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 ~~July 1,~~September 30, 2006

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

For the transition period from

toTo

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 $0.01 per share: 22,426,296 shares outstanding as of ~~August 14,~~November 13, 2006.

HANOVER DIRECT, INC.

TABLE OF CONTENTS

Page

Part I - Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets -

~~July 1,~~September 30, 2006, December 31, 2005 and ~~June 25,~~September 24, 2005

Condensed Consolidated Statements of Income (Loss) – 13 and ~~26-~~39- weeks ended

~~July 1,~~September 30, 2006 and ~~June 25,~~September 24, 2005

Condensed Consolidated Statements of Cash Flows – ~~26-~~39- weeks ended

~~July 1,~~September 30, 2006 and ~~June 25,~~September 24, 2005

Notes to Condensed Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Consolidated Financial Condition and

Results of Operations

1618

Item 3. Quantitative and Qualitative Disclosures about Market Risk

2124

Item 4. Controls and Procedures

2124

Part II - Other Information

Item 1. Legal Proceedings

2224

Item 1A. Risk Factors

Item 6. Exhibits

2226

Signature Page

2427

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of dollars, except share amounts)

	July 1, 2006	December 31, 2005	June 25, 2005	September 30, 2006	December 31, 2005	September 24, 2005
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 31	$ 275	$ 542	$ 61	$ 275	$ 134
Accounts receivable, net of allowance for doubtful accounts of $805, $916 and $1,246, respectively	12,814	16,518	14,981
Accounts receivable, net of allowance for doubtful accounts of $742, $916 and $911, respectively				13,085	16,518	10,837
Inventories, principally finished goods	58,017	51,356	50,187	58,558	51,356	57,315
Prepaid catalog costs	18,715	17,567	18,717	18,997	17,567	21,017
Other current assets	3,001	2,744	3,332	3,650	2,744	2,777
Total Current Assets	92,578	88,460	87,759	94,351	88,460	92,080
PROPERTY AND EQUIPMENT, AT COST:
Land	4,378	4,378	4,361	4,418	4,378	4,361
Buildings and building improvements	18,200	18,194	18,237	18,214	18,194	18,192
Leasehold improvements	1,052	1,115	1,012	1,332	1,115	1,118
Furniture, fixtures and equipment	52,155	51,532	50,957	53,680	51,532	51,322
Construction in progress	246	--	--	165	--	--
	76,031	75,219	74,567	77,809	75,219	74,993
Accumulated depreciation and amortization	(55,827)	(55,030)	(53,829)	(56,447)	(55,030)	(54,337)
Property and equipment, net	20,204	20,189	20,738	21,362	20,189	20,656
Goodwill	8,649	8,649	8,649	8,649	8,649	8,649
Deferred tax assets	2,890	2,890	2,350	2,890	2,890	2,350
Other assets	1,327	1,989	2,447	606	1,989	2,232
Total Assets	$ 125,648	$ 122,177	$ 121,943	$ 127,858	$ 122,177	$ 125,967

Continued on next page.

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands of dollars, except share amounts)

	July 1, 2006	December 31, 2005	June 25, 2005	September 30, 2006	December 31, 2005	September 24, 2005
	(Unaudited)		(Unaudited)	(Unaudited)		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

CURRENT LIABILITIES:
Short-term debt and capital lease obligations	$ 10,628	$ 10,105	$ 4,635
Short-term debt and capital lease obligations (including debt to a related party see note 6)				$ 32,095	$ 10,105	$ 13,749
Accounts payable	26,447	27,043	28,851	20,593	27,043	26,079
Accrued liabilities	12,940	12,341	18,596	14,029	12,341	10,235
Customer prepayments and credits	12,380	10,074	16,005	14,572	10,074	14,828
Deferred tax liability	2,890	2,890	2,350	2,890	2,890	2,350
Total Current Liabilities	65,285	62,453	70,437	84,179	62,453	67,241
NON-CURRENT LIABILITIES:
Long-term debt (including debt to a related party see note 6)	13,754	12,543	11,709	259	12,543	12,083
Series C Participating Preferred Stock, authorized, issued and outstanding 564,819 shares; liquidation preference of $56,482	72,689	72,689	72,689
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	1,067	40	3	80	40	18
Total Non-current Liabilities	87,510	85,272	84,401	73,028	85,272	84,790
Total Liabilities	152,795	147,725	154,838	157,207	147,725	152,031
SHAREHOLDERS’ DEFICIENCY:
Common Stock, $0.01 par value, authorized 50,000,000 shares at July 1, 2006, December 31, 2005 and June 25, 2005; 22,426,296 shares issued and outstanding at July 1, 2006, December 31, 2005 and June 25, 2005	225	225	225
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	460,943	460,891	460,822	460,952	460,891	460,857
Accumulated deficit	(488,315)	(486,664)	(493,942)	(490,526)	(486,664)	(487,146)
Total Shareholders’ Deficiency	(27,147)	(25,548)	(32,895)	(29,349)	(25,548)	(26,064)
Total Liabilities and Shareholders’ Deficiency	$ 125,648	$ 122,177	$ 121,943	$ 127,858	$ 122,177	$ 125,967

See Notes to Condensed Consolidated Financial Statements.

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 26- Weeks Ended		For the 13- Weeks Ended		For the 39- Weeks Ended
	July 1, 2006	June 25, 2005	July 1, 2006	June 25, 2005	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005
	July 1, 2006	June 25, 2005	July 1, 2006	June 25, 2005	September 30, 2006	September 24, 2005	September 30, 2006	September 24, 2005

NET REVENUES	$ 108,739	$ 100,231	$ 209,022	$ 189,913	$ 93,737	$ 96,839	$ 302,759	$ 286,752

OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses	66,860	61,030	130,125	115,002	59,273	59,795	189,398	174,797
Special charges	--	(6)	--	18	--	(25)	--	(7)
Selling expenses	30,274	25,772	56,457	48,050	25,385	24,119	81,842	72,169
General and administrative expenses	8,578	9,250	18,433	19,833	8,069	3,275	26,502	23,108
Depreciation and amortization	552	774	1,089	1,527	619	681	1,708	2,208
	106,264	96,820	206,104	184,430	93,346	87,845	299,450	272,275

INCOME BEFORE INTEREST AND INCOME TAXES	2,475	3,411	2,918	5,483	391	8,994	3,309	14,477
Interest expense, net (including interest expense to a related party see note 6)	2,333	1,928	4,579	3,755	2,586	2,208	7,165	5,963

INCOME (LOSS) BEFORE INCOME TAXES	142	1,483	(1,661)	1,728	(2,195)	6,786	(3,856)	8,514
Provision for Federal income taxes	7	30	--	35
Provision (benefit) for state income taxes	(9)	9	(10)	10
Provision (benefit) for Federal income taxes					3	(16)	3	19
Provision for state income taxes					13	6	3	16
Provision (benefit) for income taxes	(2)	39	(10)	45	16	(10)	6	35

INCOME (LOSS) FROM CONTINUING OPERATIONS	144	1,444	(1,651)	1,683	(2,211)	6,796	(3,862)	8,479

Gain from discontinued operations of Gump’s, net of $14 of income tax benefit, including a gain including a gain on disposal of $3,576 for the 26- weeks ended June 25, 2005	--	8	--	2,996
Gain from discontinued operations of Gump’s, net of $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)	144	1,452	(1,651)	4,679	(2,211)	6,796	(3,862)	11,475
Earnings applicable to Preferred Stock	--	36	--	115	--	167	--	282

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS	$ 144	$ 1,416	$ (1,651)	$ 4,564	$ (2,211)	$ 6,629	$ (3,862)	$ 11,193

NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations – basic	$ 0.01	$ 0.06	$ (0.07)	$ 0.07	$ (0.10)	$ 0.30	$ (0.17)	$ 0.37
From continuing operations – diluted	$ 0.00	$ 0.04	$ (0.07)	$ 0.05	$ (0.10)	$ 0.20	$ (0.17)	$ 0.25
From discontinued operations – basic	$ 0.00	$ 0.00	$ 0.00	$ 0.13	$ 0.00	$ 0.00	$ 0.00	$ 0.13
From discontinued operations – diluted	$ 0.00	$ 0.00	$ 0.00	$ 0.09	$ 0.00	$ 0.00	$ 0.00	$ 0.09
Net income (loss) per common share – basic	$ 0.01	$ 0.06	$ (0.07)	$ 0.20	$ (0.10)	$ 0.30	$ (0.17)	$ 0.50
Net income (loss) per common share – diluted	$ 0.00	$ 0.04	$ (0.07)	$ 0.14	$ (0.10)	$ 0.20	$ (0.17)	$ 0.34
Weighted average common shares outstanding – basic (thousands)	22,426	22,426	22,426	22,426	22,426	22,426	22,426	22,426
Weighted average common shares outstanding – diluted (thousands)	32,631	32,562	22,426	32,574	22,426	32,593	22,426	32,580

See Notes to Condensed Consolidated Financial Statements.

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

(Unaudited)

For the 26- Weeks Ended

July 1,
2006

June 25,
2005
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

$         (1,651)

$         4,679
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization, including deferred fees

1,449

2,003
Provision for doubtful accounts

274

356
Special charges

--

18
Gain on the sale of Gump’s

--

(3,576)
Gain on the sale of property and equipment

(2)

(71)
Compensation expense related to stock options

52

79
Accretion of debt discount

2,187

1,547
Changes in assets and liabilities:

Accounts receivable

3,430

407
Inventories

(6,661)

(3,028)
Prepaid catalog costs

(1,148)

(4,133)
Accounts payable

(596)

1,807
Accrued liabilities

599

(664)
Customer prepayments and credits

2,306

4,522
Other, net

1,072

1,049
Net cash provided by operating activities

1,311

4,995
CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisitions of property and equipment

(1,104)

(875)
Proceeds from disposal of property and equipment

2

80
Proceeds from the sale of Gump’s

--

8,921
Net cash provided (used) by investing activities

(1,102)

8,126
CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings (payments) under Wachovia revolving loan facility

546

(11,928)
Payments under Wachovia Tranche A term loan facility

(994)

(996)
Net borrowings of other debt financing

33

--
Payments of capital lease obligations

(38)

(165)
Net cash used by financing activities

(453)

(13,089)
Net increase (decrease) in cash and cash equivalents

(244)

32
Cash and cash equivalents at the beginning of the period

275

510
Cash and cash equivalents at the end of the period

$                 31

$            542

Supplemental Disclosures of Cash Flow Information:

Cash paid for:

Interest

$            2,021

$         2,016
Income taxes

$                   2

$            133

	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.

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 ~~13 and 26-~~39- Weeks Ended ~~June 25,~~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 ~~26-~~39- Weeks Ended ~~June 25,~~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 ~~July 1,~~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 ~~July 1,~~September 30, 2006, ~~2.8~~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 and 26-~~13- weeks ended ~~July 1,~~September 30, 2006 and ~~June 25,~~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.

The weighted average Black-Scholes fair value assumptions for stock options issued during the 13 and ~~26-~~39- weeks ended ~~July 1,~~September 30, 2006 and ~~June 25,~~September 24, 2005 are as follows (no stock options were granted for the 13 and ~~26-~~39- weeks ended ~~July 1, 2006)~~September 30, 2006 and 13- weeks ended September 24, 2005):

For the 13- Weeks Ended

For the 26- Weeks Ended

July 1,
2006

June 25,
2005

July 1,
2006

June 25,
2005

Expected term (in years)

—

4

—

4
Risk free interest rate

—

4.13%

—

3.96%
Expected volatility

—

86.49%

—

87.55%
Expected dividend yield

—

0%

—

0%

	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 ~~26-~~39- weeks ended ~~July 1,~~September 30, 2006 is presented below:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value	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	1,169,600	$ 4.65	4.9	$ 61,070
Granted	—				—	—
Exercised	—				—	—
Forfeited	(479,000)	4.62			(617,700)	5.24
Options outstanding, end of period	690,600	$ 4.68	6.9	$ 38,000	551,900	$ 4.00	7.0	$ 43,000
Options exercisable, end of period	616,758	$ 5.09	6.7	$ 25,333	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 1,18, 2006 ~~all~~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 ~~July 1,~~September 30, 2006, and changes during the ~~26-~~39- weeks ended ~~July 1,~~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
(101,665)
1.14
Forfeited
—
—
Nonvested options outstanding, end of period
73,842
$0.82

	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 ~~July 1,~~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 ~~1.1~~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.

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 ~~SEC~~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 ~~91%~~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 ~~proposes~~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

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

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

For the 13- Weeks Ended

For the 26- Weeks Ended

July 1,
2006

June 25,
2005

July 1,
2006

June 25,
2005

Net income (loss)

$        144

$         1,452

$      (1,651)

$         4,679
Less:

Earnings applicable to preferred stock

--

36

--

115
Net income (loss) applicable to common Shareholders

$        144

$         1,416

$      (1,651)

$         4,564
Basic net income (loss) per common share

$        0.01

$           0.06

$        (0.07)

$           0.20

Weighted-average common shares outstanding

22,426

22,426

22,426

22,426

Diluted net income (loss)

$        144

$         1,416

$      (1,651)

$         4,564
Diluted net income (loss) per common share

$        0.00

$           0.04

$        (0.07)

$           0.14

Weighted-average common shares outstanding

22,426

22,426

22,426

22,426
Effect of Dilution:

Stock warrants (issued July 8, 2004)

10,183

10,136

--

10,148
Stock options

22

--

--

--
Weighted-average common shares outstanding assuming dilution

32,631

32,562

22,426

32,574

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 ~~10,205,174~~10,207,205 and 10,220,395 for the ~~26-~~13 and 39- weeks ended ~~July 1, 2006.~~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 ~~26-~~39- weeks ended ~~July 1,~~September 30, 2006 and ~~June 25,~~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 ~~590,600~~451,900 shares and ~~1,180,500~~1,068,600 shares relating to the 13- week periods, respectively, and ~~542,600~~403,900 shares and ~~1,130,500~~1,118,600 shares relating to the ~~26-~~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:

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.~~

~~Two~~quarter of ~~these~~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.~~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.

~~Discovery in the third case is scheduled to be completed in September 2006.~~

The Company believes that it properly denied CIC benefits with respect each of ~~the three~~these two former employees and that it has meritorious defenses in ~~all of~~ 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 ~~July 1,~~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 ~~26-~~39- weeks ended ~~July 1,~~September 30, 2006 and is expected to continue ~~further into~~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.

As of ~~July 1,~~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 ~~July~~October 31, 2006, there are ~~$6.1~~$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 ~~July 1,~~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 ~~is expiring~~expired in October 2006 and ~~will~~was not be 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 ~~26-~~39- weeks ended ~~June 25,~~September 24, 2005:

In thousands (000’s)

~~26-~~39- Weeks Ended

~~June 25,~~September 24,

2005

Net revenues

$ 7,241

Income before income taxes

$ 2,974^a^a

a) Includes a gain on disposal of $3,576 at ~~June 25,~~September 24, 2005

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.

As of ~~July 1,~~September 30, 2006, December 31, 2005 and ~~June 25,~~September 24, 2005, debt consisted of the following (in thousands):

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 ~~$2.0~~$1.5 million as of ~~July 1,~~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 ~~July 1,~~September 30, 2006. As of ~~July 1,~~September 30, 2006, the weighted average interest rate on the Tranche A term loan was ~~7.13%~~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 ~~July 1,~~September 30, 2006. As of ~~July 1,~~September 30, 2006, the weighted average interest rate on the Revolver was ~~7.46%~~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.

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 ~~July 1,~~September 30, 2006 was ~~$17.5~~$9.2 million.

	July 1, 2006	December 31, 2005	June 25, 2005	September 30, 2006	December 31, 2005	September 24, 2005

Amount Borrowed Under the Chelsey Facility	$ 20,000	$ 20,000	$ 20,000	$ 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)	(12,939)	(12,939)	(12,939)
Accretion of Debt Discount (Recorded as Interest Expense)	6,671	4,484	2,645	7,916	4,484	3,524

	$ 13,732	$ 11,545	$ 9,706	$ 14,977	$ 11,545	$ 10,585

	13- Weeks Ended				26- Weeks Ended				13- Weeks Ended				39- Weeks Ended
	July 1, 2006		June 25, 2005		July 1, 2006		June 25, 2005		September 30, 2006		September 24, 2005		September 30, 2006		September 24, 2005

Net revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and operating expenses	61.5		60.9		62.3		60.6		63.2		61.7		62.6		60.9
Selling expenses	27.8		25.7		27.0		25.3		27.1		24.9		27.0		25.2
General and administrative expenses	7.9		9.2		8.8		10.4		8.6		3.4		8.8		8.0
Depreciation and amortization	0.5		0.8		0.5		0.8		0.7		0.7		0.6		0.8
Income before interest and income taxes	2.3		3.4		1.4		2.9		0.4		9.3		1.1		5.1
Interest expense, net	2.2		1.9		2.2		2.0		2.8		2.3		2.4		2.1
Provision for Federal and state income taxes	--		0.1		--		--
Provision (benefit) for Federal and state income taxes									--		--		--		--
Income (loss) from continuing operations	0.1		1.4		(0.8)		0.9		(2.4)		7.0		(1.3)		3.0
Gain from discontinued operations of Gump’s	--		--		--		1.6		--		--		--		1.0
Net income (loss) and comprehensive income (loss)	0.1		1.4		(0.8)		2.5		(2.4)		7.0		(1.3)		4.0
Earnings applicable to Preferred Stock	--		--		--		0.1		--		0.2		--		0.1
Net income (loss) applicable to common shareholders	0.1	%	1.4	%	(0.8)	%	2.4	%	(2.4)	%	6.8	%	(1.3)	%	3.9	%

•	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 ~~catalog postage costs~~general and administrative expenses due to the ~~USPS rate increase that occurred~~reversal in ~~early January 2006.~~September 2005 of a $4.5 million accrual related to Rakesh Kaul, a former CEO who pursued claims against the Company.

•	a decline in operating profit primarily driven by higher outbound merchandise shipping, product fulfillment, catalog paper and postage ~~costs;~~costs which aggregated $2.4 million; and
•	~~A $0.8~~higher general and administrative expenses due to the reversal in September 2005 of a $4.5 million ~~increase in payroll and fringe benefits;~~accrual related to Rakesh Kaul, a former CEO who pursued claims against the Company;

•	~~lower product costs due to improved sourcing of merchandise; and~~
•	~~a $0.4 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.~~

•	a decline in operating profit primarily driven by higher outbound merchandise shipping, fulfillment, catalog paper and postage ~~costs;~~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;

•	~~Lower product costs due to improved sourcing of merchandise;~~
•	a ~~$1.7~~$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 ~~$0.5~~$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.

~~10.89~~10.91	~~Thirty-Sixth~~Thirty-Seventh Amendment to Loan and Security Agreement, dated as of ~~August 10,~~November 8, 2006, by and among Wachovia Bank, National Association and the Borrowers and Guarantors named therein.

~~10.90~~10.92	~~Fifth~~Sixth Amendment to Loan And Security Agreement dated as of ~~August 10,~~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.~~Swatek pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	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: ~~August 14,~~November 13, 2006