default shall exist or have occurred.

Section 5.    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

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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 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.

Section 6.    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.

Section 7.    Governing Law. The validity, interpretation and enforcement of this Amendment whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of New York but excluding any principles of conflict of laws or other rule of law that would cause the application of the law of any jurisdiction, other than the laws of the State of New York. Without in any way limiting the foregoing, the parties elect to be governed by New York law in accordance with, and relying on (at least in part), Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York.

Section 8.    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.

Section 9.    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.

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

WACHOVIA BANK, NATIONAL ASSOCIATION
By:	/s/ Thomas Grabosky
Name:	Thomas Grabosky
Title:	Director
THE COMPANY STORE FACTORY, INC. THE COMPANY OFFICE, INC.
By:	/s/ John Swatek
Name:	John Swatek
Title:	Senior Vice President & Chief Financial Officer
BRAWN, LLC SILHOUETTES, LLC HANOVER COMPANY STORE, LLC DOMESTICATIONS, LLC KEYSTONE INTERNET SERVICES, LLC THE COMPANY STORE GROUP, LLC
By:	/s/ John Swatek
Name:	John Swatek
Title:	Senior Vice President & Chief Financial Officer

[SIGNATURES CONTINUE ON FOLLOWING PAGE]

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[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/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Chief Executive Officer
CLEARANCE WORLD OUTLETS, LLC SCANDIA DOWN, LLC D.M. ADVERTISING, LLC HANOVER DIRECT MANUFACTURING, LLC SCANDIA ONLINE, LLC
By:	/s/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Manager
HANOVER GIFTS, INC. HANOVER DIRECT MEMBERSHIPS, INC.
By:	/s/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Chairman

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EX-10.92

Exhibit 10.92

SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “Amendment”), dated as of November 8, 2006, is entered into by and among CHELSEY FINANCE, LLC, a Delaware limited liability company (“Lender”), BRAWN, LLC, a Delaware limited liability company (“Brawn LLC”), 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, Brawn LLC, 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”), CLEARANCE WORLD OUTLETS, LLC, a Delaware limited liability company (“Clearance World”), SCANDIA DOWN, LLC, a Delaware limited liability company (“Scandia Down LLC”), D.M. ADVERTISING, LLC, a Delaware limited liability company (“DM Advertising LLC”), HANOVER DIRECT MANUFACTURING, LLC, a Delaware limited liability company, formerly known as AMERICAN DOWN & TEXTILE, LLC, (“HDM LLC”), HANOVER GIFTS, INC., a Virginia corporation (“Hanover Gifts”) and HANOVER DIRECT MEMBERSHIPS, INC., a Delaware corporation (“HDMI”), collectively “Guarantors” and each, individually, a “Guarantor”.

WITNESSETH:

WHEREAS, Borrowers, Guarantors and Lender are parties to the Loan and Security Agreement, dated as of July 8, 2004, as amended (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 revise the amounts of EBITDA that Borrowers are required to maintain in the fourth fiscal quarter of the fiscal year ending December 30, 2006 and the first and second fiscal quarters of Borrowers for the fiscal year ending December 29, 2007;

WHEREAS, the parties hereto desire to enter into this Amendment to evidence and effectuate such consents and amendments, in each case subject to the terms and conditions and to the extent set forth herein; and 

WHEREAS, Lender is willing to agree to provide such consents and make such amendments, subject to the terms and conditions and to the extent set forth herein.

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

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acknowledged, the parties hereto agree as follows:

1. Definitions. All capitalized terms used herein and not defined herein shall have the meanings given to such terms in the Loan Agreement.

2. EBITDA. Sections 6.28 (c) of the Loan Agreement is hereby deleted in their entirety and replaced with the following:

(c) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2006 of Hanover and its Subsidiaries, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:

Fiscal Quarter End YTD Periods for Fiscal Year 2006	Cumulative Minimum EBITDA
(i)          January 1, 2006 through April 1, 2006	$360,000
(ii)        January 1, 2006 through July 1, 2006	$3,600,000
(iii)       January 1, 2006 through September 30, 2006	$4,500,000
(iv)       January 1, 2006 through December 30, 2006	$5,400,000”

(d) Hanover and its Subsidiaries shall not, as to any fiscal quarter during the fiscal year 2007 of Hanover and its Subsidiaries and for each fiscal quarter thereafter and in any fiscal year thereafter, permit EBITDA of Hanover and its Subsidiaries commencing on the first day of such fiscal year and ending on the last day of the applicable fiscal quarter set forth below on a cumulative YTD basis to be less than the respective amount set forth below opposite such fiscal quarter end YTD period:

Fiscal Quarter End YTD Periods for Fiscal Year 2007	Cumulative Minimum EBITDA
(i)          December 31, 2006 through March 31, 2007	($1,100,000)
(ii)        December 31, 2006 through June 30, 2007 and thereafter	$900,000”

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3. Representations, Warranties and Covenants. Borrowers and Guarantors represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants 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:

3.1 This Amendment and each other agreement or instrument to be executed and delivered by Borrowers or Guarantors hereunder have been duly authorized, executed and delivered by all necessary action on the part of Borrowers and Guarantors 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 Borrowers or Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms.

3.2 No action of, or filing with, or consent of any governmental or public body or authority, other than the filing of UCC financing statements, and no approval or consent of any other party, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment.

3.3 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.

3.4 After giving effect to the waivers and consents set forth in this Amendment, no Incipient Default or Event of Default exists or has occurred on the date hereof.

4. 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:

4.1 Lender shall have received a photocopy of an executed original or executed original counterparts of this Amendment by electronic mail or 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;

4.2 each Borrower and Guarantor 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, which any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a reasonably acceptable to Lender; and

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4.3 As of the date of this Amendment and after giving effect hereto, no Incipient Default or Event of Default shall exist or have occurred.

5. 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 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.

6. 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.

7. 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.

8. 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.

9. 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.

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

CHELSEY FINANCE, LLC
By:	/s/ WilliamWachtel
Name:	William Wachtel
Title:	Manager
THE COMPANY STORE FACTORY, INC. THE COMPANY OFFICE, INC.
By:	/s/ John Swatek
Name:	John Swatek
Title:	Senior Vice President & Chief Financial Officer
BRAWN, LLC SILHOUETTES, LLC HANOVER COMPANY STORE, LLC DOMESTICATIONS, LLC KEYSTONE INTERNET SERVICES, LLC THE COMPANY STORE GROUP, LLC
By:	/s/ John Swatek
Name:	John Swatek
Title:	Senior Vice President & Chief Financial Officer

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[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/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Chief Executive Officer

CLEARANCE WORLD OUTLETS, LLC SCANDIA DOWN, LLC D.M. ADVERTISING, LLC HANOVER DIRECT MANUFACTURING, LLC SCANDIA ONLINE, LLC
By:	/s/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Manager
HANOVER GIFTS, INC. HANOVER DIRECT MEMBERSHIPS, INC.
By:	/s/ Wayne P. Garten
Name:	Wayne P. Garten
Title:	Chairman

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EX-10.93

Exhibit 10.93

AGREEMENT

AGREEMENT made and entered into as of the 26th day of September, 2006 between UNITED MARKETING GROUP, LLC, an Illinois limited liability company (“UMG”), with offices located at 929 North Plum Grove Road, Schaumburg, Illinois 60173 and HANOVER DIRECT, INC., a Delaware corporation (“HDI”), with offices located at 1500 Harbor Boulevard, Weehawken, New Jersey 07086.

Recitals

UMG is a developer, marketer and administrator of consumer membership services.

HDI is engaged in the direct marketing business and operates a portfolio of catalogs (“HDI Catalogs”) and associated e-commerce websites (“HDI Websites”) through the wholly owned corporations and limited liability companies listed on attached Schedule A (“HDI Affiliates”). (A reference in this Agreement to HDI shall be deemed, where the context requires, to include the HDI Affiliates.) In addition to merchandise offered in HDI Catalogs and Websites, HDI also markets, among other things, membership programs.

A wholly owned HDI subsidiary provides call center and e-commerce services to third party direct marketers. Some of the direct marketers listed on attached Schedule B (“Third Party HDI Affiliates”) permit HDI, from time to time, to market membership programs to their customers on inbound order calls.

UMG and HDI wish to enter into this Agreement whereby HDI will market and sell membership programs supplied by UMG and described in Schedule C (“ Programs”) on select inbound order calls placed by HDI Catalog customers and the customers of Third Party HDI Affiliates (“Telephone Customers”) and on select HDI Websites.

NOW, THEREFORE, in consideration of the mutual covenants and promises contained in this Agreement, the receipt and sufficiency of which are hereby acknowledged, HDI and UMG agree as follows:

1. RETAIL/WHOLESALE ELECTIONS AND RESPONSIBILITIES

1.1 Election. HDI shall select whether to market Programs on a revenue sharing basis (a “Rev Share Election”) or on a wholesale basis (“Wholesale Election”) on no less than 60 days prior written notice to UMG. An election shall take effect on the first day of the fiscal week, which starts on Sunday, after a 30 day implementation period following the 60 day notice period. HDI has initially made a Wholesale Election and delegated to UMG the delegable functions specified in Sections 2.2, 2.4, 2.6, 2.7 and 2.8.

1.2 Assignment of Responsibilities. The chart below assigns responsibility for the various functions described in Section 2 below; certain functions are a party’s responsibility regardless of whether a Rev Share or a Wholesale Election is in effect while responsibility for other functions is dependent on which election is in effect. In addition, if HDI makes a Wholesale Election, HDI may request that UMG provide certain of the functions in which event UMG shall provide the delegated functions and HDI shall compensate UMG in the amounts set forth on Schedule F.

Section Reference	Description	Rev Share Election	Wholesale Election	Delegable by HDI
2.1	Marketing	HDI	HDI
2.2	Premiums - Administration	UMG	HDI	Yes
2.2.1	Premiums - Cost	UMG	HDI
2.3	Merchant Accounts	HDI	HDI
2.4	Credit Card Processing	UMG	HDI	Yes*
2.5	Membership Kits and Program Benefits	UMG	UMG
2.5.4	Customer Service- Program Benefits	UMG	UMG
2.6	Customer Service – Cancellations & Refunds	UMG	HDI	Yes*
2.7	Training	UMG	HDI	Yes
2.8	Renewal Materials	UMG	HDI	Yes
2.9	Direct Mail & Other Marketing Programs	Rev Share basis only; responsibility for program duties to be determined mutually by the parties on a program by program basis.

* Partyhandling Customer Service – Cancellations and Refunds shall also handle Credit Card Processing.

1.3 Exclusive Membership Program Provider. Except as otherwise provided for in Section 1.3.1, (i) HDI will use its best efforts to ensure that a Program offer is made to all telephone customers on inbound order calls and (ii) during the term of this Agreement the only membership programs HDI will offer during inbound order calls will be UMG supplied membership programs. For purposes of this Agreement, a membership program shall mean a program or service where discounts, information and/or benefits are delivered to a consumer or business in exchange for a recurring membership fee on a negative option or similar basis, including, but not limited to, programs or services similar to Programs, but shall not include loyalty and continuity programs such as HDI’s Buyer’s Clubs that are offered by HDI or any of the Third Party HDI Affiliates that promote the sale of the offeror’s merchandise, magazine programs, and offers of merchandise or services provided by a third party on a nonrecurring membership program basis

1.3.1 Exceptions to Exclusivity. Notwithstanding the foregoing, a telephone service representative may, in his or her reasonable discretion, determine to not offer a Program on inbound order call if (i) the Customer has recently purchased a membership program, (ii) the Customer has previously indicated an unwillingness to be solicited to purchase a membership program, (iii) because of exigent circumstances such as call center call volume, (iv) business rules such as frequency of and/or interval between inbound order calls from a single customer, (v) commencing six months prior to the expiration date of the Term, HDI may engage in limited test marketing of non-UMG provided membership programs and/or (vi) the Customer is part of a controlled group of customers established by HDI to test whether offers of membership programs are adversely affecting merchandise sales to HDI’s customers.

2.FUNCTIONS

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2.1 Marketing. HDI shall market and offer the Programs on (i) inbound order calls by Telephone Customers, (ii) on select HDI Websitesand (iii) such other marketing channels as the parties may mutually agree. HDI may amend Schedules A and B, from time to time, in its sole discretion and shall provide UMG notice thereof within five (5) calendar day of such amendment. In clarification of (ii) above, HDI shall offer Programs on HDI Websites that offer membership programs (e.g, www.scandiadown.com shall be excluded from such calculation) that in the aggregate have at least 50% of the web traffic for all such HDI Websites for so long as the net conversion rate (as determined under Section 5.4(iii)) for Program offers on such HDI Websites is at least 3%.

2.1.1 Reading of Scripts. HDI shall be responsible for developing scripts which HDI’s telephone service reps (which shall include third party call centers under contract with HDI) shall read on Inbound Order Calls (the “Scripts”). HDI shall use its reasonable commercial efforts to ensure that its reps follow the scripts. If a Rev Share Election is in effect, UMG shall have the right to review and approve proposed scripts, such approval not to be unreasonably withheld or delayed. HDI shall (i) comply with applicable federal, state and local laws, rules and regulations with respect to use of the scripts, (ii) use the intellectual property of Program benefit providers and UMG in the scripts in conformance with UMG provided guidelines, (iii) accurately represent Programs and their respective benefits, and (iv) have the option to re-name a Program solely for purposes of use in the Scripts. If HDI elects to rename a Program, HDI and UMG will mutually agree on any adjustments to the pricing for any renamed Program based on the incremental costs associated with preparing new membership kits and other direct incremental costs.

2.1.2 Design of Program Offer. HDI shall have the right to set the terms of the Program offer including price, annual versus monthly billing, premium and cancellation/refund policy and may test various permutations of the Program offer as it deems reasonable. UMG shall have the right to offer its advice on the Program offer. While a Rev Share Election is in effect, UMG shall offer a $50 gas card as a premium or such other premium as the parties shall mutually agree.

2.1.3 Website Marketing. UMG and HDI shall jointly create and develop banner ads and other hyperlinks for marketing Programs to Internet Customers. For those HDI Websites on which HDI elects to market Programs,HDI, shall host the banner ads and other UMG developed Internet marketing materials and provide hyperlinks to UMG hosted landing pages. HDI may request that UMG host the banner ads in which event UMG shall report the number of impressions to HDI. UMG shall host the landing pages for click throughs from the HDI Websites and shall provide reporting to HDI of click throughs and conversions. HDI shall have the option to host the landing pages in which HDI shall provide reporting to UMG.

2.1.4 Transmission of Enrollment Files. HDI will transmit daily to UMG enrollment files of Customers who have elected to purchase a Program (“Program Purchasers”). The enrollment files shall include the Program Purchasers’ name, mailing address, Program purchased, purchase date, and if UMG is handling credit card processing under Section 2.4, the Program Purchasers credit card information (“Customer Information”). UMG will assign a unique identification number to each Program Purchaser.

2.1.5 Taping. HDI, at its sole cost and expense and in compliance with applicable laws, shall digitally record and retain the confirmation of the original sales transaction and the entirety of each Program presentation (including the acceptance and order confirmation)

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on inbound order calls where Telephone Customers have ordered Programs. HDI maintains and administers a Terms & Conditions Compliance Plan & Corrective Action Policy for Telephone Service Center Representatives which is summarized in attached Schedule H. UMG may request a reasonable number of recordings to ensure HDI’s compliance with this Agreement’s terms or conduct quality assurance in connection with a regulatory/ BBB contact or otherwise. The recordings will be digitally transmitted by HDI to UMG via WAV file format. UMG acknowledges that such recordings will contain Customer Information and agrees to handle them in compliance with Section 3.1. Upon request by UMG, HDI shall transmit any particular customer’s recording within 2 business days of UMG’s request and within 4 business days for request for more than 10 calls. HDI will retain the recordings for no less than 2 years or such longer period of time as may be required by applicable laws.

2.2 Premiums. The designated party shall be responsible for the administration of any premiums offered in connection with marketing Programs. If UMG is the designated party, it shall provide reporting to HDI with respect to the utilization and redemption rates of the premiums.

2.2.1 The party designated in the chart in Section 1.2 shall be responsible for the cost of the premiums.

2.3 Merchant Accounts. All proceeds from Program orders will be processed through HDI’s merchant accounts.

2.3.1 Non-Private Label Cards. HDI shall, at its sole cost and expense, set up and maintain merchant processing accounts with one or more merchant processors. HDI shall coordinate with the merchant processors (including, without limitation, by providing operational support) in order to effect the processing of initial and renewal billing and cancellations of Program Purchasers for all major credit cards.

2.3.2 Private Label Cards. UMG acknowledges that HDI has a private label credit card agreement with WFNNB under which WFNNB issues private label and co-branded credit cards to HDI customers. UMG acknowledges that WFNNB issued credit cards will be accepted as payment for the Programs.

2.4. Credit Card Processing. The party handling Customer Service – Cancellations and Refunds under Section 2.6 shall also handle credit card processing. The designated party shall process payment for Program Purchasers who have not cancelled during the 30 day free trial period using HDI’s merchant account. The trial period shall commence on the day the order is processed and the initial billing shall taking place approximately 45 days after the date the order is placed. The designated party will also process chargeback retrieval requests and cancellations and refunds to customer’s credit cards and will process payments of renewals. The designated party will transmit a daily file to the other party of all active Program Purchasers which shall be updated to reflect cancellations and refunds and renewals. During the Term, UMG shall utilize on HDI’s behalf the Teleformix software suite to manage the database of Program Purchasers. HDI will have remote access to the software suite and the Program Purchaser database; however all networking costs required to access the platform are the responsibility of HDI.

2.5 Membership Kits and Program Benefits. UMG shall be responsible for creating, developing and printing and mailing membership kits, designing, administering and providing, directly and/or through third parties, the Program benefits, creating, maintaining and hosting the landing pages for marketing Programs on the Internet and creating, maintaining and hosting

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websites used to provide and administer Program benefits. The Program Benefits of the three Programs to be initially offered by HDI are set forth on attached Schedule C (“Program Benefits”); the parties may mutually agree to modify Schedule C to include additional membership programs and in that event the parties will modify Schedule C to include a description of the Program Benefits of any new membership program to be offered under this Agreement. UMG shall (a) comply with applicable federal, state and local laws, rules and regulations as may be in effect from time to time with respect to its membership kits, Programs and websites, (b) use the intellectual property of Program benefit providers in the membership kits and websites in conformance with such party’s guidelines, (c) use the intellectual property of the HDI Catalogs and/or Third Party HDI Affiliates in the membership kits and on the websites in conformance with HDI supplied guidelines, and (d) accurately represent Programs and their respective benefits.

2.5.1 Initial Review Process. HDI shall have the right to review and comment upon the membership kits, the Program benefits, landing pages and websites. UMG shall provide HDI copies of all proposed membership kits no less than 15 business days prior to UMG’s proposed first use of the membership kit or with such other lead-time as the parties may mutually agree on a case-by-case basis. Each of the parties agrees to work together, in good faith, to address in a mutually agreeable manner, any comments made by the other party during the review periods described in this Section 2.5.1. UMG may use only membership kits that have not been objected to by HDI with respect to the use of HDI Catalogs and Third Party HDI Affiliates provided intellectual property within such 15-day time period, or any other agreed-upon time period.

2.5.2 Program Administration Services. UMG shall provide the program administration services described on attached Schedule G in administering the Programs (including premium administration which if a Wholesale Election is in effect, shall be at the fees set forth in Schedule F). Schedule G sets forth the service standards for the program administration services to be provided by UMG during the Term. UMG shall provide HDI with reporting as to its compliance with such service standards in such form, format and frequency as the parties shall mutually agree.

2.5.3 Modification of Program Benefits. The parties acknowledge that UMG may utilize one or more third party service providers for fulfillment of the Program Benefits provided in connection with any given Program. From time to time, UMG may determine that it is desirable, prudent or necessary to change or utilize one or more additional or alternate service providers with respect to all or part of any given Program’s Program Benefits and/or modify the Program Benefits and may make any changes with respect to any such service provider and/or Program Benefits as it deems appropriate provided such changes in providers and/or benefits does not materially adversely affect the quality, perceived value or level of the Program Benefits of a Program. UMG will use its best efforts to notify HDI no later than 90 days in advance of the effective date of such changes. If UMG makes a change in third party Program Benefit provider utilized by UMG and/or changes in the Program Benefits which HDI does not approve in its reasonable judgment, (i) the parties shall negotiate in good faith as to a suitable replacement Program Benefit and/or Program Benefit provider and/or a change in the monthly fees payable to UMG and (ii) if a Wholesale Election is in effect, HDI shall have the right to withhold 15% of the monthly fees payable to UMG until the parties reach a mutually agreeable solution.

2.5.4 Revision Process – Collateral Materials. Either party may propose reasonable revisions to any membership kits, banner buttons, landing pages, websites, renewal materials and Program related collateral communications (collectively, “Collateral Materials”)

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which may not be modified absent compliance with the following provisions. Such proposed revisions shall be subject to the written approval of the other party. The party to whom the proposed revisions have been submitted shall use its reasonable commercial efforts to review all proposed revisions to the Collateral Materials within 5 business days after receipt thereof from the other party, or such other period of time as the parties may mutually agree. UMG shall utilize such revised Collateral Materials within such period of time as the parties may mutually agree. UMG agrees to use its reasonable commercial efforts to expeditiously incorporate HDI reasonable suggestions and comments to its Collateral Materials, if appropriate and sound for UMG’s business. The parties shall cooperate with regard to such proposed revisions. The parties may agree to the testing of the proposed revision before deciding whether it should be permanently adopted.

2.5.5 Customer Service – Program Benefits. As part of UMG’s obligation to provide Program administration services,UMG shall handle customer service calls regarding Program benefits. UMG shall tape such callsin accordance with the principles of Section 2.1.5 and HDI shall have the right to request copies of a reasonable number of such calls. UMG shall answer 80% of such calls within 30 seconds, determined on a monthly basis, and shall provide monthly reporting with regard to its compliance with the 80/30 standard. If UMG receives calls regarding cancellations and/or refunds and it is not the designated party pursuant to Section 2.6, it shall forward such calls to HDI unless the customer is unwilling to be transferred and/or is irate in which case UMG may handle the call. UMG shall report any such cancellations/refunds to HDI.

2.5.5.1 Outsourcing. UMG currently handles customer service calls internally and may not outsource this function without giving HDI prior written notice of such proposed outsourcing, which notice shall identify the proposed service provider and the call volume which may be outsourced. HDI shall have the right to approve the proposed outsourcing, which approval shall not be unreasonably withheld or denied.

2.6 Customer Service – Refunds and Cancellations. The designated party’s call centers (which shall include third party call centers under contract with HDI) shall receive calls from Program Purchasers wishing to cancel their purchases or seeking refunds and shall use their reasonable commercial efforts to “save” the Program Purchaser, in accordance with all applicable laws, rules and regulations. The designated party shall be responsible for processing all such cancellations and credits where they may apply, and shall report cancellations to the other party. The designated party’s toll free customer service number shall appear on the billing descriptor on Program Purchasers’ billing statements. The designated party shall tape such calls in accordance with the principles of Section 2.1.5 and the other party shall have the right to request copies of a reasonable number of such calls. The designated party shall answer 80% of such calls within 30 seconds, determined on a monthly basis, and if the designated party is UMG, shall provide monthly reporting with regard to its compliance with the 80/30 standard. If the designated party is HDI and HDI receives calls regarding Program benefits, it shall forward such calls to UMG provided HDI customer service representatives may elect to provide first level customer service on Program benefit calls. If UMG is the designated party, the provisions of Section 2.5.5.1 shall apply to any proposed outsourcing of such function.

2.7 Training. The designated party shall provide, at its sole cost and expense, training for HDI telephone service representatives and customer service representatives. If a Rev Share Election is in place, training shall occur no less than four times per calendar year; if a Wholesale Election is in place and HDI has delegated training to UMG, HDI, in consultation with UMG, shall determine the frequency and scheduling of training sessions and shall reimburse UMG for

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its out of pocket costs in providing such training activities (collateral materials and T&E for its trainers) and pay UMG $500 per day per UMG trainer. The designated party shall be responsible for developing training materials for use at such sessions; the other party shall have the right to comment upon and make suggestions with respect to the training materials and the designated party will attempt to incorporate such comments and suggestions where appropriate. The training shall be conducted at each of HDI’s telephone call centers (which includes any HDI outsourced call center) at mutually agreed upon times. The designated party shall develop training programs for new reps, refresher courses for experienced Reps and training programs when new Programs and/or marketing materials are introduced. If HDI develops the training materials, UMG shall review them to ensure that the description of the Program benefits and Program terms and conditions are accurate.

2.8 Renewal Materials. The designated party shall prepare and mail to Program Purchasers who have purchased Programs with annual billing and who have not cancelled by the end of the 11^th month after his/her credit card was previously charged the annual fee, a renewal notice. HDI shall have the right to comment on and approve renewal notices and if a Wholesale Election is in effect, whether the renewal notice is a postcard or a full membership kit. The renewal notice shall be sent to the most recent address for such Program Purchaser; the designated party shall comply with applicable federal, state and local laws, rules and regulations with respect to the content of, mailing and processing of renewal notices. The parties shall provide each other with any updated address information that it may have. The party designated under Sections 2.4 and 2.6 shall bill the credit cards of Program Purchasers who have not cancelled after receipt of the renewal notice in accordance with the terms of the renewal notice, at the then-current annual renewal membership fee for the applicable Program. The parties shall mutually agree on any changes to the annual renewal fee applicable to Programs initially purchased while a Rev Share Election is in effect.

2.9 Direct Mail and Other Marketing Programs. The parties may mutually agree to market and promote Programs using direct mail, insert media, endorsed outbound telemarketing or other means of customer contact. In that event, the parties shall mutually agree on the design and terms of the customer contact and the plan of distributing/communicating the offer and the economic arrangement (cost of designing and producing the contact piece, premiums and premium administration and sharing ratio for net revenues generated by the program) of each marketing program. The parties agree that the any such economic arrangement shall be on a revenue sharing basis and not on a wholesale basis.

3. OTHER COVENANTS AND PROVISONS

3.1 Treatment of Mandatory Customer Information.

3.1.1 Security Controls. Each party shall establish commercially reasonable controls to ensure the confidentiality, integrity, and availability of Cardholder Personal Information (as defined in Section 3.1.2 below) and to ensure that such information is not disclosed contrary to the provisions of this Agreement, or any applicable privacy, security or other laws, rules and regulations, including but not limited to Payment Card Industry Data Security Standard (PCI-DSS) or other Card Association rules and regulations, both during the Term of this Agreement or following the expiration or termination of this Agreement. “Card Association” shall mean a nationwide payment clearing network such as MasterCard International, Inc. Visa U.S.A. Inc., Discover Bank, American Express Company or World Financial Network National Bank (“WFNNB”). Without limiting the foregoing, each party shall implement such physical and other security measures as are necessary to reasonably help (i)

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ensure the confidentiality, integrity, and availability of Cardholder Personal Information and other confidential information, (ii) protect against any threats or hazards to the confidentiality, integrity, or availability of Cardholder Personal Information and other confidential information, and (iii) protect against any unauthorized access to or use of Cardholder Personal Information and other confidential information. UMG understands and agrees that as a result of the possession of Customer Information from HDI that UMG and HDI may be subject to regulations as outlined above.

3.1.2 Procedure for Security Breach. A party shall notify the other party if it believes, or has reason to believe, that either a confidentiality or security breach, or any other unauthorized intrusion, has occurred with respect to customers’ Cardholder Personal Information and in that case (i) the other party shall determine, in its reasonable discretion, whether such breach requires notification to cardholders of such security breach by one or both of the parties under applicable law (such breach is referred to as an “Event”), and/or (ii) such breach affects more than 10% of the Program Purchasers in which case it shall be deemed to be an Event (the party causing the Event is referred to in this Section 3.1.2 as the “Triggering Party”). In such event, the other party shall estimate the Event’s affect on the other party and shall specify the corrective action to be taken which shall be at the sole cost and expense of the Triggering Party. For purposes of this section, “Cardholder Personal Information” means a cardholder’s first name or first initial and last name in combination with any one or more of the following data elements, when either the name or the data elements are not encrypted: (i) social security number; (ii) driver’s license number or other government identification number; (iii) account number, credit or debit card number, in combination with any required security code, access code, or password that would permit access to an individual’s financial account; (iv) address; or (v) date of birth; provided, however, that it shall not be deemed a confidentiality or security breach if the name is encrypted but data element (v) is unencrypted. UMG acknowledges and agrees that the Cardholder Personal Information it receives from HDI shall be owned by HDI.

3.2 Insurance. Each party shall have and continue to keep in force for the life of this Agreement full general liability insurance which insurance will cover errors and omissions, as to UMG, with respect to the membership kits and program benefits relating to the claims for the Programs or their goods and services or rendered to Program Purchasers, and with respect to HDI, the marketing of the Programs, in amounts not less than $1 million per occurrence and $2 million in the aggregate. Such insurance shall list the other party as an additional insured, and will provide that the coverage will not be modified or terminated without at least thirty (30) days prior written notice to such other party. Upon request, each party shall provide the other with a certificate evidencing such insurance coverage.

3.3 ProgramMember Contact. UMG may contact Program Purchasers to provide them with membership kits, other Program information, customer service communication related to the Programs and other communications reasonably appropriate to carry out this Agreement’s purposes. Other than the foregoing, UMG shall not contact HDI’s customers without HDI’s approval which may be withheld in HDI’s sole discretion, unless UMG obtained those names on its own or from third parties in which event UMG’s use of such names shall not imply any endorsement by HDI.

3.4 Third Party Customers. During the Term of this Agreement, UMG agrees not to contact or solicit any Third Party HDI Affiliate as set forth in Schedule B to this Agreement for the purpose of selling membership programs on inbound order calls by the Third Party HDI Affiliate Customer or through the Third Party HDI Affiliate Website, or enter into a contract or arrangement with a Third Party HDI Affiliate to conduct such marketing. Schedule B contains a

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list of the Third Party HDI Affiliates which HDI may update during the Term upon the prior written approval of UMG.

4. COMPENSATION

4.1 Commission Structure. If HDI makes a Rev Share Election, the parties’ share of revenues from sales and renewals of Programs shall be determined in the amounts and payable in accordance with Schedule D. If HDI makes a Wholesale Election, HDI shall pay UMG the amounts and at the times specified in accordance with Schedule E. If HDI elects to delegate one or more functions to UMG, HDI shall pay UMG the amounts specified in Schedule F.

4.2 Fiscal Basis. All payment amounts and payment dates shall be determined and made based on fiscal weeks and months. For purposes of this Agreement, a fiscal week shall commence on Sunday.

4.3 Payment Accounts. For amounts payable by UMG to HDI, UMG shall pay such amounts via wire transfer to the following HDI bank account:

Wachovia Bank, National Association

Charlotte, North Carolina

Wire Transfer ABA No.: 053 000 219

For credit to: Hanover Direct, Inc.

Account No.: 2000028322865

For amounts payable by HDI to UMG, HDI shall pay such amounts via wire transfer to the following UMG bank account:

J P Morgan Chase Bank, N.A.[BANK]

Wire Transfer ABA No.: 021000021

For credit to: United Marketing LLC

Account No.: 686936261

ACH ABA #071000013

4.3.1 Either party may change bank accounts by giving written notice to the other.

5. TERM

5.1 Initial and Renewal Terms. This Agreement shall be executed on the date first above written; HDI will begin offering Programs on or about October 18, 2006 and the Agreement will have an initial term of two years from the date that HDI first offers Programs (“Initial Term”). The term shall be extended for additional one year periods (each a “Renewal Period”) unless either party sends notice of nonrenewal to the other party no less than 90 days prior to the end of the Initial Term or the then current Renewal Period, as the case may be. (The Initial Term and any Renewal Period is referred to as the “Term.”) If a party sends notice of nonrenewal, the Agreement shall terminate at the end of the Initial Term or the then current Renewal Period, as the case maybe.

5.2 Early Termination Rights. Either party may terminate this Agreement if:

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5.2.1 a voluntary or involuntary petition in bankruptcy is filed by or against the other party, which is not dismissed, or the other party makes a general assignment of its assets to its creditors or a similar event occurs;

5.2.2 the other party materially breaches its obligations hereunder. In the event of a breach, the non-breaching party may provide written notice to the other party of the alleged breach. The other party shall have 30 days from receipt of such notice (10 days for payment breaches) to cure the breach; if the breach is not cured within the 30 day cure period, the non-breaching party shall have the right to terminate the Agreement; or

5.2.3 in the event of the settlement of any investigation, proceeding, suit, or other action by a Federal, State, or local regulatory or enforcement agency or authority which will have a “material adverse effect” (as defined below) on the other party’s business and (i) continuing to do business with such other party would injure the reputation of the non-settling party in any material respect, as reasonably determined, or (ii) such event causes a material change to the method, content or delivery of the offer which would materially adversely effect response or cancel rates. For purposes hereof, “material adverse effect” means that the settling party would be required to report such settlement under the first sentence of Instruction 2 to Item 103 of Regulation S-K under the Code of Federal Regulations, Title 17, Part 229, whether or not the party is subject to Regulation S-K.

5.2.4 in the event a governmental body with legislative, rule making, prosecutorial, or judicial authority enacts a new rule of law or regulation or issues an order or the like, which will prevent either party from substantially performing its obligations hereunder (which may, among other things, be based upon a party being advised of such by written opinion of outside counsel), the parties shall then negotiate in good faith toward a restructuring of this Agreement in manner that will, insofar as legally permissible, provide each party with the benefits herein contemplated. Should the parties be unable to come to an agreement in regard to an appropriate financial or other restructuring of this Agreement, then either party may terminate this Agreement upon at least ten (10) days written notice of termination.

5.3 Chargebacks. If HDI receives notice from a Card Association or its merchant processor that chargebacks in connection with the sale of Programs to HDI customers pursuant to this Agreement during at least a 30 day period are in excess of those levels permitted under such parties’ rules and regulations and the chargebacks during that same period with respect to sales from HDI customers have also exceeded that same threshold, HDI reserves the right at any time thereafter, but with at least 7 business days prior written notice to UMG, to take any action it deems necessary to respond to the problem which may include, at HDI’s sole discretion, suspending or terminating marketing of the Programs or terminating this Agreement. HDI agrees it will, before sending a termination notice, confer with UMG and determine whether any alternative course of action that may be proposed by UMG may be acceptable, which may include UMG processing orders for Programs using its merchant account. HDI shall have the right to determine whether the proposed alternative course of action is acceptable in its reasonable discretion. If no proposed alternative course of action is deemed by HDI to be reasonably acceptable, HDI may effect termination under this Section by providing UMG with at least 7 business days prior written notice.

5.4 Early Termination if Programs Fail to Perform. HDI shall have the right to terminate this Agreement upon no less than 60 days prior written notice to UMG if HDI determines, in its reasonable discretion, that (i) the conversion rate on inbound order calls is less than 14% , (ii) the retention rate for annual Program Purchasers is less than 42% and/or (iii) the

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net conversion rate (number of web Program orders divided by the number of impressions) on the Internet is less than 3.0%. Each of the three rates set forth in the preceding sentence shall be determined on a trailing three month average basis.

5.5 Effect of Termination. Expiration or termination of this Agreement shall not terminate either party’s right to bill and receive fees and/or commissions in accordance with the terms of this Agreement for all Program memberships in force prior to termination, and any subsequent renewals thereof, in perpetuity.

5.5.1 Obligation to Continue Performance Pending Effective Date of Termination. From the date any notice of termination is given by any party until the effective date of the termination of this Agreement, the parties shall be obligated to continue to perform pursuant to the terms of this Agreement.

6. REPORTS; AUDIT RIGHTS AND COOPERATION

6.1 Reports and Information. HDI and UMG shall provide each other with reports in such form and containing such information as reasonably required and as mutually agreed upon by UMG and HDI. The parties shall mutually develop responsibility for and a reporting methodology for reporting active Program Purchasers. HDI shall provide reports to UMG that shall include conversion rate reporting, enrollments, memberships billed, pre-bill cancels, cancellations received (if processed by HDI), customer order authorizations, memberships paid, memberships in process, renewals and monthly compilations thereof. UMG shall provide reports to HDI that shall include, Fulfillment Materials mailed, cancellations received (if processed by UMG), and with respect to marketing the Programs on Participating Websites, impressions (if UMG hosts the banner ads), click throughs and Internet orders and a report detailing any amount owed to HDI.

6.2 Audit Rights. Each party shall keep and maintain, at its principal place of business, complete and accurate books and records relating to this Agreement. During the Term and for so long as there are any Program Purchasers whose Programs were acquired hereunder and which Programs have been renewed, each party (or its representatives) at its expense shall have the right upon no less than 30 days prior written notice, to audit the other party’s books and records to verify and confirm the accuracy of the reports delivered and the amount of fees paid or payable under this Agreement. The party performing the audit shall have the right to make copies of relevant excerpts of any such books and records which shall be Confidential Information, as defined in and for purposes of Section 10. Audits shall be conducted at the other party’s offices, during regular business hours. If any audit discloses an underpayment or overpayment of 7.5% or more of the correct amount owed, the other party agrees, in addition to re-computing and making immediate payment of the amount owed based on the true items, to pay the auditing party’s actual out of pocket third party expenses for the audit.

6.3 Collection Costs and Attorneys’ Fees. In any action or suit under this Agreement, the prevailing party shall be entitled to recover its costs, including, without limitation, reasonable attorneys’ fees.

6.4 Cooperation. The parties agree to cooperate with one another to further the objectives of this Agreement and to promote the products and services of each of the parties.

7. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each party warrants, represents and covenants to the other that:

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7.1 it is duly qualified, authorized or licensed and in good standing in all jurisdictions necessary to carry out its obligations under this Agreement;

7.2 the execution, delivery and performance of its obligations under this Agreement will not result in a violation of or conflict with any law, regulation, or contract to which it is a party;

7.3 all of the services to be performed by it hereunder will be rendered using sound, professional practices and in a competent and professional manner by knowledgeable, trained and qualified personnel;

7.4 all obligations owed to third parties with respect to the activities contemplated to be undertaken by it pursuant to this Agreement are or will be fully satisfied by such party, so that the other party will not have any obligations with respect thereto;

7.5 it will comply with all applicable federal, state and local laws in the performance of its obligations hereunder;

7.6 the materials used by each party in fulfilling its obligations under this Agreement shall not infringe upon any third party intellectual property right;

7.7 it shall comply with all applicable written self-regulatory guidelines or industry standards which maybe in effect from time to time; and

7.8 at all times during the Term of this Agreement, UMG shall have in effect no less than three Programs.

8. INTELLECTUAL PROPERTY

8.1 Limited License. Each party grants the other a limited license to use the other party’s trademarks, service marks, trade names or logos owned or otherwise used by the other party solely as expressly provided herein. UMG and HDI trademarks, service marks and/or logos will be co-branded on Program Fulfillment Materials to be used in connection with this Agreement and shall be located on such materials, in each case as mutually agreed upon by the parties. Nothing herein shall give UMG, HDI or any other individual or entity any rights, title or interest to or in any such trademarks, service marks, trade names or logos owned or otherwise used by the other party, other than the limited license to display such trademarks, service marks, trade names or logos in connection with the marketing and fulfillment of the services with respect to Programs.

8.2 Prior Approval Rights. Each party will have prior approval over any permitted use of its property licensed hereunder and other intellectual property in connection with marketing, promotion and advertising activities online and offline under this Agreement, which approval will not be unreasonably withheld or delayed. Neither party may amend, modify, or alter the promotion copy as it appears in the version delivered for pre-approval after having been approved by the other party except with the explicit written approval of such other party.

8.3 Ownership of Materials. All Fulfillment Materials are the intellectual property of UMG, except for any such materials that are created and/or developed solely by HDI, and shall not be used or disclosed in any manner not authorized by UMG. All scripts and other marketing materials developed by HDIare the intellectual property of HDI except for any such materials

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that are created and/or developed solely by UMG (which are the intellectual property of UMG), and shall not be used or disclosed in any manner not authorized by HDI. Any such materials that are created and/or developed solely by a party are the intellectual property of the creator and shall not be used or disclosed in any manner by the other party unless authorized by the creator thereof. The parties shall jointly own the intellectual property rights in any jointly developed materials.

9. INDEMNIFICATION

9.1 HDI Indemnification. HDI, jointly and severally, shall defend, indemnify and hold UMG and its officers, directors, employees and agents (“Indemnitees”) harmless from and against any and all losses, liabilities, damages and expenses (including reasonable attorneys’ fees and expenses and excluding consequential damages) to which the Indemnitees may be subjected by reason of any third party claim or action against the Indemnitees (i) resulting from any breach or alleged breach by HDI or any HDI Affiliate, as the case may be, of any of its representations, warranties or covenants contained herein, (ii) resulting from the performance or failure to perform by HDI or any HDI Affiliate under the terms of this Agreement (iii) arising in connection with its own product sales or manner in which the Programs were sold by HDI, if so obligated, or material contained in issues of its catalog delivered to Customers or Program Purchasers pursuant to the terms hereof, which material is unrelated to the Programs; or (iv) arising in connection with material prepared solely by HDI or any HDI Affiliate contained in Fulfillment Materials sent to Customers or Program Purchasers under this Agreement.

9.2 UMG Indemnification. UMG shall defend, indemnify and hold HDI and its officers, directors, employees and agents (“Indemnitees”) harmless from and against any and all losses, liabilities, damages and expenses (including reasonable attorneys fees and expenses and excluding consequential damages) to which the indemnities may be subjected by reason of any third party claim or action against the Indemnitees (i) resulting from any breach or alleged breach by UMG of any of its representations, warranties or covenants contained herein, (ii) resulting from UMG’s performance or failure to perform under the terms of this Agreement, (iii) arising in connection with material contained in Fulfillment Materials prepared or distributed by UMG to Customers or Program Purchasers, excluding any content which may be prepared solely by HDI or any HDI Affiliate, or (iv) arising in connection with the provision of, or failure to provide, the services of the UMG Programs.

9.3 Terms Applicable to Indemnification Obligation. The indemnified party shall provide the indemnifying party with (i) prompt written notice of such claim or action; (ii) sole control and authority over the defense or settlement of such claim or action (except the indemnifying party shall not enter into any settlement that adversely affects the indemnified party’s rights or interests without the indemnified party’s prior approval); and (iii) proper and full information and reasonable assistance in connection with the defense or settlement of any such claim or action. The indemnified party shall have the right to participate in the defense at its own expense with a counsel of its choosing.

9.4 Survival of Indemnification Obligations. The provisions of this Section 9 shall survive the expiration or earlier termination of this Agreement and shall be binding upon any permitted transferee, assignee or successor of either party.

10. CONFIDENTIAL INFORMATION

10.1 Confidential Information. “Confidential Information” means (a) information concerning Programs and this Agreement, including but not limited to information concerning

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purchase price, procedures, methods, technological developments, financial results, solicitation methods, Program Purchasers, enrollees and Customers, (b) Customer Information, (c) business or technical information of either party, including but not limited to information relating to either party’s product plans, designs, costs, product prices and names, finances, marketing plans, business opportunities, personnel, research, development or know-how; (d) any information designated by either party as “confidential” or “proprietary” or which, under the circumstances taken as a whole, would reasonably be deemed to be confidential; and (e) the specific terms and conditions of this Agreement. “Confidential Information” does not, however, include information that: (i) is in or enters the public domain without breach of this Agreement; (ii) the receiving party lawfully receives from a third party without restriction on disclosure and without breach of a nondisclosure obligation; (iii) the receiving party knew prior to receiving such information from the disclosing party; or (iv) the receiving party develops independently without use of the disclosing party’s Confidential Information.

10.2 Duty to Maintain Confidential Information. Each party agrees: (a) that it will not disclose to any third party or use the Confidential Information disclosed to it by the other party for any purpose other than as expressly contemplated by this Agreement; and (b) that it will take all reasonable measures to maintain the confidentiality of all Confidential Information of the other party in its possession or control, which will in no event be less than the measures it uses to maintain the confidentiality of its own information of similar importance. Either party may disclose information if required by law or court order, provided that the party from which the disclosure is required gives the other party prior written notice and makes commercially reasonable good faith efforts to obtain confidential treatment for such Confidential Information.

11. FORCE MAJEURE

11.1 Force Majeure. Neither party shall be held liable for failure to perform any of its obligations hereunder if such failure is (i) due to an Act of God, fire, explosion, accident, flood, landslide, lightning, earthquake, storm, civil disturbance, power failure, strike or other labor disturbance affecting a party, act of war (whether war be declared or not), national defense requirement, failure of a non-party telecommunications carrier, failure or disruption of machinery, apparatus or systems; acts, injunction, or restraint of government (whether or not now threatened) and (ii) beyond the reasonable control of such party.

11.2 Impact on Affected Party’s Obligations. Upon such an occurrence, the party whose performance is affected shall immediately give written notice of the occurrence to the other party, and shall thereafter exert all reasonable efforts to overcome the occurrence and resume performance of this Agreement. If, despite such efforts, the affected party cannot overcome the occurrence and resume performance within 90 days following notification given hereunder, then the parties shall mutually agree on an equitable resolution. If the parties are unable to reach mutual agreement, the matter shall be submitted for arbitration as provided hereunder.

12. MISCELLANEOUS PROVISIONS

12.1 Counterparts. This Agreement may be executed in one or more counterpart copies. Each counterpart copy shall constitute an Agreement and all of the counterpart copies shall constitute one fully executed agreement. This Agreement may be executed on facsimile counterparts.

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12.2 Assignment. Neither party may assign its rights or obligations hereunder, in whole or in part, without the other party’s prior written consent, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, no such consent will be required (i) in connection with a merger, reorganization, acquisition, consolidation, or sale of all, or substantially all, of such party’s assets; or (ii) in connection with an assignment to any majority-owned subsidiary or affiliate of the parent of either party. Any attempt to assign such rights and obligations other than as permitted herein will be null and void. These terms and conditions will inure to the benefit of and bind the parties’ respective successors and permitted assigns.

12.3 Entire Agreement. This Agreement and the schedules and exhibits hereto constitute the entire agreement between the parties, supersede all prior agreements and are solely for the parties’ benefit.

12.4 Governing Law. New Jersey law, without regard to the conflict of laws principles thereof, shall govern this agreement.

12.5 Amendments. This Agreement may be modified or amended only by a written agreement executed and delivered by both of the parties.

12.6 Notices. All notices or other formal communications under this Agreement must be in writing. They may be sent by personal delivery, facsimile, prepaid recognized overnight air express delivery or prepaid certified mail, return receipt requested or via email with copy sent by overnight mail. All notices shall be addressed as follows:

To UMG: United Marketing Group

929 North Plum Grove Road

Schaumburg, Illinois 60173

Attn: Alan Portelli

Facsimile No. 847-240-2026

Email: aportelli@unitedmarket.com

To HDI: Hanover Direct, Inc.

1500 Harbor Boulevard

Weehawken, New Jersey 07086

Attn: General Counsel

Facsimile No. 201-272-3498

Email: dbarsky@hanoverdirect.com

If a party changes its address, facsimile number, email address or notice party, it shall send notice to the other party. Notices shall be deemed given when received by the other party. Notices sent via facsimile shall be deemed received when confirmed by receipt of the machine generated “answerback”; notices sent by email shall be deemed received when confirmed by electronic proof of “delivery” and “read.” Notices via facsimile and email shall be followed up with a copy sent overnight or via first class mail.

12.7 Costs and Expenses. Unless otherwise specifically provided in this Agreement or separately agreed to by the parties in writing, each party shall be solely responsible for bearing its own costs and expenses incurred in performing its responsibilities under this Agreement, including all tariffs, taxes, filings, licensing and/or other fees.

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12.8 Headings. Paragraph headings are for convenience only.

12.9 Relationship of Parties. HDI has engaged UMG hereunder as an independent contractor and the execution and performance of this Agreement shall not be construed to create a relationship between the parties as partners, joint-venturers, or as principal and agent. Neither party shall have any authority to bind the other in any fashion.

12.10 Severability. If any provision or portion of this Agreement shall be deemed invalid, canceled, or unenforceable, the remaining rights and obligations of the parties under this Agreement shall remain in full force and effect and shall be construed and enforced accordingly.

12.11 Equitable Remedies. The parties agree that any breach of the other party’s obligations regarding intellectual property and/or confidentiality would result in irreparable injury for which there is no adequate remedy at law. Therefore, in the event of any breach or threatened breach of a party’s obligations regarding intellectual property or confidentiality, the aggrieved party will be entitled to seek equitable relief in addition to its other available legal remedies in a court of competent jurisdiction.

12.12 Mediation. In the event disputes between the parties arising from or concerning in any manner the subject matter of this Agreement, other than disputes arising from or concerning intellectual property or confidentiality, cannot be resolved through good faith negotiation and mediation, the parties will first attempt to resolve the dispute(s) through good faith negotiation. In the event that the dispute(s) cannot be resolved through good faith negotiation within 5 business days after the commencement of such good faith negotiation, the parties will refer the dispute(s) to non-binding mediation. The party that did not originate the mediation shall have the right to determine the venue for such mediation. The parties will use a recognized mediation service staffed by retired judges and will share equally the cost of the mediator, whose selection shall be mutually agreed to by the parties. The parties hereby agree to waive their right to a jury trial in regard to any court action. The provisions of this Section shall survive the expiration or earlier termination of this Agreement.

12.13 Non-Solicitation. During and after the Term, HDI will not specifically identify and as a result knowingly solicit any Program Purchaser who purchased a Program while a Rev Share Election was in effect or allow any third party to solicit any such Program Purchaser for any non-UMG fee-based membership program that may result in the Program Purchaser terminating his UMG Program.

12.14 Survival. Any provision of this Agreement that contemplates performance or observance subsequent to expiration or earlier termination of this Agreement, such as those addressing servicing and billing of Program Purchasers and use and protection of Intellectual Property and Confidential Information, shall survive the expiration or earlier termination of this Agreement and continue in full force and effect.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written.

HANOVER DIRECT, INC (individually and on behalf of HDI Affiliates)	UNITED MARKETING GROUP, LLC
By: /s/ Wayne Garten	By: /s/ Alan Portelli
Name: Wayne Garten	Name: Alan Portelli
Title: President and CEO	Title: President and CEO

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Wayne P. Garten, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hanover Direct, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Wayne P. Garten

Wayne P. Garten

President and Chief Executive Officer

Date: November 13, 2006

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, John W. Swatek, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Hanover Direct, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ John W. Swatek

John W. Swatek

Senior Vice President,

Chief Financial Officer and Treasurer

Date: November 13, 2006

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

The undersigned, Wayne P. Garten, President and Chief Executive Officer and John W. Swatek, Senior Vice President, Chief Financial Officer and Treasurer of Hanover Direct, Inc. (the "Company"), each hereby certify that to his knowledge the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006 of the Company filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the period specified.

Signed at the City of Weehawken, in the State of New Jersey, this 13^th day of November, 2006.

/s/ Wayne P. Garten

Wayne P. Garten

President and Chief Executive Officer

/s/ John W. Swatek

John W. Swatek

Senior Vice President, Chief Financial Officer and Treasurer