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Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended August 24, 2002
----------------------------------------------

OR

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

For the transition period from ............. to ..............

Commission file number 1-9637.


LILLIAN VERNON CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Delaware 13-2529859
- ---------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)

1 Theall Road, Rye, New York 10580
---------------------------------------------------
(Address of principal executive offices) (Zip Code)

914-925-1200
----------------------------------------------------
(Registrant's telephone number, including area code)

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 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 ___

Number of shares outstanding of each of the issuer's classes of common stock:
8,334,445 Shares of Common Stock, $.01 par value, as of October 4, 2002.





LILLIAN VERNON CORPORATION AND SUBSIDIARIES

Form 10-Q

August 24, 2002


Part I. Financial Information Page #
- ----------------------------- ------
Item 1.
Condensed Consolidated Balance Sheets
as of August 24, 2002, August 25, 2001
and February 23, 2002 (unaudited) ............................. 3

Consolidated Statements of Operations
for the quarters and six months ended August 24,
2002 and August 25, 2001 (unaudited) .......................... 4

Consolidated Statements of Cash Flows
for the quarters and six months ended August 24,
2002 and August 25, 2001 (unaudited) .......................... 5

Notes to Consolidated Financial
Statements (unaudited) ........................................ 6-9

Item 2.
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ................................................. 9-13

Item 3.
Quantitative and Qualitative Disclosures
About Market Risk ............................................. 14

Part II. Other Information ............................................. 15
- --------------------------

Signatures ............................................................. 15

Officers' Certifications ............................................... 16-17

Sarbanes-Oxley Act Section 906 Certification ........................... 18


Page 2 of 18



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)




AUGUST 24, AUGUST 25, FEBRUARY 23,
ASSETS 2002 2001 2002
------ --------- --------- -----------

Current assets:
Cash and cash equivalents .................................. $ 13,752 $ 11,493 $ 24,894
Accounts receivable, net of allowances of $294, $281,
and $534, respectively ................................... 8,383 8,777 14,956
Merchandise inventories .................................... 35,602 45,670 26,618
Deferred income taxes ...................................... -- -- 293
Prepayments and other current assets ....................... 9,777 12,416 8,081
--------- --------- ---------
Total current assets ................................... 67,514 78,356 74,842

Property, plant and equipment, net ........................... 30,288 33,031 30,798
Deferred catalog costs ....................................... 10,553 9,536 6,445
Deferred income taxes ........................................ 8,853 -- 1,113
Other assets ................................................. 6,493 7,108 7,559
--------- --------- ---------
Total .................................................. $ 123,701 $ 128,031 $ 120,757
--------- --------- ---------

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------

Current liabilities:
Trade accounts payable and accrued expenses ................ $ 24,236 $ 22,949 $ 19,176
Cash overdrafts ............................................ 4,728 171 489
Customer deposits .......................................... 3,550 4,387 2,897
Deferred income taxes ...................................... 1,653 437 --
--------- --------- ---------
Total current liabilities .............................. 34,167 27,944 22,562

Deferred income taxes ........................................ -- 768 --
Other liabilities ............................................ 8,303 4,046 6,782
--------- --------- ---------
Total liabilities ...................................... 42,470 32,758 29,344
--------- --------- ---------

Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding ............. -- -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued - 10,386,324 shares, 10,389,674 shares
and 10,389,674 shares, respectively ...................... 104 104 104
Additional paid-in capital ................................. 31,332 31,332 31,332
Retained earnings .......................................... 76,230 90,329 87,387
Accumulated other comprehensive losses, net of taxes ....... (1,008) (527) (1,500)
Treasury stock, at cost -2,053,273 shares, 2,072,775 shares
and 2,088,731 shares, respectively ....................... (25,427) (25,965) (25,910)
--------- --------- ---------
Total stockholders' equity ............................. 81,231 95,273 91,413
--------- --------- ---------
Total .................................................. $ 123,701 $ 128,031 $ 120,757
--------- --------- ---------




See Notes to Consolidated Financial Statements


Page 3 of 18


LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)




SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------- ---------------------
AUGUST 24, AUGUST 25, AUGUST 24, AUGUST 25,
2002 2001 2002 2001
--------- --------- --------- ---------

Revenues ..................................... $ 36,056 $ 36,828 $ 72,945 $ 76,521

Costs and expenses:
Product and delivery costs ................. 24,438 23,191 46,465 46,569
Selling, general and administrative expenses 19,659 19,398 40,714 42,326
Restructuring credit (Note 3) .............. -- (113) (387) (113)
-------- -------- -------- --------
44,097 42,476 86,792 88,782
-------- -------- -------- --------
Operating loss ........................... (8,041) (5,648) (13,847) (12,261)
Interest income .............................. 20 191 144 593
Financing expense (Note 4) ................... (1,504) (71) (3,067) (156)
-------- -------- -------- --------
Loss before benefit from
income taxes ........................... (9,525) (5,528) (16,770) (11,824)

Provision for (benefit from) income taxes:
Current .................................. 21 (3,058) 137 (5,202)
Deferred ................................. (3,466) 958 (5,973) 709
-------- -------- -------- --------
(3,445) (2,100) (5,836) (4,493)
-------- -------- -------- --------

Net loss .............................. (6,080) (3,428) (10,934) (7,331)
-------- -------- -------- --------


Net loss per common share - Basic and Diluted $ (.73) $ (.41) $ (1.31) $ (.87)
-------- -------- -------- --------

Weighted average number of common shares -
Basic and Diluted ............................ 8,334 8,376 8,324 8,467
-------- -------- -------- --------




See Notes to Consolidated Financial Statements.


Page 4 of 18



LILLIAN VERNON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)




SIX MONTHS ENDED
---------------------
AUGUST 24, AUGUST 25,
2002 2001
--------- ---------

Cash flows from operating activities:
Net loss ................................................................ ($10,934) ($ 7,331)
Adjustments to reconcile net loss to net cash provided by
(used in ) operating activities:
Financing expense for paper collar contract ........................... 2,932 --
Depreciation .......................................................... 1,109 1,260
Amortization .......................................................... 1,582 456
Decrease in accounts receivable ....................................... 6,573 10,706
Increase in merchandise inventories ................................... (8,984) (13,726)
Increase in prepayments and other current assets ...................... (1,696) (6,834)
Increase in deferred catalog costs .................................... (4,108) (739)
Increase in other assets .............................................. (23) (1,904)
Increase in trade accounts payable and accrued expenses ............... 3,710 291
Increase (decrease) in customer deposits .............................. 653 (196)
Decrease in other liabilities ......................................... (61) (86)
(Increase) decrease in deferred income taxes .......................... (5,794) 1,024
-------- --------
Net cash used in operating activities ............................. (15,041) (17,079)
-------- --------

Cash flows from investing activities:
Purchases of property, plant and equipment .............................. (599) (635)
-------- --------
Net cash used in investing activities .............. (599) (635)
-------- --------

Cash flows from financing activities:
Increase (decrease) in cash overdrafts .................................. 4,239 (1,130)
Dividends paid .......................................................... -- (1,348)
Payments to acquire treasury stock ...................................... (3) (2,835)
Reissuance of treasury stock for stock options and employee benefit plans 262 340
-------- --------
Net cash provided by (used in) financing activities ................. 4,498 (4,973)
-------- --------

Net decrease in cash and cash equivalents ........................... (11,142) (22,687)
-------- --------

Cash and cash equivalents at beginning of period .......................... 24,894 34,180
-------- --------
Cash and cash equivalents at end of period ................................ $ 13,752 $ 11,493
-------- --------


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes .......................................................... $ 109 $ 518
-------- --------




For the six months ended August 25, 2001, accounting for the Company's paper
hedge contract resulted in a non-cash charge of $527 (net of tax of $323) to
accumulated other comprehensive loss and a liability of $850. See Note 4.


See Notes to Consolidated Financial Statements.


Page 5 of 18



LILLIAN VERNON CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. The year-end condensed
balance sheet data as of February 23, 2002 was derived from audited financial
statements, but does not include all Notes to Financial Statements and
Statements of Stockholders Equity required by generally accepted accounting
principles. The interim financial statements furnished with this report reflect
all adjustments, consisting only of items of a normal recurring nature, which
are, in the opinion of management, necessary for the fair statement of the
consolidated financial condition and consolidated results of operations for the
interim periods presented. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended February 23, 2002.


1. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows (in thousands):

August 24, August 25, February 23,
2002 2001 2002
--------- --------- -----------

Land and buildings ............... $33,023 $32,946 $32,975
Machinery and equipment .......... 30,732 32,910 30,284
Furniture and fixtures ........... 4,239 4,241 4,162
Leasehold improvements ........... 1,002 1,021 977
------- ------- -------
Total property, plant &
equipment, at cost ........... 68,996 71,118 68,398

Less: accumulated depreciation
and amortization ........ 38,708 38,087 37,600
------- ------- -------
Property, plant and equipment, net $30,288 $33,031 $30,798
------- ------- -------


Page 6 of 18







2. LOSS PER SHARE

Basic and diluted loss per share was calculated as follows (amounts in
thousands):

Second Quarter Ended Six Months Ended
-------------------- --------------------
August 24, August 25, August 24, August 25,
2002 2001 2002 2001
-------- -------- -------- --------
Net loss - Basic and Diluted ... ($ 6,080) ($ 3,428) ($10,934) ($ 7,331)

Weighted average shares for
Basic and Diluted EPS .... 8,334 8,376 8,324 8,467

For the quarters and six month periods ended August 24, 2002 and August 25,
2001, options on 2,232,000 and 1,759,000 shares of common stock, respectively,
were not included in the calculation of weighted average shares for Diluted EPS
because their effects were antidilutive.

3. RESTRUCTURING AND OTHER CHARGES (CREDITS)

During fiscal 2001, the Company recorded pretax restructuring and other
charges aggregating $2,050,000, which included severance pay for a former
officer ($360,000), and for a restructuring plan ($1,690,000) to streamline
operations and reduce costs in light of decreased consumer spending and an
uncertain economy ("the Plan"). Under the Plan, the Company eliminated
approximately 12% of its salaried workforce and consolidated its Las Vegas Call
Center into its National Distribution Center located in Virginia Beach. Changes
in the accrued balance for Plan costs through August 24, 2002 were as follows
(dollars in thousands):




Initial
Plan Asset Write-offs Balance as of
Cost & Expenditures Adjustments August 24, 2002
------- ---------------- ----------- ---------------

Severance and related benefits $ 687 ($ 687) -- $ --
Write-off of leasehold
improvements and equipment 317 (204) ($ 113) --
Lease termination costs ...... 686 (299) (387) --
------- ------- ------- -----
$ 1,690 ($1,190) ($ 500) $ --



In the prior year's second quarter (ended August 25, 2001), a $113,000
restructuring credit was recorded due to the favorable disposition of certain
fixed assets.

On April 24, 2002, the Company decided to reactivate the Las Vegas Call
Center as a seasonal call center for the upcoming peak holiday selling season.
As a result of this decision, the remaining accrual of $387,000 for the lease
termination costs for this facility was reversed in the first quarter of fiscal
2003.


Page 7 of 18



4. PAPER HEDGE CONTRACT

The Company's earnings are impacted by fluctuating paper prices. In order
to partially mitigate this risk the Company entered into a collar hedge contract
in 1999. This contract covers certain grades of paper used by the Company to
produce its catalogs. There is a floor and ceiling on paper prices within the
contract. If paper prices remain within the range of the contract, there would
be no payment to either party to the contract. If paper prices exceed the
established ceiling the Company is entitled to be reimbursed by the counterparty
for the excess. Conversely, if paper prices fall below the established floor the
Company must pay the counterparty. The Company did not pay a premium at the
inception of the contract. The contract has an expiration date of August 2005.

Financial Accounting Standard ("FAS") No. 133 requires that all derivative
financial instruments be recorded on the balance sheet as either assets or
liabilities at fair value. Changes in the fair value of derivatives are recorded
each period in earnings or other comprehensive earnings (losses), depending on
whether a derivative is designated and effective as part of a hedge transaction
and, if it is, the type of hedge transaction. Gains and losses on derivative
instruments reported in other comprehensive earnings (losses) are reclassified
to earnings in the periods in which earnings are affected by the hedged item.
The collar hedge contract had been designated, and was effective, as a hedge
through November 2001. During the nine months ended November 24, 2001,
ineffectiveness related to the collar hedge contract was not significant.

In view of the financial situation of Enron North America Corporation
("Enron"), the counterparty, the Company discontinued hedge accounting during
the fourth quarter of fiscal 2002. As a result, amounts previously recorded in
Accumulated Other Comprehensive Losses under hedge accounting of $1,736,000 (net
of taxes of $1,064,000) through November 24, 2001 will continue to be
reclassified to earnings as a component of selling, general and administrative
expenses in the period in which earnings are affected by the paper costs.
Further, any changes in the fair value of the contract subsequent to November
24, 2001 will be recorded in earnings as financing expense. The fair value of
the contract at August 24, 2002 was $4,403,000, which is included in other
liabilities in the accompanying balance sheet. Total amounts expensed for the
second quarter and the first half of fiscal 2003 approximated $1,852,000 and
$3,702,000, respectively, on a pre-tax basis, which includes $1,438,000 and
$2,932,000, respectively, in financing expense for the change in the fair market
value of the contract and $414,000 and $769,000 respectively, of catalog expense
included in selling, general and administrative expenses.

Enron filed for bankruptcy in the Company's fourth quarter of fiscal 2002.
To date, the Company has not been entitled to receive any payments from Enron
under the paper price collar agreement. Although the Company does not know what
effect Enron's bankruptcy will ultimately have upon the paper price collar
contract, amounts recorded on the accompanying balance sheet are appropriate
with respect to management's current estimate of the liability. The Company's
management and legal counsel are currently exploring the status of the contract.


Page 8 of 18



Hedging activity affected Accumulated Other Comprehensive Losses, net of
income taxes, during the second quarter and the six months ended August 24, 2002
as follows (dollars in thousands):

Balance as of February 23, 2002 ....................... $1,500
Derivative losses transferred to earnings:
Quarter ended May 25, 2002 ................... (42)
Quarter ended August 24, 2002 ................ (450)
------
Balance as of August 24, 2002 ......................... $1,008

5. RECENTLY ADOPTED ACCOUNTING STANDARD

Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the six
months ended August 25, 2001 was not material.

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

Results of Operations
Quarter Ended August 24, 2002

The net loss for the second quarter of fiscal 2003 was ($6.1) million, or
($.73) per share, compared to ($3.4) million, or ($.41) per share for the same
period last year. The increase in the net loss for the second quarter of fiscal
2003 was due to several operating factors including a postal rate increase in
July 2002. The Company also implemented a new program which will reward the
National Distribution Center employees for increased efficiency. While initial
costs associated with the implementation of this pay-for-performance program of
approximately $.6 million after taxes ($.08 per share) were recognized in the
second quarter, the majority of savings to be derived from the program this year
are expected to be recognized in the Company's peak season, during the second
half of the fiscal year. The second quarter results also included an additional
financing charge of $.9 million after taxes, ($.11 per share) to record the
change in the fair market value of the Company's paper price collar contract.
Exclusive of these two charges, the net loss per share would have been ($.54)
for the second quarter of fiscal 2003. The Company's business is seasonal. Net
losses are generally incurred during the first and second fiscal quarters.

Revenues for the quarter ended August 24, 2002 decreased 2.1% to $36.1
million compared to $36.8 million last year, primarily due to a reduction of
approximately 2.5% in the number of catalogs circulated during the quarter.
While the total number of orders processed for the quarter increased 1.6% over
the same period last year,


Page 9 of 18



Internet orders rose by 76% compared to last year, and represented approximately
19% of the Company's total orders processed in the second quarter of fiscal
2003, compared to approximately 10% in the second quarter last year. Average
revenue per order declined by 3.1%, which resulted in average revenue per
catalog being comparable to the same period last year.

Product and delivery costs of $24.4 million in the second quarter of fiscal
2003 increased 5.4% from $23.2 million for the comparable period last year.
Product and delivery costs include the cost of merchandise sold, and the cost of
receiving, personalizing, and filling orders for the Company's customers. As a
percentage of revenue, product and delivery costs increased from 63.0% in the
second quarter of fiscal 2002 to 67.8% in the second quarter of fiscal 2003. The
increase in product and delivery costs was principally because of the new
pay-for-performance program implemented by the Company. While $1 million
(pretax) of costs associated with the implementation of this pay-for-performance
program were recognized in the second quarter, the majority of the savings to be
derived from the program this year, are expected to be recognized in the
Company's peak season, during the second half of the fiscal year. In addition,
the increase was due to higher fulfillment labor costs, which rose principally
because of a 19% increase in the number of personalized items sold. Higher
lease costs were incurred to reactivate the Las Vegas Call Center for the
upcoming peak holiday season. Such lease costs were accrued by the Company at
the end of fiscal 2001 as part of a restructuring accrual, and therefore were
not expensed during the second quarter of fiscal 2002. A portion of the
restructuring accrual which related to lease costs was subsequently reversed in
the first quarter of fiscal 2003 and recorded in the restructuring credit line
on the Statement of Operations.

Selling, general and administrative (SG&A) expenses were $19.7 million in
the second quarter of fiscal 2003 compared to $19.4 million in the second
quarter of fiscal 2002, an increase of $.3 million or 1.3%. As a percentage of
revenue, SG&A expenses increased from 52.7% in the second quarter of fiscal 2002
to 54.5% in the second quarter of fiscal 2003. SG&A expenses rose principally
because of higher software amortization related to the Company's enhanced
website which was launched last fall. This was partially offset by a reduction
in the cost of producing, printing, and mailing the Company's catalogs, which
decreased principally because of lower circulation.

Interest income for the second quarter of fiscal 2003 declined by $.2
million compared to the second quarter of fiscal 2002. The decrease was due
primarily to lower interest rates on the Company's cash investments.

Financing expense for the second quarter of fiscal 2003 was $1.5 million
compared to $.1 million for the second quarter of fiscal 2002. The current
quarter includes a financing charge of $1.4 million to record the change in the
fair value of the Company's paper price collar contract. The Company cannot
predict what effect changes in paper prices will have on its earnings for the
balance of Fiscal 2003 or beyond.


Page 10 of 18



The Company's effective tax benefit rate in the second quarter of fiscal
2003 was 36.2%, compared to 38% for the second quarter of fiscal 2002. The lower
effective tax benefit rate, principally relating to state and local taxes,
reflects the Company's estimated full year effective tax benefit for fiscal
2003.

Results of Operations
Six Months Ended August 24, 2002

The net loss for the six months ended August 24, 2002 was ($10.9) million,
or ($1.31) per share, compared to ($7.3) million, or ($.87) per share for the
same period last year. The net loss for the first six months of fiscal 2003
included financing charges of $1.9 million after taxes, ($.23) per share, to
record the change in the fair market value of the Company's paper price collar
contract and a charge of $.7 million after taxes, ($.09) per share, for the
implementation of the pay-for-performance program. Exclusive of these two
charges, the net loss per share for the first half of fiscal 2003 would have
been ($.99).

Revenues for the six months ended August 24, 2002 decreased 4.7% to $72.9
million compared to $76.5 million last year, primarily due to a planned
reduction of approximately 10% in the number of catalogs circulated during the
six months ended August 24, 2002. Specifically, the Company's Neat Ideas catalog
was consolidated into its other catalogs and the Sales and Bargains catalog was
not mailed in the first quarter. Revenue per catalog increased by 7.6% compared
to the same period last year due to more targeted circulation, positive customer
response to new product offerings and value priced merchandise. While the total
number of orders received for the six month period was comparable to last year,
Internet orders rose 70% compared to the same period last year and represented
approximately 18% of the Company's total orders, compared to approximately 11%
for the six month period last year.

Product and delivery costs of $46.5 million for the six months ended August
24, 2002 decreased 0.2% from $46.6 million for the comparable period last year,
principally because of a decline in the volume of orders processed as a result
of the planned circulation reduction. As a percentage of revenue, product and
delivery costs increased from 60.9% in the six months ended August 25, 2001 to
63.7% for the six months ended August 24, 2002. The increase as a percentage of
revenue occurred principally as a result of $1.1 million of costs to implement
the pay-for-performance program, higher labor costs due to an increase in the
number of personalized items sold, and higher postage costs.

Selling, general and administrative (SG&A) expenses were $40.7 million for
the six months ended August 24, 2002 compared to $42.3 million for the same
period last year, a decrease of $1.6 million or 3.8%. These costs declined
principally because of a decrease in the number of catalogs and total pages
circulated for the six months of fiscal 2003 as well as a decline in the cost of
paper. As a percentage of revenue, SG&A expenses increased to 55.8% for the six
months ended August 24, 2002 compared to 55.3% for the same period last year
primarily because of higher software amortization costs associated with the
Company's enhanced website, and the effect of relatively fixed costs on reduced
sales volume.


Page 11 of 18



The restructuring credit of $.4 million for the six months ended August 24,
2002 represents a reversal of an accrual that was previously recorded for lease
termination costs for the Las Vegas Call Center. During the first quarter of
fiscal 2003, the Company decided to reactivate the facility as a seasonal call
center for the upcoming peak holiday selling season.

Interest income for the six months ended August 24, 2002 was $.1 million
compared to $.6 million for the same period of the prior year. The decrease was
due primarily to lower interest rates on the Company's cash investments.

Financing expense for the six months ended August 24, 2002 was $3.1 million
compared to $.2 million for the same period last year. The six months ended
August 24, 2002 results include a financing charge of $2.9 million to record the
change in the fair value of the Company's paper price collar contract. The
Company cannot predict what effect changes in paper prices will have on its
earnings for the balance of fiscal 2003 or beyond.

The effective tax benefit rate for the six months ended August 24, 2002 was
34.8%, compared to 38% for the same period of the prior year. The lower
effective tax benefit rate, principally relating to state and local taxes,
reflects the Company's estimated full year effective tax benefit for fiscal
2003.

Financial Condition

The Company's balance sheet and liquidity remain strong. Cash and cash
equivalents were $13.8 million as of August 24, 2002. The current ratio was
2.0:1 as of August 24, 2002, compared to 2.8:1 as of August 25, 2001. The
reduction in the current ratio was due principally to lower inventory and
prepayments and other current assets as of August 24, 2002 compared to the same
period last year. Specifically, the income tax benefit for the six month period
last year resulted in a current income tax receivable, compared to a long-term
deferred tax benefit for the six months this year. In addition, other long-term
liabilities of $8.3 million as of August 24, 2002 were $4.3 million higher than
the comparable period last year principally as a result of the change in the
fair market value of the Company's paper price collar contract. The Company has
neither borrowed money in the current six month period nor in the same period of
the prior year, and its working capital needs were met with funds on hand and
generated from operations.

The Company's second quarter is traditionally a period of cash consumption
in preparation for the peak selling season. The Company builds up its inventory
and prepays substantial catalog costs during this period. The Company's use of
funds for operating activities for the six months ended August 24, 2002 was $2.0
million less than the same period last year, principally because of lower
inventory purchases. Inventory levels were $10.1 million, or 22.0% lower this
year as compared to the same period last year, reflecting the Company's
successful efforts to reduce inventory levels and enhance cash flow.

Capital spending of $.6 million for the six months ended August 24, 2002
was the same as the comparable period last year. These expenditures were made
principally to upgrade the Company's computer equipment and distribution
machinery equipment.


Page 12 of 18



For the remainder of fiscal 2003, the Company is not planning any major capital
projects and will continue to implement tight controls on capital expenditures
and make commitments for items that have a positive return on investment.

The Company generated $.3 million of cash from the issuance of common stock
through its employee benefit plans during the six months ended August 24, 2002,
the same amount as last year.

At its February 28, 2002 meeting, the Board of Directors voted to
discontinue the regular quarterly cash dividend to conserve cash for
reinvestment in the business. The Company will evaluate its dividend policy on
an ongoing basis in view of its earnings, financial position, capital
requirements, and other relevant factors.

As of August 24, 2002, the Company had repurchased 1,178,442 shares at a
total cost of approximately $11.4 million under its current 1.5 million share
open market stock repurchase program, which was authorized by the Board of
Directors on October 7, 1998 and September 28, 1999. Virtually no shares were
repurchased during the six months ended August 24, 2002, compared to $2.8
million paid for shares repurchased during the six months last year.

Recently Adopted Accounting Standard

Effective February 24, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets". FAS No. 142 primarily addresses the accounting that
must be applied to goodwill and intangible assets subsequent to acquisition and
requires an annual review of goodwill for potential impairment. The adoption of
FAS No. 142 for fiscal 2003 does not have a material impact on the Company's
financial statements. Goodwill amortization included in the net loss for the six
months ended August 25, 2001 was not material.

Forward Looking Statements

Except for historical information contained herein, statements included in
this Form 10-Q may constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
the Company's future performance, including, without limitation, statements with
respect to the Company's anticipated results of operations, revenues, cash flows
and/or level of business. Such statements represent the Company's current
expectations only and are subject to certain risks, assumptions and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated or projected. Among the factors that could
cause actual results to materially differ include the overall strength of the
economy, the level of consumer confidence and spending, customer preferences,
circulation changes and other initiatives, increased competition in the direct
mail industry and from the growing Internet market, changes in government
regulations, risks associated with the social, political, economic and other
conditions affecting foreign sourcing, including possible disruptions caused by
the current global situation, and possible future increases in operating costs
including postage and paper costs. For further information, see Part I of Form
10-K for the fiscal year ended February 23, 2002.


Page 13 of 18



ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's earnings are impacted by fluctuating paper prices. In order to
partially mitigate this risk, the Company entered into a collar hedge contract
in 1999. This contract covers certain grades of paper used by the Company to
produce its catalogs. There is a floor and ceiling on paper prices within the
contract. If paper prices remain within the range of the contract there would be
no payment to either party to the contract. If paper prices exceed the
established ceiling the Company is entitled to be reimbursed by the counterparty
for the excess. Conversely, if paper prices fall below the established floor,
the Company must pay the counterparty. The Company did not pay a premium at the
inception of the contract. The contract has an expiration date of August 2005.

The paper price collar contract had been designated as, and was effective
as, a hedge through November 2001. During the nine months ended November 24,
2001, ineffectiveness related to the paper price collar contract was not
significant. Enron filed for bankruptcy in the fourth quarter of fiscal 2002. In
view of Enron's financial situation the Company discontinued hedge accounting
during the fourth quarter of fiscal 2002. As a result, amounts previously
recorded in Accumulated Other Comprehensive Losses under hedge accounting of
$1,736,000 (net of taxes of $1,064,000 ) through November 24, 2001 will continue
to be reclassified to earnings as a component of selling, general and
administrative expenses in the period in which earnings are affected by the
paper costs. Such amount is expected to be approximately $1 million of expense
(net of taxes) for fiscal 2003. Further, any changes in the fair value of the
contract subsequent to November 24, 2001 will be recorded in earnings as
financing expense. The fair value of the contract at August 24, 2002 was
$4,403,000, which is included in other liabilities in the accompanying balance
sheet. Total amounts expensed for the six months ended August 24, 2002
approximated $3,702,000 on a pretax basis ($2.4 million after taxes). Changes in
future paper prices will result in changes in the fair market value of the
contract. The Company cannot predict what, if any, financing expenses under the
contract may be incurred for the balance of fiscal 2003 or beyond.

To date, the Company has not been entitled to receive any payments from
Enron under the paper price collar agreement. Although the Company does not know
what effect Enron's bankruptcy will ultimately have upon the paper price collar
contract, amounts recorded on the accompanying balance sheet are appropriate
with respect to management's current estimate of the liability. The Company's
management and legal counsel are currently exploring the status of the contract.


Page 14 of 18



PART II. OTHER INFORMATION

ITEMS 1, 2, 3, and 5 are not applicable and have been omitted.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On July 17, 2002, the Company held its Annual Meeting of Stockholders. The
matters voted upon at the meeting and the results with respect to each such
matter are summarized below.

1. Election of two Directors for a three year term expiring at the 2005
Annual Meeting of Stockholders.

For Withheld
--------- --------
Lillian Vernon .......... 7,842,513 41,196
Joel Salon .............. 7,865,563 18,146

David C. Hochberg, Elizabeth M. Eveillard and Jonah Gitlitz continue to
serve as Directors until the 2003 Annual Meeting of Stockholders. Bert W.
Wasserman and Richard A. Berman continue to serve as Directors until the 2004
Annual Meeting of Stockholders.

2. Approval of the appointment of PricewaterhouseCoopers LLP as the
independent auditors of the Company for the year ending February 22,
2003.

For Against Abstain
--- ------- -------
7,872,564 3,150 7,995

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

Exhibits: None
Reports on Form 8-K: None.


SIGNATURES

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

Lillian Vernon Corporation


Date: October 4, 2002 By:
---------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer


Page 15 of 18



CHIEF EXECUTIVE OFFICER
CERTIFICATION

I, Lillian Vernon, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lillian Vernon
Corporation;

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

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



Date: October 4, 2002

By:
---------------------------------
Lillian Vernon
Chairman and Chief Executive Officer


Page 16 of 18



CHIEF FINANCIAL OFFICER
CERTIFICATION

I, Richard P. Randall, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lillian Vernon
Corporation;

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

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



Date: October 4, 2002


By:
-----------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer


Page 17 of 18



CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned,
being the Chief Executive Officer and the Chief Financial Officer of Lillian
Vernon Corporation (the "Issuer"), respectively, hereby certify that:

1. The 10-Q Report of the Issuer for the quarter ended August 24, 2002
("10-Q Report") fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934, and that

2. The 10-Q Report fairly presents, in all material respects, the
financial condition and results of operations of the Issuer.


Date: October 4, 2002

LILLIAN VERNON CORPORATION

By:
-------------------------------
Lillian Vernon
Chief Executive Officer


By:
-------------------------------
Richard P. Randall
Executive Vice President
Chief Operating Officer/
Chief Financial Officer


Page 18 of 18