SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10-Q~~ 10-Q/A

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~JUNE 26, 2004~~ September 24, 2005

Commission file number 1-08056

HANOVER DIRECT, INC. ~~-------------------- (Exact~~

(Exact name of registrant as specified in its charter) DELAWARE 13-0853260 -------- ---------- (State of incorporation) (IRS Employer Identification No.) 115 RIVER ROAD, BUILDING 10, EDGEWATER, NEW JERSEY 07020 - -------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (201) 863-7300 -------------- (Telephone number)

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 [ ]~~

Yes_ No X

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ~~YES [ ] NO [X]~~

Yes_ No X

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

Yes_ No X

Common stock, par value ~~$.66 2/3~~ $0.01per share: ~~224,518,395~~22,426,296 shares outstanding ~~(net of treasury shares)~~ as of ~~August 4, 2004.~~ February 21, 2006.

EXPLANATORY NOTE

This Form 10-Q/A amends the Form 10-Q previously filed on December 12, 2005. The original Form 10-Q filing included financial information which had not been reviewed by the Company’s independent auditors, Golstein Golub Kessler LLP, who had only recently been engaged and had not completed their review. The financial statements included herein have been reviewed by Goldstein Golub Kessler LLP.

HANOVER DIRECT, INC.

TABLE OF CONTENTS


	Page ~~----~~
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - ~~June 26,~~ September 24, 2005, December 25, 2004 and ~~Restated December 27, 2003 .............................................. 2~~ September 25, 2004	3
Condensed Consolidated Statements of Income ~~(Loss) -~~– 13 and ~~26-~~39- weeks ended ~~June 26,~~ September 24, 2005 and September 25, 2004 ~~and Restated June 28, 2003 .................................................. 4~~	5
Condensed Consolidated Statements of Cash Flows -– 13 and ~~26-~~39- weeks ended ~~June 26,~~ September 24, 2005 and September 25, 2004 ~~and Restated June 28, 2003................................................... 5~~	7
Notes to Condensed Consolidated Financial ~~Statements......................................... 6~~ Statements	8
Item 2. ~~Management's~~Management’s Discussion and Analysis of Consolidated Financial Condition and Results of ~~Operations...................................................................... 23~~ Operations	16
Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk............................. 35~~ Risk	22
Item 4. Controls and ~~Procedures................................................................ 35~~ Procedures	22
Part II - Other Information
Item 1. Legal Proceedings...................................................................... 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................ 40 Item 5. Other Information...................................................................... 40 Proceedings	24
Item 6. Exhibits ~~and Reports on Form 8-K....................................................... 42 Signatures...................................................................................... 44~~	24
Signature Page	25

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)~~
JUNE 26, DECEMBER 27, 2004 2003 ---- ---- (AS RESTATED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 392 $ 2,282 Accounts receivable, net of allowance for doubtful accounts of $1,035 and $1,105, respectively 13,332 13,802 Inventories 36,974 41,794 Prepaid catalog costs 15,780 11,945 Other current assets 3,132 3,951 --------- --------- Total Current Assets 69,610 73,774 --------- --------- PROPERTY AND EQUIPMENT, AT COST: Land 4,361 4,361 Buildings and building improvements 18,212 18,210 Leasehold improvements 10,108 10,108 Furniture, fixtures and equipment 53,519 53,212 --------- --------- 86,200 85,891 Accumulated depreciation and amortization (60,129) (58,113) --------- --------- Property and equipment, net 26,071 27,778 --------- --------- Goodwill 9,278 9,278 Deferred tax assets 2,213 2,213 Other assets 1,642 1,575 --------- --------- Total Assets $ 108,814 $ 114,618 ========= =========

(In thousands of dollars, except share amounts)

	September 24, 2005	December 25, 2004	September 25, 2004
	(Unaudited)		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$ 134	$ 510	$ 418
Accounts receivable, net of allowance for doubtful accounts of $911, $1,367 and $1,062, respectively	10,837	17,819	13,448
Inventories, principally finished goods	57,315	53,147	51,102
Prepaid catalog costs	21,017	15,644	18,670
Other current assets	2,777	4,482	4,130
Total Current Assets	92,080	91,602	87,768
PROPERTY AND EQUIPMENT, AT COST:
Land	4,361	4,361	4,361
Buildings and building improvements	18,192	18,221	18,213
Leasehold improvements	1,118	10,156	10,197
Furniture, fixtures and equipment	51,322	53,792	53,478
	74,993	86,530	86,249
Accumulated depreciation and amortization	(54,337)	(61,906)	(61,106)
Property and equipment, net	20,656	24,624	25,143
Goodwill	8,649	9,278	9,278
Deferred tax assets	2,350	2,179	1,769
Other assets	2,232	2,816	2,933
Total Assets	$ 125,967	$ 130,499	$ 126,891

Continued on next page. 2

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS ~~(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS) (UNAUDITED)~~
JUNE 26, DECEMBER 27, 2004 2003 ---- ---- (AS RESTATED) LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES: Short-term debt and capital lease obligations $ 12,232 $ 13,468 Accounts payable 39,678 41,834 Accrued liabilities 12,004 12,907 Customer prepayments and credits 5,839 5,485 Deferred tax liability 2,213 2,213 ----------- ---------- Total Current Liabilities 71,966 75,907 ----------- ---------- NON-CURRENT LIABILITIES: Long-term debt 6,970 9,042 Series C Participating Preferred Stock, authorized, issued and outstanding 564,819 shares; liquidation preference of $56,482 72,689 72,689 Other 3,692 4,609 ----------- ---------- Total Non-current Liabilities 83,351 86,340 ----------- ---------- Total Liabilities 155,317 162,247 ----------- ---------- SHAREHOLDERS' DEFICIENCY: Common Stock, $0.66 2/3 par value, authorized 300,000,000 shares; 222,294,562 shares issued and 220,173,633 shares outstanding 148,197 148,197 Capital in excess of par value 302,554 302,432 Accumulated deficit (493,908) (494,912) ----------- ---------- (43,157) (44,283) ----------- ---------- Less: Treasury stock, at cost (2,120,929 shares) (2,996) (2,996) Notes receivable from sale of Common Stock (350) (350) ----------- ---------- Total Shareholders' Deficiency (46,503) (47,629) ----------- ---------- Total Liabilities and Shareholders' Deficiency $ 108,814 $ 114,618 =========== ==========
(Continued)

(In thousands of dollars, except share amounts)

	September 24, 2005	December 25, 2004	September 25, 2004
	(Unaudited)		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY

CURRENT LIABILITIES:
Short-term debt and capital lease obligations	$ 13,749	$ 16,690	$ 12,918
Accounts payable	26,079	29,544	33,275
Accrued liabilities	10,235	20,535	17,240
Customer prepayments and credits	14,828	12,032	17,227
Deferred tax liability	2,350	2,179	1,769
Total Current Liabilities	67,241	80,980	82,429
NON-CURRENT LIABILITIES:
Long-term debt (including debt to a related party see note 6)	12,083	11,196	11,050
Series C Participating Preferred Stock, authorized, issued and outstanding 564,819 shares; liquidation preference of $56,482	72,689	72,689	72,689
Other	18	3,286	3,457
Total Non-current Liabilities	84,790	87,171	87,196
Total Liabilities	152,031	168,151	169,625
SHAREHOLDERS’ DEFICIENCY:
Common Stock, $0.01 par value, authorized 50,000,000 shares at September 24, 2005, December 25, 2004 and September 25, 2004; 22,426,296 shares issued and outstanding at September 24, 2005 and December 25, 2004; 22,662,875 shares issued and 22,450,782 shares outstanding at September 25, 2004	225	225	227
Capital in excess of par value	460,857	460,744	464,059
Accumulated deficit	(487,146)	(498,621)	(503,674)
	(26,064)	(37,652)	(39,388)
Less:
Treasury stock, at cost (0 shares at September 24, 2005 and December 25, 2004 and 212,093 shares at September 25, 2004)	--	--	(2,996)
Notes receivable from sale of Common Stock	--	--	(350)
Total Shareholders’ Deficiency	(26,064)	(37,652)	(42,734)
Total Liabilities and Shareholders’ Deficiency	$ 125,967	$ 130,499	$ 126,891

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 26- WEEKS ENDED ----------------------- ----------------------- JUNE 28, JUNE 28, JUNE 26, 2003 JUNE 26, 2003 2004 AS RESTATED 2004 AS RESTATED ---- ---- ---- ---- NET REVENUES $ 96,482 $ 105,883 $ 191,857 $ 207,412 --------- --------- --------- --------- OPERATING COSTS AND EXPENSES: Cost of sales and operating expenses 58,009 66,291 117,294 131,398 Special charges 43 211 11 488 Selling expenses 25,754 26,922 49,029 51,100 General and administrative expenses 10,419 9,491 20,786 20,746 Depreciation and amortization 1,004 1,138 2,016 2,321 --------- --------- --------- --------- 95,229 104,053 189,136 206,053 --------- --------- --------- --------- INCOME FROM OPERATIONS 1,253 1,830 2,721 1,359 Gain on sale of Improvements -- -- -- 1,911 --------- --------- --------- --------- INCOME BEFORE INTEREST AND INCOME TAXES 1,253 1,830 2,721 3,270 Interest expense, net 790 1,120 1,712 2,568 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 463 710 1,009 702 (Benefit) provision for Federal income taxes (62) -- 1 -- (Benefit) provision for state income taxes (38) (5) 4 10 --------- --------- --------- --------- NET INCOME AND COMPREHENSIVE INCOME 563 715 1,004 692 Preferred stock dividends -- 4,290 -- 7,922 Earnings applicable to Preferred Stock 1 -- 2 -- --------- --------- --------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 562 $ (3,575) $ 1,002 $ (7,230) --------- --------- --------- --------- NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share - basic and diluted $ 0.00 $ (0.02) $ 0.00 $ (0.05) --------- --------- --------- --------- Weighted average common shares outstanding - basic (thousands) 220,174 138,316 220,174 138,316 --------- --------- --------- --------- Weighted average common shares outstanding - diluted (thousands) 220,174 138,316 220,455 138,316 --------- --------- --------- ---------

(In thousands of dollars, except per share amounts)

(Unaudited)

	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 24, 2005	September 25, 2004	September 24, 2005	September 25, 2004
	September 24, 2005	September 25, 2004	September 24, 2005	September 25, 2004

NET REVENUES	$ 96,839	$ 85,443	$ 286,752	$ 254,468

OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses	59,795	50,591	174,797	154,295
Special charges (income)	(25)	476	(7)	518
Selling expenses	24,119	21,780	72,169	65,091
General and administrative expenses	3,275	9,695	23,108	29,249
Depreciation and amortization	681	820	2,208	2,501
	87,845	83,362	272,275	251,654

INCOME BEFORE INTEREST AND INCOME TAXES	8,994	2,081	14,477	2,814
Interest expense, net (including interest expense to a related party see note 6)	2,208	1,641	5,963	3,166

INCOME (LOSS) BEFORE INCOME TAXES	6,786	440	8,514	(352)
Provision (benefit) for Federal income taxes	(16)	3	19	(2)
Provision (benefit) for state income taxes	6	(7)	16	(8)
Provision (benefit) for income taxes	(10)	(4)	35	(10)

INCOME (LOSS) FROM CONTINUING OPERATIONS	6,796	444	8,479	(342)

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 at September 24, 2005	--	267	2,996	290

NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)	6,796	711	11,475	(52)
Earnings applicable to Preferred Stock	167	--	282	--

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS	$ 6,629	$ 711	$ 11,193	$ (52)

NET INCOME (LOSS) PER COMMON SHARE:
From continuing operations – basic	$ 0.30	$ 0.02	$ 0.37	$ (0.01)
From continuing operations – diluted	$ 0.20	$ 0.01	$ 0.25	$ (0.01)
From discontinued operations – basic	$ 0.00	$ 0.01	$ 0.13	$ 0.01
From discontinued operations – diluted	$ 0.00	$ 0.01	$ 0.09	$ 0.01
Net income (loss) per common share – basic	$ 0.30	$ 0.03	$ 0.50	$ (0.00)
Net income (loss) per common share – diluted	$ 0.20	$ 0.02	$ 0.34	$ (0.00)
Weighted average common shares outstanding – basic (thousands)	22,426	22,398	22,426	22,144
Weighted average common shares outstanding – diluted (thousands)	32,593	31,356	32,580	22,144

See Notes to Condensed Consolidated Financial Statements. 4

HANOVER DIRECT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ~~(IN THOUSANDS OF DOLLARS) (UNAUDITED)~~
FOR THE 26- WEEKS ENDED ----------------------- JUNE 26, JUNE 28, 2004 2003 AS RESTATED ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,004 $ 692 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization, including deferred fees 2,158 2,966 Provision for doubtful accounts 268 298 Special charges 11 488 Gain on the sale of Improvements -- (1,911) Gain on the sale of property and equipment -- (2) Compensation expense related to stock options 122 341 Changes in assets and liabilities: Accounts receivable 202 2,114 Inventories 4,820 3,418 Prepaid catalog costs (3,835) (1,844) Accounts payable (2,156) (1,703) Accrued liabilities (914) (11,082) Customer prepayments and credits 354 2,396 Other, net (530) (1,087) -------- -------- Net cash provided (used) by operating activities 1,504 (4,916) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (308) (1,202) Proceeds from the sale of Improvements -- 2,000 Costs related to the early release of escrow funds -- (89) Proceeds from disposal of property and equipment -- 2 -------- -------- Net cash (used) provided by investing activities (308) 711 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under Congress revolving loan facility (1,050) 6,453 Payments under Congress Tranche A term loan facility (996) (994) Payments under Congress Tranche B term loan facility (900) (900) Payments of long-term debt and capital lease obligations (362) (6) Payment of debt issuance costs (125) (78) Refund (payment) of estimated Richemont tax obligation on Series B Participating Preferred Stock accretion 347 (347) -------- -------- Net cash (used) provided by financing activities (3,086) 4,128 -------- -------- Net decrease in cash and cash equivalents (1,890) (77) Cash and cash equivalents at the beginning of the year 2,282 785 -------- -------- Cash and cash equivalents at the end of the period $ 392 $ 708 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest $ 1,332 $ 1,642 Income taxes $ 8 $ 663 Non-cash investing and financing activities: Series B Participating Preferred Stock redemption price increase $ -- $ 7,575

(In thousands of dollars)

(Unaudited)

	For the 39- Weeks Ended
	September 25, 2005	September 24, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 11,475	$ (52)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization, including deferred fees	2,853	3,394
Provision for doubtful accounts	368	345
Special charges (income)	(7)	487
Gain on the sale of Gump’s	(3,576)	--
Gain on the sale of property and equipment	(70)	(2)
Compensation expense related to stock options	115	154
Accretion of debt discount	2,426	420
Changes in assets and liabilities:
Accounts receivable	4,539	542
Inventories	(10,156)	(8,296)
Prepaid catalog costs	(6,433)	(6,185)
Accounts payable	(965)	(9,467)
Accrued liabilities	(9,000)	(335)
Customer prepayments and credits	3,345	5,748
Other, net	1,673	(1,327)
Net cash used by operating activities	(3,413)	(14,574)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment	(1,483)	(371)
Proceeds from disposal of property and equipment	79	2
Proceeds from the sale of Gump’s	8,921	--
Net cash provided (used) by investing activities	7,517	(369)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under Wachovia revolving loan facility	(2,740)	1,702
Payments under Wachovia Tranche A term loan facility	(1,493)	(1,171)
Payments under Wachovia Tranche B term loan facility	--	(6,011)
Borrowings under the Chelsey facility	--	7,061
Issuance of Common Stock Warrants to Chelsey Finance	--	12,939
Payments of long-term debt and capital lease obligations	(247)	(543)
Payment of debt issuance costs	--	(1,045)
Payment of debt issuance costs to related party	--	(200)
Refund of estimated Richemont tax obligation on Series B Participating Preferred Stock accretion	--	347
Net cash (used) provided by financing activities	(4,480)	13,079
Net decrease in cash and cash equivalents	(376)	(1,864)
Cash and cash equivalents at the beginning of the period	510	2,282
Cash and cash equivalents at the end of the period	$ 134	$ 418

Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest	$ 3,037	$ 1,926
Income taxes	$ 160	$ 8
Non-cash investing and financing activities:
Issuance of Common Stock to related party for payment of waiver fee	$ --	$ 563

See Notes to Condensed Consolidated Financial Statements. 5

HANOVER DIRECT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED) 1. BASIS OF PRESENTATION~~

(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"~~“Company”) Annual Report on Form 10-K for the fiscal year ended December ~~27, 2003, as amended.~~25, 2004. 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. ~~Pursuant to~~

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 reflects the Gump’s operating results and gain on sale as discontinued operations. In addition in the Condensed Consolidated Statement of ~~Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise~~Cash Flows for the 39- Weeks Ended September 25, 2005 the change in assets and ~~Related Information," the consolidated operations of the Company are reported~~liabilities reflects Gump’s as ~~one segment.~~ discontinued operations.

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.

Audit Committee Investigation; SEC Inquiry

On November 17, 2004, the ~~Company identified a revenue recognition cut-off issue that resulted in revenue being recorded in advance~~Audit Committee of the ~~actual shipment~~Board of ~~merchandise~~Directors began an investigation of matters relating to restatements of the Company’s financial statements and other accounting-related matters with the assistance of independent outside counsel, Wilmer Cutler Pickering Hale and Dorr LLP (“Wilmer Cutler”).

On March 14, 2005, the Audit Committee reported that it had concluded its investigation and, with the assistance of Wilmer Cutler, reported its findings to the ~~customer.~~Board of Directors. The ~~practice~~Audit Committee, again with the assistance of Wilmer Cutler, formulated a series of recommendations to the Company and the Board of Directors concerning potential improvements in the Company’s internal controls and procedures for financial reporting. The Board of Directors and management have begun implementing these recommendations.

The Company was ~~stopped immediately.~~notified on January 11, 2005 by the Securities and Exchange Commission (“SEC”) that it was conducting an informal inquiry relating to the Company’s financial results and financial reporting since 1998. The ~~impact~~SEC indicated in its letter to the Company that the inquiry should not be construed as an indication by the SEC that there has been any violation of the restatement on the years ended December 30, 2000, December 29, 2001 and December 28, 2002 as well as the quarterly and year-to-date financial statements for each of the periods ended March 29, 2003, June 28, 2003, September 27, 2003 and December 27, 2003 is not material. The affected prior quarters' and annual periods' results have been restated as set forth below. 6
YEAR ENDED DECEMBER 30, 2000 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 27,703 $ 27,357 Inventory $ 69,612 $ 69,731 Total Current Assets $ 128,446 $ 128,313 Accumulated Deficiency $(471,651) $(471,753) Total Shareholders' Deficiency $ (24,452) $ (24,554) Net revenues $ 603,014 $ 602,668 Loss before interest and income taxes $ (70,552) $ (70,652) Net loss and comprehensive income loss $ (80,800) $ (80,900) Net loss applicable to common shareholders $ (84,815) $ (84,915) Net loss per share-basic and diluted $ (0.40) $ (0.40)
YEAR ENDED DECEMBER 29, 2001 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Net revenues $ 532,165 $ 532,519 Income before interest and income taxes $ 804 $ 906 Net loss and comprehensive income loss $ (5,845) $ (5,743) Net loss applicable to common shareholders $ (16,590) $ (16,488) Net loss per share-basic and diluted $ (0.08) $ (0.08)
YEAR ENDED DECEMBER 28, 2002 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 16,945 $ 16,938 Inventory $ 53,131 $ 53,134 Total Current Assets $ 88,287 $ 88,285 Accumulated Deficiency $(486,627) $(486,628) Total Shareholders' Deficiency $ (58,841) $ (58,842) Net revenues $ 457,644 $ 457,638 Net loss per share-basic and diluted $ (0.18) $ (0.18)
7
QUARTER ENDED MARCH 29, 2003 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 13,580 $ 12,652 Inventory $ 53,425 $ 53,787 Total Current Assets $ 90,837 $ 90,548 Accumulated Deficiency $(486,435) $(486,650) Total Shareholders' Deficiency $ (62,103) $ (62,318) Net revenues $ 102,474 $ 101,529 Income before interest and income taxes $ 1,655 $ 1,440 Net income (loss) and comprehensive income (loss) $ 192 $ (23) Net loss applicable to common shareholders $ (3,440) $ (3,655) Net loss per share-basic and diluted $ (0.02) $ (0.03)
QUARTER ENDED JUNE 28, 2003 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 15,360 $ 14,526 Inventory $ 49,382 $ 49,716 Total Current Assets $ 84,667 $ 84,381 Accumulated Deficiency $(485,745) $(485,935) Total Shareholders' Deficiency $ (65,540) $ (65,730) Net revenues $ 105,765 $ 105,883 Income before interest and income taxes $ 1,805 $ 1,830 Net income and comprehensive income $ 690 $ 715 Net loss applicable to common shareholders $ (3,600) $ (3,575) Net loss per share-basic and diluted $ (0.02) $ (0.02)
SIX MONTHS ENDED JUNE 28, 2003 ------------------------------ AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Net revenues $ 208,239 $ 207,412 Income before interest and income taxes $ 3,460 $ 3,270 Net income and comprehensive income $ 882 $ 692 Net loss applicable to common shareholders $ (7,040) $ (7,230) Net loss per share-basic and diluted $ (0.05) $ (0.05)
8
QUARTER ENDED SEPTEMBER 27, 2003 -------------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Net revenues $ 96,633 $ 97,466 Income (loss) before interest and income taxes $ (64) $ 126 Net loss and comprehensive loss $ (16,645) $ (16,455) Net loss applicable to common shareholders $ (16,645) $ (16,455) Net loss per share-basic and diluted $ (0.12) $ (0.12)
NINE MONTHS ENDED SEPTEMBER 27, 2003 ------------------------------------ AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) ~~Net revenues $ 304,872 $ 304,878 Net loss per share-basic and diluted $ (0.17) $ (0.17)~~
QUARTER ENDED DECEMBER 27, 2003 ------------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 14,335 $ 13,802 Inventory $ 41,576 $ 41,794 Total Current Assets $ 73,952 $ 73,774 Accumulated Deficiency $(494,791) $(494,912) Total Shareholders' Deficiency $ (47,508) $ (47,629) Net revenues $ 110,002 $ 109,469 Income before interest and income taxes $ 4,621 $ 4,500 Net income and comprehensive income $ 364 $ 243 Net income applicable to common shareholders $ 364 $ 243 Net income per share-basic and diluted $ 0.00 $ 0.00
9
YEAR ENDED DECEMBER 27, 2003 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Net revenues $ 414,874 $ 414,347 Income before interest and income taxes $ 8,017 $ 7,896 Net loss and comprehensive loss $ (15,399) $ (15,520) Net loss applicable to common shareholders $ (23,321) $ (23,442) Net loss per share-basic and diluted $ (0.16) $ (0.16)
QUARTER ENDED MARCH 27,2004 ---------------------------- AS PREVIOUSLY REPORTED AS RESTATED -------- ----------- (IN THOUSANDS) Accounts receivable, net $ 12,614 $ 12,145 Inventory $ 37,646 $ 37,835 Total Current Assets $ 71,293 $ 71,152 Accumulated Deficiency $(494,373) $(494,470) Total Shareholders' Deficiency $ (47,086) $ (47,183) Net revenues $ 95,312 $ 95,375 Income before interest and income taxes $ 1,445 $ 1,468 Net income and comprehensive income $ 418 $ 441 Net income applicable to common shareholders $ 417 $ 440 Net income per share-basic and diluted $ 0.00 $ 0.00
The restatements did not result in a change to the Company's cash flows during the restated periods; however it did result in technical defaults by the Company with its covenants under the Congress Credit Facility and the Term Loan Facility. Congress and Chelsey Finance have waived such defaults. 3. DIVIDEND RESTRICTIONSfederal securities laws. The Company is ~~restricted from paying dividends at any time~~cooperating fully with the SEC in connection with the inquiry and Wilmer Cutler has briefed the SEC and the Company’s independent registered public accounting firm, Goldstein Golub Kessler LLP (“GGK”), on the results of its ~~Common Stock or from acquiring~~investigation. The Company intends to continue to cooperate with the SEC in connection with its ~~Common Stock by certain debt covenants contained in agreements to which~~informal inquiry concerning the ~~Company is a party. 4. NET INCOME (LOSS) PER COMMON SHARE~~ Company’s financial reporting.

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 ~~Statement of Financial Accounting Standards ("SFAS")~~SFAS No. 128, ~~"Earnings~~“Earnings Per ~~Share" ("FAS 128"~~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 ~~convertible~~ stock oroptions and stock ~~options.~~warrants. The computations of basic and diluted net income (loss) per common share are as follows (in thousands except per share amounts): 10
FOR THE 13- WEEKS ENDED FOR THE 26- WEEKS ENDED ----------------------- ----------------------- JUNE 26, JUNE 28, JUNE 26, JUNE 28, 2004 2003 2004 2003 AS RESTATED AS RESTATED ---- ---- ---- ---- Net income $ 563 $ 715 $ 1,004 $ 692 Less: Preferred stock dividends -- 4,290 -- 7,922 Earnings applicable to preferred stock 1 -- 2 -- --------- --------- --------- --------- Net income (loss) applicable to common shareholders $ 562 $ (3,575) $ 1,002 $ (7,230) ========= ========= ========= ========= Basic net income (loss) per common share $ 0.00 $ (0.02) $ 0.00 $ (0.05) ========= ========= ========= ========= Weighted-average common shares outstanding 220,174 138,316 220,174 138,316 ========= ========= ========= ========= Diluted net income (loss) $ 562 $ (3,575) $ 1,002 $ (7,230) ========= ========= ========= ========= Diluted net income (loss) per common share $ 0.00 $ (0.02) $ 0.00 $ (0.05) ========= ========= ========= ========= Weighted-average common shares outstanding 220,174 138,316 220,174 138,316 Effect of Dilution: Stock options -- -- 281 -- --------- --------- --------- --------- Weighted-average common shares outstanding assuming dilution 220,174 138,316 220,455 138,316 ========= ========= ========= =========

	For the 13- Weeks Ended		For the 39- Weeks Ended
	September 24, 2005	September 26, 2004	September 24, 2005	September 26, 2004

Net income (loss)	$ 6,796	$ 711	$ 11,475	$ (52)
Less:
Earnings applicable to preferred stock	167	--	282	--
Net income applicable to common Shareholders	$ 6,629	$ 711	$ 11,193	$ (52)
Basic net income per common share	$ 0.30	$ 0.03	$ 0.50	$ (0.00)

Weighted-average common shares outstanding	22,426	22,398	22,426	22,144

Diluted net income	$ 6,629	$ 711	$ 11,193	$ (52)
Diluted net income per common share	$ 0.20	$ 0.02	$ 0.34	$ (0.00)

Weighted-average common shares outstanding	22,426	22,398	22,426	22,144
Effect of Dilution:
Stock options	--	--	--	--
Stock warrants (issued July 8, 2004)	10,167	8,958	10,154	--
Weighted-average common shares outstanding assuming dilution	32,593	31,356	32,580	22,144

Diluted net income (loss) per common share excluded incremental weighted-average shares of ~~14.6 million and 14.4 million~~2,998,123 for the ~~13-week periods~~39- weeks ended ~~June~~September 26, ~~2004 and June 28, 2003, respectively, and 12.3 million and 14.4 million~~2004. These incremental ~~shares for the 26-week periods ended June 26, 2004 and June 28, 2003, respectively. These incremental~~weighted-average shares were related to employee stock options and common stock warrants and were excluded due to their ~~antidilutive~~anti-dilutive effect. ~~5. COMMITMENTS AND CONTINGENCIES A class action lawsuit was commenced~~

3.	CONTINGENCIES

Rakesh K. Kaul v. Hanover Direct, Inc., No. 04-4410(L)-CV, 2nd Cir.S.D.N.Y., affirmed on ~~March 3, 2000~~appeal from 296 F. Supp.2d (S.D. NY 2004). On June 28, 2001, Rakesh K. Kaul, the former President and Chief Executive Officer of the Company, filed a five-count complaint in the Federal District Court in ~~Sequoyah~~New York seeking relief stemming from his separation of employment from the Company including short-term bonus and severance payments of $2,531,352, attorneys’ fees and costs, and damages due to the Company’s failure to pay him a “tandem bonus” as well as Kaul’s alleged rights to benefits under a change in control plan and a long-term incentive plan. The Company filed a Motion for Summary Judgment and in July 2004, the Court entered a final judgment dismissing most of Mr. Kaul’s claims with prejudice and awarded Mr. Kaul $45,946 in vacation pay and $14,910 in interest which the Company paid in July 2004. In August 2004, Kaul filed an appeal on three issues: severance and

short-term bonus, tandem bonus and legal fees. On June 28, 2005 the Second Circuit Court of Appeals denied Kaul’s appeal, affirming the Summary Judgment decision in the Company’s favor. Mr. Kaul’s rights to appeal the Second Circuit’s decision expired in August 2005.

During the third quarter ended September 24, 2005, the Company reversed an accrual established in fiscal 2000 of $4.5 million due to the expiration of Kaul’s rights to further pursue the claim.

Class Action Lawsuits:

The Company was a party to four class action/representative lawsuits that all involved allegations that the Company’s charges for insurance were invalid, unfair, deceptive and/or fraudulent. As described in greater detail below, the Company has, in large part, resolved all of these class action lawsuits.

Jacq Wilson v. Brawn of California, Inc. , Case No. CGC-02-404454 (Supp. Ct. San Francisco, CA 2002) (“Wilson Case”). On February 13, 2002, Jacq Wilson, suing on behalf of himself and other similarly situated persons, filed a representative suit in the Superior Court of the State of California, City and County ~~Oklahoma entitled Edwin L. Martin~~of San Francisco, against the Company alleging that the Company charged an unlawful, unfair, and fraudulent insurance fee on orders, was engaged in untrue, deceptive and misleading advertising and unfair competition under the state’s Business and Professions Code. In November, 2003, the Court entered judgment for the plaintiffs, requiring defendants to refund insurance charges collected from consumers for the period from February 13, 1998 through January 15, 2003, with interest. In April, 2004, the Court awarded plaintiff’s counsel approximately $445,000 of attorneys’ fees.

The Company appealed the Court’s decision and the order to pay attorneys’ fees. On September 2, 2005 the California Court of Appeals reversed both the Court’s findings on the merits and its award of attorneys’ fees and awarded the Company its cost on the appeal.

Teichman v. Hanover Direct, Inc. ~~and John Does 1 through 10 ("Martin")~~et. al., which sets forth claims for breach of contract, unjust enrichment, recovery of money paid absent consideration, fraud and a claim under the New Jersey Consumer Fraud Act as a result of "insurance charges" paid to the Company by participants in the class action suit. The complaint alleges that the Company charges its customers for delivery insurance even though, among other things, the Company's common carriers already provide insurance and the insurance charge provides no benefit to the Company's customers. Plaintiff also seeks a declaratory judgment as to the validity of the delivery insurance. Plaintiff seeks an order (i) directing the Company to return to the plaintiff and class members the "unlawful revenue" derived from the insurance charges, (ii) declaring the rights of the parties, (iii) enjoining the Company from imposing an insurance charge, (iv) awarding threefold damages of less than $75,000 per plaintiff and per class member, and (v) awarding attorneys' fees and costs. On July 23, 2001, the Court certified a class comprised of all persons in the United States who are customers of any catalog or catalog company owned by the Company and who at any time purchased a product from any such company and paid money which was designated to be an `insurance charge.' The Company filed an appeal of the class certification. On January 20, 2004, the plaintiff filed a motion for oral argument on the appeal of the class certification. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. No. 3L641 (Supp. Ct. San Francisco, CA 2001). On August 15, 2001, ~~the Company was served with~~Randi Teichman filed a summons and four-count complaint entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100 ("Teichman"), which was subsequently expanded to include other Hanover Direct, Inc. subsidiaries as defendants. The complaint was filed by a California resident in the Superior Court for the City and County of San Francisco seeking damages and other relief for herself and a class of ~~all others~~ similarly situated persons arising out of the insurance fee charged by catalogs and Internet sites operated by ~~subsidiaries of the Company. On May 14, 2002, as a result of the~~ Company ~~having filed a Motion to Stay the Teichman action in favor of the previously-filed Martin action and a Motion to Dismiss the~~subsidiaries. This case ~~against Hanover Direct, Inc., Hanover Brands, Inc., and Hanover Direct Virginia, Inc. for lack of personal jurisdiction, the Court (1) 11~~ granted the Company's Motion to Stay the action in favor of the previously-filed Martin action, and (2) granted the Company's Motion to Quash service, leaving only LWI Holdings, Hanover Company Store, Kitchen & Home, and Silhouettes as defendants. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. A class action lawsuit was commenced on February 13, 2002 in the Superior Court of the State of California, City and County of San Francisco entitled Jacq Wilson, suing on behalf of himself, all others similarly situated, and the general public v. Brawn of California, Inc. dba International Male and Undergear, and Does 1-100 ("Brawn"). Does 1-100 are Internet and catalog direct marketers offering a selection of men's clothing, sundries, and shoes who advertise within California and nationwide. The complaint alleged that, for at least four years, members of the class had been charged an unlawful, unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn; that Brawn was engaged in untrue, deceptive and misleading advertising in that it was not lawfully required or permitted to collect insurance, tax and sales tax from customers in California; and that Brawn has engaged in acts of unfair competition under the state's Business and Professions Code. Plaintiff and the class seek restitution and disgorgement of all monies wrongfully collected and earned by Brawn, including interest and other gains, reimbursement of the insurance charge with interest, an order enjoining Brawn from imposing insurance on its order forms; and compensatory damages, attorneys' fees, pre-judgment interest and costs of the suit. (Plaintiff lost at trial on the tax issue and has not appealed it so it is no longer among the issues being litigated in this case.) On November 25, 2003, the Court, after a trial, entered judgment for the plaintiff and the class, requiring Brawn, by June 30, 2004, to refund insurance charges collected from consumers for the period from February 13, 1998 through January 15, 2003 with interest from the date paid. On April 14, 2004, the Court awarded plaintiff's counsel approximately $445,000 of attorneys' fees. On April 23, 2004, the Company filed a Motion to Stay the enforcement of the insurance fees judgmentstayed since May 2002 pending resolution of the ~~appeal, including a request to extinguish a lien filed on April 2, 2004,~~Wilson Case.

The plaintiffs in both Wilson and ~~including a request for a determination that an appellate bond will not be required~~Teichman were represented by the ~~Company. This motion was heard on May 11, 2004~~same counsel and ~~granted,~~ the ~~Court finding that enforcement~~plaintiffs in both cases agreed to dismiss the cases with prejudice in exchange for the Company’s agreement to not seek reimbursement of ~~the judgment entered was stayed on January 23, 2004 when Brawn filed~~ its Notice of Appeal. The Company has appealed the trial court's decision on the merits of the insurance fees issue as well as the decision on the attorneys' fees issue. On May 18, 2004, the Court of Appeals issued an Order consolidating the two appeals. The Company plans to conduct a vigorous defense of this action. The potential estimated exposure isappellate costs in the range of $0 to $4.0 million. Based upon the Company's policy of evaluating accruals for legal liabilities, the Company has not established a reserve as a result of management determining that it is not probable that an unfavorable outcome will result. A class action lawsuit was commenced on October 28, 2002 in the Superior Court of New Jersey, Bergen County - Law Division entitled Wilson case.

John Morris, individually and on behalf of all other ~~persons &~~similarly situated person and entities similarly situated v. Hanover Direct, Inc., and Hanover Brands, Inc. ~~(referred to in this paragraph as "Hanover"). The plaintiff brought the action~~, No. L 8830-02 (Sup. Ct. Bergen Co. – Law Div., NJ) October 28, 2002, John Morris, individually and on behalf of ~~a class of all~~other similarly situated persons ~~and entities~~ in New Jersey ~~who purchased merchandise from Hanover within six years prior to filing of~~filed a class action alleging that (1) the lawsuit and continuing to the date of judgment. On the basis of a purchase made by plaintiff in August 2002 of clothing from a Hanover men's division catalog, plaintiff alleged that Hanover had a policy and practice ofCompany improperly ~~adding~~added a charge for ~~"insurance" to~~“insurance” and (2) the ~~orders it received, and concealed and failed to disclose the charge. Plaintiff claims that Hanover's~~Company’s conduct was in violation of the New Jersey Consumer Fraud Act as otherwise deceptive, misleading and ~~unconscionable such~~unconscionable. On February 14, 2005, the Court denied class certification which limited the damages being litigated. Pursuant to a Settlement Agreement effective as of August 29, 2005, the case was settled with the Company agreeing to pay $39,500 in the aggregate for a nominal amount of damages and legal fees.

Martin v. Hanover Direct, Inc., et. al., No. CJ-2000 (D.C. Sequoyah Co., Ok.) (“Martin Case”). On March 3, 2000, Edwin L. Martin filed a class action lawsuit against the Company claiming breach of contract, unjust enrichment, recovery of money paid absent consideration, fraud and a claim under the New Jersey Consumer Fraud Act. The allegations stem from “insurance charges” paid to the Company by consumers who had placed orders from catalogs published by indirect subsidiaries of the Company over a number of years. Martin sought relief including (i) a declaratory judgment as to ~~constitute unjust enrichment~~the validity of ~~Hanover at~~ the ~~expense and~~delivery insurance, (ii) an order directing the Company to return to the ~~detriment of~~ plaintiff and class members the “unlawful revenue” derived from the insurance charges, (iii) threefold damages for each class member, and (iv) attorneys’ fees and costs. In July 2001, the Court certified the class and unconscionable per se under the Uniform Commercial Code for contracts related to the sale of goods. Plaintiff and the class seek damages equal to the amount of all insurance charges, interest thereon, treble and punitive damages, injunctive relief, costs and reasonable attorneys' fees, and such other relief as may be just, necessary and appropriate. On December 13, 2002, the Company filed ~~a Motion to Stay the action pending resolution~~an appeal of the ~~previously-filed~~class certification. On October 25, 2005, the class certification was reversed. Martin ~~action in Oklahoma. The Court granted the Company's Motion to Stay and the case~~filed an Application for Rehearing which was ~~stayed, and extended once, until March 31, 2004, at which time the stay was lifted.~~denied on January 3, 2006. On ~~April 30, 2004, the Company responded to Plaintiff's Amended Complaint. The case is~~January 18, 2006, Martin filed

a Petition for a Writ of Certiorari in the ~~discovery phase. The Company plans to conduct a vigorous defense of this action.~~Oklahoma Supreme Court. The Company believes that ~~a loss~~it is ~~not probable; therefore, no accrual for potential losses was deemed necessary. On June 28, 2001, Rakesh K. Kaul,~~unlikely that the former President and Chief Executive Officer of the Company, filed a five-count complaint (the "Complaint") seeking damages and other relief arising out of his separation of employment 12 ~~from the Company. On or about July 13, 2004, a final judgment was entered whereby the~~Oklahoma Supreme Court ordered and adjudged that certain claims in the case are dismissed with prejudice and that Mr. Kaul is to recover from the Company $45,946, representing four weeks of vacation pay, together with interest thereon from December 5, 2000. The parties have agreed to a final payment, including interest, in the amount of $60,856. The Court is expected to shortly issue a final judgment implementing its summary judgment Opinion. Each party will ~~have the right to appeal any aspect of that judgment.~~ grant Martin’s petition.

The Company ~~has reserved $65,435 for payments due Mr. Kaul and~~established a $0.5 million reserve during the ~~associated employer payroll taxes. Payment was made to Mr. Kaul on July 15,~~third quarter of 2004 for the ~~interest portion~~class action lawsuits described above for settlements and the Company’s current estimate of future legal fees to be incurred. The balance of the ~~agreement and on July 16, 2004~~reserve as of September 24, 2005 was approximately $0.1 million.

Claims for ~~the four weeks vacation.~~ Post-Employment Benefits:

The Company ~~was named as one~~is involved in four lawsuits instituted by former employees arising from the Company’s denial of ~~88 defendants~~change in ~~a patent infringement complaint filed on November 23, 2001 in~~control (“CIC”) benefits under compensation continuation plans following the ~~U.S. District Court in Arizona~~termination of employment.

Two of these cases arose from the circumstances surrounding the Restatement:

Charles Blue v. Hanover Direct, Inc., William Wachtel, Stuart Feldman, Wayne Garten and Robert Masson, (Supp. Ct. N.J., Law Div. Hudson Cty, Docket No.: L-5153-05) is an action instituted by the ~~Lemelson Medical, Education & Research Foundation, Limited Partnership (the "Lemelson Foundation").~~Company’s former Chief Financial Officer who was terminated for cause on March 8, 2005. The complaint ~~was not served on the Company until March 2002. In the complaint, the Lemelson Foundation accuses the named defendants~~seeks compensatory and punitive damages and attorney’s fees and alleges retaliation, mental anguish and reputational damage, loss of infringing seven U.S. patents, which allegedly cover "automatic identification" technology through the defendants' use of methods for scanning production markings such as bar codes. The Court entered a stay of the case on March 20, 2002, requested by the Lemelson Foundation, pending the outcome of a related case in Nevada being fought by bar code manufacturers. On January 23, 2004, the Nevada Court entered judgment declaring that the claims of each of the patents at issue in the Nevada case, including all seven patents asserted by the Lemelson Foundation against the Company in the Arizona case, are unenforceable under the doctrine of prosecution laches, are invalid for lack of written descriptionearnings and ~~enablement,~~employment and are not infringed by the bar code equipment manufacturers. The Lemelson Foundation filed a notice of appeal before the deadline of May 28, 2004. The Arizona court confirmed that the stay of the Arizona case will extend until the entry of a final, non-appealable judgment in the Nevada litigation. The Company has analyzed the merits of the issues raised by the complaint, notified vendors of its receipt of the complaint and letter, evaluated the merits of joining a joint-defense group, and had discussions with attorneys for the Lemelson Foundation regarding their license offer. The Company will not agree to a settlement at this time and thus has not established a reserve. A preliminary estimate of the royalties and attorneys' fees, which the Company may pay if it decides to accept the license offer from the Lemelson Foundation, range from about $125,000 to $400,000. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action.racial discrimination. The Company believes that Mr. Blue was properly terminated for cause and that his claims are groundless.

Frank Lengers v. Hanover Direct, Inc., Wayne Garten, William Wachtel, A. David Brown, Stuart Feldman, Paul S. Goodman, Donald Hecht and Robert Masson, (Supp. Ct. N.J., Law Div. Hudson Cty, Docket No.: L-5795-05) was brought as a ~~loss is not probable; therefore, no accrual for potential losses was deemed necessary. In early March 2003,~~result of the Company ~~learned that one~~terminating the employment of its ~~business units had engaged in certain travel transactions that may have constituted violations under the provisions~~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 U.S. government regulations promulgated pursuant to 50 U.S.C. App. 1-44, which proscribe certain transactions related to travel to certain countries. The Company immediately commenced an inquiry into the matter, incurred resulting charges, made an initial voluntary disclosure to the appropriate U.S. government agency under its program for such disclosuresCIC benefits, age and ~~will submit to that agency a detailed report on the results~~disability discrimination, handicap discrimination, aiding and abetting and breach of the inquiry. In addition, the Company has taken steps to ensure that all of its business units are acting in compliance with the travel and transaction restrictions and other requirements of all applicable U.S. government programs. Although the Company is uncertain of the extent of the penalties, if any, that may be imposed on it by virtue of the transactions being voluntarily disclosed, it does not currently believe that any such penalties will have a material effect on its business or financial condition.contract. The Company believes that Mr. Lengers was properly terminated for cause and that his claims are groundless.

The Company believes that it properly denied CIC benefits with respect to each of the four former employees and that it has meritorious defenses in all of the cases and plans a ~~loss is not probable; therefore, no accrual for potential losses was deemed necessary.~~ 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~~Company’s financial position, or results of ~~operations. 6. SPECIAL CHARGES~~ 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 24, 2005. 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 our fulfillment centers, our 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 continued through the end of fiscal 2005 and is expected to continue during 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 $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. Since the relocation and consolidation of the Men’s apparel catalogs, the transition has negatively impacted the performance of the Men’s apparel catalogs in 2005.

During the first three quartersof 2005, the reserve activity represents the utilization of the severance reserves established in 2004 for the Lacrosse fulfillment center and storage facility and the International Male and Undergear catalog operations as well as additional severance charges (net of reductions) of less than $0.1 million.

2000 Plan

In December 2000, the Company began a strategic business realignment program that resulted in the recording of special charges for severance, facility exit costs and fixed asset write-offs. The actions related to the strategic business realignment program were taken in an effort to direct the ~~Company's~~Company’s resources primarily towards a loss reduction strategy and return to profitability. ~~As of June 26, 2004,~~

Plan Summary

At September 24, 2005, a current liability of approximately ~~$2.0~~$0.1 million was included within Accrued Liabilities ~~and a liability of approximately $2.6 million was included within Other Non-current Liabilities~~ relating to future payments in 13 connection with the ~~Company's strategic business realignment program. They are expected to be satisfied no later than February 2010~~Company’s 2000 and ~~consist~~2004 plans and consists of the following (in thousands):

	Severance & Personnel Costs	Real Estate Lease & Exit Costs
	2004 Plan	2000 Plan	Total

Balance at December 25, 2004	$ 1,518	$ 3,360	$ 4,878
2005 expenses (reductions)	(7)	--	(7)
Paid in 2005	(1,400)	(538)	(1,938)
Reductions due to sale of Gump’s	--	(2,822)	(2,822)
Balance at September 24, 2005	$ 111	$ --	$ 111

SEVERANCE & REAL ESTATE PERSONNEL LEASE & COSTS EXIT COSTS TOTAL ----- ---------- ----- Balance at December 27, 2003 $ 205 $ 5,589 $ 5,794 2004 revisions of previous estimate (31) 42 11 Paid in 2004 (174) (1,013) (1,187) ------- ------- ------- Balance at June 26, 2004 $ -- $ 4,618 $ 4,618 ======= ======= =======
5.	SALE OF GUMP’S BUSINESS

~~A summary of the liability related to real estate lease and exit costs, by location, as of June 26, 2004 and December 27, 2003, is as follows (in thousands):~~

~~7. SALE OF IMPROVEMENTS BUSINESS~~

On ~~June 29, 2001,~~March 14, 2005, the Company sold ~~certain assets and liabilities~~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 ~~Improvements business~~right to ~~HSN, a division~~require redemption of ~~USA Networks, Inc.'s Interactive Group, for~~ approximately ~~$33.0 million. In conjunction with~~$6.9 million of the Series C Preferred subject to Wachovia’s approval.

After the sale, the ~~Company's Keystone Internet~~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 is 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 cannot secure the Company’s release within a year of the closing, an affiliate of the Purchaser will 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. As of February 6, 2006 there are $7.1 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 24, 2005.

The Company entered into a Direct Marketing Services ~~Inc. subsidiary (now Keystone Internet Services, LLC, or "Keystone") agreed~~Agreement with the Purchaser to provide telemarketing and fulfillment services for the ~~Improvements business under a services agreement with HSN~~Gump’s catalog and direct marketing businesses for ~~a period of three years. Effective June 28, 2004,~~18 months. We have the ~~services agreement was extended~~option to extend the term for an additional ~~two years through June 27, 2006. The asset purchase agreement between~~18 months.

Listed below are the ~~Company and HSN provided that if Keystone failed to perform its obligations during the first two years~~carrying values of the ~~services contract, HSN could receive a reduction~~major classes of assets and liabilities of Gump’s included in the ~~original purchase price of up to $2.0 million. An escrow fund of $3.0 million, which was withheld from~~Consolidated Balance Sheets:

In thousands (000’s)	December 25, 2004	September 25, 2004
Total current assets	$ 10,842	$ 12,362
Total non-current assets	$ 3,221	$ 3,397
Total assets	$ 14,063	$ 15,759
Total current liabilities	$ 6,727	$ 7,686
Total non-current liabilities	$ 3,283	$ 3,449
Total liabilities	$ 10,010	$ 11,135

Listed below are the ~~original proceeds of the sale, had been established for a period of two years under the terms of an escrow agreement between LWI Holdings, Inc. (a wholly-owned subsidiary of the Company), HSN~~revenues and The Chase Manhattan Bank as a result of these contingencies. On March 27, 2003, the Company and HSN amended the asset purchase agreement to provide for the release of the remaining $2.0 million balance of the escrow fund and to terminate the related escrow agreement. By agreeing to the terms of the amendment, HSN forfeited its ability to receive a reductionincome before income taxes included in the ~~original purchase price~~Consolidated Statements of upIncome (these results exclude certain corporate overhead charges allocated to ~~$2.0 million if Keystone failed to perform its obligations during the first two years of the~~Gump’s for services contract. In consideration for the release, Keystone issued a credit to HSN for $100,000, which could be applied by HSN against any invoices of Keystone to HSN. This credit was utilized by HSN during the March 2003 billing period. On March 28, 2003, the remaining $2.0 million escrow balance was receivedprovided by the Company ~~thus terminating~~to run the ~~escrow agreement.~~ business) for the 13- and 39- weeks ended:

In thousands (000’s)

13- Weeks Ended

September 24,

2005

39- Weeks Ended

September 24,

2005

13- Weeks Ended

September 25,

2004

39- Weeks Ended

September 25,

2004

Net revenues

$ --

$ 7,241

$ 9,000

$ 27,045

Income before income

taxes

$ --

$ 2,974^a

$ 267

$ 290

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

DEBT

The Company ~~recognized~~has two credit facilities: a ~~net gain on~~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 ~~sale~~entire $20.0 million was borrowed by the Company. Chelsey Finance is an affiliate of ~~approximately $23.2 million, net~~Chelsey, the Company’s principal shareholder.

As of ~~a non-cash goodwill charge of $6.1 million, in the second quarter of 2001. During fiscal 2002, the Company recognized approximately $0.6 million~~September 24, 2005, December 25, 2004 and September 25, 2004, debt consisted of the deferred gain consistent with the terms of the escrow agreement. The Company recognized the remaining net deferred gain of $1.9 million upon the receipt of the escrow balance on March 28, 2003. This gain was reported net of the costs incurred to provide the credit to HSN of approximately $0.1 million. 14 following (in thousands):

	September 24, 2005	December 25, 2004	September 25, 2004
	September 24, 2005	December 25, 2004	September 25, 2004

Wachovia facility:
Tranche A term loans – Current portion, interest rate of 7.0% at September 24, 2005, 5.5% at December 25, 2004 and 5.0% at September 25, 2004	$ 1,992	$ 1,992	$ 1,825
Revolver, interest rate of 7.0% at September 24, 2005, 5.5% at December 25, 2004 and 5.0% at September 25, 2004	11,668	14,408	10,699
Capital lease obligations – Current portion	89	290	394
Short-term debt	13,749	16,690	12,918

8. CHANGES IN MANAGEMENT AND BOARD OF DIRECTORS PRESIDENT AND CHIEF EXECUTIVE OFFICER Thomas C. Shull. Thomas C. Shull resigned as Chairman of the Board, President and Chief Executive Officer of the Company on May 5, 2004. In connection with Mr. Shull's resignation, effective May 5, 2004, Mr. Shull

Wachovia facility:
Tranche A term loans, interest rate of 7.0% at September 24, 2005, 5.5% at December 25, 2004 and 5.0% at September 25, 2004	1,492	2,985	3,474
Chelsey facility – stated interest rate of 11.5% (5.0% above prime rate) at September 24, 2005, 10.0% (5.0% above prime rate) at December 25, 2004 and 9.5% (5.0% above prime rate) at September 25, 2004	10,585	8,159	7,481
Capital lease obligations	6	52	95
Long-term debt	12,083	11,196	11,050
Total debt	$ 25,832	$ 27,886	$ 23,968

Wachovia Facility

Wachovia and the Company ~~entered into~~are parties to a ~~General Release~~Loan and Covenant Not to Sue (the "Shull Severance Agreement") in conjunction with Mr. Shull's resignation from all positions with the Company pursuant to which the Company agreed to pay to Mr. Shull $900,000 ("Severance") in multiple installments of which the first installment of $300,000 was paid on May 18, 2004 and the remaining $600,000 is to be payable in 16 installments of $35,625 payable every two weeks commencing May 21, 2004 with a final payment in the amount of $30,000 to be payable on or about December 31, 2004. In addition, the Company agreed to pay the cost of continuing Mr. Shull's group health and dental benefits under COBRA and Exec-U-Care plan coverage ("Benefits Continuation" and together with Severance, "Termination Benefits") for a period of eighteen months. Under the Shull SeveranceSecurity Agreement the Company and Mr. Shull agreed that, except for the Termination Benefits and the reimbursement of previously submitted out-of-pocket expenses, no other monies or benefits will be due, become due or be paid to Mr. Shulldated November 14, 1995 (as amended by the ~~Company; provided that Mr. Shull's options remain vested and exercisable in accordance with their terms. The Shull Severance Agreement contained a general release by Mr. Shull in favor of~~First through Thirty-Fourth Amendments, the Company, and a limited release by the Company of certain claims against Mr. Shull, and covenants not to sue. The Company accrued the $900,000 severance, as well as $26,795 of other benefits, in the second quarter of 2004. Wayne P. Garten. Wayne P. Garten was elected as President and Chief Executive Officer of the Company effective May 5, 2004. In connection with Mr. Garten's election, effective May 5, 2004, Mr. Garten and the Company entered into an Employment Agreement (the "Garten Employment Agreement"“Wachovia Loan Agreement”) pursuant to which ~~Mr. Garten is employed by~~Wachovia provided the Company as its President and Chief Executive Officer, as described below. The term of the Garten Employment Agreement began on May 5, 2004 and will terminate on May 5, 2006 (the "Garten Employment Agreement Term"). Under the Garten Employment Agreement, Mr. Garten is to receive from the Company base compensation equal to $600,000 per annum, payable in accordance with the ~~Company's normal payroll procedures ("Base Compensation"~~Wachovia Facility which has included, since inception, one or more term loans and a revolving credit facility (“Revolver”). ~~Mr. Garten is to be provided with~~The Wachovia Facility expires on July 8, 2007.

Currently, the ~~employee benefits the Company provides to its other senior executives, including but not limited to four weeks~~Wachovia facility has a Tranche A term loan outstanding which has a principal balance of paid vacation per year and participation in such bonus plans with such targets as the Compensation Committee of the Board of Directors may approve in its sole discretion, determined in a manner consistent with bonus opportunities afforded to other senior executives under such plans. The Company is to reimburse Mr. Garten for his reasonable out-of-pocket expenses incurred in connection with his employment by the Company. In addition, the Company is also to reimburse Mr. Garten for up to $12,500 of attorneys' fees incurred by him in connection with legal advice relating to, and the negotiation of, the Garten Employment Agreement. Under the Garten Employment Agreement, upon the closing of any transaction within the Garten Employment Agreement Term that constitutes a "change of control" thereunder (as defined in the Garten Employment Agreement), the Company will be required to make a lump sum cash payment to Mr. Garten in the amount of 200% of his Base Compensation (a "Change of Control Payment") within 30 days of the closing of the transaction resulting in the "change of control." Under the Garten Employment Agreement, additional amounts are payable to Mr. Garten by the Company under certain circumstances upon the termination of the Garten Employment Agreement. If the termination is on account of the expiration of the Garten Employment Agreement Term and no "change of control" has occurred thereunder, Mr. Garten shall be entitled to receive, subject to his continued compliance with his confidentiality and nonsolicitation obligations under the Garten Employment Agreement, monthly severance payments at the rate of Mr. Garten's Base Compensation for a period of 18 months, payable in accordance with the Company's normal payroll practices and policies and continued coverage under the Company's health, life insurance and long-term disability benefit plans for the 18-month period immediately following the end of the Garten Employment Agreement Term. If the termination is on account of the Company's termination of Mr. Garten's employment "For Cause," Mr. Garten's resignation other than "For Good Reason," or on account of Mr. Garten's death or "Disability" (all as defined in the Garten Employment Agreement), no additional amount (other than payment of Base Compensation through the end of the month in which the termination occurred) shall be payable to Mr. Garten. If the termination is on account of Mr. 15 Garten's resignation For Good Reason, or the Company's termination of Mr. Garten's employment other than For Cause, and in either such case Mr. Garten has not received or become entitled to receive a Change of Control Payment, Mr. Garten shall receive, subject to his continued compliance with his confidentiality and nonsolicitation obligations under the Garten Employment Agreement, continued payments of his monthly Base Compensation for a period equal to 18 months, payable in accordance with the Company's normal payroll practices and policies, the pro rated portion of bonuses earned for the fiscal year in which the effective date of termination occurs pursuant to the Company's bonus plans, accrued vacation and continued coverage under the Company's health, life insurance and long-term disability benefit plans for the 18-month period immediately following Mr. Garten's resignation or termination, as applicable. Under the Garten Employment Agreement, the Company is required to maintain directors' and officers' liability insurance for Mr. Garten during the Garten Employment Agreement Term. The Company is also required to indemnify Mr. Garten in certain circumstances. Under the Garten Employment Agreement, on May 5, 2004, the Company granted Mr. Garten an option to purchase 1,000,000 shares of Common Stock under the Company's 2000 Management Stock Option Plan at a price of $0.195 per share, and, subject to approval by the shareholders at the 2004 Annual Meeting of Shareholders, an additional option to purchase an additional 1,000,000 shares of Common Stock at a price of $0.195 per share, which option was granted under a Stock Option Agreement between the Company and Mr. Garten outside the Company's 2000 Management Stock Option Plan. All such options vest over a two-year period; one-third of such options vested on the execution of the Garten Employment Agreement, one-third will vest on May 5, 2005 and the final one-third will vest on May 5, 2006; provided that all such options will vest in their entirety and become fully exercisable upon the earliest to occur of Mr. Garten's resignation "For Good Reason," the Company's termination of Mr. Garten's services under the Garten Employment Agreement other than "For Cause," or a "change of control" under the Garten Employment Agreement. The Company expensed $113,337 during the second quarter of 2004 related to Mr. Garten's stock option grants. BOARD OF DIRECTORS Effective April 12, 2004, Paul S. Goodman joined the Company's Board of Directors as a designee of Chelsey Direct, LLC filling the vacancy created by the resignation effective February 15, 2004 of Martin L. Edelman from the Board of Directors. Thomas C. Shull resigned as Chairman of the Board, President and Chief Executive Officer of the Company on May 5, 2004. William B. Wachtel was elected as Chairman of the Board and Wayne P. Garten was elected as President and Chief Executive Officer of the Company effective the same date. On April 12, 2004, the Company issued options to purchase 50,000 shares of the Company's Common Stock to Mr. Goodman, the newly-appointed Board member, at a price of $0.23 per share and services rendered. On July 30, 2004, Basil P. Regan resigned as a member of the Company's Board of Directors. As a result, Mr. Regan has advised the Company that he will not be standing for reelection at the Company's August 12, 2004 Annual Meeting of Shareholders. Mr. Regan continues to have the right, which is required to be exercised as promptly as practicable, to appoint a designee to the Company's Board of Directors until November 30, 2005 pursuant to the Company's Corporate Governance Agreement datedapproximately $3.5 million as of November 30, 2003 among the Company, Chelsey Direct, LLC, Stuart Feldman, Regan Partners L.P., Regan International Fund Limited and Basil P. Regan so long as the Regan group collectively owns at least 29,128,762 shares of Common Stock of the Company (as adjusted for stock splits and the like). 9. RECENTLY ISSUED ACCOUNTING STANDARDS The Company accounts for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized but reviewed for impairment if impairment indicators arise and, at a minimum, annually. During the second quarters of 2004 and 2003, the Company completed its annual reviews of goodwill, which did not result in an impairment charge. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer 16 classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability, manySeptember 24, 2005, of which ~~had been previously~~approximately $2.0 million is classified as ~~equity or between the liabilities~~short term and ~~equity sections of~~approximately $1.5 million is classified as long term on the Condensed Consolidated Balance Sheet. The ~~provisions~~Tranche A term loan bears interest at 0.5% over the Wachovia prime rate and requires monthly principal payments of ~~SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at~~approximately $166,000. As of September 24, 2005, the ~~beginning~~interest rate on the Tranche A term loan was 7.0%.

The Revolver has a maximum loan limit of the first interim period beginning after June 15, 2003. The standard is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of SFAS 150 and still existing at the beginning of the interim period of adoption. The Company adopted the provisions of SFAS 150, which resulted in the reclassification of its Series B Participating Preferred Stock to a liability rather than between the liabilities and equity sections of the Condensed Consolidated Balance Sheet. Based upon the requirements set forth by SFAS 150, this reclassification was$34.5 million, subject to ~~implementation beginning~~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 ~~June~~the Revolver is currently 0.5% over the Wachovia prime rate. As of September 24, 2005, the interest rate on the Revolver was 7.0%.

Remaining availability under the Wachovia Facility as of September 24, 2005 was $7.2 million.

Third Quarter 2005 Amendments to Wachovia Loan Agreement

On July 29, ~~2003. Upon implementation of SFAS 150,~~2005 the Company ~~reflected subsequent increases in liquidation preference as an increase in Total Liabilities with a corresponding reduction in capital in excess of par value because~~and Wachovia amended the Wachovia Loan Agreement to provide the terms under which the Company ~~has an accumulated deficit. Accretion was recorded as interest expense. On March 31, 2004,~~could enter into the World Financial ~~Accounting Standards Board ("FASB"~~Network National Bank (“WFNNB”) ~~issued Emerging Issues Task Force Issue No. 03-6, "Participating Securities~~Credit Card Agreement under WFNNB will issue private label and co-brand (Visa and MasterCard) credit cards to the ~~Two-Class Method under FASB Statement No. 128" ("EITF 03-6")~~Company’s customers . SFAS 128 defines earnings per share ("EPS") as "the amount of earnings attributable to each share of common stock" and indicates that the objective of EPS is to measure the performance of an entity over the reporting period. SFAS 128 addresses conditions under which a participating security requiresThe amendment, among other things, prohibits the use of the ~~two-class method~~proceeds of ~~computing EPS. The two-class method is an earnings allocation formula that treats a participating security as having rights~~the Wachovia Facility to ~~earnings that otherwise would have been available to common shareholders, but does not require~~repurchase private label accounts created under the ~~presentation of basic and diluted EPS for securities other than common stock. The Company's Series C Participating Preferred Stock is a participating security and, therefore,~~WFNNB Credit Card Agreement should the Company ~~calculates EPS utilizing the two-class method, however, it has chosen not~~become obligated to present basic and diluted EPS for its preferred stock. 10. AMENDMENTS TO CONGRESS LOAN AND SECURITY AGREEMENT Concurrent with the closing of the Term Loan Facility on July 8, 2004 with Chelsey Finance (see Note 14),do so, prohibits the Company ~~amended its existing senior credit facility (the "Congress~~from terminating WFNNB Credit ~~Facility") with Congress Financial Corporation ("Congress") to (1) release certain existing availability reserves~~Card Agreement without Wachovia’s consent and ~~remove the excess loan availability covenant, increasing availability to~~restricts the Company ~~by approximately $10 million, (2) reduce~~from borrowing on receivables generated under the WFNNB Credit Card Agreement. The amendment also waives enumerated defaults, resets the financial covenants, reallocates the availability that was previously allocated to Gump’s and Gump’s By Mail among other Company subsidiaries and, retroactive to June 30, 2005, increases the amount of ~~the maximum credit, the revolving loan limit and the inventory and accounts sublimits~~letter of the borrowers, (3) defer for three months the payment of principal with respect to the Tranche A Term Loan, (4) permit the secured indebtedness to Chelsey Finance arising under the Term Loan Facility, (5) modify certain provisions of the Congress Credit Facility with respect to asset sales and the application of proceeds thereof by borrowers, (6) extend the term of the Congress Credit Facility until July 8, 2007, and (7) amend certain other provisions of the Congress Credit Facility. In addition, Congress consented to (a) the issuance bycredits that the Company ~~of the Common Stock Warrant, the Series D Preferred Stock Warrant, the Common Stock pursuant~~can issue to the Common Stock Warrant and the Series D Preferred Stock pursuant to the Series D Preferred Stock Warrant (see note 14), (b) the filing of the Certificate of Designation of the Series D Preferred Stock, (c) the proposed reverse split and the Company making payments in cash to holders of Common Stock to repurchase fractional shares of such Common Stock from such shareholders as contemplated by the proposed reverse split (pending shareholder approval at the August 2004 shareholder meeting), (d) certain amendments to the Company's Certificate of Incorporation, and (e) the issuance by the Company of Common Stock to Chelsey Finance as payment of a waiver fee. The amendment required the payment of fees to Congress in the amount of $400,000. As of June 26, 2004, the Company had $18.5 million of cumulative borrowings outstanding under the Congress Credit Facility, comprising $7.9 million of short-term borrowings under the Revolving Loan Facility, bearing an interest rate of 4.50%, $5.5 million under the Tranche A Term Loan, bearing an interest rate of 4.75%, and $5.1 million under the Tranche B Term Loan, bearing an interest rate of 13.0%. The Tranche B Term Loan, originally scheduled to be repaid in January 2007, was repaid in full on July 9, 2004. Of the total borrowings on June 26, 2004, $11.7 million is classified as short-term, and $6.8 million classified as long-term, on the Company's Condensed Consolidated Balance Sheet. As of December 27, 2003, the Company had $21.5 million of borrowings outstanding under the Congress Credit Facility comprising $9.0 million of short-term borrowings under the revolving loan facility, bearing an interest rate of 4.50%, $6.5 million under the Tranche A Term Loan, bearing an interest rate of 4.75%, and $6.0 million under the Tranche B Term Loan, bearing an interest rate of 13.0%. Of the aggregate borrowings at December 27, 2003, $12.8 17 million is classified as short-term, and $8.7 million classified as long-term, on the Company's Condensed Consolidated Balance Sheet. Remaining availability under the Congress Credit Facility as of June 26, 2004 was $5.1 million. On or before August 15, 2004, the Company is required to enter into a restatement of the loan agreement with Congress requiring no changes to the terms of the current agreement. On April 14, 2004, the judge in the Wilson case (See Note 5) ruled on a motion filed by the plaintiff requesting attorneys' fees and costs, awarding plaintiff's counsel approximately $445,000. Prior thereto, on November 25, 2003, the Court entered judgment in the Wilson case in plaintiff's favor requiring the Company's Brawn of California subsidiary, which operates the International Male catalog business, to refund insurance fees collected from consumers for the period from February 13, 1998 through January 15, 2003 with interest from the date paid by June 30, 2004. The Company is appealing both of these decisions. On or about April 2, 2004, plaintiff's counsel filed a lien against Brawn of California's real property assets in the State of California with respect to the insurance fees judgment, which has subsequently been extinguished. Both the award of attorneys' fees and costs of $445,000 and the filing of a lien by plaintiff's counsel against Brawn of California's assets for the insurance fees judgment constituted defaults by the Company under the Congress Credit Facility. Congress agreed to conditionally waive such defaults so long as (1) the Company is diligently defending the Wilson action by all appropriate proceedings and sets aside adequate reserves in accordance with GAAP, (2) no action shall be taken by the plaintiff in the Wilson action against any collateral of Brawn of California or any other borrower or guarantor under the Congress Credit Facility, (3) Brawn shall not enter into any settlement agreement with the plaintiff in the Wilson action without prior written consent of Congress, (4) Congress' security interests remain senior to any interest of the plaintiff in the Wilson action, and (5) no other event of default exists or occurs. The Company believes that it may be a number of years before all appeals in the Wilson action are exhausted and continues to believe that an unfavorable outcome to the Company is not probable. 11. SERIES B PARTICIPATING PREFERRED STOCK On December 19, 2001, as part of the Company's transaction (the "Richemont Transaction") with Richemont Finance S.A. ("Richemont"), the Company issued to Richemont 1,622,111 shares of Series B Participating Preferred Stock. The Series B Participating Preferred Stock had a par value of $0.01 per share. In the event of the liquidation, dissolution or winding up of the Company, the holders of the Series B Participating Preferred Stock were entitled to a liquidation preference, which was initially $47.36 per share, increasing thereafter to a maximum of $86.85 per share in 2005. The Company was required to redeem the Series B Participating Preferred Stock on August 23, 2005 consistent with Delaware General Corporation Law. The Company could redeem all or less than all of the then outstanding shares of Series B Participating Preferred Stock at any time prior to that date. As a result of filings made by Richemont and certain related parties with the Securities and Exchange Commission on May 21, 2003, the Company learned that Richemont sold to Chelsey, on May 19, 2003, all of Richemont's securities in the Company consisting of 29,446,888 shares of Common Stock and 1,622,111 shares of 18 ~~Series B Participating Preferred Stock for $40~~$15.0 million. The Company ~~was not~~paid Wachovia a ~~party to such transaction and did not provide Chelsey with any material, non-public information~~$60,000 fee in connection with such transaction, nor did the Company's Board of Directors endorse the transaction. As a result of the transaction, Chelsey succeeded to Richemont's rights in the Common Stock and the Series B Participating Preferred Stock, including the right of the holder of the Series B Participating Preferred Stock to a liquidation preference with respect to such shares which was equal to $98,202,600 on May 19, 2003, the date of the sale of the shares, and which could have increased to and capped at $146,168,422 on August 23,this amendment.

On July 29, 2005 the final redemption date of the Series B Participating Preferred Stock. On November 30, 2003, the Company consummated the transactions contemplated by the Recapitalization Agreement, dated as of November 18, 2003, with Chelsey and recapitalized the Company, completed the reconstitution of the Board of Directors of the Company and settled outstanding litigation between the Company and Chelsey ~~(the "Recapitalization"). In the transaction, the Company exchanged all~~Finance entered into a similar amendment of the ~~1,622,111 outstanding shares of the Series B Participating Preferred Stock held by~~ Chelsey ~~for the issuance to~~ Facility.

Chelsey of 564,819 shares of newly created Series C Participating Preferred Stock and 81,857,833 additional shares of Common Stock of the Company. Effective upon the closing of the transactions contemplated by the Recapitalization Agreement, the size of the Board of Directors was increased to nine (9) members. ForFacility

The Chelsey Facility is a ~~period of two (2) years from the closing of the Recapitalization, five (5) of the nine (9) directors of the Company will at all times be directors of the Company designated by~~$20.0 million junior secured credit facility with Chelsey and one (1) of the nine (9) directors of the Company will at all times be a director of the Company designated by Regan Partners. Because its Series B Participating Preferred Stock was mandatorily redeemable and thus accounted for as a liability, the Company accounted for the exchange of the 1,622,111 outstanding shares of its Series B Participating Preferred Stock held by Chelsey for the issuance of the 564,819 shares of newly-created Series C Participating Preferred Stock and the 81,857,833 additional shares of Common Stock of the Company to Chelsey in accordance with SFAS No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." As such, the $107.5 million carrying value of the Series B Participating Preferred Stock as of the consummation date of the exchange was compared with the fair value of the Common Stock of approximately $19.6 million issued to Chelsey as of the consummation date and the total maximum potential cash payments of approximately $72.7 millionFinance that could be made pursuant to the terms of the Series C Participating Preferred Stock. Since the carrying value, net of issuance costs of approximately $1.3 million, exceeded these amounts by approximately $13.9 million, pursuant to SFAS No. 15, such excess was determined to be a "gain" and the Series C Participating Preferred Stock was recorded at ~~the amount~~net of ~~total potential cash payments (including dividends and other contingent amounts) that could be required pursuant to its terms. Since~~an un-accreted debt discount of $7.1 million. The Chelsey was a significant stockholder at the time of the exchange and, as a result, a related party, the "gain" was recorded to "Capital in Excess of Par Value" within "Shareholders' Deficiency" on the accompanying Condensed Consolidated Balance Sheets. 12. SERIES C CUMULATIVE PARTICIPATING PREFERRED STOCK On November 30, 2003, as part of the Recapitalization, the Company issued to Chelsey 564,819 shares of Series C Participating Preferred Stock. The Series C Participating Preferred StockFacility has a par value of $.01 per share. The holders of the Series C Participating Preferred Stock are entitled to one hundred votes per share on any matter on which the Common Stock votes and are entitled to one hundred votes per share plus that number of votes as shall equal the dollar value of any accrued, unpaid and compounded dividends with respect to such share. The holders of the Series C Participating Preferred Stock are also entitled to vote as a class on any matter that would adversely affect the Series C Participating Preferred Stock. In addition, in the event that the Company defaults on its obligations under the Certificate of Designations, the Recapitalization Agreement or the Congress Credit Facility, then the holders of the Series C Participating Preferred Stock, voting as a class, shall be entitled to elect twice the number of directors as comprised the Board of Directors on the default date, and such additional directors shall be elected by the holders of record of Series C Participating Preferred Stock as set forth in the Certificate of Designations. In the event of the liquidation, dissolution or winding up of the Company, effective through December 31, 2005, the holders of the Series C Participating Preferred Stock are entitled to a liquidation preference of $100 per share, or an aggregate amount of $56,481,900. Effective October 1, 2008, the maximum aggregate amount of the liquidation preference is $72,689,337, which would occur if the Company elects to accrue unpaid dividends as mentioned below. 19 Commencing January 1, 2006, dividends will be payable quarterly on the Series C Participating Preferred Stock at the rate of 6% per annum, with the preferred dividend rate increasing by 1 1/2% per annum on each subsequent January 1 until redeemed. At the Company's option, in lieu of cash dividends, the Company may instead elect to cause accrued and unpaid dividends to compound at a rate equal to 1% higher than the applicable cash dividend rate. The Series C Participating Preferred Stock is entitled to participate ratably with the Common Stock on a share for share basis in any dividends or distributions paid to or with respect to the Common Stock. The right to participate has anti-dilution protection. The Congress Credit Facility and the Term Loan Facility currently prohibit the payment of dividends. The Series C Participating Preferred Stock may be redeemed in whole and not in part, except as set forth below, at the option of the Company at any time for the liquidation preference and any accrued and unpaid dividends (the "Redemption Price"). The Series C Participating Preferred Stock, if not redeemed earlier, must be redeemed by the Company on January 1, 2009 (the "Mandatory Redemption Date") for the Redemption Price. If the Series C Participating Preferred Stock is not redeemed on or before the Mandatory Redemption Date, or if other mandatory redemptions are not made, holders of the Series C Participating Preferred Stock will be entitled to elect one-half (1/2) of the Company's Board of Directors. Notwithstanding the foregoing, the Company will redeem the maximum number of shares of Series C Participating Preferred Stock as possible with the net proceeds of certain asset and equity sales not required to be used to repay Congress pursuant to the terms of the 19th Amendment to the Loan and Security Agreement with Congress (as modified by the 29th Amendment to the Loan and Security Agreement), and Chelsey will be required to accept such redemptions, as set forth in Section 5 of the Certificate of Designations of the Series C Participating Preferred Stock. Pursuant to the terms of the Certificate of Designations of the Series C Participating Preferred Stock, the Company's obligation to pay dividends on or redeem the Series C Participating Preferred Stock is subject to its compliance with its agreements with Congress and Chelsey Finance. 13. AMERICAN STOCK EXCHANGE NOTIFICATION The Company received a letter dated May 21, 2004 (the "Letter") from the American Stock Exchange (the "Exchange") advising that a review of the Company's Form 10-K for the period ended December 27, 2003 indicates that the Company does not meet certain of the Exchange's continued listing standards as set forth in Part 10 of the Exchange's Company Guide. Specifically, the Company is not in compliance with Section 1003(a)(i) of the Company Guide with shareholders' equity of less than $2,000,000 and losses from continuing operations and/or net losses in two out of its three most recent fiscal years; and Section 1003(a)(ii) of the Company Guide with shareholders' equity of less than $4,000,000 and losses from continuing operations and/or net losses in three out of its four most recent fiscal years; and Section 1003(a)(iii) of the Company Guide with shareholders' equity of less than $6,000,000 and losses from continuing operations and/or net losses in its five most recent fiscal years. The Exchange requested that the Company contact the Exchange by June 4, 2004 to confirm receipt of the Letter, discuss any possible financial data of which the Exchange's staff may be unaware, and indicate whether or not the Company intends to submit a plan of compliance. In order to maintain its listing on the Exchange, the Company had to submit a plan to the American Stock Exchange by June 22, 2004, advising the Exchange of action it has taken, or will take, that would bring it into compliance with the continued listing standards of the Exchange by November 21, 2005 (18 months of receipt of the Letter). The Company submitted a plan to the Exchange on June 22, 2004 and on August 3, 2004 the Exchange notified the Company that it accepted the Company's plan of compliance and granted the Company an extension of time until November 21, 2005 to regain compliance with the continued listing standards. The Company will be subject to periodic review by Exchange staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period on November 21, 2005 could result in the Company being delisted from the Exchange. There can be no assurance that the Company will be able to maintain the listing of its Common Stock on the Exchange. 14. SUBSEQUENT EVENTS TERM LOAN FACILITY WITH CHELSEY FINANCE On July 8, 2004, the Company completed a $20 million junior secured term loan facility (the "Term Loan 20 ~~Facility") with Chelsey Finance, LLC ("Chelsey Finance"), an affiliate of its controlling shareholder, Chelsey Direct LLC ("Chelsey"). The Term Loan Facility is for~~ 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 ana stated interest rate of 5% above the prime rate publicly announced by ~~Wachovia Bank, N.A., which~~Wachovia. The Company is ~~calculated and payable monthly. The Term Loan Facility~~not obligated to

make principal payments until July 8, 2007, except if there is ~~secured by~~ a ~~second priority lien on the assets~~change in control or sale of the Company. At September 24, 2005, the amount recorded as debt on the Condensed Consolidated Balance Sheet is $10.6 million, net of the un-accreted debt discount of $9.4 million.

In ~~connection therewith, Chelsey Finance concurrently entered into an intercreditor~~accordance with Accounting Principles Board Opinion No. 14, “Accounting for Convertible Debt and ~~subordination agreement~~Debt Issued with Stock Purchase Warrants” (“APB 14”), proceeds received from the sale of debt with detachable stock purchase warrants should be allocated to both the debt and warrants, with the ~~Company's senior secured lender, Congress. In consideration for providing the Term Loan Facility~~portion allocable to the ~~Company, Chelsey Finance received a closing fee~~warrants to be accounted for as Capital in excess of $200,000, which was paid in cash, and will receive a warrant (the "Common Stock Warrant") to purchase 30% of the fully diluted shares of Common Stock of the Company, which the Company believes would be equivalent to the issuance of an additional 10,247,210 shares of Common Stock (adjusted for the proposed one-for-ten reverse split of the Company's Common Stock) at an exercise price of $.01 per share. Pending shareholder approval of such issuance at the Company's Annual Meeting of Shareholders scheduled for August 12, 2004, Chelsey Finance received a warrant (the "Series D Preferred Warrant") to purchase a newly-issued series of nonvoting preferred stock of the Company, called Series D Participating Preferred Stock (the "Series D Preferred Stock"), that will be automatically exchanged for the Common Stock Warrant upon the receipt of shareholder approval of the issuance thereof at the Company's Annual Meeting of Shareholders. See the Series D Participating Preferred Stock discussion below for a description of the terms of the Series D Preferred Stock. In connectionpar value with the closing of the Term Loan Facility, Chelsey received a waiver fee equal to 1% of the liquidation preference of the Company's outstanding Series C Participating Preferred Stock, payable in Common Stock of the Company,remaining portion, or ~~4,344,762 additional shares of Common Stock (calculated based upon the~~$7.1 million, classified as debt. The fair market value thereof two business days prior to the closing date), in consideration for the waiver by Chelsey of its blockage rights over the issuance of senior securities. As part of the Term Loan Facility, the Company and its subsidiaries agreed to indemnify Chelsey Finance and its affiliates and each of its and their respective directors, officers, partners, attorneys and advisors from any losses suffered arising out of, in any way related to or resulting from the Term Loan Facility and the related agreements and the transactions contemplated thereby other than liabilities resulting from such parties' gross negligence or willful misconduct. The indemnification agreement is not limited as to term and does not include any limitations on maximum future payments thereunder. The terms of the Term Loan Facility with Chelsey Finance were approved by the Company's Audit Committee, all of whose members are independent, and the Company's Board of Directors. On July 8, 2004, proceeds from the Term Loan Facility with Chelsey Finance were used to repay, in full, the Tranche B Term Loan of approximately $4.9 million under the Congress Credit Facility (see Note 10) and the balance will be used to pay fees and expenses in connection with the transactions and will provide ongoing working capital for the Company which will be used to reduce outstanding payables. The Term Loan Facility, together with the concurrent amendment of the Congress Credit Facility discussed in Note 10, has increased the Company's liquidity by approximately $25 million. SERIES D PARTICIPATING PREFERRED STOCK On the closing of the Term Loan Facility, Chelsey Finance received the Series D Preferred Warrant, which entitles Chelsey Finance to purchase 100 shares of a newly issued series of non-voting preferred stock, the Series D Preferred Stock, as part of the consideration for providing the Term Loan Facility. The Series D Preferred Warrant will be automatically exchanged for the Common Stock Warrant (see discussion above) upon receipt of shareholder approval thereof at the 2004 Annual Meeting of Shareholders. The Common Stock Warrant will entitle Chelsey Finance to purchase 30% of the fully diluted shares of Common Stock of the Company at an exercise price of $.01 per share, which the Company believes would be equivalent to the issuance of an additional 10,247,210 shares of Common Stock (adjusted for the proposed one-for-ten reverse split of the Company's Common Stock). The Series D Preferred Warrant may not be exercised prior to September 30, 2004. The Series D Preferred Stock has a par value of $.01 per share. The holders of the Series D Preferred Stock have no voting rights except the right to vote as a class on certain matters that would adversely affect the rights of the Series D Preferred Stock. 21 ~~In the event of the liquidation, dissolution or winding up of the Company, the holders of the Series D Preferred Stock are entitled to a liquidation preference equal to the fair market~~ value of the Common Stock Warrant ~~on July 8, 2004, or $81,868.40 per share ($8.2~~of $12.9 million inwas determined using the ~~aggregate), plus declared but unpaid dividends thereon. The holders~~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 ~~Series D Preferred Stock will be entitled to participate in dividends equal~~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 ~~liquidation preference plus the amount of any declared but unpaid dividends thereon~~Chelsey Facility is as of the record date, multiplied by the dividend yield of a share of Common Stock as of the close of the business day immediately preceding the record date for the dividend on the Common Stock. At the election of the holders of a majority of the shares of Series D Preferred Stock, in the event of the approval by the shareholders of the Company of a sale of the Company or substantially all of its assets or certain mergers, or upon the election of any holder following a Change of Control (as defined), such transaction will be treated as a liquidation and entitle such holders to have their shares of Series D Preferred Stock redeemed for an amount equal to the liquidation preference plus declared but unpaid dividends thereon. The Series D Preferred Stock is entitled to participate with the Common Stock in any dividends or distributions paid to or with respect to the Common Stock based upon the liquidation preference per share of Series D Preferred Stock times a fraction, the numerator of which is the dividend per share of Common Stock and the denominator is the fair market value of the Common Stock immediately prior to the record date for the dividend. The Company's credit agreements with Congress and Chelsey Finance currently prohibit the payment of dividends. The Series D Preferred Stock may be redeemed in whole and not in part, except as set forth below, at the option of the Company at any time for the liquidation preference plus any declared but unpaid dividends (the "Redemption Price"). The Series D Preferred Stock, if not redeemed earlier, must be redeemed by the Company out of the proceeds of certain equity sales, and any remaining outstanding shares shall be redeemed on January 1, 2009 (the "Mandatory Redemption Date") for the Redemption Price. Pursuant to the terms of the Certificate of Designations of the Series D Preferred Stock, the Company's obligation to pay dividends on or redeem the Series D Preferred Stock is subject to compliance with its credit agreements with Congress and Chelsey Finance. 22 follows (in thousands):

	September 24, 2005	December 25, 2004	September 25, 2004

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)	3,524	1,098	420

	$ 10,585	$ 8,159	$ 7,481

~~------------------------~~

ITEM 2. ~~MANAGEMENT'S~~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~~Company’s Condensed Consolidated Statements of ~~Income (Loss):~~
13- WEEKS ENDED 26- WEEKS ENDED --------------- --------- ------ June 28, June 28, June 26, 2003 June 26, 2003 2004 As Restated 2004 As Restated ---- ----------- ---- ----------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and operating expenses 60.1 62.6 61.1 63.4 Special charges 0.0 0.2 0.0 0.2 Selling expenses 26.7 25.4 25.6 24.6 General and administrative expenses 10.9 9.0 10.8 10.0 Depreciation and amortization 1.0 1.1 1.1 1.1 Income from operations 1.3 1.7 1.4 0.7 Gain on sale of Improvements 0.0 0.0 0.0 0.9 Interest expense, net 0.8 1.1 0.9 1.3 (Benefit) provision for Federal and state income taxes (0.1) 0.0 0.0 0.0 Net income and comprehensive income 0.6% 0.6% 0.5% 0.3%
~~EXECUTIVE SUMMARY~~Income:

	13- Weeks Ended				39- Weeks Ended
	September 24, 2005		September 25, 2004		September 24, 2005		September 25, 2004

Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and operating expenses	61.7		59.2		60.9		60.6
Special charges (income)	(0.0)		0.6		(0.0)		0.2
Selling expenses	24.9		25.5		25.2		25.6
General and administrative expenses	3.4		11.3		8.0		11.5
Depreciation and amortization	0.7		1.0		0.8		1.0
Income from operations	9.3		2.4		5.1		1.1
Interest expense, net	2.3		1.9		2.1		1.2
Provision (benefit) for Federal and state income taxes	(0.0)		(0.0)		0.0		(0.0)
Gain from discontinued operations of Gump’s	0.0		0.3		1.0		0.1
Net income and comprehensive income	7.0		0.8		4.0		(0.0)
Earnings applicable to Preferred Stock	0.2		0.0		0.1		0.0
Net income applicable to common shareholders	6.8	%	0.8	%	3.9	%	(0.0)	%

Executive Summary

For the nine months ended September 24, 2005, net revenues increased $32.3 million or 12.7% to $286.8 million from $254.5 million in the comparable period of 2004. The ~~Company's second~~increase was primarily driven by an increase in catalog circulation levels supported by deeper inventory positions that enabled higher initial fulfillment rates for customer orders and lower overall cancellation rates. Higher demand was experienced in The Company Store, Domestications and Silhouettes catalogs, while lower demand was experienced in the International Male catalogs which are in the process of being repositioned to return it to its roots as a young men’s “lifestyle” fashion leader. This merchandising shift has been evident in catalogs commencing in the fourth quarter of 2005. The Company is increasing inventory positions for Domestications to support the growth and improve the operating results ~~were negatively impacted by low inventory levels which resulted~~ in ~~substantially increased backorder levels,~~this catalog. The Company Store has experienced increases in merchandise costs in addition to increases in selling expenses resulting from lower ~~initial~~ customer ~~order fill~~response rates and higher ~~customer order cancellations.~~ costs that have negatively impacted operating results in this catalog. This negative trend for The ~~low inventory levels were caused by~~Company Store continued through the ~~Company's reduced borrowing availability under~~end of fiscal 2005 and is expected to continue during fiscal 2006.

We also completed the ~~Congress Credit Facility and tighter vendor credit. In order~~implementation of strategies to ~~alleviate these situations,~~reduce the Company entered into a new $20 million Term Loan Facility with Chelsey Finance on July 8, 2004 and concurrently amended the terms of the Congress Credit Facility. The additional working capital will provide the Company with the ability to restore inventory to adequate levels in order to fulfill demand, reduce existing backorder levels and increase initial customer order fill rates to more normal levels. In addition, the increased working capital will allow the Company to circulate more catalogs in order to grow the business. On May 5, 2004, Wayne P. Garten was appointed President and Chief Executive Officer ("CEO")infrastructure of the Company ~~succeeding Thomas C. Shull. The Company accrued $0.9 million in severance and other benefit costs~~which were developed during fiscal 2004. These strategies included the ~~second quarter associated with the resignation~~consolidation of Mr. Shull. During the second quarter of 2004, the Company identified a revenue recognition cut-off issue that resulted in revenue being recorded in advance of the actual shipment of merchandise to the customer. The practice was stopped immediately and the Company implemented procedures to ensure that this issue does not recur. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for the required restatements. The Company announced on June 30, 2004, its intention to consolidate the operations of the LaCrosse, Wisconsin fulfillment ~~centers~~center into the Roanoke, Virginia fulfillment center, ~~over~~which was completed by July 2005; the ~~next twelve months. The~~relocation of the International Male and Undergear catalog operations from San Diego, California to the corporate headquarters in Weehawken, New Jersey, which was completed February 28, 2005; and the consolidation of ~~operations~~the Edgewater facility into the Weehawken, New Jersey premises, which was ~~prompted~~completed by May 31, 2005. Since the ~~lack~~consolidation of ~~sufficient warehouse space~~our fulfillment centers, our 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 continued through the end of fiscal 2005 and is expected to continue during 2006.

On March 14, 2005, the Company sold all of the stock of Gump’s Corp. and Gump’s By Mail, Inc. (collectively, “Gump’s”) to Gump’s Holdings, LLC, an unrelated third party 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 on the sale of approximately $3.6 million in the ~~leased Wisconsin facilities to support~~quarter ended March 26, 2005.

Results of Operations – 13- weeks ended September 24, 2005 compared with the growth of The Company Store and to reduce the overall cost structure of the Company. A review of the management structure leading the operations of both the Domestications and The Company Store brands determined the need for a separate management team to guide each brand. The size and diversity of the brands were the primary factors influencing the decision. The Company hired an individual to fill the brand president level position for Domestications in mid-July. While the new president assembles a management team and implements changes throughout the business, circulation will be decreased in the short-term to stabilize the brand; 23 ~~therefore, it is expected that sales for Domestications will be lower than the prior year comparable periods for the remainder of the year. RESULTS OF OPERATIONS -~~ 13- ~~WEEKS ENDED JUNE 26,~~weeks ended September 25, 2004 ~~COMPARED WITH THE 13- WEEKS ENDED JUNE 28, 2003 AS RESTATED~~

Net ~~Income (Loss).~~ Income. The Company reported net income applicable to common shareholders of ~~$0.5~~$6.6 million, or ~~$0.00~~$0.30 basic income per share and $0.20 diluted income per share, for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 compared with ~~a net loss of $3.6 million, or $0.02 per share, for the comparable fiscal period in 2003. The $4.1 million increase in~~ net income applicable to common shareholders ~~was~~of $0.7 million, or $0.03 basic income per share and $0.02 diluted income per share, for the comparable period in 2004.

The Company primarily ~~due to: - A favorable impact of $4.3 million due~~attributes the increase in net income to the Recapitalization and exchange of the Series B Participating Preferred Stock for the Series C Participating Preferred Stock with Chelsey. During the 13- weeks ended June 28, 2003 Preferred Stock dividends and accretion were recorded relating to the Series B Participating Preferred Stock. The Series C Participating Preferred Stock has been recorded at the maximum amount of future cash payments; thus, the Company is currently not required to record interest expense relating to the Series C Participating Preferred Stock; - A favorable impact of $1.2 million due to continued reductions in cost of sales and operating expenses primarily associated with reductions in product postage costs and inventory write-downs; - A favorable impact of $1.1 million due to an increase in product sales margins primarily associated with the shift from domestic to foreign-sourced goods; - A favorable impact of $0.3 million due to reductions in interest resulting from lower average borrowings and deferred amendment fees which have been fully amortized relating to the Congress Credit Facility; - A favorable impact of $0.2 million due to the reduction of special charges recorded; - A favorable impact of $0.1 million due to a reduction in the estimated effective tax rate for fiscal 2004; and - A favorable impact of $0.1 million due to a decrease in depreciation and amortization. following:

•	Improved operating results generated from a $11.4 million increase in net revenues;
•	A favorable impact of $4.5 million from the reversal of an accrual established in fiscal 2000 due to the expiration of Rakesh Kaul’s rights to pursue his claims against the Company;

Partially offset by: - An unfavorable impact of $1.2 million due to increases in selling expenses primarily associated with increases in third-party Web site fees, catalog preparation costs and postage costs for mailing catalogs; - An unfavorable impact of $1.0 million due to increases in general and administrative expenses resulting from severance related to the resignation of the former President and Chief Executive Officer and compensation costs incurred on the appointment of his successor; - An unfavorable impact of $0.8 million due to a benefit recognized during the second quarter of 2003 from the revision of the Company's vacation and sick policy; and - An unfavorable impact of $0.2 million due to a reduction in variable contribution associated with the decline in net revenues.

•	An unfavorable impact of $0.6 million on net interest expense primarily due to interest costs incurred with the $20.0 million junior secured credit facility with Chelsey Finance (“Chelsey Facility,”) which the Company closed on July 8, 2004. See Note 6 of Notes to the condensed consolidated financial statements for additional information regarding the Chelsey Facility;
•	An unfavorable impact of $0.3 million of discontinued operations representing income from Gump’s on-going operations for the 13- weeks ended September 25, 2004.

Net Revenues. Net revenues ~~decreased $9.4~~increased $11.4 million ~~(8.9%~~(13.3%) for the 13-week period ended ~~June 26, 2004~~September 24, 2005 to ~~$96.5~~$96.8 million from ~~$105.9~~$85.4 million for the comparable ~~fiscal~~ period in 2003. Due to lower inventory levels across all brands resulting from the Company's reduced borrowing availability and tighter vendor credit, the Company experienced a decline in product fill rates caused2004. This increase was primarily driven by ~~increases in backorders and cancellations. In addition, the decrease was due to a continued reduction in circulation for Domestications in order to limit the investment~~an increase in catalog ~~production costs~~circulation levels supported by deeper inventory positions that enabled higher initial fulfillment rates for customer orders and ~~working capital necessary to maintain its inventory. For~~lower overall cancellation rates. Higher demand was experienced in The Company Store (although on lower customer response rates), Domestications and Silhouettes catalogs, while lower demand was experienced for the ~~balance of 2004, Domestications' circulation will be decreased while changes are implemented to stabilize the brand.~~International Male catalogs. Internet sales ~~continued to grow, not withstanding the negative impact of low inventory levels,~~increased and comprised ~~31.1%~~40.0% of combined Internet and catalog revenues for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 compared with ~~27.5%~~35.2% for the comparable fiscal period in ~~2003,~~2004, and have increased by approximately ~~$0.8~~$5.5 million, or ~~2.9%~~20.3%, to ~~$28.3~~$32.6 million for the 13-week period ended ~~June 26, 2004~~September 24, 2005 from ~~$27.5~~$27.1 million for the comparable ~~fiscal~~ period in ~~2003. 24~~ 2004.

Cost of Sales and Operating Expenses. Cost of sales and operating expenses ~~decreased~~increased by ~~$8.3~~$9.2 million to ~~$58.0~~$59.8 million for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with ~~$66.3~~$50.6 million for the comparable period in ~~2003.~~2004. Cost of sales and operating expenses ~~decreased~~increased to ~~60.1%~~61.7% of net revenues for the 13-week period ended ~~June 26, 2004~~September 24, 2005 as compared with ~~62.6%~~59.2% of net revenues for the comparable period in ~~2003.~~2004. As a percentage of net revenues, this ~~decrease~~increase was primarily due to ~~a decline~~increases in product shipping costs, merchandise ~~costs associated with a shift from domestic to foreign-sourced goods that have higher product margins for~~and fulfillment costs. The Company ~~Store and Domestications (1.1%), a decrease in product postage costs resulting from utilizing~~has more ~~economical shipping sources and methods (1.0%), a decrease in inventory write-downs due to less slow~~aggressively liquidated slower moving inventory through clearance avenues within its catalogs and websites, thus resulting in lower product margins. In addition, since the consolidation of our fulfillment centers, our Roanoke fulfillment center has experienced high levels of employee turnover and lower productivity that ~~would be required to be discounted~~has negatively impacted fulfillment costs and ~~increasing sales~~the Company’s overall performance. This trend of ~~clearance merchandise~~high levels of employee turnover and lower productivity continued through the ~~Internet, which has less variable costs than utilizing catalogs as the clearance avenue (0.7%),~~end of fiscal 2005 and ~~a decrease in information technology costs due~~is expected to ~~declines in equipment rentals and maintenance (0.1%). These reductions were partially offset by an increase in fixed distribution and telemarketing costs (0.4%).~~ continue during 2006.

Special Charges. In December 2000 and June 2004, the Company ~~began a~~implemented strategic business realignment ~~program~~programs that resulted in the recording of special charges for severance, facility exit costs and fixed asset write-offs. The actions related to the strategic business realignment ~~program~~programs were taken in an effort to direct the ~~Company's~~Company’s resources primarily towards a loss reduction strategy and a return to profitability. Special charges decreased by ~~$0.2~~approximately $0.5 million for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with the comparable period in ~~fiscal 2003. During~~2004. This was primarily due to the Company recording $0.5 million in severance and related costs associated with the consolidation of the LaCrosse operations during the 13- weeks ended June 28, 2003, $0.2 million of costs were incurred to revise estimated losses related to sublease arrangements in connection with the office facilities in San Francisco, California. For the 13- weeks ended June 26, 2004, additional costs of less than $0.1 million were incurred relating to real estate lease and exit costs associated with the Weehawken, New Jersey and San Diego, California facilities. September 25, 2004.

Selling Expenses. Selling expenses ~~decreased~~increased by ~~$1.1~~$2.3 million to ~~$25.8~~$24.1 million for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with ~~$26.9~~$21.8 million for the comparable period in ~~2003.~~2004. Selling expenses ~~increased~~decreased to ~~26.7%~~24.9% of net revenues for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 from ~~25.4%~~25.5% for the comparable period in ~~2003.~~2004. As a percentage of net revenues, this change was primarily due ~~primarily~~ to ~~an increase in fees paid to third-party Web sites for every click~~higher response rates that ~~leads to~~more than offset the ~~Company's sites (0.5%), an increase in~~cost of higher catalog preparation costs (0.4%), an increase in postage costs for mailing catalogs (0.3%) and an increase in costs associated with utilizing rented name lists from other mailers and compilers as a primary source of new customers (0.2%). These increases were partially offset by a reduction in paper and printing costs (0.1%). circulation.

General and Administrative Expenses. General and administrative expenses ~~increased~~decreased by ~~$0.9~~$6.4 million to ~~$10.4~~$3.3 million for the 13- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with ~~$9.5~~$9.7 million for the comparable period in ~~2003.~~2004. As a percentage of net revenues, general and administrative expenses ~~increased~~declined to ~~10.9%~~3.4% of net revenues for the ~~13- weeks~~13-week period ended ~~June 26, 2004~~September 24, 2005 as compared ~~with 9.0%~~to 11.3% of net revenues for the comparable period in 2003. This increase was primarily due to severance and other benefit costs associated with the resignation of the former Company President and for compensation of his replacement. Depreciation and Amortization. Depreciation and amortization decreased approximately $0.1 million to $1.0 million for the 13- weeks ended June 26, 2004 from $1.1 million for the comparable period in 2003. The decrease was primarily due to fixed assets that have become fully amortized. Income from Operations. The Company's income from operations decreased by $0.6 million to $1.2 million for the 13- weeks ended June 26, 2004 from income from operations of $1.8 million for the comparable period in 2003. See "Results of Operations - 13- weeks ended June 26, 2004 compared with the 13- weeks ended June 28, 2003 as restated - Net Income (Loss)" for further details. Interest Expense, Net. Interest expense, net, decreased $0.3 million to $0.8 million for the 13- weeks ended June 26, 2004 from $1.1 million for the comparable period in fiscal 2003. The decrease in interest expense is due to lower average cumulative borrowings relating to the Congress Credit Facility and decreases in amortization from deferred financing costs relating to the Company's amendments to the Congress Credit Facility that have become fully amortized. 25 RESULTS OF OPERATIONS - 26- WEEKS ENDED JUNE 26, 2004 COMPARED WITH THE 26- WEEKS ENDED JUNE 28, 2003 AS RESTATED Net Income (Loss). The Company reported net income applicable to common shareholders of $1.0 million, or $0.00 per share, for the 26- weeks ended June 26, 2004 compared with a net loss of $7.2 million, or $0.05 per share, for the comparable period in fiscal 2003. The $8.2 million increase in net income applicable to common shareholders was primarily due to: - A favorable impact of $7.9 million due to the Recapitalization and exchange of the Series B Participating Preferred Stock for the Series C Participating Preferred Stock with Chelsey. During the 26- weeks ended June 28, 2003 Preferred Stock dividends and accretion were recorded relating to the Series B Participating Preferred Stock. The Series C Participating Preferred Stock has been recorded at the maximum amount of future cash payments; thus, the Company is currently not required to record interest expense relating to the Series C Participating Preferred Stock; - A favorable impact of $1.7 million comprising continued reductions in cost of sales and operating expenses primarily associated with reductions in product postage costs and inventory write-downs and a decrease in depreciation and amortization; - A favorable impact of $1.5 million due to an increase in product sales margins primarily associated with the shift from domestic to foreign-sourced goods; - A favorable impact of $0.9 million due to reductions in interest resulting from lower average borrowings and deferred amendment fees relating to the Congress Credit Facility, which have been fully amortized; and - A favorable impact of $0.5 million resulting from a reduction of special charges recorded. Partially offset by: - An unfavorable impact of $1.9 million due to the non-recurring deferred gain related to the June 29, 2001 sale of the Company's Improvements business recognized during the 26- weeks ended June 28, 2003; - An unfavorable impact of $1.0 million due to increases in general and administrative expenses resulting from severance related to the resignation of the former President and Chief Executive Officer and compensation costs incurred on the appointment of his successor; - An unfavorable impact of $0.8 million due to a benefit recognized during the second quarter of 2003 from the revision of the Company's vacation and sick policy; and - An unfavorable impact of $0.6 million due to a reduction in variable contribution associated with the decline in net revenues. Net Revenues. Net revenues decreased $15.5 million (7.5%) for the 26-week period ended June 26, 2004 to $191.9 million from $207.4 million for the comparable fiscal period in 2003. Due to lower inventory levels across all brands resulting from the Company's reduced borrowing availability and tighter vendor credit, the Company experienced a decline in product fill rates caused by increases in backorders and cancellations. In addition, the decrease was due to a reduction in circulation for Domestications in order to limit the investment in catalog production costs and working capital necessary to maintain its inventory. For the balance of 2004, Domestications' circulation will be decreased while changes are implemented to stabilize the brand. Internet sales continued to grow, not withstanding the negative impact of low inventory levels, and comprised 31.6% of combined Internet and catalog revenues for the 26- weeks ended June 26, 2004 compared with 27.1% for the comparable fiscal period in 2003, and have increased by approximately $3.9 million, or 7.3%, to $57.0 million for the 26-week period ended June 26, 2004 from $53.1 million for the comparable fiscal period in 2003. Cost of Sales and Operating Expenses. Cost of sales and operating expenses decreased by $14.1 million to $117.3 million for the 26- weeks ended June 26, 2004 as compared with $131.4 million for the comparable fiscal period in 2003. Cost of sales and operating expenses decreased to 61.1% of net revenues for the 26-week period ended June 26, 2004 as compared with 63.4% of net revenues for the comparable fiscal period in 2003.2004. As a percentage of net revenues, this decrease was primarily due to the reversal of a ~~decline~~$4.5 million accrual established in fiscal 2000 pertaining to Rakesh Kaul. The accrual was reversed due to the expiration of Mr. Kaul’s rights to pursue his claims against the Company. In addition the Company incurred lower compensation and legal expenses during the 13- weeks ended September 24, 2005.

Depreciation and Amortization. Depreciation and amortization decreased approximately $0.1 million during the 13- weeks ended September 24, 2005 from the comparable period in 2004. 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 from Operations. The Company’s income from operations increased by approximately $6.9 million to $9.0 million for the 13- weeks ended September 24, 2005 from $2.1 million for the comparable period in 2004. See “Results of Operations – 13- weeks ended September 24, 2005 compared with the 13- weeks ended September 25, 2004 - Net Income” for further details as the relationships are the same excluding the discussion on income tax and interest expense.

Interest Expense, Net. Interest expense, net, increased $0.6 million to $2.2 million for the 13- weeks ended September 24, 2005 from $1.6 million for the comparable period in fiscal 2004. This increase in interest expense is primarily due to $0.5 million of accretion of the debt discount and $0.2 million of stated interest related to the Chelsey Facility during the 13- weeks ended September 24, 2005. These increases were partially offset by a $0.1 million decrease in amortization of debt costs associated with the Wachovia Facility.

Income Taxes. The benefit for federal and state income taxes is approximately 0.1% of income before taxes for the 13-week period ended September 24, 2005.

Gain from discontinued operations of Gump’s. On March 14, 2005, the Company sold all of the stock of to Gump’s Holdings, LLC. The Company recognized a gain of $0.3 million representing income from Gump’s on-going operations for the 13- weeks ended September 25, 2004.

Results of Operations – 39- weeks ended September 24, 2005 compared with the 39- weeks ended September 25, 2004

Net Income (Loss). The Company reported net income applicable to common shareholders of $11.2 million, or $0.50 basic income per share and $0.34 diluted income per share, for the 39- weeks ended September 24, 2005 compared with a net loss applicable to common shareholders of $0.1 million, or $0.00 basic and diluted loss per share for the comparable period in 2004.

The Company primarily attributes the increase in net income to the following:

•	Improved operating results generated from a $32.3 million increase in net revenues;
•	A favorable impact of $4.5 million from the reversal of an accrual established in fiscal 2000 due to the expiration of Rakesh Kaul’s rights to pursue his claims against the Company;
•	A favorable impact of $2.7 million of discontinued operations due to the gain of $3.6 million recognized relating to the March 14, 2005 sale of stock of Gump’s;
•	A favorable impact of $1.5 million due to the reduction in general and administrative expenses related to severance.

Partially offset by:

•	An unfavorable impact of $2.8 million on net interest expense primarily due to interest costs incurred with the $20.0 million junior secured credit facility with Chelsey Finance (“Chelsey Facility,”) which the Company closed on July 8, 2004. See Note 6 of Notes to the condensed consolidated financial statements for additional information regarding the Chelsey Facility;
•	An unfavorable impact of $1.7 million related to general and administrative expenses incurred for the investigation conducted by the Audit Committee of the Board of Directors in connection with the restatement of the Company’s consolidated financial statements and other accounting-related matters.

Net Revenues. Net revenues increased $32.3 million (12.7%) for the 39-week period ended September 24, 2005 to $286.8 million from $254.5 million for the comparable period in 2004. This increase was primarily driven by an increase in catalog circulation levels supported by deeper inventory positions that enabled higher initial fulfillment rates for customer orders and lower overall cancellation rates. Higher demand was experienced in The Company Store (although on lower customer response rates), Domestications and Silhouettes catalogs, while lower demand was experienced for the International Male catalogs. Internet sales increased and comprised 38.6% of combined Internet and catalog revenues for the 39- weeks ended September 24, 2005 compared with 34.4% for the comparable fiscal period in 2004, and have increased by approximately $18.1 million, or 22.6%, to $98.1 million for the 39-week period ended September 24, 2005 from $80.0 million for the comparable period in 2004.

Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased by $20.5 million to $174.8 million for the 39- weeks ended September 24, 2005 as compared with $154.3 million for the comparable period in 2004. Cost of sales and operating expenses increased to 60.9% of net revenues for the 39-week period ended September 24, 2005 as compared with 60.6% of net revenues for the comparable period in 2004. As a percentage of net revenues, this increase was primarily due to increases in product shipping costs, offset by declines in merchandise costs associated with ~~a shift from domestic 26~~ the ability to ~~foreign-sourced~~source goods that have higher product margins ~~for The Company Store~~ and Domestications (0.8%), a decrease in product postage costs resulting from utilizing more economical shipping sources and methods (0.8%), a decrease in inventory write-downs due to less slow moving inventory that would be required to be discounted and increasing sales of clearance merchandise through the Internet, which has less variable costs than utilizing catalogs as the clearance avenue (0.7%), and a decreasedecreases in information technology costs due to declines in equipment rentals and ~~maintenance (0.2%). These reductions were partially offset by an increase in fixed distribution and telemarketing costs (0.2%).~~ maintenance.

Special Charges. In December 2000 and June 2004, the Company ~~began a~~implemented strategic business realignment ~~program~~programs that resulted in the recording of special charges for severance, facility exit costs and fixed asset write-offs. The actions related to the strategic business realignment ~~program~~programs were taken in an effort to direct the ~~Company's~~Company’s resources primarily towards a loss reduction strategy and a return to profitability. Special charges decreased by approximately $0.5 million for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with the comparable period in ~~fiscal 2003. During the 26- weeks ended June 28, 2003,~~2004. This was primarily due to the Company ~~recorded~~recording $0.5 million ~~of additional~~in severance ~~costs~~ and ~~charges incurred to revise estimated losses~~ related to sublease arrangements for office facilities in San Francisco, California. Increased anticipated losses on sublease arrangements for the San Francisco office space resulted from the loss of a subtenant, coupled with declining market values in that area of the country. For the 26- weeks ended June 26, 2004, additional costs of less than $0.1 million were incurred relating to real estate lease and exit costs associated with the ~~Weekhawken, New Jersey and San Diego, California facilities.~~ consolidation of the LaCrosse operations during the 39- weeks ended September 25, 2004.

Selling Expenses. Selling expenses ~~decreased~~increased by ~~$2.1~~$7.1 million to ~~$49.0~~$72.2 million for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 as compared with ~~$51.1~~$65.1 million for the comparable period in ~~2003.~~2004. Selling expenses ~~increased~~decreased to ~~25.6%~~25.2% of net revenues for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 from ~~24.6%~~25.6% for the comparable period in ~~2003.~~2004. As a percentage of net revenues, this change was primarily due ~~primarily~~ to ~~an increase in fees paid to third-party Web sites for every click~~higher response rates that ~~leads to~~more than offset the ~~Company's sites (0.4%), an increase in costs associated with utilizing rented name lists from other mailers and compilers as a primary source~~cost of ~~new customers (0.3%), an increase in postage costs for mailing catalogs (0.1%) and an increase in~~higher catalog ~~preparation costs (0.2%).~~ circulation.

General and Administrative Expenses. General and administrative expenses ~~remained constant at $20.8~~decreased by $6.1 million to $23.1 million for the ~~26-~~39- weeks ended ~~June 26, 2004 and June 28, 2003, respectively.~~September 24, 2005 as compared with $29.2 million for the comparable period in 2004. As a percentage of net revenues, general and administrative expenses ~~increased~~declined to ~~10.8%~~8.0% of net revenues for the ~~26- weeks~~39-week period ended ~~June 26, 2004~~September 24, 2005 as compared ~~with 10.0%~~to 11.5% of net revenues for the comparable period in ~~2003. This increase~~2004. As a percentage of net revenues, this decrease was primarily due to the $4.5 million reversal of an accrual related to Rakesh Kaul and severance and other ~~benefit~~ costs incurred during the 39- weeks ended September 25, 2004 associated with the resignation of three executives, including the Company’s former ~~Company President~~President. This decrease was partially offset by additional fees incurred for the investigation conducted by the Audit Committee of the Board of Directors in connection with the restatement of the Company’s consolidated financial statements and ~~costs incurred in compensating his replacement.~~ other accounting-related matters.

Depreciation and Amortization. Depreciation and amortization decreased ~~approximately~~ $0.3 million to ~~$2.0~~$2.2 million for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 from ~~$2.3~~$2.5 million for the comparable period in ~~2003.~~2004. The decrease was primarily due to ~~fixed assets~~property and equipment that have become fully ~~amortized.~~ depreciated, partially offset by the depreciation of newly purchased property and equipment.

Income from Operations. The ~~Company's~~Company’s income from operations increased by ~~$1.3~~approximately $11.7 million to ~~$2.7~~$14.5 million for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 from ~~income from operations of $1.4~~$2.8 million for the comparable period in ~~2003.~~2004. See ~~"Results~~“Results of Operations ~~- 26-~~– 39- weeks ended ~~June 26, 2004~~September 24, 2005 compared with the ~~26-~~39- weeks ended ~~June 28, 2003 as restated~~September 25, 2004 - Net ~~Income (Loss)"~~Income” for further ~~details. Gain~~details as the relationships are the same excluding the discussion on Sale of the Improvements Business. During the 26- weeks ended June 28, 2003, the Company recognized the remaining deferred gain of $1.9 million consistent with the terms of the March 27, 2003 amendment made to the asset purchase agreement relating to the sale of the Improvements business. Effective March 28, 2003, the remaining $2.0 million escrow balance was received by the Company, thus terminating the escrow agreement. See Note 7 of Notes to the Condensed Consolidated Financial Statements. income tax and interest expense.

Interest Expense, Net. Interest expense, net, ~~decreased $0.9~~increased $2.8 million to ~~$1.7~~$6.0 million for the ~~26-~~39- weeks ended ~~June 26, 2004~~September 24, 2005 from ~~$2.6~~$3.2 million for the comparable period in fiscal ~~2003. The~~2004. This increase in interest expense is primarily due to $2.0 million of accretion of the debt discount and $1.2 million of stated interest related to the Chelsey Facility during the 39- weeks ended September 24, 2005. These increases were partially offset by a decrease in interest expense is due to lower average cumulative borrowings relating to the ~~Congress Credit~~Wachovia Facility in the amount of $0.4 million.

Income Taxes. The provision for federal and ~~decreases~~state income taxes is approximately 0.4% of income before taxes for the 39-week period ended September 24, 2005.

Gain from discontinued operations of Gump’s. On March 14, 2005, the Company sold all of the stock of to Gump’s Holdings, LLC. The Company recognized a gain of approximately $3.6 million in ~~amortization~~the 39- weeks ended September 24, 2005, offset by losses from ~~deferred financing costs relating to~~Gump’s on-going operations through the ~~Company's amendments to the Congress Credit Facility that have become fully amortized. 27~~ sale date of approximately $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES ~~OVERVIEW As~~

Overview

In 2005, the liquidity position of the Company continues to strengthen as a result of ~~lower than expected inventory levels in~~improved operating results, proceeds from the ~~fourth quarter~~sale of ~~2003~~Gump’s and the interruptions in the flow of merchandise, which prevented inventories from reaching adequate levels in the first quarter of 2004, the Company experienced a significant negative impact on second quarter revenues and cash flow. These lower inventory levels resulted in large part from tighter vendor credit and a more restrictive senior debt facility. This had a compounding effect on the business as a ~~whole; lower levels~~result of ~~inventory reduced~~securing the ~~amount of the financing available under the Congress Credit~~$20.0 million Chelsey Facility as well as the ability to meet customer demand, which resulted in a significant increase in the Company's backorder position and cancellation of customer orders. During the second quarter of 2004, management determined that this inventory position was not sustainable for the long-term, as the Company was experiencing a significant negative impact on second quarter net revenues due to the decreased inventory levels. Management's primary objective became the formulation and execution of a plan to address the liquidity issue facing the Company and after reviewing alternatives available, the Company entered into the Chelsey Finance Loan and Security Agreement, dated July 8, 2004 and concurrently ~~amended~~amending the terms of the ~~Congress Credit~~Wachovia Facility. The additional ~~availability of~~ working capital ~~resulting from these transactions will~~has continued to provide ~~for~~us the ~~purchase and receipt of~~ability to restore inventory to ~~fulfill current~~adequate levels in order to support higher demand ~~reduce existing backorder levels and~~driven by an overall increase ~~initial customer order fill rates to more normal levels. Finally, the~~in catalog circulation. The funding ~~also alleviates the difficulties with certain vendors who were suggesting the need for more restrictive~~has eliminated substantially all vendor restrictions involving our credit arrangements. The $8.9 million in proceeds from the sale of Gump’s enabled the Company to pay down $8.1 million of the Wachovia revolving loan facility during the first quarter of 2005; however, during the second and third quarters of 2005, a portion of these monies have been utilized to fund the continuing growth of on-going operations of the Company.

Net cash ~~provided~~used by operating activities. During the ~~26-week~~39-week period ended ~~June 26, 2004,~~September 24, 2005, net cash ~~provided~~used by operating activities was ~~$1.5~~$3.4 million. ~~Cash provided by operations, net of non-cash items, and receipts resulting from a decrease in accounts receivable were only partially offset by~~This was due primarily to payments made by the Company to increase ~~investment in working capital items such as~~inventory and prepaid catalog costs and ~~a reduction in~~reduce accrued liabilities and accounts payable. These were partially offset by an increase in customer prepayments and credits, payments received on accounts receivables and $13.6 million of operating cash provided by net income, when adjusted for the gain on the disposition of Gump’s, depreciation, amortization and other non cash items.

Net cash ~~used~~provided (used) by investing activities. During the ~~26-week~~39-week period ended ~~June 26, 2004,~~September 24, 2005, net cash ~~used~~provided by investing activities was ~~$0.3~~$7.5 million. This ~~entire amount comprised~~was due primarily to $8.9 million in proceeds received from the sale of Gump’s, partially offset by capital expenditures, consisting primarily of purchases and upgrades to various information technology hardware and software throughout the Company and purchases of furniture and equipment for the ~~Company's Lacrosse, Wisconsin and Roanoke, Virginia locations.~~ Company’s headquarters in New Jersey.

Net cash ~~used~~(used) provided by financing activities. During the ~~26-week~~39-week period ended ~~June 26, 2004,~~September 24, 2005, net cash used by financing activities was ~~$3.1~~$4.5 million, which was primarily due to net payments of ~~$2.9~~$4.2 million under the ~~Congress Credit~~Wachovia Facility and payments of ~~$0.4~~$0.2 million ~~made to lessors relating to~~for obligations under capital ~~leases and a payment of $0.1 million~~leases.

Financing Activities

See Note 6 to the ~~Company's lender~~condensed consolidated financial statements for ~~fees~~information relating to ~~an amendment~~the Company’s debt and financing activities.

Other Activities

Consolidation of New Jersey Office Facilities. The Company entered into a 10-year extension of the ~~Congress Credit Facility. These payments were partially offset~~lease for its Weehawken, New Jersey premises and has relocated its executive offices to that facility in 2005. We consolidated all of our New Jersey operations into the Weehawken facility when the Edgewater, New Jersey facility closed upon the expiration of the lease on May 31, 2005.

Consolidation of Men’s Apparel Business. The Company decided on November 9, 2004 to relocate and consolidate all functions of International Male and Undergear from San Diego, California to Weehawken, New Jersey by ~~a $0.3~~February 28, 2005. The decision was prompted by the business need to consolidate operations, reduce costs and leverage its catalog expertise in New Jersey. We accrued $0.9 million ~~refund relating to withholding taxes remitted on behalf of Richemont Finance S.A. for estimated taxes due~~in severance and related ~~to the Series B Participating Preferred Stock. Amendments to the Congress Credit Facility. In~~costs during the fourth quarter of ~~2003,~~2004 associated with the elimination of 32 California-based full-time equivalent positions. The payment of these costs began in February 2005 and continued through August 2005. During the 39- weeks ended September 24, 2005, the Company ~~re-examined~~made payments of $0.8 million in severance and related costs associated with this consolidation.

The projected annual savings from the ~~provisions~~consolidation of the ~~Congress Credit Facility~~San Diego, California and ~~based on EITF Issue No. 95-22, "Balance Sheet Classification~~the Edgewater, New Jersey facilities into the Weehawken, New Jersey facility is approximately $2.1 million, however with this relocation and consolidation, the transition has negatively impacted the performance of ~~Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause~~the Men’s Apparel catalogs in 2005.

Consolidation of Fulfillment Centers. On June 30, 2004 the Company announced plans to consolidate the operations of the LaCrosse, Wisconsin fulfillment center and ~~a Lock-Box Arrangement" ("EITF 95-22")~~storage facility into the Roanoke, Virginia fulfillment center by June 30, 2005. The LaCrosse fulfillment center and ~~certain provisions~~the LaCrosse storage facility were closed in June 2005 and August 2005, upon the ~~credit agreement,~~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 accrued $0.5 million in severance and related costs during 2004 and incurred $0.2 million and $0.6 million of facility exit costs during 2004 and 2005, respectively, associated with the consolidation of the LaCrosse operations and the elimination of 149 full and part-time positions. The payment of these costs began in January 2005 and will continue into the fourth quarter of 2005. During the 39- weeks ended September 24, 2005, the Company has ~~classified its revolving loan~~made payments of approximately $0.4 million in severance and related costs and $0.6 million in facility ~~as short-term debt at June 26, 2004~~exit costs associated with this consolidation. Since the consolidation of our fulfillment centers, our Roanoke fulfillment center has experienced high levels of employee turnover and December 27, 2003. Concurrent with the closing of the Term Loan Facility on July 8, 2004 with Chelsey Finance (see Note 14 of Notes to the Condensed Consolidated Financial Statements), the Company amended the Congress Credit Facility to (1) release certain existing availability reserves and remove the excess loan availability covenant, increasing availability to the Company by approximately $10 million, (2) reduce the amount of the maximum credit, the revolving loan limitlower productivity that has negatively impacted fulfillment costs and the ~~inventory~~Company’s overall performance. This trend of high levels of employee turnover and ~~accounts sublimits~~lower productivity continued through the end of ~~the borrowers, (3) defer for three months the payment~~fiscal 2005 and is expected to continue during 2006.

Delisting of principal with respect to the Tranche A Term Loan, (4) permit the secured indebtedness to Chelsey Finance arising under the Term Loan Facility, (5) modify certain provisions of the Congress Credit Facility with respect to asset sales and the application of proceeds thereof by borrowers, (6) extend the term of the Congress Credit Facility until July 8, 2007, and (7) amend certain other provisions of the Congress Credit Facility. In addition, Congress consented to (a) the issuance by the Company of theCommon Stock. The Common Stock Warrant, the Series D Preferred Stock Warrant, the Common Stock pursuant to the Common Stock Warrant and the Series D Preferred Stock pursuant to the Series D Preferred Stock Warrant, (b) the 28 filing of the Certificate of Designation of the Series D Preferred Stock, (c) the proposed reverse split and the Company making payments in cash to holders of Common Stock to repurchase fractional shares of such Common Stockwas delisted from such shareholders as contemplated by the proposed reverse split (pending shareholder approval at the August 2004 shareholder meeting), (d) certain amendments to the Company's Certificate of Incorporation, and (e) the issuance by the Company of Common Stock to Chelsey Finance as payment of a waiver fee. The amendment required the payment of fees to Congress in the amount of $400,000. See Note 10 of Notes to the Condensed Consolidated Financial Statements. Under the Congress Credit Facility, the Company is required to maintain minimum net worth, working capital and EBITDA as defined throughout the term of the agreement, which it was in compliance with as of June 26, 2004. However, the Company's restatements resulted in technical defaults by the Company with its covenants under the Congress Credit Facility and the Term Loan Facility. Congress and Chelsey Finance have waived such defaults. As of June 26, 2004, the Company had $18.5 million of cumulative borrowings outstanding under the Congress Credit Facility, comprising $7.9 million of short-term borrowings under the Revolving Loan Facility, bearing an interest rate of 4.50%, $5.5 million under the Tranche A Term Loan, bearing an interest rate of 4.75%, and $5.1 million under the Tranche B Term Loan, bearing an interest rate of 13.0%. The Tranche B Term Loan, originally scheduled to be repaid in January 2007, was repaid in full on July 9, 2004. Of the total borrowings on June 26, 2004, $11.7 million is classified as short-term, and $6.8 million classified as long-term, on the Company's Condensed Consolidated Balance Sheet. As of December 27, 2003, the Company had $21.5 million of borrowings outstanding under the Congress Credit Facility comprising $9.0 million of short-term borrowings under the revolving loan facility, bearing an interest rate of 4.50%, $6.5 million under the Tranche A Term Loan, bearing an interest rate of 4.75%, and $6.0 million under the Tranche B Term Loan, bearing an interest rate of 13.0%. Of the aggregate borrowings on December 27, 2003, $12.8 million is classified as short-term, and $8.7 million classified as long-term, on the Company's Condensed Consolidated Balance Sheet. Remaining availability under the Congress Credit Facility as of June 26, 2004 was $5.1 million. On or before August 15, 2004, the Company is required to enter into a restatement of the loan agreement with Congress requiring no changes to the terms of the current agreement. Sale of Improvements Business. On June 29, 2001, the Company sold certain assets and liabilities of its Improvements business to HSN, a division of USA Networks, Inc.'s Interactive Group, for approximately $33.0 million. In conjunction with the sale, the Company's Keystone Internet Services, Inc. subsidiary (now Keystone Internet Services, LLC, or "Keystone") agreed to provide telemarketing and fulfillment services for the Improvements business under a services agreement with HSN for a period of three years. Effective June 28, 2004, the services agreement was extended an additional two years through June 27, 2006. The asset purchase agreement between the Company and HSN provided that if Keystone failed to perform its obligations during the first two years of the services contract, HSN could receive a reduction in the original purchase price of up to $2.0 million. An escrow fund of $3.0 million, which was withheld from the original proceeds of the sale, had been established for a period of two years under the terms of an escrow agreement between LWI Holdings, Inc. (a wholly-owned subsidiary of the Company), HSN and The Chase Manhattan Bank as a result of these contingencies. On March 27, 2003, the Company and HSN amended the asset purchase agreement to provide for the release of the remaining $2.0 million balance of the escrow fund and to terminate the related escrow agreement. By agreeing to the terms of the amendment, HSN forfeited its ability to receive a reduction in the original purchase price of up to $2.0 million if Keystone failed to perform its obligations during the first two years of the services contract. In consideration for the release, Keystone issued a credit to HSN for $100,000, which could be applied by HSN against any invoices of Keystone to HSN. This credit was utilized by HSN during the March 2003 billing period. On March 28, 2003, the remaining $2.0 million escrow balance was received by the Company, thus terminating the escrow agreement. The Company recognized a net gain on the sale of approximately $23.2 million, net of a non-cash goodwill charge of $6.1 million, in the second quarter of 2001. During fiscal 2002, the Company recognized approximately $0.6 million of the deferred gain consistent with the terms of the escrow agreement. The Company recognized the remaining net deferred gain of $1.9 million upon the receipt of the escrow balance on March 28, 2003. This gain was reported net of the costs incurred to provide the credit to HSN of approximately $0.1 million. American Stock Exchange Notification. The Company received a letter dated May 21, 2004 (the "Letter") from 29 the American Stock Exchange ~~(the "Exchange"~~(“AMEX”) ~~advising that a review~~on February 16, 2005 because of the ~~Company's~~Restatement which prevented us from timely filing our Form ~~10-K~~10-Q for the ~~period~~fiscal quarter ended ~~December 27, 2003 indicates that~~September 25, 2004, a condition of continued AMEX listing. Current trading information about the ~~Company does not meet certain of~~Company’s Common Stock can be obtained from the ~~Exchange's continued listing standards as set forth in Part 10 of~~Pink Sheets (www.pinksheets.com) under the Exchange's Company Guide. Specifically, the Company is not in compliance with Section 1003(a)(i) of the Company Guide with shareholders' equity of less than $2,000,000 and losses from continuing operations and/or net losses in two out of its three most recent fiscal years; and Section 1003(a)(ii) of the Company Guide with shareholders' equity of less than $4,000,000 and losses from continuing operations and/or net losses in three out of its four most recent fiscal years; and Section 1003(a)(iii) of the Company Guide with shareholders' equity of less than $6,000,000 and losses from continuing operations and/or net losses in its five most recent fiscal years. The Exchange requested that the Company contact the Exchange by June 4, 2004 to confirm receipt of the Letter, discuss any possible financial data of which the Exchange's staff may be unaware, and indicate whether or not the Company intends to submit a plan of compliance. In order to maintain its listing on the Exchange,trading symbol HNVD.PK.

General. At September 24, 2005, the Company had to submit a plan to the American Stock Exchange by June 22, 2004, advising the Exchange of action it has taken, or will take, that would bring it into compliance with the continued listing standards of the Exchange by November 24, 2005 (18 months of receipt of the Letter). The Company submitted a plan to the Exchange on June 22, 2004 and on August 3, 2004 the Exchange notified the Company that it accepted the Company's plan of compliance and granted the Company an extension of time until November 21, 2005 to regain compliance with the continued listing standards. The Company will be subject to periodic review by Exchange staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period on November 21, 2005 could result in the Company being delisted from the Exchange. There can be no assurance that the Company will be able to maintain the listing of its Common Stock on the Exchange. General. At June 26, 2004, the Company had $0.4$0.1 million in cash and cash equivalents, compared with ~~$2.3~~$0.5 million at December ~~27, 2003.~~25, 2004 and $0.4 million at September 25, 2004. Working capital and current ratio at September 24, 2005 were $24.8 million and 1.37 to 1, respectively. Total ~~cumulative~~ borrowings, including financing under capital lease obligations, as of ~~June 26, 2004,~~September 24, 2005, aggregated ~~$19.2~~$25.8 million. Remaining availability under the ~~Congress Credit~~Wachovia Facility as of ~~June 26, 2004~~September 24, 2005 was ~~$5.1 million. There were nominal short-term capital commitments (less than $0.1 million)~~$7.2 million, compared with $9.9 million at ~~June 26,~~September 25, 2004. Management continues to focus on enhancing shareholder value through the exploration of various avenues that will strengthen the Company's financial position and results of operations. The Company continues to pursue opportunistic sales of certain assets and other financing alternatives. This would provide additional liquidity for operational requirements and potentially enable the Company to retire a portion of the Series C Participating Preferred Stock obligation.

Management believes that the Company has sufficient liquidity and availability under its credit agreements to fund its planned operations through at least the next twelve months. See ~~"Cautionary Statements"~~“Forward-Looking Statements” below. Continued flexibility among the Company's major vendors is critical to the maintenance of adequate liquidity as is compliance with the terms and provisions of the Congress Credit Facility and the Term Loan Facility as mentioned in Notes 10 and 14 of the Condensed Consolidated Financial Statements.

USES OF ESTIMATES AND OTHER CRITICAL ACCOUNTING POLICIES

NEW ACCOUNTING PRONOUNCEMENTS The Company accounts for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized but reviewed for impairment if impairment indicators arise 30 and, at a minimum, annually. During the second quarters of 2004 and 2003, the Company completed its annual reviews of goodwill, which did not result in an impairment charge. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability, many of which had been previously classified as equity or between the liabilities and equity sections of the Condensed Consolidated Balance Sheet. The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The standard is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of SFAS 150 and still existing at the beginning of the interim period of adoption. The Company adopted the provisions of SFAS 150, which resulted in the reclassification of its Series B Participating Preferred Stock to a liability rather than between the liabilities and equity sections of the Condensed Consolidated Balance Sheet. Based upon the requirements set forth by SFAS 150, this reclassification was subject to implementation beginning on June 29, 2003. Upon implementation of SFAS 150, the Company reflected subsequent increases in liquidation preference as an increase in Total Liabilities with a corresponding reduction in capital in excess of par value because the Company has an accumulated deficit. Accretion was recorded as interest expense. On March 31, 2004, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128" ("EITF 03-6"). SFAS 128 defines earnings per share ("EPS") as "the amount of earnings attributable to each share of common stock" and indicates that the objective of EPS is to measure the performance of an entity over the reporting period. SFAS 128 addresses conditions under which a participating security requires the use of the two-class method of computing EPS. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common shareholders, but does not require the presentation of basic and diluted EPS for securities other than common stock. The Company's Series C Participating Preferred Stock is a participating security and, therefore, the Company calculates EPS utilizing the two-class method, however, it has chosen not to present basic and diluted EPS for its preferred stock.

See ~~"Management's~~“Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,"” found in the ~~Company's~~Company’s Annual Report on Form 10-K for the fiscal year ended December ~~27, 2003, as amended, and Note 9 of the Condensed Consolidated Financial Statements~~25, 2004, for additional information relating to new accounting pronouncements that the Company has adopted. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The Company has entered into no "off-balance sheet arrangements" within the meaning of the Securities Exchange Act of 1934, as amended, and the rules thereunder other than operating leases, which are in the normal course of business. Provided below is a tabular disclosure of contractual obligations as of June 26, 2004, as required by Item 303(a)(5) of SEC Regulation S-K. In addition to obligations recorded on the Company's Condensed Consolidated Balance Sheets as of June 26, 2004, the schedule includes purchase obligations, which are defined as legally binding and enforceable agreements to purchase goods or services that specify all significant terms (quantity, price and timing of transaction). 31 ~~PAYMENT DUE BY PERIOD (IN THOUSANDS)~~
LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ----------------------- ----- ------ --------- --------- ------- Debt Obligations, excluding the Series C Participating Preferred Stock $ 18,532 $ 11,739 $ 6,793 $ -- $ -- Total Minimum Lease Payments Under Capital Lease Obligations 707 524 182 1 -- Operating Lease Obligations 14,363 4,945 4,462 3,732 1,224 Operating Lease Obligations - Restructuring/Discontinued Operations 7,950 3,056 2,221 2,005 668 Purchase Obligations (a) 2,908 2,010 898 -- -- Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP (b) 72,689 -- -- 72,689 -- -------- -------- -------- ------ -------- Total $117,149 $ 22,274 $ 14,556 $78,427 $ 1,892 ======== ======== ======== ======= ========
(a) The Company's purchase obligations consist primarily of a total commitment of $2,000,000 to purchase telecommunication services during the period from May 1, 2004 through April 30, 2006, of which approximately $1,166,667 should be fulfilled during the next 12 months and the remaining $833,333 fulfilled by April 30, 2006; a total commitment of approximately $487,000 to purchase catalog photography services during the period from September 11, 2003 through September 10, 2005, of which approximately $172,000 had been fulfilled as of June 26, 2004, and of which approximately $250,000 should be fulfilled during the next twelve months and the remaining $65,000 fulfilled by September 10, 2005; a total commitment of $375,000 for list processing services representing the maximum exposure for a service contract which requires a three-month notice of termination for services costing $125,000 per month; a total commitment of $199,000 to purchase various packaging materials from several vendors during the next 12 months, under contracts wherein the vendors warehouse varying minimum and maximum levels of materials to ensure immediate availability; and several commitments totaling approximately $75,000 for various consulting services to be provided during the period August 2003 through July 2004, of which approximately $56,000 had been fulfilled as of June 26, 2004. (b) Represents Series C Participating Preferred Stock as disclosed in Note 12 to the Company's Condensed Consolidated Financial Statements. SEASONALITY The Company does not consider its business seasonal. The revenues for the Company are proportionally consistent for each quarter during a fiscal year. The percentage of annual revenues for the first, second, third and fourth quarters recognized by the Company, respectively, were as follows: 2003 - 24.5%, 25.6%, 23.5% and 26.4%; and 2002 - 23.9%, 24.9%, 23.1% and 28.2%.

FORWARD-LOOKING STATEMENTS ~~The following statements from above constitute~~

This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ~~1995: "Management believes that the Company has sufficient liquidity~~1995. The use of words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” and ~~availability under its credit agreements to fund its planned operations through at least the next twelve months." 32~~ ~~CAUTIONARY STATEMENTS The following material identifies important factors that could cause actual results to differ materially from those expressed in the~~“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, identified above and in any other forward-looking statements contained elsewhere herein: - A general deterioration in economic conditions in the United States leading to reduced consumer confidence, reduced disposable income and increased competitive activity and the business failuremany of companies in the retail, catalog and direct marketing industries. Such economic conditions leading to a reduction in consumer spending generally and in-home fashions specifically, and leading to a reduction in consumer spending specifically with reference to other types of merchandise the Company offers in its catalogs or over the Internet, or which are offered by the Company's third party fulfillment clients. - Customer response to the Company's merchandise offerings and circulation changes; effects of shifting patterns of e-commerce versus catalog purchases; costs associated with printing and mailing catalogs and fulfilling orders; effects of potential slowdowns or other disruptions in postal service; dependence on customers' seasonal buying patterns; and fluctuations in foreign currency exchange rates. The abilitybeyond management’s control. Some of the ~~Company to reduce unprofitable circulation~~more material risks and ~~to effectively manage its customer lists. - The ability~~uncertainties are identified in “Risk Factors” contained in Item 1A of the Company to achieve projected levels of sales and the ability of the Company to reduce costs commensurate with sales projections. Increases in postage, printing and paper prices and/or the inability of the Company to reduce expenses generally as required for profitability and/or increase prices of the Company's merchandise to offset expense increases. - The failure of the Internet generally to achieve the projections for it with respect to growth of e-commerce or otherwise, and the failure of the Company to increase Internet sales. The imposition of regulatory, tax or other requirements with respect to Internet sales. Actual or perceived technological difficulties or security issues with respect to conducting e-commerce over the Internet generally or through the Company's Web sites or those of its third party fulfillment clients specifically. - The ability of the Company to attract and retain management and employees generally and specifically with the requisite experience in e-commerce, Internet and direct marketing businesses. The ability of employees of the Company who have been promoted as a result of the Company's strategic business realignment program to perform the responsibilities of their new positions. - A general deterioration in economic conditions in the United States leading to key vendors and suppliers reducing or withdrawing trade credit to companies in the retail, catalog and direct marketing industries. The risk that key vendors or suppliers may reduce or withdraw trade credit to the Company, convert the Company to a cash basis or otherwise change credit terms, or require the Company to provide letters of credit or cash deposits to support its purchase of inventory, increasing the Company's cost of capital and impacting the Company's ability to obtain merchandise in a timely manner. The ability of the Company to find alternative vendors and suppliersCompany’s Annual Report on competitive terms if vendors or suppliers who exist cease doing business with the Company. - The inability of the Company to timely obtain and distribute merchandise, leading to an increase in backorders and cancellations. - Defaults under the Congress Credit Facility, or inadequacy of available borrowings thereunder, reducing or impairing the Company's ability to obtain letters of credit or other credit to support its purchase of inventory and support normal operations, impacting the Company's ability to obtain, market and sell merchandise in a timely manner. - The inadequacy of available borrowings under the Congress Credit Facility preventing the Company from paying vendors or suppliers in a timely fashion. - Defaults under the Term Loan Facility impacting the Company's ability to obtain, market and sell merchandise in a timely manner or preventing the Company from paying vendors or suppliers in a timely fashion. 33 - Continued compliance by the Company with and the enforcement by Congress of financial and other covenants and limitations contained in the Congress Credit Facility, including net worth, net working capital, capital expenditure and EBITDA covenants, and limitations based upon specified percentages of eligible receivables and eligible inventory, affecting the ability of the Company to continue to make borrowings under the Congress Credit Facility. - Continuation of the Company's history of operating losses, and the incidence of costs associated with the Company's strategic business realignment program, resulting in the Company failing to comply with certain financial and other covenants contained in the Congress Credit Facility and/or the Term Loan Facility, including net worth, net working capital, capital expenditure and EBITDA covenants and the ability of the Company to obtain waivers from Congress and/or Chelsey Finance in the event that future internal and/or external events result in performance that results in noncompliance by the Company with the terms of the Congress Credit Facility and/or the Term Loan Facility requiring remediation. - The ability of the Company to realize the aggregate cost savings and other objectives anticipated in connection with the strategic business realignment program, or within the time periods anticipated therefor. The aggregate costs of effecting the strategic business realignment program may be greater than the amounts anticipated by the Company. - The ability of the Company to achieve its business plan. - The ability of the Company to maintain advance rates under the Congress Credit Facility that are at least as favorable as those obtained in the past due to market conditions affecting the value of the inventory which is periodically re-appraised in order to re-set such advance rates. - The ability of the Company to dispose of assets related to its third party fulfillment business, to the extent not transferred to other facilities. - The initiation by the Company of additional cost cutting and restructuring initiatives, the costs associated therewith, and the ability of the Company to timely realize any savings anticipated in connection therewith. - The ability of the Company to maintain insurance coverage required in order to operate its businesses and as required by the Congress Credit Facility. The ability of the Company to obtain certain types of insurance, including directors' and officers' liability insurance, or to accept reduced policy limits or coverage, or to incur substantially increased costs to obtain the same or similar coverage, due to recently enacted and proposed changes to laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules of the Securities and Exchange Commission thereunder. - The inability of the Company to access the capital markets due to market conditions generally, including a lowering of the market valuation of companies in the direct marketing and retail businesses, and the Company's business situation specifically. - The inability of the Company to sell non-core or other assets due to market conditions or otherwise. - The inability of the Company to redeem the Series C Participating Preferred Stock. - The ability of the Company to maintain the listing of its Common Stock on the American Stock Exchange due to a failure to maintain $15 million of public float or otherwise. - The continued willingness of customers to place and receive mail orders in light of worries about bio-terrorism. - The ability of the Company to sublease, terminate or renegotiate the leases of its vacant facilities in Weehawken, New Jersey and other locations. - The ability of the Company to smoothly transition its operations at its leased fulfillment facility in LaCrosse, WI to its owned facility in Roanoke, VA. 34 - The ability of the Company to achieve a satisfactory resolution of the various class action lawsuits that are pending against it, including the Wilson case. The possibility that the Company may be required to post a significant bond or bonds in the Wilson case or the other class action lawsuits when appealing an adverse decision of the courts. - The ability of the Company to evaluate and implement the requirements of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission thereunder, as well as recent changes to listing standards by the American Stock Exchange, in a cost effective manner. - The ability of the Company to achieve cross channel synergies, create successful affiliate programs, effect profitable brand extensions or establish popular loyalty and buyers' club programs. - Uncertainty in the U.S. economy and decreases in consumer confidence leading to a slowdown in economic growth and spending resulting from the invasion of, war with and occupation of Iraq, which may result in future acts of terror. Such activities, either domestically or internationally, may affect the economy and consumer confidence and spending within the United States and adversely affect the Company's business. - Softness in demandForm 10-K for the ~~Company's products. - The inability of the Company~~fiscal year ended December 25, 2004. We do not intend, and disclaim any obligation, to continue to source goods from foreign sources, particularly India and Pakistan, leading to increased costs of sales. - The possibility that all or part of the summary judgment decision in the matter of Rakesh K. Kaul v. Hanover Direct, Inc. will be overturned on appeal. - Reductions in unprofitable circulation leading to loss of revenue, which is not offset by a reduction in expenses. - Any significant increase in the Company's return rate experience as a result of the recent change in its return policy or otherwise. - The inability of the Company to achieve its targeted annual conversion rate of buyers' club customers leading to a loss of the agreed-upon year-end bonus. - Any significant increase in the cost of down as a result of the Asian bird virus or otherwise. update any forward-looking statements.

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ~~INTEREST RATES:~~

Interest Rates: The ~~Company's~~Company’s exposure to market risk relates to interest rate fluctuations for borrowings under the ~~Congress revolving credit facility and its~~Wachovia Facility, including the term ~~financing facilities,~~loans, which bear interest at variable rates, and the ~~Term Loan~~Chelsey Facility, ~~with Chelsey Finance,~~ which bears interest at 5%5.0% above the prime rate publicly announced by Wachovia Bank, N.A. At ~~June 26, 2004,~~September 24, 2005, outstanding principal balances under the ~~Congress Credit~~Wachovia Facility and Chelsey Facility subject to variable rates of interest were approximately ~~$13.4 million.~~$15.2 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 ~~June 26, 2004,~~September 24, 2005, would be approximately ~~$0.13~~$0.4 million on an annual basis.

In addition, the ~~Company's~~Company’s exposure to market risk relates to customer response to the ~~Company's~~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'~~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. The Company's~~

Our management, with the participation of ~~the 35~~ ~~Company's~~our Chief Executive Officer and Chief Financial Officer, has ~~evaluated~~completed an evaluation of the effectiveness of the ~~Company's~~design and operation of our disclosure controls and procedures (as ~~such term is detailed~~defined in ~~Rules 13a-15(e) and 15d-15(e)~~Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the ~~"Exchange Act"~~“Exchange Act”)) aspursuant to Item 307 of Regulation S-K for the ~~end of the period~~fiscal quarter covered by this quarterly report. ~~Based~~

Over the past year and half, we have implemented a plan to remediate previously identified weaknesses in our disclosure and internal controls and procedures. This plan was memorialized in a Remediation Plan adopted by the Audit Committee on ~~such evaluation,~~July 7, 2005 which directs management to periodically review the ~~Company's Chief Executive Officer~~plan to assess its efficacy and ~~Chief Financial Officer have concluded~~requires that it be revised, updated and augmented from time to time as needed. During the third fiscal quarter of

2005, management implemented the following additional remedial steps to enhance our internal and accounting controls and procedures:

•	Documented our significant accounting policies and implemented a procedure to periodically review and update these policies; and
•	Implemented a policy that requires the preparation of contemporaneous memoranda and related documentation to support key accounting judgments and to maintain and document the significant terms of material contracts and the accounting treatment thereof.

As a result of the ~~end~~restatement of ~~such~~our prior period financial statements and the ~~Company's disclosure controls~~delay in the completion of the audits and reviews of those statements and the change in our auditors, the burden on our accounting and financial staff has been greatly increased and has thus far caused us to be unable to file our periodic SEC reports on a timely basis. While management believes that current practices and procedures are ~~effective in recording, processing, summarizing and reporting, on a timely basis, information~~sufficient to bring to its attention items required to be disclosed byin our periodic SEC filings, after an evaluation of those practices, we have determined to institute additional procedures to enhance the ~~Company in~~effectiveness of our disclosure controls. Subject to the reports it files or submits under the Exchange Act. INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relatesforegoing, management believes that ~~have materially affected, or~~our disclosure controls are ~~reasonably likely to materially affect, the Company's internal control over financial reporting. 36~~ effective for purposes of Item 307 of Regulation S-K.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS ~~A class action lawsuit was commenced on March~~

See Note 3 2000 in the District Court in Sequoyah County, Oklahoma entitled Edwin L. Martin v. Hanover Direct, Inc. and John Does 1 through 10 ("Martin"), which sets forth claims for breach of contract, unjust enrichment, recovery of money paid absent consideration, fraud and a claim under the New Jersey Consumer Fraud Act as a result of "insurance charges" paid to the ~~Company by participants in the class action suit. The complaint alleges that the Company charges its customers~~condensed consolidated financial statements for ~~delivery insurance even though, among other things, the Company's common carriers already provide insurance and the insurance charge provides no benefit~~information relating to the Company's customers. Plaintiff also seeks a declaratory judgment as to the validity of the delivery insurance. Plaintiff seeks an order (i) directing the Company to return to the plaintiff and class members the "unlawful revenue" derived from the insurance charges, (ii) declaring the rights of the parties, (iii) enjoining the Company from imposing an insurance charge, (iv) awarding threefold damages of less than $75,000 per plaintiff and per class member, and (v) awarding attorneys' fees and costs. On July 23, 2001, the Court certified a class comprised of all persons in the United States who are customers of any catalog or catalog company owned by the Company and who at any time purchased a product from any such company and paid money which was designated to be an `insurance charge.' The Company filed an appeal of the class certification. On January 20, 2004, the plaintiff filed a motion for oral argument on the appeal of the class certification. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. On August 15, 2001, the Company was served with a summons and four-count complaint entitled Teichman v. Hanover Direct, Inc., Hanover Brands, Inc., Hanover Direct Virginia, Inc., and Does 1-100 ("Teichman"), which was subsequently expanded to include other Hanover Direct, Inc. subsidiaries as defendants. The complaint was filed by a California resident in the Superior Court for the City and County of San Francisco seeking damages and other relief for herself and a class of all others similarly situated arising out of the insurance fee charged by catalogs and Internet sites operated by subsidiaries of the Company. On May 14, 2002, as a result of the Company having filed a Motion to Stay the Teichman action in favor of the previously-filed Martin action and a Motion to Dismiss the case against Hanover Direct, Inc., Hanover Brands, Inc., and Hanover Direct Virginia, Inc. for lack of personal jurisdiction, the Court (1) granted the Company's Motion to Stay the action in favor of the previously-filed Martin action, and (2) granted the Company's Motion to Quash service, leaving only LWI Holdings, Hanover Company Store, Kitchen & Home, and Silhouettes as defendants. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. A class action lawsuit was commenced on February 13, 2002 in the Superior Court of the State of California, City and County of San Francisco entitled Jacq Wilson, suing on behalf of himself, all others similarly situated, and the general public v. Brawn of California, Inc. dba International Male and Undergear, and Does 1-100 ("Brawn"). Does 1-100 are Internet and catalog direct marketers offering a selection of men's clothing, sundries, and shoes who advertise within California and nationwide. The complaint alleged that, for at least four years, members of the class had been charged an unlawful, unfair, and fraudulent insurance fee and tax on orders sent to them by Brawn; that Brawn was engaged in untrue, deceptive and misleading advertising in that it was not lawfully required or permitted to collect insurance, tax and sales tax from customers in California; and that Brawn has engaged in acts of unfair competition under the state's Business and Professions Code. Plaintiff and the class seek restitution and disgorgement of all monies wrongfully collected and earned by Brawn, including interest and other gains, reimbursement of the insurance charge with interest, an order enjoining Brawn from imposing insurance on its order forms; and compensatory damages, attorneys' fees, pre-judgment interest and costs of the suit. (Plaintiff lost at trial on the tax issue and has not appealed it so it is no longer among the issues being litigated in this case.) On November 25, 2003, the Court, after a trial, entered judgment for the plaintiff and the class, requiring Brawn, by June 30, 2004, to refund insurance charges collected from consumers for the period from February 13, 1998 through January 15, 2003 with interest from the date paid. On April 14, 2004, the Court awarded plaintiff's counsel approximately $445,000 of attorneys' fees. On April 23, 2004, the Company filed a Motion to Stay the enforcement of the insurance fees judgment pending resolution of the appeal, including a request to extinguish a lien filed on April 2, 2004, and including a request for a determination that an appellate bond will not be required by the Company. This motion was heard on May 11, 2004 and granted, the Court 37 finding that enforcement of the judgment entered was stayed on January 23, 2004 when Brawn filed its Notice of Appeal. The Company has appealed the trial court's decision on the merits of the insurance fees issue as well as the decision on the attorneys' fees issue. On May 18, 2004, the Court of Appeals issued an Order consolidating the two appeals. The Company plans to conduct a vigorous defense of this action. The potential estimated exposure is in the range of $0 to $4.0 million. Based upon the Company's policy of evaluating accruals forCompany’s legal liabilities, the Company has not established a reserve as a result of management determining that it is not probable that an unfavorable outcome will result. A class action lawsuit was commenced on October 28, 2002 in the Superior Court of New Jersey, Bergen County - Law Division entitled John Morris, individually and on behalf of all other persons & entities similarly situated v. Hanover Direct, Inc., and Hanover Brands, Inc. (referred to in this paragraph as "Hanover"). The plaintiff brought the action individually and on behalf of a class of all persons and entities in New Jersey who purchased merchandise from Hanover within six years prior to filing of the lawsuit and continuing to the date of judgment. On the basis of a purchase made by plaintiff in August 2002 of clothing from a Hanover men's division catalog, plaintiff alleged that Hanover had a policy and practice of improperly adding a charge for "insurance" to the orders it received, and concealed and failed to disclose the charge. Plaintiff claims that Hanover's conduct was in violation of the New Jersey Consumer Fraud Act as otherwise deceptive, misleading and unconscionable such as to constitute unjust enrichment of Hanover at the expense and to the detriment of plaintiff and the class and unconscionable per se under the Uniform Commercial Code for contracts related to the sale of goods. Plaintiff and the class seek damages equal to the amount of all insurance charges, interest thereon, treble and punitive damages, injunctive relief, costs and reasonable attorneys' fees, and such other relief as may be just, necessary and appropriate. On December 13, 2002, the Company filed a Motion to Stay the action pending resolution of the previously-filed Martin action in Oklahoma. The Court granted the Company's Motion to Stay and the case was stayed, and extended once, until March 31, 2004, at which time the stay was lifted. On April 30, 2004, the Company responded to Plaintiff's Amended Complaint. The case is in the discovery phase. The Company plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. On June 28, 2001, Rakesh K. Kaul, a former President and Chief Executive Officer of the Company, filed a complaint in New York State Court against the Company seeking damages and other relief arising out of his separation of employment from the Company including, among other things, severance payments of $2,531,352 and attorneys' fees and costs incurred in connection with the prosecution and defense of the lawsuit, and damages due to the Company's purported breach of the terms of the "Long-Term Incentive Plan for Rakesh K. Kaul" by failing to pay him a "tandem bonus" he alleges was due and payable to him on the 30th day following his termination of employment. The case was removed to the United States District Court for the Southern District of New York whereupon Mr. Kaul amended his complaint to add ERISA claims. On October 11, 2001, the Company filed its Answer, Defenses and Counterclaim to the amended complaint, denying liability under each of Mr. Kaul's eight causes of action, raising several defenses and stating nine counterclaims of its own against Mr. Kaul including, among other things, (1) breach of contract; (2) breach of fiduciary duty; (3) unjust enrichment; and (4) unfair competition. The Company moved to amend its counterclaims, and the parties each moved for summary judgment. The Company requested judgment dismissing Mr. Kaul's claims and judgment awarding damages on the Company's claim for reimbursement of a tax loan. Mr. Kaul requested judgment dismissing certain of the Company's counterclaims and defenses. On January 7, 2004, the Court rendered an Opinion and Order dismissing in part and granting in part the motions on summary judgment. The Court: granted summary judgment in favor of the Company dismissing Mr. Kaul's claim for severance under his employment agreement on the ground that he failed to provide the Company with a general release; granted in part the Company's motion for summary judgment on Mr. Kaul's claim for attorneys' fees, finding as a matter of law that Mr. Kaul is not entitled to fees incurred in prosecuting this lawsuit but finding an issue of fact as to the amount of reasonable fees he may have incurred in seeking advice and representation in connection with the termination of his employment; granted summary judgment in favor of the Company dismissing Mr. Kaul's claims related to change in control benefits on the grounds that Mr. Kaul's participation in the plan was properly terminated when his employment was terminated, the plan was properly terminated, and the administrator and appeals committee properly denied Mr. Kaul's claim; granted summary judgment in favor of the Company dismissing Mr. Kaul's claim for a tandem bonus payment on the ground that payment is not owed to him; granted summary judgment in part and denied 38 summary judgment in part on Mr. Kaul's claims for vacation pay, deeming Mr. Kaul to have abandoned claims for vacation pay in excess of five weeks but finding him entitled to four weeks vacation pay based on the Company's policy and finding an issue of fact as to Mr. Kaul's claim for an additional week of vacation pay in dispute for 2000; and denied summary judgment on the Company's counterclaim for payment under a tax note based on disputed issues of fact. The Court dismissed the Company's affirmative defenses as largely moot and the Court: granted summary judgment in favor of Mr. Kaul dismissing certain of the Company's counterclaims. The Court denied in part and granted in part the Company's motion to amend its Answer and Counterclaims. The Court granted the Company's motion with respect to its claim for reimbursement of amounts paid to the Internal Revenue Service ("IRS") on Mr. Kaul's behalf. Only three claims remained in the case: (i) Mr. Kaul's claim for attorneys' fees pursuant to Section 12 of the employment agreement; (ii) Mr. Kaul's claim for an additional week of vacation pay in the amount of approximately $11,500; and (iii) the Company's counterclaim for $211,729 plus interest it paid to the IRS on Mr. Kaul's behalf. On or about July 13, 2004 a final judgment was entered whereby the Court dismissed the remaining claims (except for Mr. Kaul's claim to attorney's fees incurred in prosecuting and defending the law suit) and ordered a payment to Mr. Kaul in the amount of $45,946, representing four weeks of vacation pay, together with interest thereon from December 5, 2000. The parties have agreed to a final payment, including interest, in the amount of $60,856. The Court is expected to shortly issue a final judgment implementing its summary judgment Opinion. Each party shall have the right to appeal any aspect of that judgment. The Company has reserved $65,435 for payments due Mr. Kaul including the associated employer payroll taxes. Payment was made to Mr. Kaul on July 15, 2004 for the interest portion of the agreement and on July 16, 2004 for the four weeks vacation. The Company was named as one of 88 defendants in a patent infringement complaint filed on November 23, 2001 in the U.S. District Court in Arizona by the Lemelson Medical, Education & Research Foundation, Limited Partnership (the "Lemelson Foundation"). The complaint was not served on the Company until March 2002. In the complaint, the Lemelson Foundation accuses the named defendants of infringing seven U.S. patents, which allegedly cover "automatic identification" technology through the defendants' use of methods for scanning production markings such as bar codes. The Court entered a stay of the case on March 20, 2002, requested by the Lemelson Foundation, pending the outcome of a related case in Nevada being fought by bar code manufacturers. On January 23, 2004, the Nevada Court entered judgment declaring that the claims of each of the patents at issue in the Nevada case, including all seven patents asserted by the Lemelson Foundation against the Company in the Arizona case, are unenforceable under the doctrine of prosecution laches, are invalid for lack of written description and enablement, and are not infringed by the bar code equipment manufacturers. The Lemelson Foundation filed a notice of appeal before the deadline of May 28, 2004. The Arizona court confirmed that the stay of the Arizona case will extend until the entry of a final, non-appealable judgment in the Nevada litigation. The Company has analyzed the merits of the issues raised by the complaint, notified vendors of its receipt of the complaint and letter, evaluated the merits of joining a joint-defense group, and had discussions with attorneys for the Lemelson Foundation regarding their license offer. The Company will not agree to a settlement at this time and thus has not established a reserve. A preliminary estimate of the royalties and attorneys' fees which the Company may pay if it decides to accept the license offer from the Lemelson Foundation range from about $125,000 to $400,000. The Company believes it has defenses against the claims and plans to conduct a vigorous defense of this action. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. In early March 2003, the Company learned that one of its business units had engaged in certain travel transactions that may have constituted violations under the provisions of U.S. government regulations promulgated pursuant to 50 U.S.C. App. 1-44, which proscribe certain transactions related to travel to certain countries. The Company immediately commenced an inquiry into the matter, incurred resulting charges, made an initial voluntary disclosure to the appropriate U.S. government agency under its program for such disclosures and will submit to that agency a detailed report on the results of the inquiry. In addition, the Company has taken steps to ensure that all of its business units are acting in compliance with the travel and transaction restrictions and other requirements of all applicable U.S. government programs. Although the Company is uncertain of the extent of the penalties, if any, that may be imposed on it by virtue of the transactions being voluntarily disclosed, it does not currently believe that any such penalties will have a material effect on its business or financial condition. The Company believes that a loss is not probable; therefore, no accrual for potential losses was deemed necessary. 39 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 or results of operations. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS In consideration for providing the $20 million Term Loan Facility to the Company, the Company will issue to Chelsey Finance a warrant (the "Common Stock Warrant") to purchase 30% of the fully diluted shares of Common Stock of the Company, which the Company believes would be approximately 10,247,210 shares of Common Stock (adjusted for the proposed one-for-ten reverse split of the Company's Common Stock) at an exercise price of $.01 per share. Pending shareholder approval of such issuance at the Company's Annual Meeting of Shareholders scheduled for August 12, 2004, on July 8, 2004, the Company issued to Chelsey Finance a warrant (the "Series D Preferred Warrant") to purchase 100 shares of a newly-issued series of nonvoting preferred stock of the Company, called Series D Participating Preferred Stock (the "Series D Preferred Stock"), that will be automatically exchanged for such Common Stock Warrant upon the receipt of shareholder approval of the issuance thereof at the Company's Annual Meeting of Shareholders scheduled for August 12, 2004. See Note 14 of Notes to Consolidated Financial Statements for a description of the terms of the Term Loan Facility and the Series D Preferred Stock. In connection with the closing of the Term Loan Facility, on July 8, 2004, the Company paid Chelsey a waiver fee equal to 1% of the liquidation preference of the Company's outstanding Series C Participating Preferred Stock, in Common Stock of the Company, issuing to Chelsey 4,344,762 additional shares of Common Stock (calculated based upon the fair market value of the Common Stock two business days prior to the closing date), in consideration for the waiver by Chelsey of its blockage rights over the issuance of senior securities. The Board of Directors of the Company determined that the value of the waiver was at least equal to the aggregate par value of the 4,344,762 shares of Common Stock issued to Chelsey. The Series D Preferred Stock Warrant issued to Chelsey Finance and the shares of Common Stock paid as a waiver fee to Chelsey were not publicly offered and there were no underwriters involved in their offering. The Company issued the Series D Preferred Stock Warrant to Chelsey Finance and the 4,344,762 shares of Common Stock to Chelsey pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder as a transaction by the Company not involving a public offering. ITEM 5. OTHER INFORMATION AMERICAN STOCK EXCHANGE NOTIFICATION The Company received a letter dated May 21, 2004 (the "Letter") from the American Stock Exchange (the "Exchange") advising that a review of the Company's Form 10-K for the period ended December 27, 2003 indicates that the Company does not meet certain of the Exchange's continued listing standards as set forth in Part 10 of the Exchange's Company Guide. Specifically, the Company is not in compliance with Section 1003(a)(i) of the Company Guide with shareholders' equity of less than $2,000,000 and losses from continuing operations and/or net losses in two out of its three most recent fiscal years; and Section 1003(a)(ii) of the Company Guide with shareholders' equity of less than $4,000,000 and losses from continuing operations and/or net losses in three out of its four most recent fiscal years; and Section 1003(a)(iii) of the Company Guide with shareholders' equity of less than $6,000,000 and losses from continuing operations and/or net losses in its five most recent fiscal years. The Exchange requested that the Company contact the Exchange by June 4, 2004 to confirm receipt of the Letter, discuss any possible financial data of which the Exchange's staff may be unaware, and indicate whether or not the Company intends to submit a plan of compliance. In order to maintain its listing on the Exchange, the Company had to submit a plan to the American Stock Exchange by June 22, 2004, advising the Exchange of action it has taken, or will take, that would bring it into compliance with the continued listing standards of the Exchange by November 24, 2005 (18 months of receipt of the Letter). The Company submitted a plan to the Exchange on June 22, 2004 and on August 3, 2004 the Exchange notified the Company that it accepted the Company's plan of compliance and granted the Company an extension of time until November 21, 2005 to regain compliance with the continued listing standards. The Company will be subject to periodic review by Exchange staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the 40 continued listing standards by the end of the extension period on November 21, 2005 could result in the Company being delisted from the Exchange. There can be no assurance that the Company will be able to maintain the listing of its Common Stock on the Exchange. BOARD RESIGNATION On July 30, 2004, Basil P. Regan resigned as a member of the Company's Board of Directors. As a result, Mr. Regan has advised the Company that he will not be standing for reelection at the Company's August 12, 2004 Annual Meeting of Shareholders. Mr. Regan continues to have the right, which is required to be exercised as promptly as practicable, to appoint a designee to the Company's Board of Directors until November 30, 2005 pursuant to the Company's Corporate Governance Agreement dated as of November 30, 2003 among the Company, Chelsey Direct, LLC, Stuart Feldman, Regan Partners L.P., Regan International Fund Limited and Basil P. Regan so long as the Regan group collectively owns at least 29,128,762 shares of Common Stock of the Company (as adjusted for stock splits and the like). 41 proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Amendment to By-laws of the Company 10.1 Employment Agreement, dated as of May 5, 2004, between Wayne P. Garten and the Company 10.2 General Release and Covenant Not to Sue, dated as of May 5, 2004, between Thomas C. Shull and the Company 31.1 Certification signed by Wayne P. Garten 31.2 Certification signed by Charles E. Blue. 32.1 Certification signed by Wayne P. Garten and Charles E. Blue. (b) Reports on Form 8-K: 1.1 Form 8-K, filed March 29, 2004 -- reporting pursuant to Item 5 of such Form the filing of a Form 12b-25 Notification of Late Filing for its Annual Report on Form 10-K for the fiscal year ended December 27, 2003. 1.2 Form 8-K, filed April 2, 2004 -- reporting pursuant to Item 5 of such Form certain letters sent to Chelsey Direct, LLC. 1.3 Form 8-K, filed April 12, 2004 -- reporting pursuant to Item 7 of such Form (information furnished pursuant to Item 12 of such Form) the issuance of a press release announcing operating results for the fiscal year ended December 27, 2003. 1.4 Form 8-K, filed April 12, 2004 -- reporting pursuant to Item 5 of such Form the appointment of Paul S. Goodman as a director. 1.5 Form 8-K, filed April 13, 2004 -- reporting pursuant to Item 9 of such Form a statement of guidance as to where the Company sees fiscal year 2004. 1.6 Form 8-K, filed April 16, 2004 -- reporting pursuant to Item 9 of such Form an unofficial transcript of its conference call with management to review the operating results for the fiscal year ended December 27, 2003. 1.7 Form 8-K, filed May 6, 2004 -- reporting pursuant to Item 5 of such Form the resignation of Thomas C. Shull as Chairman of the Board, President and Chief Executive Officer of the Company and the election of William B. Wachtel as Chairman of the Board and Wayne P. Garten as President and Chief Executive Officer effective immediately. 1.8 Form 8-K, filed May 12, 2004 -- reporting pursuant to Items 7 and 9 of such Form (information furnished pursuant to Item 12 of such Form) the issuance of a press release announcing operating results for the thirteen weeks ended March 27, 2004. 1.9 Form 8-K, filed May 25, 2004 -- reporting pursuant to Item 5 of such Form the receipt of a letter dated May 21, 2004 from the American Stock Exchange as to the Company's compliance with the Exchange's continued listing standards. 2.0 Form 8-K, filed June 17, 2004 -- reporting pursuant to Items 5 and 7 of such Form the Company's signing of a commitment letter with Chelsey Direct LLC for a $20 million junior secured loan facility and an agreement in principle to amend its existing senior credit facility with Congress Financial Corporation and that it had notified the American Stock Exchange that it intends to submit a plan to the Exchange by June 22, 2004 to address its compliance with the Exchange's continued listing standards. 42

31.1 Certification signed by Wayne P. Garten.

31.2 Certification signed by John W. Swatek.

32.1 Certification signed by Wayne P. Garten and John W. Swatek.

2.1 Form 8-K, filed July 12, 2004 -- reporting pursuant to Items 5 and 7 of such Form the closing and funding of the $20 million junior secured term loan facility with Chelsey Finance, LLC and the amendment to the Company's existing senior credit facility with Congress Financial Corporation. 2.2 Form 8-K, filed August 3, 2004 -- reporting pursuant to Items 5 and 7 of such Form the resignation of Basil P. Regan from the Company's Board of Directors effective July 30, 2004. 43

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/ Charles E. Blue ---------------------------------------- Charles E. Blue Senior Vice President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer) Date: August 10, 2004 44

	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: February 21, 2006