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United States

Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-K







|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended June 28, 2008

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 333-127173





Harry & David Holdings,
Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 20-0884389                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

2500 South Pacific Highway, Medford, OR, 97501

(Address of Principal Executive Offices)

(541) 864-2362

(Registrants telephone number including area code)

None

(Former name, former address,
and former fiscal year if changed since last report)





None

(Securities registered pursuant to Section 12(b) of the Act)

None

(Securities registered pursuant to Section 12(g) of the Act)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No   ̈

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 if 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   ̈    No  x

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act (check one):

Large accelerated   ̈    Accelerated filer   ̈    Non-accelerated filer  x    Smaller
reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2)    Yes   ̈    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant is not applicable as the registrants common stock is not publicly-held or publicly traded.

The number of outstanding shares of the registrants common stock as of August 23, 2008 was 1,033,295.









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AVAILABLE INFORMATION

We voluntarily file annual, quarterly, and current reports, and amendments to reports filed or furnished consistent with Sections 13(a), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). The public may read and copy any document we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, information statements and other information regarding Harry & David
Holdings, Inc. and other companies that file materials with the SEC electronically. We also make available free of charge through our website, www.hndcorp.com, copies of our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed or furnished to the SEC.

FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995
that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking
statements. Such forward-looking statements include, without limitation, projections of earnings, revenues or financial items, statements of the plans, strategies and objectives of management for future operations, statements related to the future
performance and growth potential of our brands, statements related to litigation matters, statements related to introducing new core and seasonal merchandise assortments, statements related to reducing returns, replacements and damages, statements
related to implementing new inventory management systems, statements related to new marketing initiatives and expanding electronic direct marketing initiatives, statements related to transportation costs, statements related to our plans to open new
retail stores, statements related to implementing new e-commerce functionality, statements related to future comparable store sales, statements related to our fiscal 2008 income tax provision and effective tax rate, statements related to the use of
our available cash, statements related to our projected capital expenditures, statements related to the impact of new accounting pronouncements, statements related to the impact of acquisitions, statements related to indemnifications under our
agreements, statements related to legal proceedings and statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as will,
may, should, expects, plans, anticipates, believes, estimates, predicts, intends, potential, continue, or the
negative of such terms, or other comparable terminology.

The risks, uncertainties and assumptions referred to above that could cause our results to differ
materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed in Part I  Item 1A  Risk Factors and the risks, uncertainties and assumptions discussed from
time to time in our other public filings and public announcements. All forward-looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking
statements, unless required by law.



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TABLE OF CONTENTS



|                           |  |                                                                                                                 |  |   
|-------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|AVAILABLE INFORMATION      |  | i                                                                                                              
|                           | 
|FORWARD-LOOKING STATEMENTS |  | i                                                                                                              
|                           |  |                                                                                                                
|                           |  | PART I                                                                                                          |  |   
|                           |  |                                                                                                                
|ITEM 1.                    |  | BUSINESS                                                                                                        |  | 1 
|                           |  |                                                                                                                
|ITEM 1A.                   |  | RISK FACTORS                                                                                                    |  | 7 
|                           |  |                                                                                                                
|ITEM 1B.                   |  | UNRESOLVED STAFF COMMENTS                                                                                       |  | 15
|                           |  |                                                                                                                
|ITEM 2.                    |  | PROPERTIES                                                                                                      |  | 16
|                           |  |                                                                                                                
|ITEM 3.                    |  | LEGAL PROCEEDINGS                                                                                               |  | 16
|                           |  |                                                                                                                
|ITEM 4.                    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             |  | 16
|                           |  |                                                                                                                
|                           |  | PART II                                                                                                         |  |   
|                           |  |                                                                                                                
|ITEM 5.                    |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 17
|                           |  |                                                                                                                
|ITEM 6.                    |  | SELECTED FINANCIAL DATA                                                                                         |  | 17
|                           |  |                                                                                                                
|ITEM 7.                    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |  | 19
|                           |  |                                                                                                                
|ITEM 7A.                   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                                       |  | 36
|                           |  |                                                                                                                
|ITEM 8.                    |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                     |  | 37
|                           |  |                                                                                                                
|ITEM 9.                    |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            |  | 37
|                           |  |                                                                                                                
|ITEM 9A.                   |  | CONTROLS AND PROCEDURES                                                                                         |  | 37
|                           |  |                                                                                                                
|ITEM 9B.                   |  | OTHER INFORMATION                                                                                               |  | 38
|                           |  |                                                                                                                
|                           |  | PART III                                                                                                        |  |   
|                           |  |                                                                                                                
|ITEM 10.                   |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                          |  | 39
|                           |  |                                                                                                                
|ITEM 11.                   |  | EXECUTIVE COMPENSATION                                                                                          |  | 41
|                           |  |                                                                                                                
|ITEM 12.                   |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                  |  | 51
|                           |  |                                                                                                                
|ITEM 13.                   |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                       |  | 52
|                           |  |                                                                                                                
|ITEM 14.                   |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                          |  | 53
|                           |  |                                                                                                                
|                           |  | PART IV                                                                                                         |  |   
|                           |  |                                                                                                                
|ITEM 15.                   |  | EXHIBITS, FINANCIAL STATEMENT, AND FINANCIAL STATEMENT SCHEDULES                                                |  | 54
|                           | 
|SIGNATURES                 |  |                                                                                                                



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PART I



|ITEM 1. |  | BUSINESS
|------- |  | --------



Unless otherwise indicated, as used in this Form 10-K, the terms we, our and
us refer to Harry & David Holdings, Inc. and its consolidated subsidiaries. Harry & David Holdings, Inc. is a holding company owned by funds sponsored by Wasserstein Partners, LP, and its affiliates
(Wasserstein), funds sponsored by Highfields Capital Management LP (Highfields), and certain members of management. References to Harry and David are to our subsidiaries that grow, manufacture, design, market and
package our gift-quality fruit and gourmet food products and gifts. References to Harry and David® are to the trademark.



Note that the dollar amounts presented in this Form 10-K are in thousands except per share
data unless otherwise indicated.



OVERVIEW



We are a leading multi-channel
specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry and David® and our newly acquired Wolfermans® brands. Our signature Harry and David® products include our flagship Royal Riviera® pears, our Fruit-of-the-Month Club® products, our Tower of Treats® gifts and Moose Munch® caramel and chocolate popcorn snacks. Our Wolfermans® products include specialty English muffins and other breakfast products.
In addition, on August 8, 2008, we acquired substantially all the assets of Cushmans Fruit Company, Inc., adding to our product line the Cushman HoneyBells® citrus, among other
products. Our marketing channels include direct marketing (via phone, Internet, mail/fax and telemarketing), business-to-business, our Harry and David stores and wholesale distribution through select retailers.



We grow, manufacture, design or package products that account for the significant majority of
our sales annually. In addition, we have created a substantial and scalable infrastructure through recent significant capital expenditures in our production, fulfillment and distribution capabilities, our information technology systems, and our
retail stores network. Our vertically integrated operations allow us to efficiently manage our costs, quality assurance, manufacturing flexibility and inventory. Accordingly, we expect to derive cost structure and operating margin benefits as
revenues increase. We believe that our vertical integration allows us to maintain a high degree of control over product quality compared with that of our competitors as we rely less heavily on third-party suppliers, particularly during peak periods.



OUR HISTORY



Harry & David Holdings, Inc. (formerly known as Bear Creek Holdings, Inc.) was
incorporated in March 2004 in Delaware for the purpose of acquiring Harry & David Operations Corp. (formerly known as Bear Creek Corporation).



On June 17, 2004, Harry & David Holdings, Inc. purchased all of the outstanding shares of common stock of Harry & David Operations Corp. (our
Predecessor for accounting purposes), from Yamanouchi Consumer Inc., (YCI) (the 2004 Acquisition). The 2004 Acquisition was financed through an $82,600 equity contribution from Wasserstein and Highfields,
borrowings by our subsidiary Harry & David Operations Corp. of $155,000 under a senior secured term loan and borrowings by us of $13,900 under an unsecured term loan.



In February 2005, Harry & David Operations Corp. issued $70,000 of Senior Floating Rate Notes and $175,000 of Senior Fixed Rate
Notes (the Senior Notes), the proceeds of which, together with operating cash, were used to repay the $155,000 secured loan and the $13,900 unsecured term loans and to return $82,630 of capital to Harry and David Holdings, Inc.s
initial stockholders. In fiscal 2006, Harry & David Operations Corp. completed the public exchange offer for the Senior Notes. On November 30, 2007, in connection with an internal corporate re-organization, Harry & David
Operations Corp. merged with and into Harry and David, its wholly-owned subsidiary, and Harry and David assumed all of Harry & David Operations Corp.s obligations under the Senior Notes pursuant to a supplemental indenture.



The results of operations presented in this Form 10-K for all periods prior to
the 2004 Acquisition are referred to as the results of the Predecessor. The financial data of the Predecessor and Harry & David Holdings, Inc. (Successor) has been combined for fiscal year 2004 and is presented for
comparative purposes.



Acquisition of Wolfermans business



On
January 15, 2008, we completed the acquisition of Wolfermans, LLC, a direct-marketing company specializing in English muffins and other breakfast products sold primarily under the Wolfermans® brand, from Williams Foods, Inc., for a net purchase price of approximately $22,784, which included $622 of transaction related expenses. We paid for the acquisition of Wolfermans with available cash balances.
We anticipate this acquisition will leverage our infrastructure and generate operating and marketing synergies and productivity improvements for both the Harry and David® and
Wolfermans® brands. In connection with the acquisition, Williams Foods, Inc., has agreed to provide certain transitional services, as needed, through September 2008. The operating
results of Wolfermans are included in both of our Direct Marketing and



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Wholesale segments according to the nature of the operating activity. For further information see Note 5-Acquisition in the notes to our
consolidated financial statements within Item 15 of this Form 10-K. The acquisition was a permitted transaction under the terms of our credit agreement.



Acquisition of Cushmans business



On August 8, 2008, we completed the acquisition of substantially all of the assets of Cushman Fruit Company, Inc., a privately held, multi-channel direct marketer of
specialty foods, primarily Florida citrus, for a net purchase price of approximately $8,615, excluding deal costs, subject to customary final working capital adjustments to be completed 60 days after the transaction date. We paid for the acquisition
of Cushmans with available cash balances. Our revolving credit agreement was amended to permit the acquisition and to address other administrative matters. Cushmans has agreed to provide certain transitional services, as needed, for 60
days after the transaction date. The acquisition was completed subsequent to our fiscal year ended June 28, 2008 and, as such, Cushmans results of operations are not included in our fiscal 2008 results.



Cushmans was founded in 1945, is
based in West Palm Beach, Florida, and is best known for its Cushman HoneyBells® citrus, a rare natural hybrid of Dancy Tangerine and Duncan Grapefruit. Cushman HoneyBells® citrus join Harry & Davids Royal Riviera® Pears and Wolfermans® English Muffins in our family of nationally recognized brands.



Sale of the Jackson & Perkins businesses



As discussed elsewhere in this Form 10-K, we divested our Jackson & Perkins businesses in the fourth
quarter of fiscal 2007, including the direct marketing and wholesale businesses, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventory, as well as its
direct marketing and wholesale customer lists and relationships. In connection with the sale of the business, we entered into an agreement to provide certain transitional services to the buyer through June of fiscal 2008, which has been extended
through October of fiscal 2009. The related assets were written down to fair value, resulting in a net loss on divestiture of Jackson & Perkins of $4,429. Proceeds on the sale, net of transaction fees, were $25,783. A portion of the
proceeds received was comprised of net receivable amounts and product credits due from the buyer of $6,303, of which $1,848 was outstanding at June 28, 2008.



In a separate transaction associated with the sale of our Jackson & Perkins businesses, we also sold approximately 3,200 acres of
land in Wasco, California, which had been used primarily to support the rose growing operations of Jackson & Perkins, as well as the related buildings and equipment. We recognized a net gain of $11,424 on the sale of land and the associated
buildings of its Wasco facility, which was primarily utilized to support rose growing operations. Proceeds on the sale, net of transaction fees, were $27,726.



The total net gain recognized on the sale of the Jackson & Perkins businesses was $6,995, which is included within the results of discontinued operations in
the consolidated statement of operations for fiscal 2008 and 2007. Also included in discontinued operations are the historical operating results of Jackson & Perkins business and the transitional revenues and expenses.



The results of operations of these components are presented in the consolidated statements of
operations and cash flows as discontinued operations.



Unless otherwise noted,
the former Jackson & Perkins segment is generally not discussed in this Item 1 Business section.



For further information regarding the divestiture of the Jackson & Perkins business, see Note 6  Discontinued Operations in the notes to our audited consolidated financial statements
included in Part IV, Item 15 in this Form 10-K.



For financial information
about our reporting segments, see Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 16  Segment Reporting in the notes to our
audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



OUR SEGMENTS



Our net sales are derived
primarily from our Direct Marketing, Stores, and Wholesale segments. Our Other segment also derives sales from surplus, non-gift-quality fruit grown both in our orchards and from contract purchases. For further information on how we
evaluate and define our reporting segments, see Note 16  Segment Reporting in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



Our Brands



Under the Harry and David® brand, we grow, manufacture, design, package and market, through multiple channels, gift-quality fruit, such as our flagship Royal Riviera® pears and
Fruit-of-the-Month Club® products, exclusive specialty food products and other gifts such as Moose Munch® caramel and chocolate
popcorn snacks, packaged gift baskets and Tower of



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Treats® gifts, other gourmet confections, chocolates, bakery items, specialty foods and home
accessories. Under the Wolfermans® brand, we design, package and market through multiple channels exclusive specialty food products including English muffins and other breakfast
products. Our Harry and David® and Wolfermans® products are sold through our catalogs, the Internet, business-to-business
telemarketing, stores and wholesale channels. As discussed above, our newly acquired Cushmans business adds its Cushman HoneyBells® citrus to our family of nationally recognized
brands.



Direct Marketing



We offer a wide variety of gift-quality fruit and exclusive specialty foods and other gifts
through our Harry and David and Wolfermans catalogs, the Internet and our business-to-business and consumer telemarketing. The Direct Marketing metrics below do not include Wolfermans activity for the year due to the lack of availability
of comparative information.



Catalogs.Our catalogs have historically
been and continue to be our primary marketing tool for both existing and new customers and help to generate the majority of our orders and sales in each of our direct marketing response channels. We maintain an active marketing and purchasing
history, and we model a customers propensity to respond to future promotions. For prospective customers, we employ a similar strategy based on names and information that we rent from or exchange with third parties. In fiscal 2008, we
circulated approximately 103.2 million Harry and David catalogs, an increase of approximately 4.3% over the prior fiscal year. In fiscal 2007, we circulated approximately 98.9 million Harry and David catalogs, an increase of approximately
0.7% over the prior fiscal year.



Internet.Our Harry and David website,
at www.harryanddavid.com and our Wolfermans website, at www.wolfermans.com, provide growing and complementary channels that enable customer access and convenience to our catalog business, enable timely communication through
email, enhance our market share of last minute gift-giving sales and increase our brand awareness. In fiscal 2008, nearly 52% of all our direct marketing orders were placed over the Internet, which on a dollar basis, represents approximately 42% of
net sales, and approximately 70% of our new customers placed at least one order on our website. In fiscal 2007, nearly 46% of all direct marketing orders were placed over the Internet, which on a dollar basis, represents approximately 38% of net
sales, and approximately 63% of our new customers placed at least one order on our website. Our newly acquired Cushmans business adds its website, at www.honeybell.com, to our group of internet sales channels.



Increased Internet orders help lower infrastructure and operating costs and improve inventory
management through pricing flexibility, as well as lower customer acquisition expenses compared to catalogs. The Internet also allows us to capture a larger share of our customers gifting orders. We believe that our highly recognizable brand
name has enabled us to develop strategic on-line partnerships, strategic advertising placement on websites and key word search placement on search engine websites.



Business-to-business sales.We offer business-to-business sales of our products for corporate gift-giving, incentive and consumer
promotional programs throughout the year. Business-to-business customers tend to generate higher average order sizes and become valuable long-term customers. Our relationships with these customers are typically established for a specific period of
time and are tied to a specific selling season or event.



Customer profile.In fiscal 2008, individuals accounted for the majority of our Direct Marketing net sales, while businesses accounted for the remaining sales. Our Direct Marketing customers are primarily affluent, well-educated, discerning, brand responsive
family oriented women. The top 100 customers in our Direct Marketing segment represented approximately 1.6% of Direct Marketing segment net sales in fiscal 2008 compared to 1.5% in 2007.



Competition.The U.S. consumer markets for flowers, cards and gifts, and specialty foods are highly competitive and fragmented. We
compete based on product quality, package design, shopping convenience, customer service and previous brand experience. In our direct marketing channel, we compete with traditional distribution channels, other web sites, floral and specialty gift
direct marketers and catalog companies. Direct Marketings primary competitors include 1-800 Flowers, FTD.com, Williams Sonoma and Omaha Steaks.



Stores



We launched our Stores segment in 1993 and opened our flagship Country Village store near our headquarters in
Medford, Oregon in 1994. Our Stores provide a platform to capture consumer demand for year-round gifts, self-consumption as well as entertaining needs. Our stores also increase our access to new customers and allow us to extend our Harry and
David® brand presence to a wider audience. Our Stores segment also acts as a consumer testing ground for new products that can later be expanded into our Direct Marketing and Wholesale
segments.



Our core
products sold in stores include signature holiday and seasonal gift items such as boxes of Royal Riviera® pears and Tower of Treats® gifts. Our Stores segment also offers an expanded assortment of products for self-use and entertaining needs including a broad assortment of chocolates, confections, snacks, condiments, easy-to-prepare specialty foods, home entertainment
products such as tabletop and home décor accessories.



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Our outlet stores focus on products for self-use along with selections from our core gift product line. Our specialty
stores focus on our core product line, gift-ready packaging, selected tabletop, home décor accessory and entertainment products. Our flagship Country Village store offers the full selection of Harry and David retail products as well as
expanded offerings consisting of fresh fruit, vegetables and produce, and gourmet specialty foods and wine selections.

Store locations. We operate
our stores in leading outlet and lifestyle centers, specialty malls and other high traffic shopping areas throughout the United States. We intend to open new store locations, primarily in outlet centers. The number of stores in operation by type at
fiscal year end was as follows:



|                             |  |               |  |               |  |              
|---------------------------- |  | ------------- |  | ------------- |  | -------------
|Store Type                   |  | June 28, 2008 |  | June 30, 2007 |  | June 24, 2006
|Country Village stores       |  | 1             |  | 1             |  | 1            
|Factory outlet center stores |  | 95            |  | 88            |  | 83           
|Specialty stores             |  | 47            |  | 46            |  | 46           
|                             |  |               |  |               |  |              
|Total stores in operations   |  | 143           |  | 135           |  | 130          

Customer profile. Similar to our Direct Marketing segment customers, our Stores segment customers are
primarily affluent, well-educated, discerning, brand-responsive and family-oriented women. Our store customers, who are slightly younger, purchase primarily for self-use and entertaining purposes, while our Direct Marketing customers, who are
typically slightly older, primarily make purchases for gifts. Stores customers make purchases year-round and more frequently in the non-holiday period than Direct Marketing customers and, therefore, provide us with new year-round customers to target
through our Direct Marketing segment at favorable customer acquisition costs.

Competition. Our Stores compete based on proprietary, diverse and
high-quality product offerings, and focus on customer satisfaction and gift services. Our primary competitors in the confections sector are Sees Candies, Lindt & Sprüngli (the parent company of Ghirardelli), Godiva and Rocky
Mountain Chocolate. Our primary competitors in the specialty food and home accessories sector are Williams-Sonoma for our specialty stores and Kitchen Connection and Le Gourmet Chef for our outlets.

Wholesale

Our Wholesale segment was launched in fiscal 2001
to further expand our customer reach and brand awareness, focusing primarily on building relationships with leading retailers, generally including select club channel retailers, mass merchants, department stores, specialty retailers and grocery
accounts. The top ten wholesale customers represented approximately 86% and 88% of Wholesale segment gross product revenues in fiscal 2008 and 2007, respectively. We also believe that our wholesale relationships increase our brand presence and
awareness, and allow us to produce and sell greater amounts during our non-holiday selling season.

All of the products that we sell through the wholesale channel are branded, proprietary and packaged appropriately for retail customers. Harry and David products sold through the wholesale channel include chocolates and confections, such as
Moose Munch® caramel and chocolate popcorn confection and Moose Munch® bars, as well as channel-appropriate gift baskets and
other food gifts.

Competition.Our Wholesale segments primary competitors in the confections sector are premier confectioneries
Lindt & Sprüngli (the parent company of Ghirardelli) and Godiva.

Production, Manufacturing and Support Functions

We own approximately 3,400 acres of land in Oregon, of which approximately 1,900 acres are planted orchards geographically dispersed throughout the Rogue Valley of
Southern Oregon at varying elevations and micro-climates. This dispersion has historically allowed us to successfully mitigate the risks associated with frost, wind, hail, storm damage and other inclement weather as well as dependence on any single
water source. Also included in our 3,400 acres is our 93-acre campus in Medford, Oregon, which houses our 54,000 square foot bakery, confectionery and chocolate complex dedicated to the production of baked goods, chocolates and confections, our
646,000 square foot fruit packing and gift assembly complex including cold storage, our 72,000 square foot year-round call center and various other distribution and storage facilities. Our owned acreage also includes housing for our seasonal
workforce. We also own a 51-acre campus in Hebron, Ohio, which houses our 275,000 square foot fruit packing and gift assembly complex including cold storage and our 55,000 square foot office space and call center.



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We are currently the largest producer of Comice pears in the United States, producing or controlling the majority of the
gift-quality Comice pears commercially produced in the United States.

RAW MATERIALS, INVENTORY MANAGEMENT AND SOURCING

We outsource some of our products including selected fresh produce, meats, certain confections, snacks, condiments and tabletop, entertaining and home décor
accessories. We maintain high quality standards in our selection of third-party vendors to which we outsource and from which we purchase.

Our primary raw
materials include paper for our catalogs, corrugated paper for our delivery needs, and chocolate, butter, cheese and fruit that we do not produce or grow ourselves. We attempt to have multiple suppliers for critical raw materials in order to avoid
dependency on any one particular supplier. We develop our products based on projected demand and have the flexibility in our manufacturing operation to change the quantity and assortment of products to ensure we have adequate supply while minimizing
lost sales or excess inventory.

DISTRIBUTION AND LOGISTICS

We operate two year-round distribution centers, located in Medford, Oregon and Hebron, Ohio, to deliver our products to our customers. In Medford, Oregon, plant products and food products along with other store merchandise are distributed
through two discrete buildings. In Hebron, Ohio, our products are packaged and distributed in a combination of owned and leased buildings. In addition to our owned facilities, we lease storage and distribution facilities throughout the United States
during the holiday selling season.

From our manufacturing and packaging facilities, products are typically shipped by refrigerated truck or common carrier
to one of our distribution centers. Depending on the ultimate customer, subsequent distribution may include truck shipment to regional distribution points, to our Stores or to our wholesale customers. Shipments to customers from our distribution
points are carried by commercial parcel service or U.S. Postal Service. For expedited deliveries, we can ship directly through commercial parcel service or the U.S. Postal Service from our facilities in Medford, Hebron or other seasonal distribution
locations. Larger wholesale customers often pick up products directly from our distribution centers.

INFORMATION TECHNOLOGY

Our information technology systems consist of both purchased systems and proprietary software that have fully-integrated functionality. Our internally developed order
fulfillment software is integrated with our manufacturing and distribution operations. At the point of order, a customer is able to select a desired receipt date to coincide with gift-giving occasions. In addition, the system is able to select
products from our inventory that comply with state or international agricultural restrictions, as appropriate, and assign the distribution facility from which the order will be shipped.

Our information technology department generally manages our technology systems, but in some cases, where appropriate, systems and data are managed outside of the department. We have invested significant capital to
develop our information technology infrastructure and we estimate annual expenditures will generally include selected system replacements, normal maintenance and functional enhancements.

Our information technology systems were designed with an emphasis on infrastructure stability. While several of our systems are linked, in the event of a system error, built-in redundancy and fail-safe capabilities
are generally designed to keep remaining systems operational whenever possible.

CALL CENTERS AND CUSTOMER SERVICE

We accept orders through two year-round call centers located in Medford, Oregon and Hebron, Ohio, which collectively operate 24 hours a day, seven days a week. We have a
72,000 square foot call center at our Medford, Oregon facility and a 55,000 square foot call center and office space at our Hebron, Ohio facility. In order to support our peak selling season, we also operate a seasonal call center in Eugene, Oregon.
Our newly acquired Cushmans business (discussed above) does not currently utilize our call center as such services are and will be outsourced to third-parties until the transition to our call centers are complete.

Our in-house call centers enable us to retain greater control of the quality, timeliness and cost of taking product orders than other marketers who outsource call center
services to third-party contractors. Through our toll-free numbers, customers place orders, request catalogs or make merchandise and order inquiries. Customers generally have access to real-time product



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availability information and are able to select a desired receipt date at the time of order. Our experienced customer service representatives, including many
of our seasonal staff who return each year to assist us during our peak selling periods, are an integral part of our business. We hire, train and retain customer-friendly customer service agents to answer telephone and e-mail inquiries, to offer
assistance with shopping online and online customer service and to provide prompt attention and helpful information in response to our customers inquiries.

Defining attributes of the call centers are their scalability and integration. The information technology systems that support the call centers are scalable, supporting few call center workstations during non-peak seasons and expanding
during peak seasons. In addition, the call centers are all fully integrated such that in the event of a hardware or software error at one call center, all incoming calls will automatically be rerouted to functioning call centers.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

We hold trademark registrations covering the form and style of most of the slogans and trademarks used in our advertisements and packaging materials, including Royal Riviera® pears, Fruit-of-the-Month Club® product shipments, Tower of Treats® gifts, Moose Munch® caramel and chocolate popcorn snacks, Wolfermans®products and recipes and Cushman HoneyBells® citrus. We believe that our trademark registrations are of significant value to our business.

We own or have rights to trademarks and trade names that we use in conjunction with the operation of our business.
Our service marks and trademarks used in this Form 10-K include: Harry and David®; Royal Riviera® pears; Fruit-of-the-Month
Club®; Tower of Treats®; Moose Munch®; Royal Chocolates®; Wolfermans® and Cushman HoneyBells® citrus. Each trademark, trade
name or service mark of any other company appearing in this Form 10-K belongs to its holder. Use or display by us of other parties trademarks, trade names or service marks is not intended to and does not imply a relationship with, or
endorsement or sponsorship by us of, the trademark, trade name or service mark owner.

EMPLOYEES

At August 23, 2008, we had 1,321 full-time employees. During the fiscal 2008 holiday selling season, we employed approximately 9,292 workers.

GOVERNMENT REGULATION

Our food operations are subject to regulations
enforced by, among others, the U.S. Food and Drug Administration and state, local and foreign equivalents, and to inspection by the U.S. Department of Agriculture and other federal, state, local and foreign environmental, health and safety
authorities. The U.S. Food and Drug Administration enforces statutory standards regarding the labeling and safety of food products, establishes ingredients and manufacturing procedures for certain foods, establishes standards of identity for foods
and determines the safety of food substances in the U.S. Similar functions are performed by state, local and foreign governmental entities with respect to food products produced or distributed in their respective jurisdictions. See
Item 1A  Risk Factors.

We are subject to various labor, health and pension regulations, which, among others, includes the Employee
Retirement Income Security Act (ERISA) and regulations set forth by the Occupational Safety and Health Administration (OSHA).

Our operations are subject
to comprehensive federal, state and local laws and regulations relating to environmental protection. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, or the risk of exposure to
chemicals, and these permits are subject to modification, renewal and revocation by issuing authorities. We use pesticides, petroleum products, refrigerants and other hazardous materials in the operation of our business. If we do not fully comply
with applicable environmental laws and regulations or the permits required for our operations, or if a release of hazardous materials occurs at or from one of our facilities, we could become subject to fine, penalties, or other sanctions as well as
to lawsuits alleging exposure, personal injury or property damage. We could also be held liable for the cost of remedying the condition or incur costs related to retrofitting or upgrading our facilities. In addition, maintaining or achieving
compliance with the existing and increasingly stringent future environmental requirements could require us to make material additional expenditures.

We
have incurred, and may in the future incur, costs to investigate and clean up soil contamination at some of our current and former properties.

Our
operations are also subject to federal and state laws governing the collection and use of personal identifying information obtained from individuals when accessing the Internet, with particular emphasis on access by minors. In addition, governmental
authorities have enacted and/or proposed regulations to govern the collection and use of personal information that may be obtained from customers or visitors when accessing the Internet. These regulations may include requirements that procedures be
established to disclose and notify users of our websites of our privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct or delete personal



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information stored by us. In addition, the FTC has made inquiries and investigations of companies practices with respect to their information
collection and dissemination practices to confirm that these are consistent with stated privacy policies and to determine whether companies take precautions to secure the privacy policies of these customers, including policies relating to security
of consumers personal information. In some situations, the FTC has brought actions against companies to enforce the privacy of these customers, including policies relating to the security of consumers personal information. Additionally,
U.S. and foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following information describes certain
significant risks and uncertainties inherent in our business, which should be carefully considered together with the other information contained in this Form 10-K and in our other filings with the SEC. If any such risks and uncertainties actually
occur, our business, financial condition or other operating results could differ materially from the plans, projections and other forward-looking statements included in Item 7  Managements Discussion & Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K and in our other public filings. See Forward-looking Statements discussion at the beginning of this Form 10-K. In addition, if any of the following risks
and uncertainties, or if any other risks and uncertainties actually occur, our business, financial condition or operating results could be harmed substantially.

Demand for our merchandise is difficult to gauge and our inability to predict consumer spending patterns and consumer preferences may reduce our revenues, gross margins and earnings.

Consumer spending patterns are difficult to predict and are sensitive to the general economic climate, the consumers level of disposable income, consumer debt, and
overall consumer confidence. Declines in consumer spending could reduce our revenues, gross margins and earnings. We are currently operating in challenging macroeconomic conditions which have continued into the first quarter of fiscal 2009 and have
had a negative impact on our revenues, gross margins and earnings. We believe these conditions will continue during the remainder of fiscal 2009. While we are taking steps to implement changes in our business strategy that we hope over time will
both increase revenue and reduce costs, these initiatives will take time to implement and we cannot assure that these initiatives will be successful or that they will have any positive effect on our operating results.

Forecasting consumer demand for our merchandise is difficult given the nature of changing consumer preferences, which can vary by season and from one geographic region
to another. If the demand for our merchandise is lower than expected we will be forced to discount more merchandise, which reduces our gross margins and earnings. Our inventory levels fluctuate seasonally, and at certain times of the year, such as
during the holiday season, we maintain higher inventory levels and are particularly susceptible to risks related to demand for our merchandise. If we elect to carry relatively low levels of inventory and demand is stronger than we anticipated, we
may be forced to backorder merchandise in our direct channels or not have merchandise available for sale in our retail stores, which may result in lost sales and lower customer satisfaction.

The majority of our sales and net earnings are realized during the holiday selling season from October through December; therefore, if sales during this period are
below our expectations, there may be a disproportionate effect on our revenues and expenses.

We experience significantly increased sales activity
during the holiday selling season, particularly between the Thanksgiving and Christmas holidays. For example, in fiscal 2008 our Direct Marketing and Stores segments collectively generated approximately 64% of their annual net sales during the
holiday selling season. If sales during this period are below our expectations, there may be a disproportionate effect on our revenues and expenses. Accordingly, changing economic conditions or deviations from projected demand for products during
the holiday selling season in the fourth calendar quarter could have a material adverse effect on our financial position and results for the full year.

In
anticipation of the holiday selling season, we incur significant expenses and we also make up-front advance commitments. For example, we typically incur significant expenses related to catalog paper and printing. We also increase our inventory
levels and hire a substantial number of seasonal employees to supplement our existing workforce. In addition, because we commit to these costs, as well as certain fixed costs, in anticipation of expected sales during the fourth quarter holiday
selling season, in the event that our actual sales during that calendar quarter are lower than anticipated, our results of operations and profitability will be negatively impacted.

Disruption in our operations in preparing for, or experienced during, the holiday season could result in decreased sales. Such disruptions can result from interruptions or delays in telecommunication systems or the
Internet that interfere with our order-taking process, and/or supply chain disruptions caused by an interruption in our information technology systems or at our



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distribution centers. These disruptions could impede the timely and effective delivery of our products and result in cancelled orders, a delay in the
circulation of our holiday catalogs, or other problems with our information technology or order-fulfillment operations as discussed below.

Our
quarterly operating results may fluctuate significantly due to a variety of factors, including seasonality and the timing of various holidays.

Our
quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including, but not limited to, shifts in the timing of holidays, including Easter, Thanksgiving and Christmas and the strategic
importance of holiday selling season results. Because of the timing of our fiscal quarter ends, a holiday may occur during different fiscal quarters from year to year. Holiday selling season sales may also significantly fluctuate annually depending
upon the number of shopping days between Thanksgiving and Christmas, which is our peak season. As a result, our year-to-year comparisons may be inconsistent.

In addition, most of our operating expenses, such as depreciation and amortization, rent expenses, advertising and promotional expenses and core employee wages and salaries, do not vary directly with sales and are difficult to adjust in the
short term. As a result, if sales for a particular quarter are below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore a sales shortfall could have a disproportionate effect on our
operating results for that quarter. As a result of these factors, our operating results for any one period may not be indicative of our operating results for the full fiscal year.

Comparable store performance may fluctuate significantly due to a variety of factors.

Comparable store sales
may fluctuate in the future due to a variety of factors, including:



| |  |  | the general retail sales environment, including local competition and economic conditions;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | changes in our merchandise mix or pricing strategies;
| | - |  | -----------------------------------------------------



| |  |  | our ability to efficiently source and distribute products;
| | - |  | ----------------------------------------------------------



| |  |  | the timing of release of new merchandise and promotional events;
| | - |  | ----------------------------------------------------------------



| |  |  | the success of our marketing programs;
| | - |  | --------------------------------------



| |  |  | our ability to attract and retain a qualified sales staff, particularly during the holiday season;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the number of stores we open, expand or close in any period; and
| | - |  | ----------------------------------------------------------------



| |  |  | weather conditions which can reduce customer traffic, thereby affecting comparable store sales.
| | - |  | -----------------------------------------------------------------------------------------------

If we are unable to accurately target the appropriate segment of the consumer market with our catalog mailings and achieve adequate response rates through our
catalog mailings, we could experience lower sales, significant markdowns or write-offs of inventory and lower margins.

We have historically relied
on revenues generated from customers initially contacted through our catalog mailings. The success of our direct marketing business largely depends on our ability to achieve adequate response rates to our catalog mailings, which have historically
fluctuated. Although we track the purchasing history of our customers to extrapolate a customers propensity to respond to future catalog circulations, any of the following could cause customers to forego or defer purchases:



| |  |  | the failure by us to offer a mix of products that is attractive to our catalog customers;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the size, breadth and pricing of our product offering and the timeliness and condition of delivery of our catalog mailings;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to design appealing catalogs; and
| | - |  | -----------------------------------------------



| |  |  | the customers particular economic circumstances or general economic conditions.
| | - |  | --------------------------------------------------------------------------------

We must timely and effectively deliver merchandise to our stores and customers; if we fail to successfully manage our order-taking, fulfillment and distribution
operations, merchandise may not be delivered in a timely and effective manner and the reputation of our brands may be damaged, resulting in decreased sales or unanticipated expenses.

In order to deliver high-quality products on a timely, reliable and accurate basis, we must successfully manage our order-taking, fulfillment and distribution operations.
Our call centers and websites must be able to handle increased traffic, particularly during peak holiday periods. As is common in our industry, our order taking operations rely, in part, on third parties who provide telecommunications, data,
electrical and other systems. If these third parties experience system failures, interruptions or long response times, degradation of our service may result. If orders are incorrect, incomplete, defective, or not delivered on time, customer
retention rates could decline and, in turn, cause our revenues and profitability to decline.



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We conduct the majority of our distribution operations through two year-round distribution centers. A serious disruption
or slow-down at any of these facilities could materially impair our ability to distribute our products to customers in a timely manner or at the anticipated cost. We could incur significantly higher costs and longer lead times associated with
distributing our products to our customers during the time that it takes for us to reopen or replace any of our distribution centers or systems, which could reduce our revenues and profits and may harm our relationships with our customers. A
significant portion of our products are perishable goods, and any disruption in operations, particularly any failure of our cold storage facilities, could damage a significant portion of our inventory and require us to write off that damaged
inventory, thereby increasing our expenses.



We are dependent on our
management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.



Our success depends largely upon the continued services of our executive officers and other key personnel, including senior design, marketing, operational and finance
executives. Any loss or interruption of the services of one or more of our executive officers or key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy.



Because competition for our employees is intense, we may not be able to attract and
retain the highly skilled and seasonal employees we need to support our current operations and planned growth, or if we experience work stoppages or slow-downs, we could be adversely affected.



Our ability to provide high quality products, as well as our ability to execute our business
plan generally, depends in large part upon our ability to attract and retain highly qualified personnel. Competition for such personnel is intense. We have in the past experienced, and we expect to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. The location of our corporate offices outside of a major metropolitan area, under some circumstances, makes it more difficult to recruit personnel in certain fields, such as
finance, marketing and design. At certain times, we may have difficulty in our efforts to recruit and retain the required personnel. If we fail to attract new personnel or retain and motivate our current personnel, our business and future growth
prospects could be severely harmed.



We require a large number of seasonal
workers to meet customer demand during our peak season, as well as seasonal agricultural workers in late summer and early fall to meet our harvest demands. While we have been successful in the past, if we are unable to hire an adequate number of
seasonal workers, we may be unable to meet production schedules. In addition, we may experience higher wage costs if wage increases are required to attract adequate seasonal labor.



No unions currently exist at our facilities, however, any disruption of our operations due to labor difficulties could result in our
inability to timely meet customer demand or affect the quality or breadth of the products we offer. The reputation of our company and brands could suffer and we could lose customers as a result. In addition, increased labor costs, to the extent they
cannot be passed on to our customers, could negatively impact our profitability.



Upgrades or modifications to our information technology systems and disruptions to our IT operations and other areas may result in decreased sales or cause us to incur unanticipated expenses.



Our success depends on our ability to take orders and source and distribute merchandise
efficiently through appropriate systems and procedures. We regularly evaluate our information technology systems and requirements and, from time to time, we may substantially upgrade or otherwise modify the information technology systems that
support our product pipeline, including systems relating to product design, sourcing, merchandise planning, forecasting, purchase orders, inventory, order taking, distribution, transportation and price management. There are inherent risks associated
with modifying our core systems, including possible supply chain disruptions that would affect our ability to take orders and ship products to our stores and customers on a timely basis. Any disruptions could result in decreased sales or cause us to
incur unanticipated expenses, thereby reducing our profitability.



We
must successfully manage our Internet business.



The success of our
Internet business depends, in part, on factors over which we have limited control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain additional risks and uncertainties associated
with the Internet, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state
regulation, security breaches, consumer privacy concerns as well as the need to protect our brands and intellectual property against online trademark infringement by our competitors. Our failure to successfully respond to these risks and
uncertainties might adversely affect the sales in our Internet business, as well as damage our reputation and brands.



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Failure to maintain adequate financial and management processes and controls could lead to errors in our financial
reporting and could harm our ability to manage our expenses.

SEC reporting obligations place a considerable strain on our financial and management
systems, processes and controls, as well as on our personnel. In addition, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can
certify as to the effectiveness of our internal controls. This process requires us to document our internal controls over financial reporting and to potentially make significant changes thereto. See also Part II  Item 9A  Controls
and Procedures.

We rely on the products and services of third parties and if we fail to establish, maintain and develop strategic
relationships with high quality, well-known, reputable and reliable vendors and suppliers, our sales may decline or our costs may increase.

Our business is dependent on continued good relations with our third-party vendors and suppliers for some of our
products and services. Outsourced products include some of our Harry and David® fresh fruit, produce, meats, snacks and condiments, gift plants, and tabletop and home décor
accessories. We do not directly control these vendors or the quality of their goods and therefore cannot control the selection, grading and shipping of some of these fresh products. If these vendors and suppliers do not fulfill orders to our
customers satisfaction, including our customers expectation of quality, our customers may not purchase from us in the future. Further, if we are unable to produce sufficient inventory for any reason, we may also be dependent on third
parties for products we usually produce ourselves.

In addition to outsourcing materials and production for some of our products, we also depend on third
parties for our cold storage, telecommunications, maintenance of certain of our technology systems and shipment of our products. Our inability to acquire such services, or the loss of one or more key vendors, could have a negative effect on our
business and financial results.

We depend on third-party carriers to deliver our catalogs, as well as for delivery of purchased products, and any
increase in postal or delivery rates or disruption in delivery services will result in increased customer acquisition or delivery costs, which we may be unable to recover.

Our business depends on the timely delivery of our catalogs and purchased products to our customers. We rely on the U.S. Postal Service to deliver our catalogs, and on private carrier services to deliver our purchased
products. The inability of these carriers to timely deliver our catalogs or products could harm our reputation and result in lower order rates, resulting in lower sales revenues and lost customers.

We rely upon third-party carriers for our product shipments, including shipments to, from and between our stores. Accordingly, we are subject to risks, including
employee strikes and inclement weather, which may affect our third-party carriers abilities to meet our delivery needs. Among other things, any circumstances that require us to use other delivery services for all or a portion of our shipments
could result in increased costs and delayed deliveries and could materially harm our business. In addition, we are subject to the risk that our service providers may increase the rates they charge, terminate their contract with us, decrease the rate
discounts provided to us when an existing contract is renewed or that we may be unable to agree on the terms of a new contract, any of which could materially adversely affect our operating results.

Increases in delivery rates or changes in the availability of rate discounts could have a negative impact on our operating results to the extent that we are unable to
pass such increased costs on directly to customers or offset such increased costs by raising our selling prices. In addition, fuel costs are a significant component of our product delivery costs. There is a risk of continued higher fuel costs,
which, because of the inability of our third-party carriers to absorb such increases, could result in higher delivery expenses for us. In the event that our third-party carriers raise their prices to ship our goods, our customers might choose to buy
comparable products locally to avoid delivery charges, which could negatively impact our sales.

Any decrease in the availability, or increase in the
cost, of raw materials could materially affect our earnings.

Our operations depend, in part, on the availability of various raw materials,
including paper for our catalog operations, corrugated paper for our delivery needs, and chocolate, butter, sugar and cheese used to produce some of our products, and fruit and produce that we do not grow ourselves. The availability of raw materials
may decrease and their prices are likely to be volatile as a result of, among other things, changes in overall supply and demand levels and new laws or regulations. Disruption in the supply of our raw materials could temporarily impair our ability
to manufacture some of our products or require us to pay higher prices in order to obtain these raw materials from other sources. In the event our raw material costs increase, we may not be able to pass these higher costs on to our customers in full
or at all. Any increase in the prices for raw materials could materially increase our costs and therefore lower our gross margins.



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Extreme weather conditions, crop diseases and pests could reduce both our crop size and quality, and we may be
unable to produce or acquire sufficient inventory, resulting in lost sales, increased costs or lost customers.

Our business activities are subject
to a variety of agricultural risks. Extreme weather conditions, such as droughts, frosts, hail or other storms can cause unfavorable growing conditions that adversely affect the quality and quantity of the pears and peaches grown in our orchards.
Moreover, all of our irrigation rights are subject to and limited by adequate availability of irrigation water within a particular water shed system. Seasonal circumstances such as lower annual rainfall or snow accumulation may negatively affect the
availability of water and consequently, in such a year, we may not receive our full allotment of water. The loss or reduction of the supply of water to any of our orchards or farms as a result of a drought at a particular water shed could result in
our inability to produce sufficient inventory. Furthermore, weather conditions may also affect the availability and ripening of the fruit we use in various programs and promotions, which in turn may shift sales between quarters on a comparable
year-to-year basis. Pests and crop diseases can also reduce our crop size and quality. If any of these factors affect a substantial portion of our production facilities in any year, we may be unable to produce sufficient crop inventory, resulting in
lost sales, shifts in fruit sales between fiscal quarters, increased costs and/or lost customers.

Our primary growing season occurs during the
second and third calendar quarters; the timing of ripening of seasonal fruits, if delayed, could cause delayed product shipments and therefore cause revenue recognition to be inconsistent from quarter to quarter.

Because we must commit to certain fixed costs before we know the results of a particular harvest, inclement weather conditions and agricultural pests leading to lower
harvest yields can also negatively impact our sales and profitability.

Our operations and the food products that we grow, manufacture and market,
including products we source from third parties, are subject to regulation and inspection by the U.S. Department of Agriculture and the U.S. Food and Drug Administration, among other regulatory agencies, and we may incur increased costs to comply
with applicable regulations.

We are subject to regulations enforced by, among others, the U.S. Food and Drug Administration and state, local and
foreign equivalents, and to inspection by the U.S. Department of Agriculture and other federal, state, local and foreign environmental, health and safety authorities. These agencies enforce statutory standards and regulate matters such as the nature
and amounts of pesticides that may be used in growing fruit, the sanitary condition of storage, processing and packing facilities and equipment, documentation of shipments, traceability of food products, the use of various additives, labeling, sales
promotion, marketing practices, and, in some cases, the fruit that may be shipped to or from a state. Although we believe that our operations and our products, including products we source from third parties, are substantially in compliance with all
currently applicable regulations and licensing requirements, we may be required to incur costly changes to operations in the future if regulations change or if new rules are adopted or if it is ultimately determined that we are not in compliance
with existing regulations. Applicable federal, state or local regulations may cause us to incur substantial compliance costs or delay the availability of items at one or more of our orchards, food production facilities, or storage and distribution
centers, which could result in decreased sales. In addition, if violations occur, regulators can impose fines, penalties or other sanctions, and we could be subject to private lawsuits alleging injury and/or property damage. Our products could also
become subject to quarantine by regulatory authorities, which would result in significant lost sales.

The industries in which we compete are highly
competitive and a failure to effectively compete could result in lost revenues if our customers take their business elsewhere or we are unable to attract new customers.

The U.S. gift, gourmet food gift and specialty foods industries are highly competitive. The market for specialty
retail products has undergone significant changes and growth over the past several years as consumer spending levels have increased, leaving the industries in which we compete highly fragmented and open to entry by new competitors. We compete with
national, regional and local businesses and Internet retailers, as well as department stores and specialty stores, discount stores, big box retailers, supermarkets, club store chains and mass merchants, some of whom are also customers that offer
goods substantially similar to those we offer through our Harry and David® brand. Some of our existing and potential competitors may have competitive advantages over us, including larger
customer bases, more widespread brand recognition, a more developed Internet presence or greater financial resources. We face a variety of competitive challenges, including:



| |  |  | maintaining favorable brand recognition and achieving customer perception of value;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | anticipating and quickly responding to changing consumer demands better than our competitors;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | developing innovative, high-quality products that appeal to our target customers; and
| | - |  | -------------------------------------------------------------------------------------



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| |  |  | sourcing, manufacturing, and distributing merchandise effectively.
| | - |  | ------------------------------------------------------------------

If we fail to effectively compete, we may have to reduce prices, resulting in decreased revenues and lower profit margins, loss of market share or increased marketing expenditures.

Because we specialize in hard to find and best in class products and our business is heavily dependent upon brand name and product recognition, the failure to
protect our intellectual property could adversely affect our brand name and reputation which could result in a loss of customer confidence and lower sales, which may increase costs and reduce our profitability.

Our patents, trademarks, service marks, copyrights, trade dress rights, trade secrets, domain names and other intellectual property are valuable assets that are critical
to our success. Our success, competitive position and amount of potential future income also depend on our ability to obtain and maintain our reputation for brand name proprietary products.

The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of
our brand names or goodwill and cause a decline in consumer confidence, resulting in a decline in our sales. Any unauthorized use of our trademarks, such as Fruit-of-the-Month Club®,
Wolfermans® English muffins, Royal Rivera® pears or our newly acquired Cushman Honeybells® citrus by another party, in particular for use in connection with products of a lower quality than the products we offer, may dilute the value of our products and damage our reputation as a producer of high-quality,
proprietary goods.

We cannot guarantee we will be able to adequately protect our intellectual property or that the costs of defending our intellectual
property will not adversely affect our operating results. We are also subject to the risk of adverse claims and litigation alleging that our business practices infringe on the intellectual property rights of others. Litigation to establish the
validity of any of our intellectual property, to defend against infringement claims of others or to assert infringement claims against others, can be expensive and time-consuming even if the outcome is favorable to us. If the outcome is unfavorable
to us, we may be required to pay damages, stop production and sales of infringing products or be subject to increased competition from similar products.

Our business depends, in part, on factors affecting consumer spending that are out of our control.

Our business depends on consumer
demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, disposable consumer income, fuel prices, recession and fears of recession, war and fear of war,
inclement weather, consumer debt, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic conditions and political conditions, health epidemics and consumer perceptions
of personal well-being and security. These factors may also affect our various brands and channels differently. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our
sales and harming our business and operating results.

The amount of our outstanding borrowings could adversely affect our financial condition and
adversely affect our ability to execute our business strategy.

We have a significant amount of indebtedness. As of June 28, 2008, we had
$235,599 of debt outstanding, representing the total outstanding principal amount of our Senior Notes and the long-term portion of our capital lease obligations. As of June 28, 2008, we also had $124,300 available under our revolving credit
facility, excluding $700 in letters of credit outstanding. The maximum available borrowings under the revolving credit facility are determined in accordance with our asset-based debt limitation formula. Our total available borrowing capacity at
June 28, 2008 was $3,783.

Our leverage may have important consequences. For example, it may:



| |  |  | limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flow from operations to debt service, reducing the availability of our cash flow to use for other purposes;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase our vulnerability to economic downturns, limit our ability to capitalize on significant business opportunities and restrict our flexibility to react to
changes in market or industry conditions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to satisfy our outstanding debt obligations will depend upon our future operating
performance, which will be affected by prevailing economic and financial conditions, business and other factors, many of which are beyond our control. We anticipate that our operating cash flow, together with borrowings under our revolving credit
facility, will be sufficient to meet our anticipated operating expenses and to service our debt obligations as they become due. If, however, we do not



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generate sufficient cash flow for these purposes, we may be unable to service our indebtedness and may have to adopt alternative strategies that could
include reducing or delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness or seeking equity capital.

We may not be
able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all. If sufficient funds are not available or are not available on terms acceptable to us, our ability to fund expansion, take advantage of acquisition
opportunities, develop or enhance our products, or otherwise respond to competitive pressures would be significantly limited. These limitations could materially and adversely affect our business, results of operations and financial condition.

Our operations are restricted by the terms of our debt.

Our revolving credit facility and the indenture governing our Senior Notes include a number of restrictive covenants. Our credit facility covenants limit us and our subsidiary, Harry and David, and certain of its subsidiaries, and the
indenture governing our Senior Notes limit Harry and David, and certain of its subsidiaries in, among other things:



| |  |  | incurring additional indebtedness or issuing preferred stock;
| | - |  | -------------------------------------------------------------



| |  |  | paying dividends or making other distributions or repurchasing or redeeming its stock or subordinated indebtedness;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | making certain investments;
| | - |  | ---------------------------



| |  |  | selling assets and issuing capital stock of restricted subsidiaries;
| | - |  | --------------------------------------------------------------------



| |  |  | incurring liens;
| | - |  | ----------------



| |  |  | entering into agreements restricting our subsidiaries ability to pay dividends;
| | - |  | --------------------------------------------------------------------------------



| |  |  | entering into transactions with affiliates; and
| | - |  | -----------------------------------------------



| |  |  | consolidating, merging or selling all or substantially all of Harry and David or any of the guarantors assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------

These covenants could limit our ability to plan for or react to market conditions or to meet our capital needs. If we are not able to comply with these covenants and
other requirements contained in the indenture governing our Senior Notes or our revolving credit facility, an event of default under the relevant debt instrument could occur which could also trigger similar rights under other agreements and cause
holders of the defaulted debt to declare amounts outstanding with respect to that debt to be immediately due and payable.

If we are not able to comply
with the covenants and other requirements contained in the indenture governing our outstanding Senior Notes or our revolving credit facility, an event of default under the relevant debt instrument could occur.

We consider our customer databases to be proprietary information and any change in privacy laws or security breaches may negatively impact our sales or threaten
our competitive advantage.

We maintain proprietary information about our customers and their purchasing history. In connection with our efforts to
seek new customers, we rely on our ability to rent customer lists from third parties and on our ability, subject to our privacy policy, to exchange our lists with third parties. Subject to confidentiality agreements and our privacy policy, we also
rent our customer list to third parties.

Our operations are also subject to federal and state laws governing the collection and use of personal
identifying information obtained from individuals when accessing the Internet, with particular emphasis on access by minors. In addition, other governmental authorities have enacted and/or proposed regulations to govern the collection and use of
personal information that may be obtained from customers or visitors when accessing the Internet. These regulations may include requirements that procedures be established to disclose and notify users of our websites of our privacy and security
policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct or delete personal information stored by us. In addition, the FTC has made inquiries and investigations of
companies practices with respect to their information collection and dissemination practices to confirm that these are consistent with stated privacy policies and to determine whether companies take precautions to secure consumers
personal information. In some situations, the FTC has brought actions against companies to enforce the privacy policies of these companies, including policies relating to security of consumers personal information. Additionally, U.S. and
foreign laws regulate our ability to use customer information and to develop, buy and sell mailing lists.

Becoming subject to the FTCs regulatory
and enforcement efforts, to those of another governmental authority or to those of private litigation could have an adverse effect on our ability both to collect demographic and personal information from our customers and to rent or exchange such
information with third parties, which, in turn, could have an adverse effect on our



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marketing efforts, business, financial condition, results of operations and cash flow. In addition, the adverse publicity regarding the existence or results
of an investigation could have an adverse impact on customers willingness to use our websites and catalogs and thus could adversely impact our future revenues.

In addition, if there is a compromise or breach of the technology or other methods we use to protect customer transaction data, we could be held liable for claims based on unauthorized purchases or fraud claims, among
others. These claims could damage our reputation, negatively affect sales and expose us to a risk of loss or litigation.

We may incur unexpected
costs associated with environmental compliance or liabilities.

Our operations are subject to comprehensive federal, state and local laws and
regulations relating to environmental protection. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, or the risk of exposure to chemicals, and these permits are subject to modification,
renewal and revocation by the issuing authorities. We use pesticides, petroleum products, refrigerants and other hazardous materials in the operation of our business. If we do not fully comply with applicable environmental laws and regulations or
the permits required for our operations, or if a release of hazardous materials occurs at or from one of our facilities, we could become subject to fines, penalties, or other sanctions as well as to lawsuits alleging exposure, personal injury or
property damage. We could also be held liable for the cost of remedying the condition or incur costs related to retrofitting or upgrading our facilities. In addition, maintaining or achieving compliance with the existing and increasingly stringent
future environmental requirements could require us to make material additional expenditures.

We are subject to the risk of product liability claims,
which may result in the payment of damages or settlement fees, and which may exceed or be outside of our insurance coverage, and even in unsuccessful claims, negative publicity may adversely affect our brand image.

The sale of food products for human consumption involves the risk of injury to consumers. Injuries may result from tampering by unauthorized third parties, spoilage or
product contamination, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling or transportation process. We have from time to time been involved in product
liability lawsuits and claims, none of which were material to our business. While we are subject to governmental inspection and regulations and believe our facilities and operations, as well as those of third-party growers, comply in all material
respects with all applicable laws and regulations, consumption of our products could cause a health-related illness or injury in the future and we could become subject to claims or lawsuits relating to such matters. Even if a product liability claim
is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused illness or injury could adversely affect our reputation with existing and potential customers and our corporate and brand image.
Moreover, claims or liabilities of this sort might not be covered by our insurance or by any rights of indemnity or contribution that we may have against others. We maintain product liability insurance in an amount which we believe to be adequate.
However, such insurance may not continue to be available at a reasonable cost, or we may incur claims or liabilities for which we are either not insured or indemnified, or which exceed the amount of our insurance coverage.

If we are required to recall a product because of a defect in the product or other reasons, the recalls may provide the basis for product liability claims against us. In
addition, recalls, whether or not the basis for a product liability claim against us, could damage our reputation.

Additionally, we are involved from time
to time, in litigation incidental to our business. Management believes, after considering a number of factors and the nature of the legal proceedings to which we are subject, that the outcome of current litigation is not expected to have a material
adverse effect upon our results of operations or financial condition. However, managements assessment of our current litigation could change in light of the discovery of facts not presently known to us or determinations by judges, juries or
other finders of fact that are not in accord with managements evaluation of the possible liability or outcome of such litigation. As a result, there can be no assurance that the actual outcome of pending or future litigation will not have a
material adverse effect on our results of operations or financial condition.

The effects of natural disasters, terrorism, acts of war and retail
industry conditions may adversely affect our business.

Our retail stores, corporate offices, manufacturing facilities, distribution centers,
infrastructure projects and catalog distribution, as well as the operations of vendors from which we receive goods and services, are vulnerable to damage from earthquakes, hurricanes, tornados, fires, floods, power losses, telecommunications
failures, computer viruses, acts of terrorism, acts of war and similar events. If any of these events result in damage to our facilities or systems, or those of our vendors, we may experience interruptions in our business until the damage is
repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.



14



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Additionally, the continued threat of terrorism and related heightened security measures in the U.S. may disrupt commerce
and the U.S. economy. Any further acts of terrorism or a war may disrupt commerce and undermine consumer confidence, which could negatively impact sales revenue by causing consumer spending and/or shopping center traffic to decline. Furthermore,
acts of terrorism, acts of war and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from vendors for sale to our customers. Any
significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

Not applicable.



15



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##### Table of Contents

|ITEM 2. |  | PROPERTIES
|------- |  | ----------



The following table summarizes the location and general size of facilities that we own and are used by our operating segments as of June 28, 2008.



|            |  |                                        |  |                      
|----------- |  | -------------------------------------- |  | ---------------------
|Location    |  | Function                               |  | Size                 
|Medford, OR |  |                                        |  |                      
|            |  | Campus                                 |  | 93 acres             
|            |  | Orchards Planted / Undeveloped / Other |  | 1,900/1,000/400 acres
|            |  | Manufacturing / Distribution           |  | 386,000 sq ft        
|            |  | Call Center                            |  | 72,000 sq ft         
|            |  | Office                                 |  | 329,000 sq ft        
|            |  | Warehouse / Cold Storage               |  | 260,000 sq ft        
|Hebron, OH  |  |                                        |  |                      
|            |  | Campus                                 |  | 51 acres             
|            |  | Packaging / Distribution / Warehouse   |  | 148,000 sq ft        
|            |  | Call Center / Office                   |  | 55,000 sq ft         
|            |  | Cold Storage                           |  | 127,000 sq ft        



Our leased store space totaled 390,098
square feet for 143 stores as of June 28, 2008 compared to 362,444 square feet for 135 stores as of June 30, 2007. The retail stores are leased by us with original terms ranging generally from 5 to 20 years. Certain leases contain renewal
options for periods of up to 10 years. The rental payment requirements in our store leases are typically structured as either minimum rent, minimum rent plus additional rent based on a percentage of store sales if a specified store sales threshold
is exceeded, or rent based on a negotiated threshold of sales after which a percent of sales is paid to the landlord.



The following table summarizes the location and general size of facilities that we lease and that are used by our operating segments as of June 28, 2008.



|            |  |              |  |              
|----------- |  | ------------ |  | -------------
|Location    |  | Function     |  | Size         
|Medford, OR |  | Cold Storage |  | 446,665 sq ft
|Hebron, OH  |  | Warehouse    |  | 50,000 sq ft 



We believe that our facilities are
adequate for our current needs and that suitable additional or substitute space will be available in the future to replace our existing facilities, if necessary, or to accommodate the expansion of our operations.



|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



In the normal course of business, we are involved from time to time in claims and legal actions incidental to our operations, both as plaintiff and defendant. In the opinion of management as of June 28, 2008, the
ultimate liability, if any, arising from the actions or claims to which we are a party is not expected to have a material adverse effect, individually or in the aggregate, on our business or financial condition.



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



There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2008.



16



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##### Table of Contents

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ------------------------------------------------------------------------------------------------------------

MARKET INFORMATION

There is no established public trading market for
our common stock and we have no authorized preferred stock.

HOLDERS

The outstanding voting securities of Harry & David Holdings, Inc. consist of shares of its common stock, par value $0.01 per share. As of June 28, 2008, there were 1,033,295 shares of our common stock
outstanding. As of June 28, 2008 all shares of Harry & David Holdings, Inc.s common stock were held by funds sponsored by Wasserstein and their affiliates, Highfields and their affiliates, and current and former employees of
Harry and David.

DIVIDENDS

Although we paid dividends
in fiscal 2006 and fiscal 2005, we do not plan to pay dividends on our common stock for the foreseeable future. Rather, for the foreseeable future, we expect to retain any future earnings to support the development and expansion of our business or
make additional payments under our credit facility. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, cash needs,
growth plans and the terms of any credit agreements that we may be a party to at the time. Our revolving credit facility and indenture governing our Senior Notes impose limitations on our and our subsidiaries ability to pay cash dividends or
other payments or distributions with respect to their capital stock in excess of certain limitations, which, therefore, limits our ability to pay cash dividends.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Equity Compensation Plan Information Summary

The table below sets forth information regarding our Equity Compensation Plans as of June 28, 2008:



|                                                           |  |                                                                                             |  |                                                                             |        |                                                                                                                                          |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and
rights(a) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights(b) |        | Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))(c)
|Equity Compensation Plans approved by security holders     |  | 62,530                                                                                      |  | $                                                                           | 115.63 |                                                                                                                                          | 54,175
|Equity Compensation Plans not approved by security holders |  |                                                                                            |  |                                                                             |       |                                                                                                                                          |      
|                                                           |  |                                                                                             |  |                                                                             |        |                                                                                                                                          |       
|Total                                                      |  | 62,530                                                                                      |  | $                                                                           | 115.63 |                                                                                                                                          | 54,175

RECENT SALES OF UNREGISTERED SECURITIES

On various dates in fiscal 2008, we issued and sold an aggregate amount of 1,054 shares of common stock, par value $0.01 per share, upon exercise of employee stock options under our Amended and Restated 2004 Stock
Option Plan for an aggregate consideration of $91 in cash. These issuances of common stock were made in reliance on Section 4(2) of the Securities Act of 1933, as amended.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

Harry & David Holdings, Inc. was
formed for the purpose of completing the acquisition of Harry & David Operations Corp. (our Predecessor, for accounting purposes, formerly known as Bear Creek Corporation). The selected historical consolidated financial
information as of June 28, 2008, June 30, 2007, June 24, 2006 and June 25, 2005 and for the 52 weeks ended June 28, 2008, the 53 weeks ended June 30, 2007, and the 52 weeks ended June 24, 2006 and
June 25, 2005, has been derived from, and should be read together with, the audited consolidated financial statements and accompanying notes of Harry & David Holdings, Inc. (Successor) appearing elsewhere in this Form 10-K.
The selected historical consolidated financial information for the period from June 17, 2004 to June 26, 2004 has been derived from the audited consolidated financial statements of our Predecessor, which have not been included in this Form
10-K.



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The following discussion should also be read together with Item 7. - Managements Discussion and Analysis of
Financial Condition and Results of Operations and our audited Consolidated Financial Statements and accompanying notes appearing in Part IV, Item 15 in this Form 10-K.



|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|------------------------------------------------------- |  | ----------------- | --------- | -- | ------------------------------------------ | - | ----------- | ---------------- |  | ------------------------------------------- | ---------------- | - | --------------------------------- | - | --------- | - |  | - | --------- | - |  |  |  | - | ------- | - |  | - | -------
|                                                        |  | Successor         |           |    |                                            |   | Predecessor
|                                                        |  | Fiscal year ended |           |    | Period fromJune 17,2004 toJune 26,2004 (4) |   |             |                  |  | Period fromMarch 28,2004
toJune 16,2004 (4) |                  |   | Fiscal yearendedMarch 27,2004 (4)
|Dollars in thousands, except per share data             |  | June 28,2008      |           |    | June 30,2007 (3)                           |   |             | June 24,2006 (3) |  |                                             | June 25,2005 (3) |   |                                   |   |           |  
|Statement of Operations Data:                           |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Net sales                                               |  | $                 | 545,064   |    |                                            | $ | 561,017     |                  |  | $                                           | 524,384          |   |                                   | $ | 490,738   |   |  | $ | 7,664     |   |  |  |  | $ | 61,845  |   |  | $ | 522,162
|Gross profit                                            |  |                   | 249,170   |    |                                            |   | 265,806     |                  |  |                                             | 221,995          |   |                                   |   | 220,743   |   |  |   | 2,282     |   |  |  |  |   | 15,693  |   |  |   | 226,456
|Operating income (loss)(1)                              |  |                   | 31,162    |    |                                            |   | 50,734      |                  |  |                                             | 22,776           |   |                                   |   | 26,469    |   |  |   | (1,741    | ) |  |  |  |   | (25,795 | ) |  |   | 14,505 
|Net income (loss) from continuing operations            |  |                   | 4,337     |    |                                            |   | 30,697      |                  |  |                                             | (5,661           | ) |                                   |   | (5,274    | ) |  |   | (1,378    | ) |  |  |  |   | (15,332 | ) |  |   | 10,837 
|Net income (loss) from discontinued operations          |  |                   | 271       |    |                                            |   | 1,304       |                  |  |                                             | (4,052           | ) |                                   |   | 951       |   |  |   |          |   |  |  |  |   |        |   |  |   |       
|Net income (loss)(1)                                    |  |                   | 4,608     |    |                                            |   | 32,001      |                  |  |                                             | (9,713           | ) |                                   |   | (4,323    | ) |  |   | (1,378    | ) |  |  |  |   | (15,332 | ) |  |   | 10,837 
|Basic net income (loss) per share:                      |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Continuing operations                                   |  |                   | 4.20      |    |                                            |   | 29.90       |                  |  |                                             | (5.58            | ) |                                   |   | (5.27     | ) |  |   | (1.38     | ) |  |  |  |   | (15,332 | ) |  |   | 10,837 
|Discontinued operations                                 |  |                   | 0.26      |    |                                            |   | 1.27        |                  |  |                                             | (4.00            | ) |                                   |   | 0.95      |   |  |   |          |   |  |  |  |   |        |   |  |   |       
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Total basic net income (loss) per share                 |  | $                 | 4.46      |    |                                            | $ | 31.17       |                  |  | $                                           | (9.58            | ) |                                   | $ | (4.32     | ) |  | $ | (1.38     | ) |  |  |  | $ | (15,332 | ) |  | $ | 10,837 
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Diluted net income (loss) per share:                    |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Continuing operations                                   |  |                   | 4.16      |    |                                            |   | 29.90       |                  |  |                                             | (5.58            | ) |                                   |   | (5.27     | ) |  |   | (1.38     | ) |  |  |  |   | (15,332 | ) |  |   | 10,837 
|Discontinued operations                                 |  |                   | 0.26      |    |                                            |   | 1.27        |                  |  |                                             | (4.00            | ) |                                   |   | 0.95      |   |  |   |          |   |  |  |  |   |        |   |  |   |       
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Total diluted net income (loss) per share               |  | $                 | 4.42      |    |                                            | $ | 31.17       |                  |  | $                                           | (9.58            | ) |                                   | $ | (4.32     | ) |  | $ | (1.38     | ) |  |  |  | $ | (15,332 | ) |  | $ | 10,837 
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Weighted-average shares used in per share calculations: |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Basic                                                   |  |                   | 1,032,577 |    |                                            |   | 1,026,604   |                  |  |                                             | 1,013,650        |   |                                   |   | 1,000,000 |   |  |   | 1,000,000 |   |  |  |  |   | 1,000   |   |  |   | 1,000  
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Diluted                                                 |  |                   | 1,043,471 |    |                                            |   | 1,026,604   |                  |  |                                             | 1,013,650        |   |                                   |   | 1,000,000 |   |  |   | 1,000,000 |   |  |  |  |   | 1,000   |   |  |   | 1,000  
|                                                        |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Balance Sheet Data:                                     |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Cash and cash equivalents                               |  | $                 | 40,792    |    |                                            | $ | 49,408      |                  |  | $                                           | 18,637           |   |                                   | $ | 19,677    |   |  | $ | 23,629    |   |  |  |  | $ | 3,768   |   |  | $ | 3,702  
|Working capital (2)                                     |  |                   | 47,782    |    |                                            |   | 74,106      |                  |  |                                             | 22,867           |   |                                   |   | 27,021    |   |  |   | 39,692    |   |  |  |  |   | 13,195  |   |  |   | 11,630 
|Total assets                                            |  |                   | 356,637   |    |                                            |   | 370,518     |                  |  |                                             | 350,183          |   |                                   |   | 339,606   |   |  |   | 342,318   |   |  |  |  |   | 328,299 |   |  |   | 306,988
|Long-term debt                                          |  |                   | 235,599   |    |                                            |   | 245,669     |                  |  |                                             | 245,000          |   |                                   |   | 245,000   |   |  |   | 147,055   |   |  |  |  |   |        |   |  |   |       
|Stockholders equity (deficit)                          |  |                   | 4,152     |    |                                            |   | 4,264       |                  |  |                                             | (30,450          | ) |                                   |   | (20,227   | ) |  |   | 82,624    |   |  |  |  |   | 84,002  |   |  |   | 191,740
|Other Operating Metrics:                                |  |                   |           |    |                                            |   |             |                  |  |                                             |                  |   |                                   |   |           |   |  |   |           |   |  |  |  |   |         |   |  |   |        
|Store comparable sales %                                |  |                   | (6.0      | )% |                                            |   | 4.9         | %                |  |                                             | 8.2              | % |                                   |   | 8.8       | % |  |   | N/M       |   |  |  |  |   | N/M     |   |  |   | N/M    
|Store comparable sales $                                |  | $                 | (8,235    | )  |                                            | $ | 6,368       |                  |  | $                                           | 9,937            |   |                                   | $ | 10,461    |   |  |   | N/M       |   |  |  |  |   | N/M     |   |  |   | N/M    

---

|(1) | Operating income and net income in fiscal 2004 and the period from March 28, 2004 to June 16, 2004 included non-cash corporate charges totaling $50,072 and $10,053,
respectively, assessed by YCI, Harry & David Operations Corp.s former parent company, and as such, the operating results are not comparable to future years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Working capital represents current assets (which includes cash and short-term investments), less current liabilities.
|--- | ---------------------------------------------------------------------------------------------------------------------



18



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|(3) | The fiscal 2007 sale of the Jackson & Perkins businesses is accounted for as discontinued operations in each of fiscal 2008, 2007, 2006, and 2005. For further information,
refer to Note 6  Discontinued Operations in our Consolidated Financial Statements within Part IV, Item 15 of this Form 10-K.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The audited consolidated financial statements for fiscal 2004 have not been revised for the discontinued operations discussed above in footnote (3).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



The following management assessment of the financial condition and results of operations should be read in conjunction with the Consolidated
Financial Statements and related notes in Part IV, Item 15 in this Form 10-K. Our Consolidated Financial Statements and certain disclosures made in this Form 10-K have been prepared in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) and require us to make estimates and assumptions that affect reported amounts of assets and liabilities and contingent assets and contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during each reporting period. The estimates most susceptible to material changes due to significant judgment are identified as critical accounting policies. The results of these estimates are
critical because they affect our profitability and may affect key indicators used to measure our performance. For further information, see Critical Accounting Policies and Estimates below.



The following discussion should be read in conjunction with and is qualified in its entirety
by reference to, the audited Consolidated Financial Statements and accompanying notes. See Part IV Item 15 in this Form 10-K.



OVERVIEW



General



We are a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit and gourmet
food products and other gifts, which are marketed under the Harry and David® brand. During fiscal 2008, we acquired Wolfermans LLC, a direct-marketing company specializing in English
muffins and other breakfast products sold primarily under the Wolfermans® brand. In addition, on August 8, 2008, we acquired substantially all of the assets of Cushman Fruit
Company, Inc., adding to our product line its signature Cushman HoneyBells® citrus, among other products. See below discussion of our acquisitions. Our marketing channels include direct
marketing (via phone, Internet, mail/fax and telemarketing), business-to-business, our Harry and David stores and wholesale distribution through select retailers.



We market our products through multiple channels, including direct marketing (via phone, Internet, mail/fax and telemarketing),
business-to-business, our Harry and David stores and wholesale distribution through select retailers.



We grow, manufacture, design or package products that account for the significant majority of our sales. Our vertically integrated operations allow us to efficiently manage our costs, quality assurance, manufacturing
capacity, and inventory. We believe that our vertical integration allows us to maintain a high degree of control over product quality compared with that of our competitors as we rely less heavily on third-party suppliers, particularly during peak
periods. In addition, our vertical integration generally lowers our product sourcing costs, allows us to optimally adjust the assortment of products we offer and enables us to adjust product inventory levels to quickly respond to changes in customer
demand.



Net sales are derived primarily from our Direct Marketing segment,
which generates sales of Harry and David and Wolfermans merchandise through our catalog, Internet, business-to-business and consumer telemarketing operations; our Stores segment and our Wholesale segment. For further information on how we
evaluate and define our reporting segments, see Note 16  Segment Reporting in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



Our Other segment derives sales from surplus, non-gift-quality fruit grown both
in our orchards and from contract purchases. Also included in this other segment are the business units that support our operations, including orchards, product supply, distribution, customer operations, facilities, information technology services
and administrative and marketing support functions. The costs relating to the operation of these business units are allocated at cost to one of our operating segments through cost of goods sold or selling, general and administrative expense.



Acquisition of Wolfermans business



On January 15, 2008, we
completed the acquisition of Wolfermans, LLC, a direct-marketing company specializing in English muffins and other breakfast products sold primarily under the Wolfermans® brand,
from Williams Foods, Inc. for a net purchase price of approximately $22,784, which included $622 of transaction related expenses. We paid for the acquisition of Wolfermans with available cash balances. We anticipate this acquisition will
leverage our infrastructure and generate operating and marketing synergies and productivity improvements for both the Harry and David® and Wolfermans®



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brands. In connection with the acquisition, Williams Foods, Inc. has agreed to provide certain transitional services, as needed, through September 2008. The
operating results of Wolfermans are included in our Direct Marketing and Wholesale segments according to the nature of the operating activity. The acquisition was permitted under the terms of our credit agreement. For further information see
Note 5-Acquisition in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



Acquisition of Cushmans business



On August 8, 2008, we completed the acquisition of substantially all of the assets of Cushman Fruit Company, Inc., a privately held, multi-channel direct marketer of
specialty foods, primarily Florida citrus, for a net purchase price of approximately $8,615, excluding deal costs, subject to customary final working capital adjustments to be completed 60 days after the transaction date. We paid for the acquisition
of Cushmans with available cash balances. Our revolving credit agreement was amended to permit the acquisition and to address other administrative matters, on August 8, 2008. Cushmans has agreed to provide certain transitional
services, as needed, for 60 days after the transaction date. The acquisition was completed subsequent to our fiscal year ended June 28, 2008 and, as such, Cushmans results of operations are not included in our fiscal 2008 results.



Cushmans was
founded in 1945, is based in West Palm Beach, Florida, and is best known for its Cushman HoneyBells® citrus, a rare natural hybrid of Dancy Tangerine and Duncan Grapefruit. Cushman
HoneyBells® citrus join Harry & Davids Royal Riviera® Pears and Wolfermans® English Muffins in our family of nationally recognized brands.



Sale of the Jackson & Perkins businesses



We sold our Jackson & Perkins business in the fourth quarter of fiscal 2007, including the direct
marketing and wholesale businesses, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventory, as well as its direct marketing and wholesale customer lists
and relationships. In association with the sale of the Jackson & Perkins business, we also sold land in Wasco, California, which had been used primarily to support the rose growing operations of Jackson & Perkins, as well as the
related buildings and equipment. In connection with the sale of the business, we entered into an agreement with the buyer to provide certain transitional services through June of fiscal 2008, which has been extended through October of fiscal 2009.



For further information regarding the sale of the Jackson & Perkins
businesses, see Note 6  Discontinued Operations in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



Unless otherwise noted, the results of our former Jackson & Perkins segment are generally not discussed in this managements
discussion and analysis, which is limited to continuing operations.



Factors
and trends



Historically, our business has been subject to significant
seasonal variations in demand and a substantial portion of our net sales and net earnings are realized during the holiday selling season from October through December. This is a general pattern for the direct-to-customer and retail industries, but
it is more pronounced for our company than for others due to the gift-giving nature of many of our products.



Accordingly, changing economic conditions or deviations from projected demand for products during the fourth
calendar quarter can have a materially favorable or adverse impact on our financial position and results for the full year. Because we commit to certain fixed costs in anticipation of expected sales during the holiday selling season in the fourth
calendar quarter, if our actual sales during that calendar quarter are lower than anticipated, our results of operations and profitability will be negatively impacted. In addition, our primary growing season occurs during the second and third
calendar quarters. Because we must commit to certain costs before we know the results of a particular harvest, inclement weather conditions and agricultural pests leading to lower harvest yields can also negatively impact our sales and
profitability. Additionally, a portion of our Direct Marketing sales are derived from Fruit-of-the-Month Club® product shipments. As such, results in this segment may vary between periods
due to variations in fruit availability year-to-year, as well as other factors.



Several economic and industry trends and factors can impact our business, results of operations, liquidity and financial condition. Additionally, the amount of our outstanding debt could adversely affect our financial condition. For a
discussion of risk factors, see Item 1A -Risk Factors, within Part 1 of this Form 10-K.



BASIS OF PRESENTATION



Fiscal Year



Our fiscal year ends the last Saturday of June of each year. There were 53 weeks in fiscal 2007 and 52 weeks in both fiscal 2008 and fiscal 2006.



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The following discussion and analysis focuses on financial results of continuing operations. The historical results of
our operations included in the following discussion do not reflect what our results of operations, financial position and cash flows may be in the future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Managements discussion and analysis of financial condition and results of operations is based on
our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experiences and various other factors that are believed to be reasonable
under the circumstances. Actual results may differ significantly from these estimates. For a further discussion of some of the risks that could cause actual results to differ from estimates, see Item 1A - Risk Factors, included in
Part 1 of this Form 10-K.

Our critical accounting policies and estimates are described in this section. An accounting estimate is considered critical if:



| |  |  | the estimate requires management to make assumptions about matters that are highly uncertain at the time the estimate was made;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | different estimates reasonably could have been used; or
| | - |  | -------------------------------------------------------



| |  |  | changes in the estimate would have a material impact on our financial condition or results of operations are likely to occur from period to period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

However, you should also review all of our significant accounting policies, including the use of estimates in connection with these
policies, which are described in more detail in Note 3  Summary of Significant Accounting Policies in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.

Revenue Recognition

In accordance with Staff Accounting Bulletin
No.104, Revenue Recognition,we recognize revenue from product sales when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the selling
price is fixed or determinable, and (iv) collectability is reasonably assured.

For our direct marketing revenue and a portion of our wholesale
revenue, product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded upon shipment as either our or our customers standard terms and conditions provide for transfer of title upon delivery to
the carrier. For certain wholesale customers, revenue is recognized upon receipt by the customer, at which time title passes to the customer in accordance with the terms of the sale. We record a reserve for estimated product returns and allowances
in each reporting period. If returns were to increase or decrease, changes to the reserves could be required. We present sales taxes on a net basis.

Deferred revenue represents amounts received from customers for merchandise to be shipped in subsequent periods. We defer incremental direct costs of order processing related to those orders for which revenue is deferred. Revenues from
sales of gift cards are deferred until redeemed. Our gift cards and certificates do not lose value over time and do not expire. Unredeemed gift cards or certificates that are subject to escheatment ultimately revert to the appropriate state and are
not recorded as income. Unredeemed gift cards or certificates not subject to escheatment are recognized in income after being outstanding for ten years at which time we consider the possibility of redemption to be remote.

Inventories

Inventories in our Direct Marketing, Wholesale, and
Other segments are valued at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Inventories in our Stores segment are valued at the lower of cost (which approximates actual cost on a first-in,
first-out basis) or market using the retail inventory method. We estimate a provision for damaged, obsolete, excess, and slow-moving inventory based on specific identification and inventory aging reports. We provide for excess and obsolete
inventories in the period when excess and obsolescence are determined to have occurred.

We capitalize into inventory both direct and indirect production
costs. Indirect production costs include indirect labor and overhead costs related to growing, manufacturing and assembly. Costs of unharvested crops are included in inventory and include direct labor and other expenses related to nursery stock and
unharvested fruit, including the amortization of orchard development costs. Fruit crop inventories are accounted for on a crop year that spans from November to October.



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Income Taxes

We
account for income taxes under the liability method pursuant to Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS
No. 109). Under this method, deferred income tax liabilities and assets are based on the difference between the financial statements and tax basis of assets and liabilities multiplied by the expected tax rate in the year the differences
are expected to reverse. Deferred income tax expense or benefit results from the change in the net deferred tax asset or liability between periods.

We
record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. We have considered carryback and carryforward periods, historical and forecasted income, the apportioned earnings in the
jurisdictions in which we and our subsidiaries operate, and tax planning strategies in estimating a valuation allowance against our deferred tax assets. If we determine that it is more likely than not that some portion or all of the deferred tax
assets will not be realized, an adjustment to the deferred tax assets is charged to earnings in the period in which we make such a determination. Conversely, if we determine that it is more likely than not that the deferred tax assets will be
realized, we would reverse the applicable portion of the previously estimated valuation allowance.

The amount of income taxes we pay is subject to
periodic audits by federal and state tax authorities and these audits may result in proposed deficiency assessments. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
interpretation of FASB Statement No. 109 (FIN 48) which clarifies the accounting for uncertainty in income taxes in an enterprises financial statements in accordance with SFAS No. 109.FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 as of July 1, 2007. For further information, see Note 10  Income Taxes included in the notes to our audited consolidated financial
statements included in Part IV, Item 15 in this Form 10-K.

Deferred catalog expenses and advertising expenses

Deferred catalog expenses are incurred in connection with the direct response marketing of certain products. Catalog costs consist of creative design, photography,
separations, paper, print, distribution, postage, and list costs for all direct response catalogs. Such costs are capitalized as deferred catalog expenses and are amortized over their expected periods of future benefit based on the estimated sales
curve of each promotion. Each catalog is generally amortized over 3 to 4 months. However, for sales that extend up to 12 months, such as multiple club shipments, catalog expense is generally amortized up to a 12-month period. Prepaid catalog
expenses are evaluated for realizability at each reporting period by comparing the carrying amount associated with each catalog to the estimated remaining future net revenues associated with that promotion. Estimated future revenues are based on
various factors such as the total number of catalogs and pages circulated, the probability and likely magnitude of consumer response, and the assortment of merchandise offered. If the carrying amount is in excess of estimated future net revenues,
the excess is expensed in the reporting period. Non-direct response advertising is expensed as incurred.

Impairment of Long-lived Assets

Fixed assets

In accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we evaluate our long-lived assets for impairment. Recoverability of assets is measured by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value, which is calculated on a
discounted cash flow basis.

Intangible assets

Intangible assets primarily consist of trade names, trademarks, a proprietary recipe, customer mailing and rental lists and favorable lease agreements. The trade names, trademarks and the recipe have indefinite lives. The customer lists
have a remaining estimated useful life of six years. The favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases, ranging from two to five years. Goodwill and intangible assets with indefinite
lives are tested for impairment annually using the guidance and criteria described in SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The impairment testing compares carrying values to fair values, and
generally, if the carrying value of these assets is in excess of fair value, which is calculated on a discounted cash flow basis, an impairment loss would be recognized. The customer mailing lists and rental lists are amortized using a
weighted-average method over the remaining estimated useful lives and favorable lease agreements are amortized using the straight-line method.



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Goodwill



Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired our acquisition of Wolfermans (see Note
5-Acquisition included in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K). Under SFAS No. 142, goodwill is evaluated for potential impairment on an annual basis or whenever
events or circumstances indicate that an impairment may have occurred. SFAS No. 142 requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment,
compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting units goodwill is not considered to be
impaired and the second step of the impairment test is unnecessary. If the reporting units carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any.
If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.



As required by SFAS No. 142, we identified the Wolfermans direct marketing division, within our Direct Marketing segment, as the
reporting unit to be tested for goodwill impairment. The allocation of goodwill was based on the assignment of operating responsibilities and the reporting of financial results of the acquired business.



Pension Plans



Effective June 30, 2007, we adopted SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). Our pension benefit costs and liabilities are developed from actuarial valuations. Inherent in these valuations are assumptions we determine after
consultation with our actuaries, including discount rates, expected returns on plan assets and rates of compensation increases. In determining the expected rates and returns, we are required to consider current market conditions, including changes
in interest rates.



Material changes in our pension and post-retirement benefit
costs may occur in the future, resulting from changes in assumptions or other management decisions. For further discussion, see Note 9  Benefit Programs included in the notes to our audited consolidated financial statements
included in Part IV, Item 15 in this Form 10-K.



RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS



In May 2008, the
FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles
to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. SFAS 162 is effective 60 days following the Securities and Exchange
Commissions approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Presenting Fairly in Conformity with Generally Accepted Accounting Principles. We are currently evaluating
SFAS 162 and do not expect there to be a material effect on our consolidated financial statements.



In December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations, which replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will
enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 (on or after June 28, 2009 of fiscal 2010). Early adoption is not permitted. After the effective date, we will apply the requirements of SFAS No. 141R to any future business combinations.



We adopted SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Retirement Plans, effective June 30, 2007. SFAS No. 158 requires an employer to recognize the funded status of each of its defined benefit post-retirement plans as an asset or liability and to recognize changes in funded status
as a component of accumulated other comprehensive income. Upon adoption, current liabilities were increased by $223, noncurrent liabilities were reduced by $2,003, deferred taxes were increased by $661, and stockholders equity was increased by
$1,119, net of tax.



In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which requires
assets or liabilities to be carried at fair value. This statement gives entities the option to record certain financial assets and liabilities at fair value with the changes in fair value recorded in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. We are not planning to elect the option to record certain financial assets and liabilities at fair value and, therefore, this pronouncement is not expected to have
a material impact on our consolidated financial statements.



In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements, which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements
but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and to allow additional time to resolve certain issues,
the FASB delayed the effective date for one year for certain types of nonfinancial assets and nonfinancial liabilities, via FSP No. FAS 157-2, Effective Date of FASB Statement No.157. We do not expect adoption of this statement to have a
material impact on our consolidated financial statements.



In June 2006, the
FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109. FIN 48 establishes a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties,



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accounting in interim periods, disclosure and transition. We adopted FIN 48 as of July 1, 2007 and recorded a cumulative adjustment to equity upon
adoption for the accounting differences for uncertain tax positions under FIN 48 as opposed to FASB Statement No. 5, Accounting for Contingencies. For further information, see Note 10  Income Taxes included in the notes
to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.

In June 2006, the Emerging Issues Task Force
(EITF) ratified the consensus reached on Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to Financial Accounting Standards Board Statement No. 43, Accounting for Compensated
Absences (EITF 06-2). EITF 06-2 concludes that companies should accrue for employee sabbatical leave over the service period in which employees earn the right to sabbatical leave. We adopted EITF 06-2 in the first quarter of
fiscal year 2008. The impact on our financial statements was a cumulative adjustment to retained earnings totaling $256, net of taxes of $164. In addition, for fiscal 2008, a net charge of $26, or $0.03 per share on basic and diluted pre-tax basis,
was recorded in payroll expense, classified within selling, general and administrative expenses in the consolidated statement of operations pursuant to EITF 06-2.



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RESULTS OF OPERATIONS



The following table summarizes our consolidated operating results for the fiscal 2008, 2007 and 2006 (dollars in thousands).



|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|------------------------------------------------------------ |  | ----------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | -
|                                                             |  | Fiscal 2008 |         |   | Fiscal 2007 |   |         | Fiscal 2006 | 
|Net sales                                                    |  | $           | 545,064 |   |             | $ | 561,017 |             |  | $ | 524,384 |  
|Costs of goods sold                                          |  |             | 295,894 |   |             |   | 295,211 |             |  |   | 302,389 |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Gross profit                                                 |  |             | 249,170 |   |             |   | 265,806 |             |  |   | 221,995 |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Operating expenses:                                          |  |             |         |   |             |   |         |             |  |   |         |  
|Selling, general and administrative                          |  |             | 217,008 |   |             |   | 214,004 |             |  |   | 198,219 |  
|Selling, general and administrative  related party          |  |             | 1,000   |   |             |   | 1,068   |             |  |   | 1,000   |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|                                                             |  |             | 218,008 |   |             |   | 215,072 |             |  |   | 199,219 |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Operating income                                             |  |             | 31,162  |   |             |   | 50,734  |             |  |   | 22,776  |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Other (income) expense:                                      |  |             |         |   |             |   |         |             |  |   |         |  
|Interest income                                              |  |             | (2,708  | ) |             |   | (3,126  | )           |  |   | (1,780  | )
|Interest expense                                             |  |             | 25,227  |   |             |   | 28,199  |             |  |   | 26,459  |  
|Pension curtailment gain                                     |  |             |        |   |             |   | (15,844 | )           |  |   |        |  
|Gain on debt prepayment                                      |  |             | (303    | ) |             |   |        |             |  |   |        |  
|Other (income) expense, net                                  |  |             | (39     | ) |             |   | (348    | )           |  |   | 1,210   |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|                                                             |  |             | 22,177  |   |             |   | 8,881   |             |  |   | 25,889  |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |             | 8,985   |   |             |   | 41,853  |             |  |   | (3,113  | )
|Provision for income taxes                                   |  |             | 4,648   |   |             |   | 11,156  |             |  |   | 2,548   |  
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Net income (loss) from continuing operations                 |  |             | 4,337   |   |             |   | 30,697  |             |  |   | (5,661  | )
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Discontinued operations:                                     |  |             |         |   |             |   |         |             |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |             | 282     |   |             |   | 6,713   |             |  |   |        |  
|Operating income (loss) on discontinued operations           |  |             | 8       |   |             |   | (4,282  | )           |  |   | (6,511  | )
|Provision (benefit) for income taxes                         |  |             | 19      |   |             |   | 1,127   |             |  |   | (2,459  | )
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Net income (loss) from discontinued operations               |  |             | 271     |   |             |   | 1,304   |             |  |   | (4,052  | )
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  
|Net income (loss)                                            |  | $           | 4,608   |   |             | $ | 32,001  |             |  | $ | (9,713  | )
|                                                             |  |             |         |   |             |   |         |             |  |   |         |  



Fiscal 2008 Operating Results
Summary



In fiscal 2008, we experienced a challenging economic environment
characterized by higher fuel and commodity costs, which contributed to slower economic growth and reduced consumer confidence. The weaker economy contributed to lower sales across each of our segments. While we effectively managed our product costs
and controlled our variable support costs as well as discretionary spending, our decline in gross margin was due to higher fixed costs and overhead spending, favorable inventory adjustments in the prior year and the impact of higher fuel costs,
which increased our delivery expense. Our selling, general and administrative expenses rose due to higher advertising expenses, higher lease and operating costs to support our new stores and higher payroll costs, all of which contributed to the
decline in our operating income. Despite the years challenges, we generated operating cash flows that were sufficient to enable us to complete the acquisition of the Wolfermans business and to complete a partial repurchase of our
outstanding bonds.



Net Sales



The following table summarizes our net sales from continuing operations and net sales by
reportable business segment and from our Other segment for the periods indicated (dollars in thousands).



|                 |  |             |         |                 |       |   |             |   |                 |  |       |             |  |                 |         |  |       |  
|---------------- |  | ----------- | ------- | --------------- | ----- | - | ----------- | - | --------------- |  | ----- | ----------- |  | --------------- | ------- |  | ----- | -
|                 |  | Fiscal 2008 |         | Percent ofTotal |       |   | Fiscal 2007 |   | Percent ofTotal |  |       | Fiscal 2006 |  | Percent ofTotal |        
|Direct Marketing |  | $           | 372,552 |                 | 68.4  | % |             | $ | 384,439         |  | 68.5  | %           |  | $               | 369,815 |  | 70.5  | %
|Stores           |  |             | 138,129 |                 | 25.3  |   |             |   | 139,478         |  | 24.9  |             |  |                 | 132,143 |  | 25.2  |  
|Wholesale        |  |             | 32,481  |                 | 6.0   |   |             |   | 35,061          |  | 6.2   |             |  |                 | 20,428  |  | 3.9   |  
|Other            |  |             | 1,902   |                 | 0.3   |   |             |   | 2,039           |  | 0.4   |             |  |                 | 1,998   |  | 0.4   |  
|                 |  |             |         |                 |       |   |             |   |                 |  |       |             |  |                 |         |  |       |  
|Total net sales  |  | $           | 545,064 |                 | 100.0 | % |             | $ | 561,017         |  | 100.0 | %           |  | $               | 524,384 |  | 100.0 | %
|                 |  |             |         |                 |       |   |             |   |                 |  |       |             |  |                 |         |  |       |  



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Net sales decreased $15,953, or 2.8%, to $545,064 for fiscal 2008 compared to $561,017 for fiscal 2007 and increased
$36,633, or 7.0%, to $561,017 for fiscal 2007 compared to fiscal 2006. The extra week in fiscal 2007 contributed additional net sales of approximately $3,200 as compared to fiscal 2008, and $3,800 as compared to fiscal 2006. In contrast to our
fiscal 2007 results, in which each of our segments increased in net sales, in fiscal 2008 we experienced declines in each segment largely driven by soft consumer demand.

Our Other segment net sales were primarily comprised of non-gift quality fruit and were not significant in each of fiscal 2008, 2007 and 2006 periods.

Direct Marketing

Our Direct Marketing segment net sales,
which include consumer catalog, Internet, business-to-business and outbound telemarketing channels, decreased $11,887, or 3.1%, to $372,552 for fiscal 2008 compared to fiscal 2007. The sales decline was driven by lower volumes resulting from soft
consumer demand, a shift in our Fruit-of-the- Month Club® product shipments, which are subject to increases or decreases based on the date on which specific fruit is available for shipment;
and, to a lesser extent, the extra week in fiscal 2007, which contributed approximately $1,400 of net sales in fiscal 2007. Although our catalog circulation increased in fiscal 2008 compared to fiscal 2007, the productivity of our additional
circulation did not meet our expectations as overall orders and response rate dropped from fiscal 2007 levels. The decline was partially offset by higher average selling prices as well as sales volume from our newly acquired Wolfermans
products. Our Internet sales continued to become a larger portion of direct marketing business, which we expect will lead to future efficiencies and cost savings in our order processing and customer support functions.

Direct Marketing segment net sales increased $14,624, or 4.0%, to $384,439 for fiscal 2007 compared to fiscal 2006. Excluding the extra week in fiscal 2007, which
contributed additional net sales of approximately $2,100, net sales increased approximately $12,524, or 3.4 % from fiscal 2006 to fiscal 2007. Despite shipping fewer packages in fiscal 2007, net sales increased due to increased delivery and
processing revenue, selected product price increases and lower markdowns due to improved inventory management and a planned reduction in promotional activity. Our delivery and processing income was attributable to increases in our delivery and
processing charges, reduced delivery promotions and the effect of product price increases, which, in turn, further drove higher delivery and processing charges.

Stores

Our Stores segment net sales decreased by $1,349, or 1.0%, to $138,129 for fiscal 2008 compared to fiscal 2007 as comparable store
sales decreased approximately 6.0%, or $8,235, offset by $7,993 of new store sales volume. The decrease in Stores segment net sales was due to lower customer traffic and the extra week in fiscal 2007, which contributed approximately $1,600 of net
sales in fiscal 2007. The decrease was partially offset by new (non-comparable) store sales and higher average selling prices. Comparable stores sales declined 4.9%, or $6,726, after adjusting for the extra week in fiscal 2007.

Fiscal 2007 Stores segment net sales increased $7,335, or 5.6%, to $139,478 as compared to fiscal 2006. Excluding the extra week in fiscal 2007 which contributed
additional net sales of approximately $1,600, net sales increased approximately $5,735, or 4.3 %, from fiscal 2006 to fiscal 2007. The net sales increase was primarily due to reduced markdowns resulting from improved inventory management and
fewer product discounts, the combination of which resulted in higher revenue per sales transaction. Comparable store sales increased 4.9% or $6,368, and 8.2% or $9,937, in fiscal 2007 and fiscal 2006, respectively. Sales for comparable stores were
up 4.0% or $5,474 for fiscal 2007 compared to fiscal 2006, after adjusting for the effect of the extra week in fiscal 2007.

A store becomes comparable in
the first fiscal month after it has been open for a full twelve months, at which point its results are included in comparable store sales. When a stores square footage has been changed as a result of reconfiguration or relocation within the
same retail complex, the store continues to be treated as a comparable store.

The following table summarizes our store openings and closures for the last
three fiscal years:



|                                         |  |             |   |  |             |   |  |             |  
|---------------------------------------- |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                         |  | Fiscal 2008 |   |  | Fiscal 2007 |   |  | Fiscal 2006 |  
|Stores in operation, beginning of period |  | 135         |   |  | 130         |   |  | 136         |  
|Stores opened                            |  | 13          |   |  | 6           |   |  | 1           |  
|Store closures                           |  | (5          | ) |  | (1          | ) |  | (7          | )
|                                         |  |             |   |  |             |   |  |             |  
|Stores in operation, end of period       |  | 143         |   |  | 135         |   |  | 130         |  
|                                         |  |             |   |  |             |   |  |             |  



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Wholesale



Our Wholesale segment net sales decreased by $2,580, or 7.4%, to $32,481 for fiscal 2008 compared to fiscal 2007. The decrease was primarily due to lower repeat volumes
with certain customers and the extra week in fiscal 2007, which contributed approximately $200 of net sales. The decrease was partially offset by new wholesale customers and Wolfermans wholesale activity.



In fiscal 2007, net sales increased by $14,633, or 71.6%, to $35,061 as compared to fiscal
2006. The extra week in fiscal 2007 contributed approximately $100 of net sales. Our Wholesale segment was able to leverage its existing relationships with national retailers, whose programs expanded to include more retail locations and wider
assortments of our merchandise.



Gross Profit



Gross profit equals net sales less cost of goods sold. Cost of goods sold includes cost of
goods, occupancy expenses for manufacturing and distribution facilities, warehouse and fulfillment costs and product delivery costs. Cost of goods consists of raw materials, manufacturing costs, costs of externally purchased merchandise, inbound
freight expenses, freight to other production/fulfillment locations, freight to stores, and other inventory-related costs such as shrinkage, markdowns and surplus write-offs. Occupancy expenses consist of depreciation, rent, utilities and other
general occupancy costs. Occupancy expenses for our stores and corporate facility are reflected in selling, general and administrative expenses. Warehouse and fulfillment costs consist of labor, storage and equipment expenses and other costs related
to inventory positioning, shipment planning, receiving, picking, packing and delivering product to the end customer, stores and production/fulfillment locations. Product delivery costs consist of third-party delivery services to customers.



The following table summarizes our gross profit from continuing operations,
gross profit by reportable business segment and our Other segment, and gross profit as a percentage of consolidated and segment net sales for the periods indicated (dollars in thousands).



|                   |  |             |         |                 |      |   |             |   |                 |  |      |             |  |                 |         |  |      |  
|------------------ |  | ----------- | ------- | --------------- | ---- | - | ----------- | - | --------------- |  | ---- | ----------- |  | --------------- | ------- |  | ---- | -
|                   |  | Fiscal 2008 |         | Percent ofSales |      |   | Fiscal 2007 |   | Percent ofSales |  |      | Fiscal 2006 |  | Percent ofSales |        
|Direct Marketing   |  | $           | 179,451 |                 | 48.2 | % |             | $ | 188,465         |  | 49.0 | %           |  | $               | 154,802 |  | 41.9 | %
|Stores             |  |             | 65,550  |                 | 47.5 |   |             |   | 69,514          |  | 49.8 |             |  |                 | 62,684  |  | 47.4 |  
|Wholesale          |  |             | 4,153   |                 | 12.8 |   |             |   | 7,823           |  | 22.3 |             |  |                 | 4,420   |  | 21.6 |  
|Other              |  |             | 16      |                 | 0.8  |   |             |   | 4               |  | 0.2  |             |  |                 | 89      |  | 4.5  |  
|                   |  |             |         |                 |      |   |             |   |                 |  |      |             |  |                 |         |  |      |  
|Total gross profit |  | $           | 249,170 |                 | 45.7 | % |             | $ | 265,806         |  | 47.4 | %           |  | $               | 221,995 |  | 42.3 | %
|                   |  |             |         |                 |      |   |             |   |                 |  |      |             |  |                 |         |  |      |  



Gross profit decreased $16,636, or
6.3% from fiscal 2007, and increased $43,811, or 19.7%, in fiscal 2007 from fiscal 2006. The extra week in fiscal 2007 contributed additional gross profit of approximately $1,200 as compared to fiscal 2008, and $600 as compared to fiscal 2006.
Consolidated gross profit as a percentage of consolidated net sales was 45.7%, 47.4%, and 42.3%, in fiscal 2008 fiscal 2007 and fiscal 2006, respectively.



Direct Marketing



Our Direct Marketing segment gross profit decreased $9,014, or 4.8%, to $179,451 in fiscal 2008 from fiscal 2007. Gross profit as a percentage of Direct Marketing segment net sales was 48.2% in fiscal 2008 as compared
to 49.0% in fiscal 2007. The 80 basis point gross margin decline was due to a combination of increased fulfillment and delivery costs as well as a favorable inventory adjustment to prior year costs of goods sold. These declines were partially offset
by improved variable product margin as selected sales price increases helped offset some of the increase in product costs as well as lower cost allocations from our manufacturing and corporate support divisions, which were shifted to our Stores and
Wholesale segments based on changes in recent historical growth rates among our segments. The favorable inventory adjustment in fiscal 2007 was primarily attributable to prior periods as highlighted in the footnotes that follow our EBITDA table
below.



Direct Marketing segment gross profit decline was largely driven by the
decline in sales volume, as discussed above, as well as the same gross margin factors mentioned above. The decrease in gross profit was also impacted by the extra week in fiscal 2007, which contributed approximately $500 of gross profit compared to
fiscal 2008. The gross profit decline was partially offset by the contribution of sales from our newly acquired Wolfermans business.



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Direct Marketing segment gross profit increased $33,663 or 21.7%, to $188,465 in fiscal 2007 from fiscal 2006. Gross
profit as a percentage of segment net sales was 49.0% in fiscal 2007 as compared to 41.9%, in fiscal 2006. The rate and dollar improvement in fiscal 2007 was driven by higher net sales per package as described above, a significant reduction in
delivery and processing discounts, lower variable product costs per package and lower delivery expenses per package. The extra week in fiscal 2007 did not have a material impact on gross profit as compared to fiscal 2006.



Stores



Our Stores segment gross profit decreased $3,964, or 5.7%, to $65,550 in fiscal 2008 from fiscal 2007. Gross profit as a percentage of Stores segment net
sales was 47.5% in fiscal 2008 and 49.8% in fiscal 2007. The gross margin decline in fiscal 2008 was primarily driven by higher allocated costs from our manufacturing and support divisions, as discussed above, increased product costs and higher
freight. These factors were partially offset by higher average selling prices. The gross profit decrease was driven by lower transaction volume as a result of weaker consumer traffic in our comparable stores and the extra week in fiscal 2007, which
contributed approximately $600 of segment gross profit, as well as the factors discussed above, partially offset by the contribution of our eight net new stores.



Stores segment gross profit increased $6,830, or 10.9%, to $69,514 in fiscal 2007 from fiscal 2006. Excluding the extra week in fiscal 2007
which contributed additional gross profit of $600, gross profit decreased approximately $6,230, or 9.9%, from fiscal 2006 to fiscal 2007. Gross profit as a percentage of segment net sales was 49.8% in fiscal 2007 and 47.4% in fiscal 2006. The gross
profit and margin improvement in fiscal 2007 was driven by reduced product markdowns, selected product price increases, and lower variable product costs.



Wholesale



Our Wholesale segment gross profit decreased $3,670, or 46.9%, to $4,153 in fiscal 2008 from fiscal 2007. Gross profit as a percentage of segment net sales was 12.8% and 22.3% for fiscal 2008 and 2007, respectively.
The gross profit and margin decline in fiscal 2008 was largely due to higher allocated costs from our manufacturing and support division, (as discussed above under Direct Marketing), which were coupled with lower sales volume. Also contributing to
the decline were higher inventory write-offs and higher delivery, freight and fulfillment costs and the extra week in fiscal 2007 which contributed approximately $100 of gross profit.



Wholesale segment gross profit increased $3,403, or 77.0%, to $7,823 in fiscal 2007 from fiscal 2006. The extra week in fiscal 2007 did not
have a material impact on gross profit as compared to fiscal 2006. Gross profit as a percentage of segment net sales was 22.3% in fiscal 2007 and 21.6% in fiscal 2006. The gross profit increases in fiscal 2007 resulted from the continued growth of
our Wholesale segment, while the rate fluctuations were driven primarily by changes in sales volume within customer channels, and to a lesser extent, a shift in product mix.



Selling, General and Administrative Expenses



Selling, general and administrative expenses consist of occupancy costs associated with our stores and corporate facility, advertising,
credit costs, call center expenses, depreciation and amortization for store leasehold improvements and fixtures, corporate facilities, IT equipment and software, and corporate administrative functions. Occupancy expenses associated with the stores
and corporate facility include rent, common area maintenance, utilities and other general expenses. Corporate administrative functions include the costs of executive administration, legal, human resources, finance, insurance, information technology
and other general expenses.



The following table summarizes our selling,
general and administrative expenses from continuing operations and by reportable business segment and our Other segment as a percentage of net sales for the periods indicated (dollars in thousands).



|                                                   |  |             |         |   |                 |      |   |             |   |         |                 |  |      |             |  |                 |         |  |      |  
|-------------------------------------------------- |  | ----------- | ------- | - | --------------- | ---- | - | ----------- | - | ------- | --------------- |  | ---- | ----------- |  | --------------- | ------- |  | ---- | -
|                                                   |  | Fiscal 2008 |         |   | Percent ofSales |      |   | Fiscal 2007 |   |         | Percent ofSales |  |      | Fiscal 2006 |  | Percent ofSales |        
|Direct Marketing                                   |  | $           | 140,267 |   |                 | 37.7 | % |             | $ | 140,907 |                 |  | 36.7 | %           |  | $               | 130,537 |  | 35.3 | %
|Stores                                             |  |             | 74,408  |   |                 | 53.9 |   |             |   | 70,842  |                 |  | 50.8 |             |  |                 | 66,219  |  | 50.1 |  
|Wholesale                                          |  |             | 3,341   |   |                 | 10.3 |   |             |   | 3,348   |                 |  | 9.5  |             |  |                 | 2,374   |  | 11.6 |  
|Other                                              |  |             | (8      | ) |                 | (0.4 | ) |             |   | (25     | )               |  | (1.2 | )           |  |                 | 89      |  | 4.5  |  
|                                                   |  |             |         |   |                 |      |   |             |   |         |                 |  |      |             |  |                 |         |  |      |  
|Total selling, general and administrative expenses |  | $           | 218,008 |   |                 | 40.0 | % |             | $ | 215,072 |                 |  | 38.3 | %           |  | $               | 199,219 |  | 38.0 | %
|                                                   |  |             |         |   |                 |      |   |             |   |         |                 |  |      |             |  |                 |         |  |      |  



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Selling, general and administrative expenses increased $2,936, or 1.4%, to $218,008 in fiscal 2008 from fiscal 2007, and
increased $15,853, or 8.0%, to $215,072 in fiscal 2007 from fiscal 2006. The extra week in fiscal 2007 contributed additional selling, general and administrative expenses of approximately $2,700 as compared to fiscal 2008, and $4,500 as compared to
fiscal 2006.



The increase in selling, general administrative expense in fiscal
2008 was due to a combination of higher advertising costs in our Direct Marketing segment, higher payroll and related benefit expense tied to merit and personnel increases, higher lease and operating costs related to our new stores and store
impairment charges. Also contributing to the increase were support and integration costs associated with our Wolfermans acquisition. These increases were partially offset by a material decrease in incentive compensation expenses.



The increase in consolidated selling, general and administrative expenses in fiscal 2007
was primarily due to a material increase in our incentive compensation expenses due to the achievement of certain fiscal 2007 financial goals, higher salaries expense due to the additional week in fiscal 2007 and higher salaried and hourly staffing
levels in selected corporate functions and in our Stores segment. Also contributing to the increase were higher consulting expenses related to the planned implementation of an Enterprise Resource Planning (ERP) software package and increased
advertising expenses in our Wholesale and Stores segments.



Consolidated
selling, general and administrative expenses as a percentage of consolidated net sales were 40.0%, 38.3% and 38.0% for fiscal 2008, fiscal 2007 and fiscal 2006, respectively.



Other (Income) Expense



Other expense consists of interest and other non-operating expense (income) and is primarily recognized within our Other segment, unless otherwise noted.



Consolidated other expense increased by $13,296, to $22,177 in fiscal 2008 from fiscal 2007,
and decreased by $17,008 to $8,881 in fiscal 2007 from fiscal 2006. Other expense for fiscal 2008 was primarily comprised of $22,519 net interest expense, partially offset by $303 net gain on our debt prepayment (as discussed in Note
8-Borrowing Arrangements in Item 15 in this Form 10-K). Other expense for fiscal 2007 was primarily comprised of $25,073 in net interest expense partially offset by the recognition of a non-cash curtailment gain of $15,844 caused by the
freeze of our qualified and non-qualified pension plans and $348 of other income related to legal settlements. Other expense for fiscal 2006 was primarily comprised of $24,679 in net interest expense, $2,180 in costs that were written off relating
to a withdrawn initial public offering and $750 in legal settlement costs, partially offset by $1,720 of legal settlement income.



Income Taxes



Total income taxes may differ from the amount computed by applying the federal corporate tax rate of 35% due to the net result of permanent differences, changes in the valuation allowance and the inclusion of state
and local income taxes, net of the federal tax benefit. The combined federal and state tax effective rates were 51.7%, 26.7%, and (81.9)% in fiscal 2008, fiscal 2007 and fiscal 2006, respectively, on income (loss) from continuing operations before
taxes of $8,985, $41,853, and $(3,113), respectively.



In fiscal 2008, the
effective tax rate for continuing operations was higher than the statutory rate primarily due to a mid-year structural reorganization that resulted in a higher state tax expense and cumulative adjustments to deferred tax items of $686 due to changes
in the state tax rate as well as an increase in tax reserves under FIN 48 of $881, offset by the reversal of the remaining valuation allowance of $795. The effective tax rate in fiscal 2007 is lower than the statutory rate primarily due to a
reversal of the valuation allowance of $3,309. The decreased effective tax rate in fiscal year 2006 was primarily due to a $3,176 increase in the valuation allowance partially offset by the cumulative effect of the change in the effective state tax
rate. The valuation allowance offsets deferred tax assets in accordance with SFAS No. 109. For further information see Note 3  Summary of Significant Accounting Policies  Income Taxes and Note 10  Income
Taxes in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



LIQUIDITY AND CAPITAL RESOURCES



Our primary liquidity and capital resource needs are to service our debt, finance working capital and make capital expenditures. At June 28, 2008, our primary
sources of liquidity were cash, cash equivalents and short-term investments of $55,825 and unused borrowings under our revolving credit facility of approximately $124,300 to the extent of our current available borrowing base. As of June 28,
2008, we had no borrowings outstanding and $700 in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit facility are determined in accordance with our asset-based debt
limitation formula. Total available borrowings at June 28, 2008, were approximately $3,783. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit facility to finance



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operations leading up to the holiday selling season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog
advertising and marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during the fourth calendar quarter (our second fiscal quarter) because of the holiday selling season (see
Seasonality below).



Based upon our historical results, current
operations and strategic plans, we believe that our cash flow from operations, together with available cash and borrowings under our revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital
expenditures, lease payments and scheduled interest payments and to fund our operations for the next twelve months. Certain loan covenants in the revolving credit facility and in the indenture governing the Senior Notes restrict the transfer of
funds from the direct and indirect subsidiaries to the parent in the form of cash dividends, loans or advances.



Cash Flows from Operating Activities from Continuing Operations



Cash provided by operating activities from continuing operations totaled $25,482, $46,496 and $20,810 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Operating
cash decreased in fiscal 2008 primarily due to lower operating income. The higher level of cash provided by operating activities in fiscal 2007 as compared to fiscal 2006 was primarily attributable to our improved operating results, partially offset
by an increase in cash used for working capital.



Cash Flows from Investing
Activities from Continuing Operations



Cash used in investing activities
from continuing operations totaled $30,398 in fiscal 2008 and consisted primarily of $22,784 for the acquisition of Wolfermans, capital expenditures of $17,855, and $14,964 for the purchases of short-term investments partially offset by
$25,173 in proceeds from the sale of and income earned on short-term investments. Capital expenditures in fiscal 2008 consisted primarily of cash used to fund our ERP system implementation, the development of new stores, our transportation and
fulfillment management systems and our new optical defect pear sorter.



For
fiscal 2007, cash used in investing activities from continuing operations were $45,851 and consisted primarily of $51,838 for the purchases of short-term investments and capital expenditures of $21,459, partially offset by $27,429 in proceeds from
the sale of short-term investments. Capital expenditures for fiscal 2007 included investment in an ERP system (excluding assets acquired by capital lease), additional manufacturing capacity, new stores, a new transportation and fulfillment
management system to support distribution, and infrastructure spending for our seasonal call center, which was relocated within the city of Eugene, Oregon.



Cash used in investing activities from continuing operations in fiscal 2006 were $17,344 and consisted primarily of
capital expenditures for investment in information technology and e-commerce systems, new stores and improvements to existing stores, installation of a delivery management system, and increase in our Moose Munch® manufacturing capacity.



We currently expect
our investing activities in fiscal 2009 to include capital expenditures of less than $17,000, consisting primarily of spending for manufacturing and distribution facility upgrade projects, retail store refurbishment and ongoing IT infrastructure
projects. However, our actual capital expenditures for fiscal 2009 may differ from those currently anticipated depending upon the size and nature of new business opportunities, actual cash flows generated by operations, and the timing of new project
spending. Our investment activities will also include cash used for the purchase of substantially all of the assets of Cushman Fruit Company, which we acquired in August 2008. See further discussion of our acquired businesses above.



Cash Flows from Financing Activities from Continuing Operations



Cash used in financing activities from continuing operations totaled $11,008, $60, and
$4,239 in fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Cash used in financing activities in fiscal 2008 primarily consisted of borrowings and repayments on our revolving credit facility, $9,405 used to buyback our senior notes and $1,684
in repayments for our capital lease obligations. The financing activities in fiscal 2007 were primarily comprised of borrowings and repayments on our revolving credit facility and $1,077 in repayments for our capital lease obligations, partially
offset by $1,017 in proceeds from the exercise of stock options. Financing cash flows in fiscal 2006 were comprised of borrowings and repayments on our revolving credit facility, payments of $3,017 for deferred financing costs and a $2,600 dividend,
partially offset by $1,646 in proceeds from the exercise of stock options.



Cash Flows from Discontinued Operations



Cash flows provided
by operating activities from discontinued operations were $3,147 in fiscal 2008 and a usage of cash of $12,674 in fiscal 2007, respectively. Operating cash flows were not significant in fiscal 2006. The increase in cash provided by operating
activities in fiscal 2008 from fiscal 2007 was attributable to cash payments made to us for transitional services we provided to the buyers of the Jackson & Perkins business. The increase in cash usage in fiscal 2007 from fiscal 2006 was
primarily due to completion of the sale of Jackson & Perkins occurring in the fourth quarter before the Jackson & Perkins selling season began, which resulted in the lack of cash inflows during the fourth fiscal quarter.



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Cash provided by investing activities from the discontinued Jackson & Perkins operations was $4,161 and $42,860
in fiscal 2008 and 2007, respectively, compared to a cash usage of $289 in fiscal 2006. Cash provided by investing activities in fiscal 2008 consisted of proceeds from the divestiture of the Jackson & Perkins business. Cash provided by
investing activities in fiscal 2007 was primarily comprised of proceeds from such divestiture partially offset by $185 of capital expenditures. Cash used in investing activities of $289 in fiscal 2006 was comprised of capital expenditures.



The divested Jackson & Perkins
business did not impact our historical cash flows from financing activities.



Borrowing Arrangements



Revolving Credit Facility



Our principal sources of liquidity are available cash, cash flows
from operations, borrowings under our revolving credit facility originally entered into by our previous subsidiary, Harry & David Operations Corp. On November 30, 2007 Harry & David Operations, Corp. merged with and into Harry
and David, pursuant to an internal corporate re-organization, and Harry and David entered into an assumption agreement with our lenders whereby Harry and David became the borrower and assumed all payment obligations under the credit agreement. See
also Note-19 Condensed Consolidating Financial Statements in Item 15 in this Form 10-K for further information on our internal corporate re-organization.



The revolving credit facility has a maturity date of March 20, 2011. Our ability to borrow under the revolving credit facility is subject to
compliance with the borrowing base and with financial covenants and other customary conditions, including that no default under the facility shall have occurred and be continuing. Borrowings under the revolving credit facility bear interest, at our
option, at either a base rate, based on the higher of the federal funds rate plus 0.5% or the corporate base lending rate of UBS AG, or a Eurodollar rate, based on the rate offered in the London interbank market (LIBOR), plus in each
case a borrowing margin based on our consolidated leverage ratio.



As discussed
elsewhere in this Form 10-K, on August 8, 2008, we completed the acquisition of substantially all of the assets of Cushman Fruit Company, Inc. Our credit agreement was amended to permit the acquisition and to address other administrative
matters on August 8, 2008.



Due to the seasonal nature of our business, we
draw on our revolving credit facility to provide seasonal working capital to support inventory buildup and catalog production in advance of the holiday selling season and for other general corporate purposes. We have consistently generated
substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 25th of each year. Cash generated during the holiday selling
season is also typically used to fund our operations for several months during the post-holiday selling season, until we begin to build inventories and other working capital components to support our next holiday selling season.



As of June 28, 2008, we had no outstanding borrowings and $700 in letters of credit
outstanding under the revolving credit facility. The maximum available borrowings under the credit agreement are determined in accordance with our asset-based debt limitation formula. Total additional available borrowings at June 28, 2008, were
approximately $3,783. We are required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitment fees are payable on the last day of each calendar year quarter and the associated expense is
included within interest expense in the consolidated statement of operations.



Harry and Davids obligations under the revolving credit facility are guaranteed by us and by all of Harry and Davids existing and future direct and indirect domestic subsidiaries and are secured by first-priority pledges of the
stock of Harry and David and each of the subsidiary guarantors equity interests and 65% of the equity interests of any future first-tier foreign subsidiaries, as well as first-priority security interests in and mortgages on all of our, Harry
and Davids and each of the subsidiary guarantors respective tangible and intangible property.



The revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities of this type, including, but not limited to, limitations on the incurrence of indebtedness,
capital expenditures, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. These covenants significantly limit our ability to obtain funds from our subsidiaries in the form
of loans, dividends or other advances other than dividends paid to us by Harry and David for the purpose of paying (i) our income taxes when and as due, (ii) management fees payable to Wasserstein under the management agreement, or
(iii) operating expenses incurred in the ordinary course of business and other corporate overhead costs and expenses (including legal and accounting expenses and similar expenses and customary fees to non-officer directors in an amount not to
exceed $350 in any fiscal year.



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The revolving credit facility requires mandatory prepayments upon the receipt of proceeds from certain assets sales,
casualty events and debt offerings. In addition, the revolving credit facility requires that, on a consolidated basis, we maintain as of December 31 each year an available cash balance (defined as all cash, cash equivalents and short-term
investments, minus all accounts payable) of at least $50,000, failing which we are required to meet and maintain a minimum fixed charge coverage ratio, subject to certain definitions and conditions. We also are also subject to an annual limitation
on our capital expenditures, subject to certain adjustments, through the terms of the revolving credit facility.

Our ability to comply with these
covenants and to meet and maintain such financial ratios and tests may be affected by events beyond our control, such as those described under Item 1A  Risk Factors in this Form 10-K. If we do not meet and maintain these financial
ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and payable which could also trigger a similar right under other agreements, including our indenture. At June 28, 2008, we were
in compliance with all of our covenants under the credit agreement.

Long-term Debt

In February 2005, Harry & David Operations Corp. issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due
March 1, 2013 (collectively, the Senior Notes). In fiscal 2006, Harry & David Operations Corp. completed the public exchange offer for the Senior Notes. The Senior Floating Rate Notes accrue interest at a rate per annum
equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 7.68% and 10.36% at June 28, 2008, and June 30, 2007, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with
semiannual interest payments due on the first of March and December.

During the fiscal year ended June 28, 2008, we purchased $9,405 of our fixed and
floating rate Senior Notes in open market purchases. This debt prepayment resulted in a net gain of $303, comprised of a $595 discount on the repayment of $10,000 of outstanding principal of the Senior Notes, partially offset by the write-off of
$284 of unamortized deferred financing costs and third-party expenses of $8 relating to the debt prepayment. Subsequent to our debt prepayment, we had $68,000 in Senior Floating Rate Notes and $167,000 in Senior Fixed Rate outstanding as of
June 28, 2008.

In the fourth quarter of fiscal 2007, we completed the sale of the
Jackson & Perkins businesses, including the direct marketing and wholesale business, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventories
and in a separate transaction, completed the sale of the land and assets used by the Jackson & Perkins rose growing operations. As we have applied the net proceeds from the sale of Jackson & Perkins businesses and assets to pay
down our revolver for working capital, for capital expenditures and for the purchase of Wolfermans, LLC, (as described in Note 5Acquisition), we have complied with the asset sale covenant under the indenture and were not
required to make an offer to repurchase the Senior Notes.

On November 30, 2007, in connection with an internal corporate re-organization,
Harry & David Operations Corp. merged with and into Harry and David, its wholly-owned subsidiary, and Harry and David assumed all of Harry & David Operations Corp.s obligations under the Senior Notes pursuant to a
supplemental indenture.

The Senior Notes represent the senior unsecured obligations of Harry and David and are guaranteed on a senior unsecured basis
by Harry & David Holdings, Inc. and all of our subsidiaries. See Note 19Condensed Consolidating Financial Statements in Item 15 in this Form 10-K. The indenture governing the Senior Notes contains various restrictive
covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. These covenants significantly
limit our ability to obtain funds from our subsidiaries in the form of loans, dividends or other advances other than (i) dividends or loans in limited circumstances if our fixed charge coverage ratio reaches specified levels or
(ii) dividends paid to us by our subsidiary, Harry and David, for the purpose of paying (A) management fees not to exceed $1,000 per year (excluding out-of-pocket expenses, (B) our consolidated income taxes when and as due, and
(C) up to $2,000 (since the date of the indenture) relating to expenses associated with an initial public offering. With respect to dividends other than as described in the preceding sentence, even if the fixed charge coverage ratio threshold
has been met, Harry and David may only pay us dividends up to a specified amount based upon, among other things, our consolidated net income and any cash proceeds received by Harry and David from the sale of equity securities or contributions to
equity.

Our ability to comply with these covenants may be affected by events beyond our control, such as those described under Item 1A  Risk
Factors in this Form 10-K. If we do not remain in compliance with these covenants, we may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could
accelerate all amounts outstanding to be immediately due and payable.

At June 28, 2008, we were in compliance with all of our covenants under the
indenture. Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist mainly of
cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.



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While our recent acquisitions of Wolfermans, LLC and substantially all of the assets of Cushman Fruit Company, Inc.
were financed with cash on hand, we expect to finance any future acquisitions using cash, capital stock, debt securities or the assumption of indebtedness. However, the restrictions imposed on us by the agreements governing our debt outstanding at
the time may affect this strategy. In addition, to fully implement our growth strategy and meet the resulting capital requirements, we may be required to request increases in amounts available under our revolving credit facility, enter into new
credit facilities, issue new debt securities or raise additional capital through equity financings. We may not be able to obtain an increase in the amounts available under our revolving credit facility on satisfactory terms, if at all, and we may
not be able to successfully complete any future bank financing or other debt or equity financing on satisfactory terms, if at all. As a result, our ability to make future acquisitions is uncertain. We may also incur expenses in pursuing acquisitions
that are never consummated.



Based upon our current operations and historical
results, we believe that our cash flow from operations, together with available cash and borrowings under our revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures, lease payments
and scheduled interest payments and to fund our future growth for the next 12 months. To the extent additional funding is required beyond the twelve-month horizon, we expect to seek additional financing in the public or private debt or equity
capital markets. Our equity sponsors, Wasserstein & Co. and Highfields Capital Management, are not obligated to provide financing to us. If we are unable to obtain the capital we require to implement our business strategy on acceptable
terms or in a timely manner, we would attempt to take appropriate actions to tailor our activities to match our available financing, including revising our business strategy and future growth plans to accommodate the amount of available financing.



CONTRACTUAL OBLIGATIONS



The following table presents our contractual obligations as
of June 28, 2008 (dollars are in thousands).



|                                                  |  |                       |         |                 |   |          |  |           |        |                  |   |         |  |   |       
|------------------------------------------------- |  | --------------------- | ------- | --------------- | - | -------- |  | --------- | ------ | ---------------- | - | ------- |  | - | ------
|                                                  |  | Amounts due by period
|                                                  |  | Total                 |         | Less than1 year |   | 1-3years |  | 4-5 Years |        | More than5 years
|Long-term debt obligations                        |  | $                     | 235,000 |                 | $ |         |  | $         |       |                  | $ | 235,000 |  | $ |      
|Estimated interest payments on long-term debt (1) |  |                       | 90,976  |                 |   | 20,252   |  |           | 40,505 |                  |   | 30,219  |  |   |      
|Capital lease obligations (2)                     |  |                       | 1,355   |                 |   | 710      |  |           | 645    |                  |   |        |  |   |      
|Operating lease obligations                       |  |                       | 124,142 |                 |   | 21,206   |  |           | 33,131 |                  |   | 20,128  |  |   | 49,677
|Purchase obligations                              |  |                       | 43,570  |                 |   | 43,570   |  |           |       |                  |   |        |  |   |      
|Pension obligations                               |  |                       | 14,400  |                 |   | 3,100    |  |           | 5,900  |                  |   | 5,400   |  |   |      
|Other miscellaneous obligations                   |  |                       | 989     |                 |   | 117      |  |           | 402    |                  |   | 253     |  |   | 217   
|                                                  |  |                       |         |                 |   |          |  |           |        |                  |   |         |  |   |       
|Total                                             |  | $                     | 510,432 |                 | $ | 88,955   |  | $         | 80,583 |                  | $ | 291,000 |  | $ | 49,894
|                                                  |  |                       |         |                 |   |          |  |           |        |                  |   |         |  |   |       

---

|(1) | Estimated interest payments exclude interest on borrowings under our revolving credit facility because we are unable to estimate future borrowings. Because we are unable to predict
future LIBOR rates, for purposes of calculating estimated interest payments, we assumed an interest rate of 7.68% per annum on our floating rate notes for all periods, the applicable interest rate as of June 28, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Capital lease obligations include payments for principal and interest.
|--- | ----------------------------------------------------------------------



OFF BALANCE SHEET ARRANGEMENTS



Leases



We lease certain properties consisting primarily of retail stores, distribution centers, and equipment with original terms ranging primarily from 3 to 10 years and up to 22 years. Certain of these leases contain
purchase options and renewal options for various terms. In addition to minimum rental payments, certain of our retail store leases require us to make contingent rental payments, which are based upon certain factors such as sales volume and property
taxes. The contingent rental expense is accrued in each reporting period if achievement of any factor is considered probable. Material leasehold improvements are depreciated over the shorter of the estimated useful life or the lease term. For
further information see Note 13  Leases in the notes to our audited consolidated financial statements included in Part IV, Item 15 in this Form 10-K.



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NON-U.S. GAAP FINANCIAL MEASURE: EBITDA

Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Securities Exchange Act of 1934, define and prescribe the conditions of use of certain non-U.S. GAAP financial
information. Our measure of EBITDA meets the definition of a non-U.S. GAAP financial measure.

EBITDA is defined as earnings before net interest expense,
income taxes, depreciation and amortization and is computed on a consistent method from quarter to quarter and year to year.

We use EBITDA, in conjunction
with U.S. GAAP measures such as cash flows from operating activities, cash flows from investing activities and cash flows from financing activities, to assess our liquidity, financial leverage and ability to service our outstanding debt. For
example, certain covenant and compliance ratios under our revolving credit facility and the indenture governing the outstanding notes use EBITDA, as further adjusted for certain items as defined in each agreement. If we are not able to comply with
these covenants, we may not be able to borrow additional amounts, incur more debt to finance our ongoing operations and working capital or take other actions. In addition, the lenders could accelerate the outstanding amounts, which could materially
and adversely affect our liquidity and financial position.

We use EBITDA, in conjunction with the other U.S. GAAP measures discussed above, to assess our
debt to cash flow leverage, to plan and forecast overall expectations and to evaluate actual results against such expectations; to assess our ability to service existing debt and incur new debt; and to measure the rate of capital expenditure and
cash outlays from year to year and to assess our ability to fund future capital and non-capital projects. We believe that, like management, debt and equity investors frequently use EBITDA to compare debt to cash flow leverage among companies.

EBITDA, when used as a liquidity measure, has limitations as an analytical tool. These limitations include:



| |  |  | EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | EBITDA is not a measure of discretionary cash available to us to pay down debt;
| | - |  | -------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

To compensate for these limitations, we analyze EBITDA in conjunction with other U.S. GAAP financial measures impacting liquidity and cash flow, including depreciation
and amortization, capital spending and net income in terms of the impact on depreciation and amortization, changes in net working capital, other non-operating income and losses that affect cash flow and liquidity, interest expense and taxes.
Similarly, EBITDA should not be considered in isolation or as a substitute for these U.S. GAAP liquidity measures.

We also use EBITDA, in conjunction with
U.S. GAAP measures such as operating income and net income, to assess our operating performance and that of each of our businesses and segments. Specifically, we use EBITDA, alongside the U.S. GAAP measures mentioned above, to measure profitability
and profit margins and to make budgeting decisions relating to historical performance and future expectations of our segments and business as a whole, and to make performance comparisons of our company compared to other peer companies. We believe
that, like management, debt and equity investors frequently use (and expect to be able to continue to use) EBITDA to assess our operating performance and compare it to that of other peer companies.

Furthermore, we use EBITDA (in conjunction with other U.S. GAAP and non-U.S. GAAP measures such as operating income, capital expenditures, taxes and changes in working
capital) to measure return on capital employed. EBITDA allows us to determine the cash return before taxes, capital spending and changes in working capital generated by the total equity employed in our company. We believe return on capital employed
is a useful measure because it indicates the total returns generated by our business, which, when viewed together with profit margin information, allows us to better evaluate profitability and profit margin trends.

As a performance measure, we also use return on capital employed to assist us in making budgeting decisions related to how debt and equity capital is being employed and
how it will be employed in the future. Historical measures of return on capital employed, which include EBITDA, are used in estimating and predicting future return on capital trends. Combined with other U.S. GAAP financial measures, historical
return on capital information helps us make decisions about how to employ capital effectively going forward.



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However, because EBITDA does not take into account certain of these non-cash items, which do affect our operations and
performance, EBITDA has inherent limitations as an operating measure. These limitations include:



| |  |  | EBITDA does not reflect the cash cost of acquiring assets or the non-cash depreciation and amortization of those assets over time, or the replacement of those
assets in the future;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect cash capital expenditures on an historical basis or in the current period, or address future requirements for capital expenditures or
contractual commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | EBITDA is not a measure of discretionary cash available to us to invest in the growth of our business;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect changes in working capital or cash needed to fund our business;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | EBITDA does not reflect our tax expenses or the cash payments we are required to make to fulfill our tax liabilities; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



To compensate for these limitations we analyze EBITDA alongside other U.S. GAAP financial
measures of operating performance, including, operating income, net income and changes in working capital, in terms of the impact on other non-operating income and losses that affect profitability and return on capital. You should not consider
EBITDA in isolation or as a substitute for these U.S. GAAP measures of operating performance.



Our fiscal 2008 EBITDA from continuing operations decreased $34,028, or 39.6%, from fiscal 2007 primarily due to a decline in operating performance, as described above. EBITDA from continuing operations in fiscal 2007
improved $46,290, or 116.5%, from fiscal 2006, primarily due to our improved operating performance, as described above, and to a lesser extent, due to the $15,844 non-cash pension curtailment gain resulting from the previously announced pension
freeze, which took effect June 30, 2007.



The following table reconciles
EBITDA from continuing operations to net cash provided by operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net income, which we believe to be the closest GAAP performance measure to EBITDA (dollars are
in thousands).



|                                                                                 |  |             |         |   |             |   |         |             |  |   |         |  
|-------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | -
|                                                                                 |  | Fiscal 2008 |         |   | Fiscal 2007 |   |         | Fiscal 2006 | 
|Net income (loss) from continuing operations                                     |  |             | 4,337   |   |             | $ | 30,697  |             |  | $ | (5,661  | )
|Interest expense, net from continuing operations                                 |  |             | 22,519  |   |             |   | 25,073  |             |  |   | 24,679  |  
|Provision for income taxes from continuing operations                            |  |             | 4,648   |   |             |   | 11,156  |             |  |   | 2,548   |  
|Depreciation and amortization from continuing operations                         |  |             | 20,492  |   |             |   | 19,098  |             |  |   | 18,168  |  
|                                                                                 |  |             |         |   |             |   |         |             |  |   |         |  
|EBITDA from continuing operations                                                |  | $           | 51,996  |   |             | $ | 86,024  |             |  | $ | 39,734  |  
|Interest expense, net from continuing operations                                 |  |             | (22,519 | ) |             |   | (25,073 | )           |  |   | (24,679 | )
|Provision for income taxes from continuing operations                            |  |             | (4,648  | ) |             |   | (11,156 | )           |  |   | (2,548  | )
|Amortization of deferred financing costs                                         |  |             | 2,604   |   |             |   | 2,669   |             |  |   | 2,473   |  
|Stock option compensation expense                                                |  |             | 552     |   |             |   | 577     |             |  |   | 444     |  
|Write-off of deferred IPO costs                                                  |  |             |        |   |             |   |        |             |  |   | 2,180   |  
|Loss on disposal and impairment of fixed assets and other long-lived assets      |  |             | 1,665   |   |             |   | 770     |             |  |   | 1,073   |  
|Gain on short-term investments                                                   |  |             | (426    | ) |             |   | (407    | )           |  |   |        |  
|Deferred income taxes                                                            |  |             | (22,916 | ) |             |   | 10,818  |             |  |   | 2,500   |  
|Pension curtailment gain                                                         |  |             |        |   |             |   | (15,844 | )           |  |   |        |  
|Gain on debt prepayment                                                          |  |             | (303    | ) |             |   |        |             |  |   |        |  
|Changes in operating assets and liabilities from continuing operations           |  |             | 19,477  |   |             |   | (1,882  | )           |  |   | (367    | )
|Net cash provided by (used in) operating activities from discontinued operations |  |             | 3,147   |   |             |   | (12,674 | )           |  |   | 22      |  
|                                                                                 |  |             |         |   |             |   |         |             |  |   |         |  
|Net cash provided by operating activities                                        |  | $           | 28,629  |   |             | $ | 33,822  |             |  | $ | 20,832  |  
|                                                                                 |  |             |         |   |             |   |         |             |  |   |         |  



Because each of the different items of
expense and/or income set forth below are not included in each period presented, net income (loss) and EBITDA for fiscal 2008, 2007 and 2006 may not be comparable, and may not be indicative of future results.



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In fiscal 2008, net income and EBITDA from continuing operations included:



| |  |  | $5,279 of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1,665 loss on disposal and impairment of fixed assets and long-lived assets;
| | - |  | -----------------------------------------------------------------------------



| |  |  | $1,108 of severance and re-organization payroll and benefits;
| | - |  | -------------------------------------------------------------



| |  |  | $1,000 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | $599 of expenses for certain deferred costs relating to prior years;
| | - |  | --------------------------------------------------------------------



| |  |  | $442 expense for certain inventory adjustments related to our ERP conversion;
| | - |  | -----------------------------------------------------------------------------



| |  |  | $324 of expense related to inventory step-up purchase accounting amortization;
| | - |  | ------------------------------------------------------------------------------



| |  |  | $304 of costs associated with legal settlements;
| | - |  | ------------------------------------------------



| |  |  | $248 of employee executive recruiting charges;
| | - |  | ----------------------------------------------



| |  |  | $303 net gain on prepayment of long-term debt; and
| | - |  | --------------------------------------------------



| |  |  | $204 of income relating to indemnified FIN 48 liabilities.
| | - |  | ----------------------------------------------------------



In fiscal 2007, net income and EBITDA from continuing operations included:



| |  |  | $15,844 non-cash pension curtailment gain;
| | - |  | ------------------------------------------



| |  |  | $3,336 of consulting fees associated with the implementation of our ERP software project, other IT and corporate projects;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | $1,185 severance;
| | - |  | -----------------



| |  |  | $1,068 of fees paid to Wasserstein and Highfields under our management agreement;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | $770 loss on disposal of fixed assets;
| | - |  | --------------------------------------



| |  |  | $734 of employee executive recruiting charges;
| | - |  | ----------------------------------------------



| |  |  | $566 loss associated with a straight-line rent adjustment on our store leases;
| | - |  | ------------------------------------------------------------------------------



| |  |  | $1,592 favorable cost of goods sold adjustment due to the reconciliation of aged unmatched receipts identified in the ERP conversion process;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $527 of income recognized from legal and vendor settlements; and
| | - |  | ----------------------------------------------------------------



| |  |  | $264 income due to a settlement gain on our pension plans.
| | - |  | ----------------------------------------------------------



In fiscal 2006, net loss and EBITDA from continuing operations included:



| |  |  | $2,180 of deferred IPO costs that were written off;
| | - |  | ---------------------------------------------------



| |  |  | $1,259 expense for payroll and benefits related to severed employees and additional reorganization severance payments as well as restructuring charges relating to
our 2004 reduction in force that was not in effect for the full 12 months in fiscal 2006;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1,073 loss on disposal of assets;
| | - |  | ----------------------------------



| |  |  | $1,000 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | $750 costs from a legal settlement;
| | - |  | -----------------------------------



| |  |  | $659 of incremental employee executive recruiting and relocation charges;
| | - |  | -------------------------------------------------------------------------



| |  |  | $325 of purchase accounting adjustments to accrued restructuring costs;
| | - |  | -----------------------------------------------------------------------



| |  |  | $149 of residual one-time consulting fees associated with evaluating the Harry and David® brand strategy and information technology strategy projects;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1,720 net proceeds from a legal settlement; and
| | - |  | ------------------------------------------------



| |  |  | $147 of income related to closed stores.
| | - |  | ----------------------------------------



|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates and commodity prices, which could impact
our financial condition, results of operations and cash flows. We plan to manage our exposure to these and other market risks through regular operating and financing activities and on a limited basis, the use of derivative financial instruments. We
intend to use such derivative financial instruments as risk management tools and not for speculative investment purposes. As of June 28, 2008, we have no derivative financial instruments in use.



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INTEREST RATE RISK

Interest on our outstanding floating rate notes and interest on borrowings under our revolving credit facility accrue at variable rates based on LIBOR and the federal funds overnight rate, among other things. Assuming we were to borrow the
entire amount available under our revolving credit facility, together with our outstanding senior floating rate notes, a 1.0% change in the interest rate on our variable rate debt would result in a $1,930 corresponding effect on our interest expense
on an annual basis. The interest rates on our variable rate long-term debt will reflect the market rate of the senior floating rate notes issued in February 2005, and therefore the carrying value of our variable rate long-term debt is expected to
approximate fair value.

COMMODITY RISK

We have
commodity risk as a result of some of the raw materials we utilize in our business, including paper for our catalog operations, corrugated packaging for our delivery needs, chocolate, butter fat, sugar and cheese used to produce some of our
products, and fruit that we do not grow ourselves. Although we do not enter into formal hedging arrangements to mitigate against commodity risk, we do ensure that we have multiple sources for these commodities.



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

Our financial
statements and supplementary data are included at the end of this Form 10-K beginning on page F-1. See the index appearing on the following pages of this Form 10-K.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

We are committed to maintaining disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and are subject to certain
limitations, including the exercise of judgment by individuals, the inability to identify unlikely future events, and the inability to eliminate misconduct completely.

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of June 28, 2008, the end of the period covered by this Form 10-K. Based upon the evaluation, our management, including our
Chief Executive Officer and our Chief Financial Officer, concluded that, as of June 28, 2008, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow for timely decisions regarding required disclosure.

In addition, our management, with the participation of the Chief Executive
Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13-a  15 (f)). Our internal control system is designed to provide
reasonable assurance to the Companys management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles.

Our management assessed the effectiveness of the companys internal control over financial reporting as of June 28, 2008. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based on this assessment, management concluded that the
companys internal control over financial reporting was effective as of June 28, 2008. During this process, we identified control improvements, none of which constitute a material weakness, either individually or in the aggregate,



37



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##### Table of Contents

and implemented a process to investigate and, as appropriate, remediate such matters. We are continuing to review, evaluate, document and test our internal
controls and procedures and may identify areas where disclosure and additional corrective measures are required. We also continue to look for methods to improve our overall system of controls.



This Form 10-K does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only
the managements report in this Form 10-K.



During the year ended
June 28, 2008, we took several steps to improve the effectiveness of our internal controls. Specifically we:



| |  |  | strengthened our controls in the approval and posting of journal entries;
| | - |  | -------------------------------------------------------------------------



| |  |  | strengthened our controls and procedures over investments; and
| | - |  | --------------------------------------------------------------



| |  |  | continued to strengthen our IT general controls, particularly in the areas of change control, segregation of duties and physical/logical access to data.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



There were no changes in our internal controls during fiscal
2008 that materially affected, or are reasonably likely to materially affect our internal control over financial reporting for the fiscal year ended June 28, 2008. The process and control improvements described above were not material.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



Not applicable.



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##### Table of Contents

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information with respect to the Companys directors and executive
officers, as of the date hereof.



|                       |  |     |  |                                                                   
|---------------------- |  | --- |  | ------------------------------------------------------------------
|Name                   |  | Age |  | Position                                                          
|                       |  |    
|William H. Williams    |  | 60  |  | President, Chief Executive Officer and Director                   
|                       |  |    
|Stephen V. OConnell   |  | 50  |  | Chief Financial Officer, Chief Administrative Officer and Director
|                       |  |    
|Cathy J. Fultineer     |  | 51  |  | Executive Vice President, Sales and Marketing                     
|                       |  |    
|Peter D. Kratz         |  | 54  |  | Executive Vice President, Operations                              
|                       |  |    
|Rudd C. Johnson        |  | 58  |  | Executive Vice President, Human Resources                         
|                       |  |    
|Donald L. Cato         |  | 60  |  | Senior Vice President and General Manager, Customer Operations    
|                       |  |    
|Joseph P. Foley        |  | 53  |  | Senior Vice President and General Manager, Stores                 
|                       |  |    
|Philip W. Young        |  | 52  |  | Senior Vice President and General Manager, Direct Marketing       
|                       |  |    
|Ellis B. Jones         |  | 54  |  | Director                                                          
|                       |  |    
|George L. Majoros, Jr. |  | 47  |  | Director                                                          
|                       |  |    
|Bruce Wasserstein      |  | 60  |  | Director                                                          

Officers are elected annually by the board of directors and hold office at the pleasure of the board of directors
until the next annual election of officers or until their successors are elected and qualified. Wasserstein currently owns approximately 66% of our common stock and Highfields currently owns approximately 34% of our common stock. As a result,
Wasserstein, alone or together with Highfields, will effectively be able to control, and Highfields, alone or together with Wasserstein, will be able to influence, the Companys affairs and policies, the election of our directors and the
appointment of the Companys management. A majority of the members of the board of directors are currently representatives of Wasserstein. We currently do not have any board committees.

William H. Williams returned as our Chief Executive Officer in June 2004. Mr. Williams was a President of YCI from November 2000 until June 2004 and Chief
Executive Officer of YCI from June 2002 until June 2004 and previously served as our Chief Executive Officer from 1988 until moving to YCI in 2000. Prior to joining us in 1988, Mr. Williams spent 18 years with Neiman Marcus during which he
worked in the mail-order, stores, merchandising and advertising divisions. Mr. Williams has served on the Oregon Economic Development Commission, the Oregon International Trade Commission and the Oregon Board of Higher Education. He has also
served on the boards of directors of several corporations and not-for-profit groups and currently serves on the board of LaCrosse Footwear, Inc. and Arroweye Solutions, Inc.

Stephen V. OConnell became our Chief Financial Officer and Chief Administrative Officer as of July 2004. Before joining us, he was a Managing Director of Wasserstein and was employed by Wasserstein and
its predecessor firm, Wasserstein Perella & Co., Inc., since 1997. Prior to joining Wasserstein, Mr. OConnell was employed for seven years with EXOR America, a private equity firm controlled by the Agnelli family, and for the
previous three years with Salomon Brothers in the Investment Banking Group. He previously served on boards of directors of All-Clad, Odwalla (board observer) and Collins and Aikman Corporation.

Cathy J. Fultineer was promoted to Executive Vice President, Sales and Marketing, on March 1, 2006. Ms. Fultineer rejoined us as Senior Vice President
and General Manager of Stores in 2003. Prior to rejoining our company, Ms. Fultineer was at Brylane LP, where she was Executive Vice President of Missy Apparel Group, Chadwicks and Lerner Brands from November 2001 to June 2003. She
originally joined us in November 1996 as Vice President of Marketing and Merchandising and was promoted to Senior Vice President of Marketing and Merchandising in June 1998. In April 2000, Ms. Fultineer was promoted to Senior Vice President and
General Manager of Direct Marketing, a position she held until joining Brylane LP in November 2001. Prior to her experience at our company, Ms. Fultineer worked in merchandising for 15 years, including a five-year tenure with Neiman Marcus as
Vice President and Division Merchandise Manager for NM Direct, and as a Buyer and Group Buyer for four years at Gucci America Inc.

Peter D. Kratz
was promoted to Executive Vice President, Operations, on March 1, 2006. Mr. Kratz joined our company in 1999 as Senior Vice President and General Manager, Product Supply. Prior to joining us, Mr. Kratz spent eight years with Sara Lee
Bakery, where he left as Vice President of Frozen Baked Goods Operations at the Chicago Headquarters. Prior to that, Mr. Kratz held positions at Procter & Gamble and Pepperidge Farm, Inc.



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Rudd C. Johnson has been our Executive Vice President Human Resources since June 2004, having served previously as
Executive Vice President, Human Resources for YCI from January 2001 until June 2004, and Senior Vice President for us from November 1996 until moving to YCI in January 2001. Mr. Johnson originally joined our company in 1996 as Senior Vice
President, Human Resources. Prior to joining us, Mr. Johnson spent 14 years with Neiman Marcus, where he was Vice President, Human Resources.

Donald L. Cato has been our Senior Vice President and General Manager, Customer Operations since 2000. Mr. Cato joined the Company as Vice President, Stores Distribution in 1995. In 1997, he assumed the role of Vice President,
Bear Creek Gardens. He was promoted to Senior Vice President, Distribution in 1998. Prior to joining the Company, Mr. Cato accumulated 24 years of experience in various senior management positions with Dayton Hudson Corporation, Target Stores,
Carter Hawley Hale and Younkers Department Stores.

Joseph P. Foley has served as our Senior Vice President and General Manager of Stores since
January 2008. Mr. Foley joined our company in 1995 as Vice President, Marketing Finance. Subsequently he held the positions of Vice President, New Business Initiatives; Senior Vice President, Customer Operations; Senior Vice President,
Jackson & Perkins Wholesale. In May 2002, following the creation of YCI, Mr. Foley was named Senior Vice President, Operations for Shaklee Corporation. In 2004, he returned to Harry & David Operations as Senior Vice President,
IT Systems Operations and was promoted to CIO in July 2005. Prior to joining Harry & David, Mr. Foley held a variety of financial and store line operations positions with Carter Hawley Hale Department Stores and May D&F Stores.

Philip W. Young has been our Senior Vice President and General Manager, Direct Marketing since joining the company in October 2007. Prior to
joining Harry & David, Mr. Young was an independent consultant assisting start-up companies with strategic and financial planning. Previously, he spent 17 years with Lands End in various roles of increasing responsibility, most
recently as Vice President of International Business. Mr. Young began his career with Allied Stores (now Macys) where he spent over nine years in stores and merchandising.

Ellis B. Jones has served as Chief Executive Officer of Wasserstein & Co., LP since January 2001. Prior to becoming Chief Executive Officer of Wasserstein & Co., LP, Mr. Jones was a
Managing Director of the investment banking firm Wasserstein Perella Inc. from February 1995 to January 2001. Prior to joining Wasserstein Perella Inc., Mr. Jones was a Managing Director at Salomon Brothers Inc. in its Corporate Finance
Department from March 1989 to February 1995. Prior to joining Salomon Brothers Inc., Mr. Jones worked in the Investment Banking Department at The First Boston Corporation from September 1979 to March 1989. Mr. Jones has over 20 years of
experience in the investment banking and mergers and acquisitions industry.

George L. Majoros, Jr. has been President and Chief Operating Officer
of Wasserstein since its inception in January 2001. Previously, Mr. Majoros was a Managing Director of Wasserstein Perella & Co., Inc. and Chief Operating Officer of its Merchant Banking Group from 1997 to 2001. Mr. Majoros joined
Wasserstein Perella & Co., Inc. in early 1993 after practicing law with Jones Day for approximately seven years. He also currently serves on the boards of directors of numerous private companies.

Bruce Wasserstein has served as Chairman and Chief Executive Officer of Lazard Group and Lazard Ltd since May 2005. Mr. Wasserstein has served as a director
of Lazard Group since January 2002 and as a director of Lazard Ltd since April 2005. Mr. Wasserstein served as the Head of Lazard and Chairman of the Executive Committee of Lazard Group from January 2002 until May 2005. Prior to joining Lazard,
Mr. Wasserstein was Executive Chairman at Dresdner Kleinwort Wasserstein from January 2001 to November 2001. Prior to joining Dresdner Kleinwort Wasserstein, he served as CEO of Wasserstein Perella Group (an investment banking firm he
co-founded) from February 1988 to January 2001, when Wasserstein Perella Group was sold to Dresdner Bank. Prior to founding Wasserstein Perella Group, Mr. Wasserstein was the Co-Head of Investment Banking at The First Boston Corporation. Prior
to joining First Boston, Mr. Wasserstein was an attorney at Cravath, Swaine & Moore. Mr. Wasserstein also currently serves as Chairman of Wasserstein & Co., LP.

CORPORATE GOVERNANCE

We have a code of ethics that applies to all
employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of our code of ethics may be found on our website, www.hndcorp.com, in the investor relations section under governance.



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|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

All monetary amounts presented in this
Item 11 are in actual dollars unless otherwise indicated.

COMPENSATION DISCUSSION AND ANALYSIS

The following Compensation Discussion and Analysis describes the material elements of compensation for the following individuals, collectively referred to as
the named executive officers:



| |  |  | William H. Williams, President and Chief Executive Officer
| | - |  | ----------------------------------------------------------



| |  |  | Stephen V. OConnell, Chief Financial Officer and Chief Administrative Officer
| | - |  | ------------------------------------------------------------------------------



| |  |  | Cathy J. Fultineer, Executive Vice President, Sales and Marketing
| | - |  | -----------------------------------------------------------------



| |  |  | Peter D. Kratz, Executive Vice President, Operations
| | - |  | ----------------------------------------------------



| |  |  | Rudd C. Johnson, Executive Vice President, Human Resources
| | - |  | ----------------------------------------------------------

Our board of directors is responsible for oversight of the compensation plans for executives and other senior management, reviewing compensation levels and approving compensation policies. Our compensation policies are intended to attract,
motivate and reward highly qualified executives for the execution of specific long-term strategic management goals and the enhancement of stakeholder value.

Non-management members of the board of directors review the reasonableness of, and approve recommendations regarding, the compensation of our named executive officers and other senior management. Our executive officers make recommendations
to the board of directors regarding the compensation of all executive officers, other than the Chief Executive Officer, and the metrics appropriate for measuring officers performance. The compensation of the Chief Executive Officer and the
other named executive officers is reviewed and determined solely by the board of directors. Our executive officers and the board of directors are authorized to retain any consultants they believe are necessary or appropriate in making compensation
decisions. In fiscal 2008, however, the board of directors did not retain any compensation consultants.

In developing the executive officers
compensation for fiscal 2008, the board of directors primarily considered historical compensation levels within the company, as well as prevailing rates for comparable positions in the marketplace.

The compensation of executive officers consists of the following components:



| |  |  | Base salary;
| | - |  | ------------



| |  |  | Annual cash incentive compensation;
| | - |  | -----------------------------------



| |  |  | Long-term equity incentive awards; and
| | - |  | --------------------------------------



| |  |  | Perquisites.
| | - |  | ------------

Base Salary. We pay base salary
to provide meaningful levels of cash compensation to executives while allowing us to manage our fixed costs. The salaries are reviewed annually and are based on the following: job scope and responsibilities; company, business unit and individual
performance; and competitive rates for similar positions as indicated by periodic review of salaries in the general marketplace.

Annual Cash Incentive
Compensation. We believe that a significant portion of the annual cash compensation of our executive officers should be contingent upon a comparison of our performance against board-approved pre-established financial objectives and, to a lesser
extent, on specific objectives for the individual officer. The specific financial objectives of our plan focus on EBITDA, as reported in our annual report on Form 10-K, adjusted for certain events as discussed elsewhere in this document. We do not
disclose actual targets because we believe such disclosure would cause us competitive harm. Our incentive compensation program is designed to reward sales growth and profit performance. Each executive officer is given a target bonus equal to a fixed
percentage of base salary with the target percentage increasing with increased job responsibility. The targets are reviewed periodically, and like base salaries, are based on job scope and responsibilities. Actual payouts are based on company and
individual performance. These targets are intended to be stretch goals but to also be achievable.

In fiscal 2008, senior management, including
the Chief Executive Officer and other named executive officers, were required to meet pre-established financial performance thresholds to become eligible to receive a bonus. If the thresholds were met, then the bonus payout would be equal to 100% of
the target bonus. In fiscal 2008, the pre-established performance thresholds were not met and, as a result, the board of directors did not approve a payout for any of our officers, including the named executive officers.



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Principal Executive Officer: Mr. Williams has a target bonus of 70% of his base salary.

Principal Financial Officer: Mr. OConnell has a target bonus of 40% of his base salary.

Other Executive Officers: Ms. Fultineer and Messrs. Kratz and Johnson have target bonuses equal to 50% of their base salaries.

For fiscal 2009, named executive officers and other senior management will be eligible to earn their target bonus if the company meets certain financial goals. Final details of the incentive compensation plan for fiscal 2009 are not yet
complete.

Long-Term Equity Incentive Compensation. On February 18, 2005, we adopted our 2004 Stock Option Plan, which was subsequently amended
on November 9, 2006. The plan provides for the grant of incentive stock options and non-qualified stock options, exercisable for shares of our common stock. We do not grant long-term equity incentives each year, but view this aspect of
compensation to be an equitable adjustment factor to be used periodically by our board of directors. A total of 150,000 shares of our common stock are currently available for option grants under this plan. As of June 28, 2008, we had granted
options to purchase 103,795 shares of our common stock under the plan to certain members of our senior management team and one outside consultant.

The
plan has been, and is currently, administered by our board of directors. Options may be exercised only to the extent they have vested. In case of termination of employment or other service by reason of death, disability or normal or early
retirement, or in the case of hardship or other special circumstances of an optionee holding options that have not vested, the board of directors may, in its sole discretion, accelerate the time at which such option may be exercised.

401(k) Plan. In order to promote retirement savings and their financial well-being, our employees, including management, are eligible to participate in our 401(k)
Retirement Savings Plan, a defined contribution retirement plan that complies with Section 401(k) of the Internal Revenue Code. Under the 401(k) plan, we provide matching contributions equal to 100% of the participants contributions for
the first 5% of the participants earnings, subject to statutory limitations on the amount of the participants applicable earnings (for 2008, this limit is $230,000). Participants who were employed by the predecessor company prior to the
2004 Acquisition were fully vested in their 401(k) account balances and such account balances in the Yamanouchi Consumer, Inc 401(k) Retirement Savings Plan were transferred to the 401(k) plan in connection with the 2004 Acquisition. In fiscal 2008,
each of the named executive officers received a matching contribution from us of $10,250.

Perquisites and Personal Benefits.We provide executive
benefits and perquisites as denoted below to compete for executive talent and to promote the well-being and financial security of our named executive officers. A description of the executive benefits and perquisites, and the costs associated with
providing them for the named executive officers, is reflected in the All Other Compensation column of the 2008 Summary Compensation Table below. We do not view perquisites as a significant component of our overall compensation package,
but do believe they can be useful in conjunction with base salary to attract and retain individuals in a competitive environment.



| |  |  | Auto Allowance
| | - |  | --------------



| |  |  | Executive Life Insurance
| | - |  | ------------------------



| |  |  | Financial Planning
| | - |  | ------------------



| |  |  | Group Term Life Insurance
| | - |  | -------------------------

Principal Executive
Officer: The aggregate value of the perquisites received by Mr. Williams in fiscal 2008 and fiscal 2007 was $104,255 and $62,704, respectively. Increased executive life insurance premiums were the major factor in this increase.

Principal Financial Officer: Mr. OConnell received perquisites with a total value of $26,837 and $27,603 in fiscal 2008 and 2007, respectively.

Other Executive Officers: Ms. Fultineer, Mr. Kratz and Mr. Johnson received perquisites, with total value of $38,095, $48,659 and $68,574, respectively,
in fiscal 2008 and $27,755, $30,481 and $47,059 respectively, in fiscal 2007. As with Mr. Williams, the increases resulted primarily from increased executive life insurance premiums for these executives.

Executive officers also participate in other employee benefit plans available on a nondiscriminatory basis to other associates, including merchandise discounts, and
group health, life and disability coverage.



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Pension Plans

The
following is a summary of the pension plan in which our management participates. The pension plan is a traditional final average pay pension plan that pays benefits on retirement based on an employees years of service and final average
earnings over a consecutive 60-month period. In addition, because of Internal Revenue Code limitations on the amount of pension benefits that can be paid to employees from qualified pension plans, our retirement program includes our Excess Pension
Plan, a nonqualified plan that allows executives to receive all of the promised benefits under the pension plan, notwithstanding the Internal Revenue Code limitations.

The following table shows the total monthly annuity benefit payable at normal retirement age from our Employees Pension Plan, which we call the Qualified Plan, and our Excess-Pension Plan, which we call the
Nonqualified Plan. The monthly annuity benefit shown below represents the total benefits under both the Qualified Plan and the Nonqualified Plan. Under the Qualified Plan, plan compensation is limited by Internal Revenue Code
Section 401(a)(17). For calendar 2008, plan compensation is limited to $230,000.



|                       |           |                  |   |       |  |    |        |    |   |        |  |    |        |  |   |        |  |   |       
|---------------------- | --------- | ---------------- | - | ----- |  | -- | ------ | -- | - | ------ |  | -- | ------ |  | - | ------ |  | - | ------
|                       |           | Years of service
|Final average earnings |           | 5                |   | 10    |  | 15 |        | 20 |   | 30     |  | 40
|$                      | 200,000   |                  | $ | 1,585 |  | $  | 3,171  |    | $ | 4,757  |  | $  | 6,343  |  | $ | 9,514  |  | $ | 9,514 
|$                      | 350,000   |                  | $ | 2,836 |  | $  | 5,671  |    | $ | 8,507  |  | $  | 11,343 |  | $ | 17,014 |  | $ | 17,014
|$                      | 450,000   |                  | $ | 3,669 |  | $  | 7,338  |    | $ | 11,007 |  | $  | 14,676 |  | $ | 22,014 |  | $ | 22,014
|$                      | 550,000   |                  | $ | 4,502 |  | $  | 9,005  |    | $ | 13,507 |  | $  | 18,009 |  | $ | 27,014 |  | $ | 27,014
|$                      | 650,000   |                  | $ | 5,336 |  | $  | 10,671 |    | $ | 16,007 |  | $  | 21,343 |  | $ | 32,014 |  | $ | 32,014
|$                      | 750,000   |                  | $ | 6,169 |  | $  | 12,338 |    | $ | 18,507 |  | $  | 24,676 |  | $ | 37,014 |  | $ | 37,014
|$                      | 850,000   |                  | $ | 7,002 |  | $  | 14,005 |    | $ | 21,007 |  | $  | 28,009 |  | $ | 42,014 |  | $ | 42,014
|$                      | 950,000   |                  | $ | 7,836 |  | $  | 15,671 |    | $ | 23,507 |  | $  | 31,343 |  | $ | 47,014 |  | $ | 47,014
|$                      | 1,050,000 |                  | $ | 8,669 |  | $  | 17,338 |    | $ | 26,007 |  | $  | 34,676 |  | $ | 52,014 |  | $ | 52,014

The benefits in the pension plan table for all of our officers at Senior Vice-President level and higher as of
December 31, 2001 are calculated under a formula of 1.6% of final average earnings, plus an additional 0.4% of final average earnings in excess of a 35-year average Social Security taxable wage base, in each case, multiplied by service limited
to 30 years. For purposes of the pension plan, earnings include earnings reported to pension plan participants on Form W-2 but do not include long-term incentive payments, retention bonuses, reimbursements or other expense allowances, cash and
non-cash fringe benefits, moving expenses, distributions of nonqualified deferred compensation, welfare benefits, or any amounts contributed to any tax qualified profit sharing plan or cafeteria plan. Under the qualified pension plan, compensation
was limited to $230,000 as required by Section 401(a)(17) of the Internal Revenue Code of 1986. Benefits in excess of the maximum benefits payable under the qualified pension plan or accrued as the result of compensation in excess of the
maximum amount allowed under the qualified pension plan are payable under the nonqualified pension plan. As of June 28, 2008, the years of credited service for Mr. Williams, Mr. OConnell, Mr. Kratz, Mr. Johnson and
Ms. Fultineer were 20, 4, 8, 11, and 5 years, respectively. The benefits listed in the pension plan table are the total benefits payable from the qualified pension plan and the nonqualified pension plan and are not subject to deduction for
Social Security or other offset amounts. See Note 9 - Benefit Programs in the notes to our consolidated financial statements included elsewhere in this Form 10-K for details regarding the assumptions used to quantify the accrued benefits
shown above.

Harry and David Employees Pension Plan

Our Employees Pension Plan provides the predecessor company employees, including management, who became our employees in connection with our acquisition of Harry & David Operations Corp., with the same levels of benefit
accruals that were available to the employees under the predecessor company Employees Pension Plan for 36 months following the date on which the 2004 Acquisition was completed (June 17, 2004). Subsequent to fiscal 2006, as noted above, we
announced the approval of a freeze of the benefits provided under this plan, effective June 30, 2007. Assets attributable to the transferred employees were transferred from the predecessor plan to our plan on August 16, 2004, with a
true-up transfer of final amounts on February 7, 2005. Participants who were employed by us or the predecessor company prior to the time of the acquisition were fully vested in their pension benefits upon completion of the transaction.

The plan is currently underfunded. Our required level of funding of this plan changes each year depending on the funded status of the plan and the
actuarial valuation report provided by our actuaries. The first significant cash funding payments in connection with our obligations under this pension plan were made in fiscal 2007 and 2008, and we expect a significant payment in fiscal 2009.
However, the timing of any future payments is subject to a number of factors and uncertainties and could change.



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Excess Pension Plan



Our Excess Pension Plan provides benefits to participants of our Employees Pension Plan, including management, to the extent benefits are limited by Sections 415
and 401(a)(17) of the Internal Revenue Code. Under this plan, accounts of the predecessor company employees who were transferred to us as of June 17, 2004 are paid in lump sum when their benefits commence under our Employees Pension Plan.
As noted above, subsequent to fiscal 2006 we froze the benefits provided under this plan, effective June 30, 2007. For more information about our pension plans, see the 2008 Pension Benefits Table below.



Severance Pay Plan



Our Severance Pay Plan for Executive Committee members provides severance equal to 12 months of salary continuation and car allowance plus a
full year of the participants target bonus, if a bonus is paid that year. Severance benefits are payable in the event of an involuntary termination of employment for any reason other than death, disability, or for cause, or in the event that
an employee resigns following a relocation of the participants work location by more than 75 miles without the employees consent. During the severance period, if the former employee elects and remains eligible for COBRA, we pay a portion
of COBRA premiums for the former employee equal to our portion of the health premiums paid while the former employee was active. COBRA premiums made for the former employee are grossed-up for federal and state taxes. The plan also provides an
outplacement benefit. Severance payments are made in a lump sum distribution. For more information, refer to the Potential Payments and Benefits upon Termination of Employment disclosure below.



Liquidity Event Plan



On February 18, 2005, we established a liquidity event award plan for each member of our senior management team who received stock
options under the 2004 Stock Option Plan (see description above) as of February 18, 2005. Upon its inception, the aggregate amount of all awards to senior management was equal to approximately $6,372,000 in future payments, or 7.5% of the
portion of the proceeds from the sale of notes that was distributed on the closing date to our equity sponsors as a return of capital. Currently, reflecting forfeitures, the aggregate amount of the award is approximately $4,912,000. The amount of
each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the
award vested on June 17, 2006, and 5% will vest quarterly thereafter, in each case, so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates, on the vesting date. As of June 28, 2008, 80% of
the award was vested. With respect to any award recipient who is so employed, vesting of the holders entire award will accelerate upon a change of control of us and upon termination, without cause within one year of the change of control,
except for vesting of the awards of Messrs. Williams and OConnell, which accelerate upon change of control. For more information about our liquidity event award plan and potential payments under the plan, see our Potential Payments and
Benefits upon Termination of Employment disclosure below.



Employment
Agreements



We generally do not enter into employment agreements with our
senior management. However, we have entered into employment agreements with Mr. Williams, our President and Chief Executive Officer, and Mr. OConnell, our Chief Financial Officer and Chief Administrative Officer.



William H. Williams. We entered into an employment agreement with Mr. Williams on
June 17, 2004. The initial term of the employment agreement expired on June 17, 2008. After the initial term, Mr. Williams employment agreement is renewable by mutual consent for successive one-year periods. On April 16,
2008, Mr. Williams employment agreement renewed on its terms through June 17, 2009. Under the terms of his employment agreement, Mr. Williams is entitled to an initial base salary of $567,600, subject to review and adjustment
upward at least annually and a discretionary annual bonus (up to 140% of his base salary) as determined by the board. Mr. Williams is entitled to participate in our standard employee benefits plans, fringe benefits and expense reimbursement
plans that are generally available to our other senior executives and executive employees, as well as certain additional fringe benefits. In addition, as long as he remains Chief Executive Officer, Mr. Williams is entitled to serve on our board
of directors.



If Mr. Williams is terminated without cause or resigns for
good reason, he is entitled to a severance payment equal to 100% of his then applicable base salary for a period of 12 months, plus one hundred percent of his target bonus, plus the dollar value of any vacation time accrued but unused during the
calendar year in which he is terminated. To the extent permissible under the specific plan terms, he will also be entitled to continue to participate in all of our welfare plans during the time he receives severance. If Mr. Williams voluntarily
resigns at any time, or if we terminate Mr. Williams with cause, he is entitled to receive only any unpaid base salary accrued for services rendered through the date of termination, plus the dollar value of vacation time accrued and unused
during the calendar year in which he resigns or is terminated. If Mr. Williams employment is terminated due to death or disability, he or his estate will be entitled to receive any unpaid base salary accrued for services rendered through
the end of the next calendar month succeeding his termination, plus the dollar value of vacation time accrued and unused during the calendar year in which his employment is terminated.



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If any payment under Mr. Williamss employment agreement would trigger an excise tax as a result of the payment
being considered contingent on a change in ownership or control of us, any such payments will be reduced to the extent necessary to ensure that the payment will not be subject to the tax as an excess parachute payment, or, if it would result in a
greater net payment to Mr. Williams, he will be paid the full amount subject to the excise tax.



Under the terms of the agreement, Mr. Williams has agreed to certain restrictions relating to competition, confidentiality and solicitation of our customers or employees.



Stephen V. OConnell. We entered into an employment agreement with
Mr. OConnell on July 1, 2004. Mr. OConnells employment agreement expired on its terms on July 1, 2008. Mr. OConnell continues his position as an at will employee under our normal benefits.



If any payment made to Mr. OConnell would trigger an excise
tax as a result of the payment being considered contingent on a change in ownership or control, any such payments will be reduced to the extent necessary to ensure that the payment will not be subject to the tax as an excess parachute payment, or,
if it would result in a greater net payment to Mr. OConnell, he will be paid the full amount subject to the excise tax.



BOARD OF DIRECTORS REPORT



The board of directors has reviewed and discussed the foregoing Compensation Discussion and Analysis with Harry and Davids management, and based on its review and
discussions, the board of directors has recommended that the Compensation Discussion and Analysis be included in Harry and Davids annual report on Form 10-K for the fiscal year ended June 28, 2008.

William H. Williams

Stephen V. OConnell

Ellis B. Jones

George L. Majoros,
Jr.

Bruce Wasserstein



EXECUTIVE COMPENSATION



2008 SUMMARY COMPENSATION TABLE



The following table discloses the compensation paid to our named executive officers for fiscal 2008 and 2007.



|                                                   |  |                |  |           |  |                    |  |                                            |  |                             |  |          
|-------------------------------------------------- |  | -------------- |  | --------- |  | ------------------ |  | ------------------------------------------ |  | --------------------------- |  | ---------
|Name and Principal Position                        |  | FiscalYear (1) |  | Salary($) |  | OptionAwards($)(2) |  | Non-EquityIncentive PlanCompensation($)(3) |  | All OtherCompensation($)(4) |  | Total($) 
|William H. Williams President and CEO              |  | 2008           |  | 595,980   |  | 162,378            |  |                                           |  | 114,505                     |  | 710,485  
|                                                   |  | 2007           |  | 577,060   |  | 162,378            |  | 760,095                                    |  | 71,604                      |  | 1,571,137
|Stephen V. OConnell CFO and CAO                   |  | 2008           |  | 500,000   |  | 138,022            |  |                                           |  | 37,087                      |  | 537,087  
|                                                   |  | 2007           |  | 508,333   |  | 138,022            |  | 350,000                                    |  | 36,503                      |  | 1,032,858
|Cathy J. Fultineer Executive VP, Sales & Marketing |  | 2008           |  | 405,000   |  | 27,075             |  |                                           |  | 48,345                      |  | 453,345  
|                                                   |  | 2007           |  | 350,750   |  | 27,075             |  | 345,000                                    |  | 36,655                      |  | 749,508  
|Peter D. Kratz Executive VP, Operations            |  | 2008           |  | 365,000   |  | 17,103             |  |                                           |  | 58,909                      |  | 423,909  
|                                                   |  | 2007           |  | 340,584   |  | 17,103             |  | 313,125                                    |  | 39,381                      |  | 720,165  
|Rudd C. Johnson Executive VP, Human Resources      |  | 2008           |  | 325,000   |  | 22,764             |  |                                           |  | 78,824                      |  | 403,824  
|                                                   |  | 2007           |  | 315,167   |  | 22,764             |  | 310,000                                    |  | 55,959                      |  | 703,890  



|(1) | For purposes of this table, fiscal 2008 and 2007 refers to the twelve months ended June 28, 2008 and June 30, 2007, which consisted of 52 and 53 weeks, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Amounts reflect the dollar amounts of compensation cost for equity-based compensation recognized for financial statement reporting purposes for fiscal 2008 and 2007 in accordance
with SFAS 123R.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Non-Equity Incentive Plan Compensation amounts represent performance bonuses and are reported for the fiscal year in which they were earned, although they may have been
paid in the following fiscal year.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | All Other Compensation
|--- | ----------------------



The following represents the breakout of All Other Compensation totals listed above for each named executive officer:



|                     |  |            |  |               |  |                        |  |                         |  |                           |  |                |  |       |     |  |       |        
|-------------------- |  | ---------- |  | ------------- |  | ---------------------- |  | ----------------------- |  | ------------------------- |  | -------------- |  | ----- | --- |  | ----- | -------
|Executive name       |  | Fiscalyear |  | Autoallowance |  | Executivelifeinsurance |  | Groupterm lifeinsurance |  | Financialplanningservices |  | 401(k)matching |  | Other |     |  | Total
|William H. Williams  |  | 2008       |  | 14,400        |  | 80,502                 |  | 6,213                   |  | 3,140                     |  | 10,250         |  | 4,754 | (1) |  | $     | 114,505
|Stephen V. OConnell |  | 2008       |  | 12,000        |  | 12,033                 |  | 2,166                   |  | 638                       |  | 10,250         |  | 3,779 | (1) |  | $     | 37,087 
|Cathy J. Fultineer   |  | 2008       |  | 12,000        |  | 18,232                 |  | 2,622                   |  | 5,241                     |  | 10,250         |  |      |     |  | $     | 48,345 
|Peter D. Kratz       |  | 2008       |  | 12,000        |  | 30,706                 |  | 2,622                   |  | 3,331                     |  | 10,250         |  |      |     |  | $     | 58,909 
|Rudd C. Johnson      |  | 2008       |  | 12,000        |  | 40,909                 |  | 4,902                   |  | 10,763                    |  | 10,250         |  |      |     |  | $     | 78,824 

|(1) | Amount represents additional discount on purchases as board members.
|--- | --------------------------------------------------------------------



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2008 GRANTS OF PLAN-BASED AWARDS TABLE



|                     |              |                                                                 |              |                                                           |            |                                                         |              |                                                               |           |                                           |            |                                              |  |           |  |   |  |   |  |   |  |  
|-------------------- | ------------ | --------------------------------------------------------------- | ------------ | --------------------------------------------------------- | ---------- | ------------------------------------------------------- | ------------ | ------------------------------------------------------------- | --------- | ----------------------------------------- | ---------- | -------------------------------------------- |  | --------- |  | - |  | - |  | - |  | -
|Name                 |              | Estimated Possible PayoutsUnder Non-Equity
IncentivePlan Awards |              | Estimated Future PayoutsUnder Equity
IncentivePlan Awards |            | All OtherStockAwards:Numberof Sharesof Stockor Units(#) |              | All OtherOptionAwards:Number ofSecuritiesUnderlyingOptions(#) |           | Exerciseor BasePrice ofOptionAwards($/Sh) |            | GrantDateFairValue ofStockandOptionAwards($) |  | GrantDate
|                     | Threshold($) |                                                                 | Target($)(1) |                                                           | Maximum($) |                                                         | Threshold($) |                                                               | Target($) |                                           | Maximum($) |                                              |  |           |  |   |  |   |  |   | 
|William H. Williams  |              |                                                                |              | 417,186                                                   |            |                                                        |              |                                                              |           |                                          |            |                                             |  |          |  |  |  |  |  |  |  | 
|Stephen V. OConnell |              |                                                                |              | 200,000                                                   |            |                                                        |              |                                                              |           |                                          |            |                                             |  |          |  |  |  |  |  |  |  | 
|Cathy J. Fultineer   |              |                                                                |              | 202,500                                                   |            |                                                        |              |                                                              |           |                                          |            |                                             |  |          |  |  |  |  |  |  |  | 
|Peter D. Kratz       |              |                                                                |              | 182,500                                                   |            |                                                        |              |                                                              |           |                                          |            |                                             |  |          |  |  |  |  |  |  |  | 
|Rudd C. Johnson      |              |                                                                |              | 162,500                                                   |            |                                                        |              |                                                              |           |                                          |            |                                             |  |          |  |  |  |  |  |  |  | 



|(1) | Represents target awards under our annual cash incentive compensation plan, as further described in our Compensation Discussion and Analysis.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

For more information about our 2004 Stock Option Plan and prior grants made under this plan, see Compensation Discussion and Analysis above (there were no
grants in fiscal 2008). Certain of our named executive officers are parties to employment agreements with us. For more information about these agreements, see Compensation Discussion and Analysis  Employment Agreements above.



47



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##### Table of Contents

OUTSTANDING EQUITY AWARDS AT 2008 FISCAL YEAR END TABLE



|                     |  |                                                               |  |                                                                 |  |                                                                                         |  |                        |  |                     
|-------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ---------------------- |  | --------------------
|                     |  | Option Awards                                                
|Name                 |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions(#)Unexercisable |  | Equity IncentivePlan Awards:Number
ofSecuritiesUnderlyingUnexercisedUnearned Options(#) |  | OptionExercisePrice($) |  | OptionExpirationDate
|William H. Williams  |  | 9,461                                                         |  | 5,405                                                           |  |                                                                                        |  | 82.60                  |  | 6/17/2014           
|Stephen V. OConnell |  | 8,040                                                         |  | 4,595                                                           |  |                                                                                        |  | 82.60                  |  | 6/17/2014           
|Cathy J. Fultineer   |  | 1,326                                                         |  | 758                                                             |  |                                                                                         |  | 82.60                  |  | 6/17/2014           
|                     |  | 776                                                           |  | 1,164                                                           |  |                                                                                        |  | 190.00                 |  | 3/8/2017            
|Peter D. Kratz       |  | 112                                                           |  | 446                                                             |  |                                                                                         |  | 86.20                  |  | 6/17/2014           
|                     |  | 666                                                           |  | 999                                                             |  |                                                                                        |  | 190.00                 |  | 3/8/2017            
|Rudd C. Johnson      |  | 1,326                                                         |  | 758                                                             |  |                                                                                        |  | 82.60                  |  | 6/17/2014           

Options granted in fiscal 2005 vest and become exercisable 20% on each of June 17, 2005, June 17,
2006, and 5% quarterly thereafter through June 17, 2009. Options granted in fiscal 2007 vest and become exercisable 20% on each of June 17, 2007, June 17, 2008, and 5% quarterly thereafter through June 17, 2011. Vesting of
all unexercised options will accelerate upon a termination of employment (without cause) within one year following a change of control (as defined in the relevant option agreements) of us, except for Messrs. Williams and OConnell, whose
options accelerate immediately upon change of control. Shares issuable upon exercise of the options may be either treasury shares or newly issued shares. Options granted under this plan expire 10 years after the date of grant.

2008 OPTION EXERCISES TABLE



|                     |  |                                         |  |                                  |       
|-------------------- |  | --------------------------------------- |  | -------------------------------- | ------
|                     |  | Option Exercises                       
|Name                 |  | Number of SharesAcquired on Exercise(#) |  | Value Realizedon Exercise($) (1)
|William H. Williams  |  |                                        |  |                                  |      
|Stephen V. OConnell |  |                                        |  |                                  |      
|Cathy J. Fultineer   |  |                                        |  |                                  |      
|Peter D. Kratz       |  | 670                                     |  | $                                | 36,247
|Rudd C. Johnson      |  |                                        |  |                                  |      



|(1) | Value realized on exercise represents the excess of option fair value over the exercise price of options exercised during the period.
|--- | -------------------------------------------------------------------------------------------------------------------------------------



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2008 PENSION BENEFITS TABLE



|                     |  |                            |  |                                   |  |                                        |  |                                  
|-------------------- |  | -------------------------- |  | --------------------------------- |  | -------------------------------------- |  | ---------------------------------
|Name                 |  | Plan Name                  |  | Number ofYearsCreditedService (#) |  | Present Value ofAccumulatedBenefit ($) |  | PaymentsDuring LastFiscal Year($)
|William H. Williams  |  | Qualified Plan Excess Plan |  | 2020                              |  | 2,300,0002,105,000                     |  |                                 
|Stephen V. OConnell |  | Qualified Plan Excess Plan |  | 40                                |  | 36,0000                                |  |                                 
|Cathy J. Fultineer   |  | Qualified Plan Excess Plan |  | 55                                |  | 48,00053,000                           |  |                                 
|Peter D. Kratz       |  | Qualified Plan Excess Plan |  | 88                                |  | 249,000164,000                         |  |                                 
|Rudd C. Johnson      |  | Qualified Plan Excess Plan |  | 1111                              |  | 542,000407,000                         |  |                                 

For more information about our pension plans, see Compensation Discussion and Analysis  Pension
Plans and related subheadings in our Compensation Discussion and Analysis. Mr. OConnell does not participate in the Excess Plan.

DEFERRED COMPENSATION

All of our compensation plans that are subject to Section 409A of the Internal Revenue Code are intended to
comply with such law. Should a plan be determined not to comply, however, we are not responsible for any additional tax or interest imposed on any employee.

POTENTIAL PAYMENTS AND BENEFITS UPON TERMINATION OF EMPLOYMENT

Liquidity Event Plan

Under our liquidity event award plan as described above in Compensation Discussion and Analysis, our named executive officers are entitled to certain
payments. Under the plan, for Messrs. Williams and OConnell, a change of control is triggered upon the happening of:



| |  |  | Wasserstein and Highfields collectively owning less than a majority of the total voting power of our voting stock and not having the power to elect or appoint a
majority of the members of our board of directors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the sale or disposition of all or substantially all of our assets to someone other than Wasserstein and Highfields; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | our stockholders approving a plan of liquidation.
| | - |  | -------------------------------------------------

For all other members of management, a change of control means:



| |  |  | the acquisition by an individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of beneficial ownership (within the
meaning of Rule 13d-3 under the Exchange Act) of 50% or more of the combined voting power of our voting stock after giving effect to such acquisition, unless such individual, entity or group is us, any affiliate of Wasserstein or Highfields, any
member of management or his or her affiliates, any of our employee benefit plans or any combination of the foregoing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | members of our current board of directors ceasing for any reason to constitute at least a majority of the board unless the election, or nomination for election by
our stockholders is approved by a vote of at least a majority of the directors then serving (excluding any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are merged or consolidated or reorganized into or with, or we sell or otherwise transfer all or substantially all of our assets to another corporation or other
legal entity, and, as a result of any such transaction, less than a majority of the combined voting power of the voting securities of such entity immediately after any such transaction is held in the aggregate by the holders of our voting stock
immediately prior to such transaction; or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the board or our stockholders approve our complete or substantial liquidation or dissolution.
| | - |  | ---------------------------------------------------------------------------------------------



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Under their respective liquidity event award agreements, the awards payable to management are as follows: $2,065,750
payable to Mr. Williams, $1,751,120 payable to Mr. OConnell, $289,100 payable to each of Mr. Johnson and Ms. Fultineer, $174,038 to each of Messrs. Kratz and Cato, and $100,103 to Mr. Foley.

Award recipients will not be entitled to receive any vested portion of their awards unless: (1) a change of control (as so defined) occurs; (2) the aggregate
net sales proceeds in such change of control plus certain other distributions received by our equity sponsors exceeds a certain level; (3) we have available cash or, if applicable, non-cash consideration equal to the aggregate of all awards;
and (4) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in
some circumstances, at a later specified date.

If any payment under a liquidity award agreement would trigger an excise tax as a result of the payment
being considered contingent on a change in ownership or control of us, any such payments, at the request of the executive, will be reduced to the extent necessary to ensure that the payment will not be subject to the tax as an excess parachute
payment, or, if it would result in a greater net payment to the participant, the participant will be paid the full amount subject to the excise tax.

Other Potential Payments

The following table presents information regarding payments that would be made to our named executive officers at,
following or in connection with any termination (as described in the table) assuming the termination or event occurred on June 28, 2008.



|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|------------------------------------------------------ |  | ------------ | --------- | ------------- | - | ------------- |  | --------- | ------- | ----------- | - | ------- |  | - | ---------
|Event                                                  |  | W.H.Williams |           | S.V.OConnell |   | C.J.Fultineer |  | P.D.Kratz |         | R.C.Johnson
|Voluntary Termination by Named Executive or Retirement |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Base Salary                                            |  | $            | 0         |               | $ | 0             |  | $         | 0       |             | $ | 0       |  | $ | 0        
|Pension Payments                                       |  |              | 4,894,000 |               |   | 36,000        |  |           | 117,000 |             |   | 436,000 |  |   | 1,154,000
|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Total                                                  |  | $            | 4,894,000 |               | $ | 36,000        |  | $         | 117,000 |             | $ | 436,000 |  | $ | 1,154,000
|Termination for Cause by Us*                           |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Base Salary                                            |  |              | 0         |               |   | 0             |  |           | 0       |             |   | 0       |  |   | 0        
|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Total                                                  |  | $            | 0         |               | $ | 0             |  | $         | 0       |             | $ | 0       |  | $ | 0        
|Termination by Us Without Cause*                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Base Salary                                            |  | $            | 595,980   |               | $ | 500,000       |  | $         | 405,000 |             | $ | 365,000 |  | $ | 325,000  
|Severance (including COBRA)                            |  |              | 522,405   |               |   | 344,133       |  |           | 285,233 |             |   | 259,601 |  |   | 232,801  
|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Total                                                  |  | $            | 1,118,385 |               | $ | 844,133       |  | $         | 690,233 |             | $ | 622,601 |  | $ | 557,801  
|Disability*                                            |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Base Salary                                            |  | $            | 200,000   |               | $ | 200,000       |  | $         | 200,000 |             | $ | 200,000 |  | $ | 200,000  
|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Total                                                  |  | $            | 200,000   |               | $ | 200,000       |  | $         | 200,000 |             | $ | 200,000 |  | $ | 200,000  
|Death*                                                 |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Executive Life Insurance                               |  | $            | 1,191,960 |               | $ | 1,000,000     |  | $         | 810,000 |             | $ | 730,000 |  | $ | 650,000  
|                                                       |  |              |           |               |   |               |  |           |         |             |   |         |  |   |          
|Total                                                  |  | $            | 1,191,960 |               | $ | 1,000,000     |  | $         | 810,000 |             | $ | 730,000 |  | $ | 650,000  

Severance Payments include COBRA for 12 months, car allowance for 12 months, outplacement assistance and bonus
paid at 100% of target.

Disability payments are in accordance with our long term disability program available to all executives. The plan provides for
payment to an individual of 50% of their average pay (including bonuses), with a maximum benefit of $200,000 per year.

Death benefits are equal to two
times the executives annual salary and the premiums are paid by us.



|* | Pension benefits are also payable under these circumstances.
|- | ------------------------------------------------------------

DIRECTOR COMPENSATION

The members of our board of directors do not receive any compensation for their services.



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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

We currently do not have a compensation committee. Executive compensation is determined by our board of directors, including our President and Chief Executive Officer
and our Chief Financial Officer. No compensation committee interlock existed during the year ended June 28, 2008. Currently, none of our executive officers have a relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

PRINCIPAL STOCKHOLDERS

The following table and accompanying footnotes show information regarding the beneficial
ownership of our common stock as of August 23, 2008 by (i) each person who is known by us to own beneficially more than 5% of our common stock; (ii) each of our directors and named executive officers; and (iii) all current
directors and the named executive officers, as a group.

We have determined beneficial ownership in accordance with the rules of the SEC. We believe that
each stockholder named in the table has sole voting and dispositive power for the shares shown as beneficially owned by them.



|                                                                                                 |  |                                             |  |                                           |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------- |  | ----------------------------------------- | -
|                                                                                                 |  | Shares of Common StockBeneficially Owned(1) |  | Percent of Common StockBeneficially Owned |  
|5% Stockholders:                                                                                 |  |                                             |  |                                           |  
|Wasserstein(2) Attn: George L. Majoros 1301 Avenue of the Americas 44th Floor New York, NY 10019 |  | 650,000                                     |  | 61.4                                      | %
|Highfields(3) Attn: Matt Botein 200 Clarendon Street 51st Floor Boston, MA 02117                 |  | 350,000                                     |  | 33.1                                      | %
|Executive Officers and Directors:                                                                |  |                                             |  |                                           |  
|William H. Williams(4)                                                                           |  | 27,816                                      |  | 2.6                                       | %
|Stephen V. OConnell(5)                                                                          |  | 22,554                                      |  | 2.1                                       | %
|Cathy J. Fultineer(6)                                                                            |  | 5,207                                       |  | 0.5                                       | %
|Peter D. Kratz(7)                                                                                |  | 4,379                                       |  | 0.4                                       | %
|Rudd C. Johnson(8)                                                                               |  | 5,642                                       |  | 0.5                                       | %
|Ellis B. Jones(2)                                                                                |  | 650,000                                     |  | 61.4                                      | %
|George L. Majoros, Jr.(2)                                                                        |  | 650,000                                     |  | 61.4                                      | %
|Bruce Wasserstein(2)                                                                             |  | 650,000                                     |  | 61.4                                      | %
|All named executive officers and directors as a group(2),(4),(5),(6),(7),(8)                     |  | 715,598                                     |  | 67.6                                      | %



Percentages above are approximate and may not sum to total due to rounding.



|(1) | Unless otherwise indicated, the address for each stockholder is c/o Harry & David Holdings, Inc. 2500 South Pacific Highway, Medford, Oregon 97501.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes funds sponsored by Wasserstein, their affiliates and related entities. The 650,000 beneficially owned shares represent 30,266 shares of common stock
beneficially owned by USEP II Co-Investment Partners, LLC, 475,231 shares of common stock beneficially owned by U.S. Equity Partners II (U.S. Parallel), L.P., 19,072 shares of common stock beneficially owned by U.S. Equity Partners II, LP, 12,409
shares of common stock beneficially owned by Bear Creek Equity Partners, LLC, 75,580 shares of common stock beneficially owned by U.S. Equity Partners II (Offshore), LP and 37,442 shares of common stock beneficially owned by Wasserstein Partners,
LP. To the extent Messrs. Jones and Majoros are designated to beneficially own the shares as a result of their positions as Chief Executive Officer and President and Chief Operating Officer, respectively, of Wasserstein & Co., LP, Messrs.
Jones and Majoros, Jr. disclaim beneficial ownership of the shares (other than, in the case of Mr. Majoros, Jr., his pecuniary interest in 1,816 shares). Mr. Wasserstein may be deemed to have beneficial ownership of the shares owned by the
Wasserstein entities.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | However, Mr. Wasserstein disclaims beneficial ownership of these shares except for his pecuniary interest in 95,987 shares. Wasserstein Partners, LP has
dispositive power over the shares held by Bear Creek Equity Partners, LLC and USEP II Co-Investment Partners, LLC.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes funds sponsored by Highfields and their affiliates. Represents 39,176 shares of common stock beneficially owned by Highfields Capital I LP, 92,476 shares of common stock
beneficially owned by Highfields Capital II LP and 218,348 shares of common stock beneficially owned by Highfields Capital Ltd. Messrs. Jonathon S. Jacobson and Richard L. Grubman hold investment and voting power over the shares held by Highfields.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Mr. Williams was granted options to purchase 27,027 shares of our common stock under a Non-Qualified Stock Option Agreement. As of August 23, 2008, Mr. Williams is a
beneficial holder of 27,816 shares, of which 12,161 represents stock option exercises through August 23, 2008, 10,812 represents options that are or will be exercisable within sixty days of August 23, 2008, and includes 4,843 shares
indirectly held by Mr. Williams.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Mr. OConnell was granted options to purchase 22,973 shares of our common stock under a Non-Qualified Stock Option Agreement. As of August 23, 2008,
Mr. OConnell is a beneficial holder of 22,554 shares, of which 10,338 represents stock option exercises through August 23, 2008, 9,189 represents options that are or will be exercisable within sixty days of August 23, 2008, and
includes 3,027 shares held indirectly through Mr. OConnells participation in the Wasserstein Equity Partners Fund.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Ms. Fultineer was granted options to purchase 5,729 shares of our common stock under a Non-Qualified Stock Option Agreement. As of August 23, 2008, Ms. Fultineer is a
beneficial holder of 5,207 shares, of which 1,705 represents stock option exercises through August 23, 2008, 2,291 represents options that are or will be exercisable within sixty days of August 23, 2008 and also includes 1,211 shares held
indirectly through Ms. Fultineers participation in Bear Creek Equity Partners Funds.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Mr. Kratz was granted options to purchase 3,896 shares of our common stock under a Non-Qualified Stock Option Agreement. As of August 23, 2008, Mr. Kratz is a
beneficial holder of 4,379 shares, of which 1,673 represents stock option exercises through August 23, 2008, 890 represents options that are or will be exercisable within sixty days of August 23, 2008 and also includes 1,816 shares held
indirectly through Mr. Kratz participation in Bear Creek Equity Partners Funds.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Mr. Johnson was granted options to purchase 3,789 shares of our common stock under a Non-Qualified Stock Option Agreement. As of August 23, 2008, Mr. Johnson is a
beneficial holder of 5,642 shares, of which 1,705 represents stock option exercises through August 23, 2008, 1,326 represents options that are or will be exercisable within sixty days of August 23, 2008 and also includes 2,422 shares held
indirectly through Mr. Johnsons participation in Bear Creek Equity Partners Funds.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION PLAN INFORMATION
SUMMARY

The table below sets forth information regarding our Equity Compensation Plans as of June 28, 2008:



|                                                           |  |                                                                                             |  |                                                                             |        |                                                                                                                                          |       
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------
|Plan Category                                              |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and
rights(a) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights(b) |        | Number of securitiesremaining available forfuture issuance underequity compensationplans
(excludingsecurities reflected incolumn (a))(c)
|Equity Compensation Plans approved by security holders     |  | 62,530                                                                                      |  | $                                                                           | 115.63 |                                                                                                                                          | 54,175
|Equity Compensation Plans not approved by security holders |  |                                                                                            |  |                                                                             |       |                                                                                                                                          |      
|                                                           |  |                                                                                             |  |                                                                             |        |                                                                                                                                          |       
|Total                                                      |  | 62,530                                                                                      |  | $                                                                           | 115.63 |                                                                                                                                          | 54,175



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

MANAGEMENT AGREEMENT

In connection with the 2004 Acquisition, the Company entered into an agreement with Wasserstein, on behalf of
Wasserstein and Highfields, to pay Wasserstein and Highfields an aggregate fee of up to $1,000 annually plus expenses for financial management, consulting and advisory services. To the extent the fee is not paid in any year, it will be accrued.
Under our management agreement, the Company has also agreed to engage Wasserstein as an advisor to the Company in connection with any material financing transaction, asset acquisitions or dispositions or any direct or indirect change of control of
the Company. Upon consummation of any such transaction, the Company will pay Wasserstein a customary transaction fee for such advisory services.



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OTHER TRANSACTIONS



From time to time in the ordinary course of business, we may enter into transactions with entities in which one or both of our equity sponsors have an interest. Any such
transaction would be subject to compliance with the covenants contained in the indenture governing the Senior Notes and our revolving credit facility. We anticipate that any such transaction would be on arms length terms. In addition, we have
entered into an employment agreements with one of our executive officers as described in Item 11Executive CompensationEmployment Agreements. We may also from time to time indemnify executive officers and directors for
actions taken in their capacities as such.



DIRECTOR INDEPENDENCE



Currently, none of our directors are
independent.



|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



PRINCIPAL ACCOUNTANT FEES AND SERVICES



The aggregate fees for professional services rendered by Ernst & Young LLP for us for fiscal 2008 and 2007 are shown in the table below (in actual dollars):



|                   |  |             |           |             |   |          
|------------------ |  | ----------- | --------- | ----------- | - | ---------
|                   |  | Fiscal 2008 |           | Fiscal 2007
|Audit fees         |  | $           | 1,242,700 |             | $ | 995,256  
|Audit-related fees |  |             | 269,002   |             |   | 289,432  
|Tax fees           |  |             | 5,000     |             |   | 19,857   
|All other fees     |  |             |          |             |   |         
|                   |  |             |           |             |   |          
|Total              |  | $           | 1,516,702 |             | $ | 1,304,545
|                   |  |             |           |             |   |          



The nature of each category of fees is
described below:



Audit fees consist of fees for professional
services for the annual audit of our consolidated financial statements and review of our quarterly reports on Form 10-Q and accounting consultation related to the audit.



Audit-related fees consist of fees for professional services related to our acquisitions and divestitures. For fiscal 2008, audit-related
fees were primarily comprised of professional services associated with our acquired businesses. For fiscal 2007, in association with the divestiture of the Jackson & Perkins business, audit-related fees also include fees for the audit of
the Jackson & Perkins closing balance sheet.



Tax fees
consist primarily of fees for tax advice.



All other fees are
fees for any products or services not included above.



The Board of Directors,
acting as the Audit Committee, approves all audit, audit-related services, tax services and other services provided by Ernst & Young LLP. Any services provided by Ernst & Young LLP that are not specifically included within the
scope of the audit must be pre-approved by the audit committee in advance of any engagement. The Board of Directors has determined that the services Ernst & Young LLP provided do not impair its independence from us.



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PART IV



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT, AND FINANCIAL STATEMENT SCHEDULES
|-------- | ----------------------------------------------------------------



|                                                            |  | 
|----------------------------------------------------------- |  | 
|(a) Report of Independent Registered Public Accounting Firm |  | 
|                                                            | 
|Consolidated Balance Sheets                                 |  | 
|                                                            | 
|Consolidated Statements of Operations                       |  | 
|                                                            | 
|Consolidated Statements of Stockholders Equity (Deficit)   |  | 
|                                                            | 
|Consolidated Statements of Cash Flows                       |  | 
|                                                            | 
|Notes to Consolidated Financial Statements                  |  | 



(b) Exhibits Index



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 
|2.1**      |  | Stock Purchase Agreement, dated as of April 1, 2004, among Pear Acquisition, Inc. (now known as Harry & David Holdings, Inc.), Yamanouchi Consumer, Inc., Yamanouchi Pharmaceutical Co., Ltd.
and Yamanouchi U.S. Holding Inc. Relating to the Purchase and Sale of 100% of the Common Stock of Bear Creek Corporation (now known as Harry & David Operations Corp.) (Filed as Exhibit 2.1 to Harry & David Holdings, Inc.s Registration
Statement on Form S-1 (File No. 333-127173) and incorporated herein by reference)                 
|            | 
|2.2        |  | Letter, dated June 17, 2004, amending the Stock Purchase Agreement among Pear Acquisition, Inc. (now known as Harry & David Holdings, Inc.), Yamanouchi Consumer, Inc., Yamanouchi
Pharmaceutical Co., Ltd. and Yamanouchi U.S. Holding Inc. Relating to the Purchase and Sale of 100% of the Common Stock of Bear Creek Corporation (now known as Harry & David Operations Corp.) (Filed as Exhibit 2.2 to Harry & David Holdings,
Inc.s Registration Statement on Form S-1 (File No. 333-127173) and incorporated herein by reference)   
|            | 
|2.3        |  | Letter, dated October 11, 2004, amending the Stock Purchase Agreement among Pear Acquisition, Inc. (now known as Harry & David Holdings, Inc.), Yamanouchi Consumer, Inc., Yamanouchi
Pharmaceutical Co., Ltd. and Yamanouchi U.S. Holding Inc. Relating to the Purchase and Sale of 100% of the Common Stock of Bear Creek Corporation (now known as Harry & David Operations Corp.) (Filed as Exhibit 2.3 to Harry & David Holdings,
Inc.s Registration Statement on Form S-1 (File No. 333-127173) and incorporated herein by reference)
|            | 
|2.4         |  | Purchase Agreement, dated as of March 30, 2007, among Harry & David Operations Corp., Bear Creek Direct Marketing, Inc., Jackson & Perkins Operations, Inc., J&P Acquisition Inc. and
Donald Hachenberger and Glenda Hachenberger (Filed as Exhibit 2.1 to Harry & David Holdings, Inc.s Quarterly Report on Form 10-Q filed on May 15, 2007 and incorporated herein by reference)                                                                                                                                                         
|            | 
|2.5         |  | Asset Purchase Agreement, dated as of March 30, 2007 between Bear Creek Operations, Inc. and J&P Acquisition Inc. (Filed as Exhibit 2.3 to Harry & David Holdings, Inc.s Quarterly
Report on Form 10-Q filed on May 15, 2007 and incorporated herein by reference)                                                                                                                                                                                                                                                                         
|            | 
|2.6         |  | Purchase Agreement, dated as of April 10, 2007 between Bear Creek Operations, Inc. and J&P Acquisition Inc. (Filed as Exhibit 2.2 to Harry & David Holdings, Inc.s Quarterly Report
on Form 10-Q filed on May 15, 2007 and incorporated herein by reference)                                                                                                                                                                                                                                                                               
|            | 
|2.7         |  | First Amendment to Asset Purchase Agreement, dated as of April 17, 2007, among Jackson & Perkins Operations, Inc., Wasco Real Properties I, LLC and Wasco Real Properties II, LLC (Filed as
Exhibit 2.4 to Harry & David Holdings, Inc.s Quarterly Report on Form 10-Q filed on May 15, 2007 and incorporated herein by reference)                                                                                                                                                                                                         



54



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1 |  | Harry & David Holdings, Inc. Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.3 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No.
333-128870) and incorporated herein by reference)                                                                                                                                    
|     | 
|3.2 |  | Harry & David Holdings, Inc. Certificate of Amendment to Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.4 to Harry & David Operations Corp.s Registration
Statement on Form S-4 (File No. 333-128870) and incorporated herein by reference)                                                                                                        
|     | 
|3.3 |  | Harry & David Holdings, Inc. Certificate of Amendment to Amended and Restated Certificate of Incorporation (Filed as Exhibit 3.5 to Harry & David Operations Corp.s Registration
Statement on Form S-4 (File No. 333-128870) and incorporated herein by reference)                                                                                                        
|     | 
|3.4 |  | Bear Creek Orchards, Inc. Certificate of Incorporation (Filed as Exhibit 3.8 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and
incorporated herein by reference)                                                                                                                                                            
|     | 
|3.5 |  | Harry and David Articles of Incorporation (Filed as Exhibit 3.9 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                         
|     | 
|3.6 |  | Harry & David Holdings, Inc. Bylaws (Filed as Exhibit 3.15 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                              
|     | 
|3.7 |  | Bear Creek Orchards, Inc. Bylaws (Filed as Exhibit 3.18 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                                 
|     | 
|3.8 |  | Harry and David Bylaws (Filed as Exhibit 3.19 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                                           
|     | 
|4.1 |  | Indenture among Bear Creek Corporation (now known as Harry & David Operations Corp.) and each of the Guarantors party thereto and Wells Fargo Bank, National Association, as trustee, dated as
of February 25, 2005 (Filed as Exhibit 4.2 to Harry & David Holdings, Inc.s Registration Statement on Form S-1 (File No. (333-127173) and incorporated herein by reference)



55



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|4.2   |  | Form of Notes (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 
|4.3   |  | Form of Guarantee (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 
|4.4    |  | First Supplemental Indenture (relating to the Indenture dated as of February 25, 2005) dated as of November 30, 2007, by and among Harry and David, as Successor, each of the other Guarantors
thereto, and Wells Fargo Bank, National Association, as Trustee (Filed as Exhibit 10.1 to Harry & David Holdings, Inc.s Form 10-Q (File No. 333-127173) dated February 2, 2008 and incorporated herein by reference)                                                                                                                                                                                                                                                                                                
|       | 
|10.1  |  | Employment Agreement, dated as of June 17, 2004, by and between Bear Creek Corporation (now known as Harry & David Operations Corp.) and William H. Williams (Filed as Exhibit 10.3 to Harry
& David Holdings, Inc.s Registration Statement on Form S-1 (File No. 333-127173) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                
|       | 
|10.3  |  | 2004 Stock Option Plan (Filed as Exhibit 10.6 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 
|10.4  |  | Form of Liquidity Event Award Agreement (Filed as Exhibit 10.7 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.5  |  | Liquidity Event Award Agreement for William H. Williams (Filed as Exhibit 10.8 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 
|10.6  |  | Liquidity Event Award Agreement for Stephen V. OConnell (Filed as Exhibit 10.9 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       | 
|10.7  |  | Form of Incentive Stock Option Agreement (Filed as Exhibit 10.10 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 
|10.8  |  | Form of Non-Qualified Stock Option Agreement (Filed as Exhibit 10.11 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein
by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 
|10.9  |  | Non-Qualified Stock Option Agreement for William H. Williams (Filed as Exhibit 10.12 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and
incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 
|10.10 |  | Non-Qualified Stock Option Agreement for Stephen V. OConnell (Filed as Exhibit 10.13 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870)
and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 
|10.11 |  | Form of Severance Pay Plan (Filed as Exhibit 10.14 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 
|10.12 |  | Credit Agreement among Harry & David Operations Corp., as Borrower, Harry & David Holdings, Inc. and certain subsidiaries of Holdings, as Guarantors, certain lenders party thereto, UBS
Securities LLC, as Lead Arranger, UBS Loan Finance LLC, as a lender and as Swingline Lender, UBS AG, Stamford Branch, as Issuing Bank, as the Administrative Collateral Agent and as Administrative Agent for the lenders and GMAC Commercial Finance
LLC, as Collateral Agent (Filed as Exhibit 10.1 to Harry & David Holdings, Inc.s Form 8-K (File No. 333-128870) dated March 20, 2006 and incorporated herein by reference)                                                                                          
|       | 
|10.13 |  | Harry & David Operations Corp.s Excess Pension Plan (Filed as Exhibit 10.1 to Harry & David Corp.s Form 8-K (File No. 333-128870) dated August 1, 2006 and incorporated herein
by reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 
|10.14  |  | Amended and Restated 2004 Stock Option Plan (Filed as Exhibit 10.1 to Harry & David Holdings, Inc.s Quarterly Report on Form 10-Q filed on November 14, 2006 and incorporated herein by
reference)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 
|10.15  |  | First Amendment to Credit Agreement, dated as of June 21, 2007, by and among Harry & David Operations Corp., as Borrower, Harry & David Holdings, Inc. and certain subsidiaries of
Holdings, as Guarantors, certain lenders party thereto, UBS Securities LLC, as Lead Arranger, UBS Loan Finance LLC, as a lender and as Swingline Lender, UBS AG, Stamford Branch, as Issuing Bank, as the Administrative Collateral Agent and as
Administrative Agent for the lenders and GMAC Commercial Finance LLC, as Collateral Agent (Filed as Exhibit 10.15 to Harry & David Holdings Form 10-K filed on September 14, 2007 and incorporated herein by reference)                                                         
|       | 
|10.16  |  | Assumption Agreement dated as of November 30, 2007 by Harry and David, pursuant to the Credit Agreement among Harry & David Operations Corp., as Borrower, Harry & David Holdings, Inc.
and certain subsidiaries of Holdings, as Guarantors, certain lenders party thereto, UBS Securities LLC, as Lead Arranger, UBS Loan Finance LLC, as a lender and as Swingline Lender, UBS AG, Stamford Branch, as Issuing Bank, as the Administrative
Collateral Agent and as Administrative Agent for the lenders and GMAC Commercial Finance LLC, as Collateral Agent (Filed as Exhibit 10.2 to Harry & David Holdings, Inc.s Form 10-Q (File No. 333-127173) dated February 2, 2008 and
incorporated herein by reference)



56



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.17 |  | Consent and Second Amendment to Credit Agreement, dated as of August 8, 2008, by and among Harry and David (as successor to Harry & David Operations Corp.), as Borrower, Harry & David
Holdings, Inc. and certain subsidiaries of Holdings, as Guarantors, certain lender party thereto, UBS AG, Stamford Branch, as Administrative Collateral Agent and as Administrative Agent for the Lenders, and GMAC Commercial Finance LLC, as Collateral
Agent.
|      | 
|21.1  |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                    
|      | 
|31.1  |  | Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                              
|      | 
|31.2  |  | Certification of Principal Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                              
|      | 
|32.1  |  | Certification of the President and Chief Executive Officer and the Chief Financial Officer and Chief Administrative Officer required by rule 13a-14(b) under the Securities Exchange Act of 1934,
as amended, and 18 U.S.C. § 1350.                                                                                                                                                                                                                     

---

|** | The Stock Purchase Agreement submitted as Exhibit 2.1 contains a list briefly identifying the contents of all omitted disclosure schedules. The Company undertakes to furnish
supplementally a copy of any omitted disclosure schedules to the Securities and Exchange Commission upon request.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Previously filed
|- | ----------------



|(c) | The following Financial Statement Schedules of Harry & David Holdings, Inc. are included in Item 8, Financial Statements and Supplementary Data  Notes to
Consolidated Financial Statements. Schedules not referenced are inapplicable or not required.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Valuation and Qualifying Accounts



Consolidating Financial Statements required by Rule 3-10 of Regulation S-X



57



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

HARRY & DAVID HOLDINGS, INC.



|                                                  |  |                                                                                               |  |                   
|------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ------------------
|Signature                                         |  | Title                                                                                         |  | Date              
|                                                  |  |                                                                                              
|/s/ William H. Williams William H. Williams       |  | President and Chief Executive Officer and Director                                            |  | September 19, 2008
|                                                  |  |                                                                                              
|/s/ Stephen V. OConnell Stephen V. OConnell     |  | Chief Financial Officer and Administrative Officer and Director (Principal Financial Officer) |  | September 19, 2008
|                                                  |  |                                                                                              
|/s/ Bernard Colpitts Bernard Colpitts             |  | Vice President, Controller (Principal Accounting
Officer)                                     |  | September 19, 2008
|                                                  |  |                                                                                              
|/s/ Ellis B. Jones Ellis
B. Jones                 |  | Director                                                                                      |  | September 19, 2008
|                                                  |  |                                                                                              
|/s/ George L. Majoros, Jr. George L. Majoros, Jr. |  | Director                                                                                      |  | September 19, 2008
|                                                  |  |                                                                                              
|/s/ Bruce Wasserstein Bruce Wasserstein           |  | Director                                                                                      |  | September 19, 2008



---

##### Table of Contents

HARRY & DAVID HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                          |  |    
|--------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm   |  | F-2
|                                                          | 
|Audited Consolidated Financial Statements                 |  |    
|                                                          | 
|Consolidated Balance Sheets                               |  | F-3
|                                                          | 
|Consolidated Statements of Operations                     |  | F-4
|                                                          | 
|Consolidated Statements of Stockholders Equity (Deficit) |  | F-5
|                                                          | 
|Consolidated Statements of Cash Flows                     |  | F-6
|                                                          | 
|Notes to Consolidated Financial Statements                |  | F-7



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

Harry & David Holdings, Inc.



We have audited the accompanying consolidated balance sheets of Harry & David Holdings, Inc. and subsidiaries (the Company) as of June 28, 2008 and
June 30, 2007, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the three fiscal years in the period ended June 28, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
the Company at June 28, 2008 and June 30, 2007, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended June 28, 2008, in conformity with U.S. generally accepted
accounting principles.



As discussed in Note 4 to the consolidated financial
statements, effective July 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48 related to accounting for uncertainty in income taxes and Emerging Issues Task Force Issue No. 06-2 related to accounting for
sabbatical leave and, effective June 30, 2007, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 158 related to defined benefit pension and other postretirement plans.

/s/ ERNST & YOUNG LLP


Portland, Oregon

September 9, 2008



F-2



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                   |  | June 28,2008 |         |   | June 30,2007 |  
|Assets                                                                                                                                                             |  |              |         |   |              |   |         |  
|Current assets                                                                                                                                                     |  |              |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 40,792  |   |              | $ | 49,408  |  
|Short-term investments                                                                                                                                             |  |              | 15,033  |   |              |   | 24,816  |  
|Trade accounts receivable, less allowance for doubtful accounts of $39 at June 28, 2008, and $15 at June 30, 2007                                                  |  |              | 2,084   |   |              |   | 2,100   |  
|Other receivables                                                                                                                                                  |  |              | 2,843   |   |              |   | 10,907  |  
|Inventories                                                                                                                                                        |  |              | 54,463  |   |              |   | 62,406  |  
|Deferred catalog expenses                                                                                                                                          |  |              | 6,258   |   |              |   | 4,198   |  
|Prepaid income taxes                                                                                                                                               |  |              |        |   |              |   | 774     |  
|Deferred income taxes                                                                                                                                              |  |              | 3,230   |   |              |   |        |  
|Other current assets                                                                                                                                               |  |              | 7,491   |   |              |   | 9,852   |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total current assets                                                                                                                                               |  |              | 132,194 |   |              |   | 164,461 |  
|Fixed assets, net                                                                                                                                                  |  |              | 162,214 |   |              |   | 163,273 |  
|Goodwill                                                                                                                                                           |  |              | 3,690   |   |              |   |        |  
|Intangibles, net                                                                                                                                                   |  |              | 45,677  |   |              |   | 29,089  |  
|Deferred financing costs, net                                                                                                                                      |  |              | 9,266   |   |              |   | 12,144  |  
|Other assets                                                                                                                                                       |  |              | 3,596   |   |              |   | 1,551   |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total assets                                                                                                                                                       |  | $            | 356,637 |   |              | $ | 370,518 |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Liabilities and stockholders equity                                                                                                                               |  |              |         |   |              |   |         |  
|Current liabilities                                                                                                                                                |  |              |         |   |              |   |         |  
|Accounts payable                                                                                                                                                   |  | $            | 18,981  |   |              | $ | 22,900  |  
|Accrued payroll and benefits                                                                                                                                       |  |              | 14,052  |   |              |   | 21,175  |  
|Income taxes payable                                                                                                                                               |  |              | 23,610  |   |              |   |        |  
|Deferred revenue                                                                                                                                                   |  |              | 13,667  |   |              |   | 12,914  |  
|Deferred income taxes                                                                                                                                              |  |              |        |   |              |   | 18,670  |  
|Accrued interest                                                                                                                                                   |  |              | 5,523   |   |              |   | 5,921   |  
|Other accrued liabilities                                                                                                                                          |  |              | 7,932   |   |              |   | 7,409   |  
|Current portion of capital lease obligations                                                                                                                       |  |              | 647     |   |              |   | 1,366   |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total current liabilities                                                                                                                                          |  |              | 84,412  |   |              |   | 90,355  |  
|Long-term debt and capital lease obligations                                                                                                                       |  |              | 235,599 |   |              |   | 245,669 |  
|Accrued pension liability                                                                                                                                          |  |              | 17,494  |   |              |   | 15,504  |  
|Deferred income taxes                                                                                                                                              |  |              | 4,074   |   |              |   | 8,422   |  
|Other long-term liabilities                                                                                                                                        |  |              | 10,906  |   |              |   | 6,304   |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total liabilities                                                                                                                                                  |  |              | 352,485 |   |              |   | 366,254 |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Commitments and contingencies (Note 14)                                                                                                                            |  |              |         |   |              |   |         |  
|Stockholders equity                                                                                                                                               |  |              |         |   |              |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; 1,033,295 and 1,032,241 shares issued and outstanding at June 28, 2008 and
June 30, 2007, respectively |  |              | 10      |   |              |   | 10      |  
|Additional paid-in capital                                                                                                                                         |  |              | 6,191   |   |              |   | 5,548   |  
|Accumulated other comprehensive income (loss), net of tax                                                                                                          |  |              | (3,558  | ) |              |   | 1,119   |  
|Retained earnings (accumulated deficit)                                                                                                                            |  |              | 1,509   |   |              |   | (2,413  | )
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                         |  |              | 4,152   |   |              |   | 4,264   |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                         |  | $            | 356,637 |   |              | $ | 370,518 |  
|                                                                                                                                                                   |  |              |         |   |              |   |         |  

See accompanying Notes to Consolidated Financial Statements.



F-3



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except share and per share data)



|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|--------------------------------------------------------------- |  | ---------------------- | --------- | - | ---------------------- | - | --------- | ---------------------- |  | - | --------- | -
|                                                                |  | Year endedJune 28,2008 |           |   | Year endedJune 30,2007 |   |           | Year endedJune 24,2006 | 
|Net sales                                                       |  | $                      | 545,064   |   |                        | $ | 561,017   |                        |  | $ | 524,384   |  
|Cost of goods sold                                              |  |                        | 295,894   |   |                        |   | 295,211   |                        |  |   | 302,389   |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Gross profit                                                    |  |                        | 249,170   |   |                        |   | 265,806   |                        |  |   | 221,995   |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Operating expenses:                                             |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Selling, general and administrative                             |  |                        | 217,008   |   |                        |   | 214,004   |                        |  |   | 198,219   |  
|Selling, general and administrative  related party             |  |                        | 1,000     |   |                        |   | 1,068     |                        |  |   | 1,000     |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|                                                                |  |                        | 218,008   |   |                        |   | 215,072   |                        |  |   | 199,219   |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Operating income                                                |  |                        | 31,162    |   |                        |   | 50,734    |                        |  |   | 22,776    |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Other (income) expense:                                         |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Interest income                                                 |  |                        | (2,708    | ) |                        |   | (3,126    | )                      |  |   | (1,780    | )
|Interest expense                                                |  |                        | 25,227    |   |                        |   | 28,199    |                        |  |   | 26,459    |  
|Pension curtailment gain                                        |  |                        |          |   |                        |   | (15,844   | )                      |  |   |          |  
|Gain on debt prepayment                                         |  |                        | (303      | ) |                        |   |          |                        |  |   |          |  
|Other (income) expense, net                                     |  |                        | (39       | ) |                        |   | (348      | )                      |  |   | 1,210     |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|                                                                |  |                        | 22,177    |   |                        |   | 8,881     |                        |  |   | 25,889    |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Income (loss) from continuing operations before income taxes    |  |                        | 8,985     |   |                        |   | 41,853    |                        |  |   | (3,113    | )
|Provision for income taxes                                      |  |                        | 4,648     |   |                        |   | 11,156    |                        |  |   | 2,548     |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Net income (loss) from continuing operations                    |  |                        | 4,337     |   |                        |   | 30,697    |                        |  |   | (5,661    | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Discontinued operations:                                        |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Gain on sale of Jackson & Perkins                               |  |                        | 282       |   |                        |   | 6,713     |                        |  |   |          |  
|Operating income (loss) on discontinued operations              |  |                        | 8         |   |                        |   | (4,282    | )                      |  |   | (6,511    | )
|Provision (benefit) for income taxes on discontinued operations |  |                        | 19        |   |                        |   | 1,127     |                        |  |   | (2,459    | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Net income (loss) from discontinued operations                  |  |                        | 271       |   |                        |   | 1,304     |                        |  |   | (4,052    | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Net income (loss)                                               |  | $                      | 4,608     |   |                        | $ | 32,001    |                        |  | $ | (9,713    | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Basic net income (loss) per share:                              |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Continuing operations                                           |  |                        | 4.20      |   |                        |   | 29.90     |                        |  |   | (5.58     | )
|Discontinued operations                                         |  |                        | 0.26      |   |                        |   | 1.27      |                        |  |   | (4.00     | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Total basic net income (loss) per share                         |  | $                      | 4.46      |   |                        | $ | 31.17     |                        |  | $ | (9.58     | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Diluted net income (loss) per share:                            |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Continuing operations                                           |  |                        | 4.16      |   |                        |   | 29.90     |                        |  |   | (5.58     | )
|Discontinued operations                                         |  |                        | 0.26      |   |                        |   | 1.27      |                        |  |   | (4.00     | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Total diluted net income (loss) per share                       |  | $                      | 4.42      |   |                        | $ | 31.17     |                        |  | $ | (9.58     | )
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Weighted-average shares used in per share calculations:         |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Basic                                                           |  |                        | 1,032,577 |   |                        |   | 1,026,604 |                        |  |   | 1,013,650 |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  
|Diluted                                                         |  |                        | 1,043,471 |   |                        |   | 1,026,604 |                        |  |   | 1,013,650 |  
|                                                                |  |                        |           |   |                        |   |           |                        |  |   |           |  

See accompanying Notes to Consolidated Financial Statements.



F-4



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries



Consolidated Statements of Stockholders Equity
(Deficit)

(in thousands, except share data)



|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------ |  | ------------------------- | -- | ---------------------------- | -------- | ----- | ----------------------------- | ------ | ------- | - | ----- | - | ------ | - |  | - | ------- | -
|                                                               |  | Common stock |  | Additionalpaid-in capital |    | Retainedearnings(accumulated |          |       | Accumulatedothercomprehensive |        |         |   |      
|                                                               |  | Shares       |  | Value                     |    |                              | deficit) |       |                               | income |         |   | Total |  
|Balance at June 25, 2005                                       |  | 1,000,000    |  | $                         | 10 |                              | $        | 1,864 |                               | $      | (22,101 | ) |       | $ |       |   |  | $ | (20,227 | )
|Net loss                                                       |  |             |  |                           |   |                              |          |      |                               |        | (9,713  | ) |       |   |       |   |  |   | (9,713  | )
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Comprehensive loss                                             |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   | (9,713  | )
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Exercise of common stock options                               |  | 19,929       |  |                           |   |                              |          | 1,646 |                               |        |        |   |       |   |       |   |  |   | 1,646   |  
|Stock option compensation                                      |  |             |  |                           |   |                              |          | 444   |                               |        |        |   |       |   |       |   |  |   | 444     |  
|Dividends paid                                                 |  |             |  |                           |   |                              |          |      |                               |        | (2,600  | ) |       |   |       |   |  |   | (2,600  | )
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Balance at June 24, 2006                                       |  | 1,019,929    |  |                           | 10 |                              |          | 3,954 |                               |        | (34,414 | ) |       |   |       |   |  |   | (30,450 | )
|Net income                                                     |  |             |  |                           |   |                              |          |      |                               |        | 32,001  |   |       |   |       |   |  |   | 32,001  |  
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Comprehensive income                                           |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   | 32,001  |  
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Adjustment to initially apply SFAS No. 158, net of tax of $661 |  |             |  |                           |   |                              |          |      |                               |        |        |   |       |   | 1,119  |   |  |   | 1,119   |  
|Exercise of common stock options                               |  | 12,312       |  |                           |   |                              |          | 1,017 |                               |        |        |   |       |   |       |   |  |   | 1,017   |  
|Stock option compensation                                      |  |             |  |                           |   |                              |          | 577   |                               |        |        |   |       |   |       |   |  |   | 577     |  
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Balance at June 30, 2007                                       |  | 1,032,241    |  |                           | 10 |                              |          | 5,548 |                               |        | (2,413  | ) |       |   | 1,119  |   |  |   | 4,264   |  
|Net income                                                     |  |             |  |                           |   |                              |          |      |                               |        | 4,608   |   |       |   |       |   |  |   | 4,608   |  
|Pension adjustment, net of tax of $2,763                       |  |             |  |                           |   |                              |          |      |                               |        |         |   |       |   | (4,677 | ) |  |   | (4,677  | )
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Comprehensive loss                                             |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   | (69     | )
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Adjustment to initially apply EITF 06-02, net of tax of $164   |  |             |  |                           |   |                              |          |      |                               |        | (256    | ) |       |   |       |   |  |   | (256    | )
|Adjustment to initially apply FIN 48                           |  |             |  |                           |   |                              |          |      |                               |        | (430    | ) |       |   |       |   |  |   | (430    | )
|Exercise of common stock options                               |  | 1,054        |  |                           |   |                              |          | 91    |                               |        |        |   |       |   |       |   |  |   | 91      |  
|Stock option compensation                                      |  |             |  |                           |   |                              |          | 552   |                               |        |        |   |       |   |       |   |  |   | 552     |  
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  
|Balance at June 28, 2008                                       |  | 1,033,295    |  | $                         | 10 |                              | $        | 6,191 |                               | $      | 1,509   |   |       | $ | (3,558 | ) |  | $ | 4,152   |  
|                                                               |  |              |  |                           |    |                              |          |       |                               |        |         |   |       |   |        |   |  |   |         |  



See accompanying
Notes to Consolidated Financial Statements.



F-5



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries



Consolidated Statements of Cash Flows

(in thousands)



|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | -------- | ---------------------- |  | - | -------- | -
|                                                                                                                                               |  | Year endedJune 28,2008 |         |   | Year endedJune 30,2007 |   |          | Year endedJune 24,2006 | 
|Operating activities                                                                                                                           |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net income (loss)                                                                                                                              |  | $                      | 4,608   |   |                        | $ | 32,001   |                        |  | $ | (9,713   | )
|Less: Net income (loss) from discontinued operations                                                                                           |  |                        | 271     |   |                        |   | 1,304    |                        |  |   | (4,052   | )
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net income (loss) from continuing operations                                                                                                   |  |                        | 4,337   |   |                        |   | 30,697   |                        |  |   | (5,661   | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities from continuing operations: |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Depreciation and amortization of fixed assets                                                                                                  |  |                        | 18,370  |   |                        |   | 17,122   |                        |  |   | 16,056   |  
|Amortization of intangible assets                                                                                                              |  |                        | 2,122   |   |                        |   | 1,976    |                        |  |   | 2,112    |  
|Amortization of deferred financing costs                                                                                                       |  |                        | 2,604   |   |                        |   | 2,669    |                        |  |   | 2,473    |  
|Stock option compensation expense                                                                                                              |  |                        | 552     |   |                        |   | 577      |                        |  |   | 444      |  
|Write-off of deferred initial public offering costs                                                                                            |  |                        |        |   |                        |   |         |                        |  |   | 2,180    |  
|Loss on disposal and impairment of fixed assets and other long-lived assets                                                                    |  |                        | 1,665   |   |                        |   | 770      |                        |  |   | 1,073    |  
|Gain on short-term investments                                                                                                                 |  |                        | (426    | ) |                        |   | (407     | )                      |  |   |         |  
|Deferred income taxes                                                                                                                          |  |                        | (22,916 | ) |                        |   | 10,818   |                        |  |   | 2,500    |  
|Gain on debt prepayment                                                                                                                        |  |                        | (303    | ) |                        |   |         |                        |  |   |         |  
|Pension curtailment gain                                                                                                                       |  |                        |        |   |                        |   | (15,844  | )                      |  |   |         |  
|Changes in operating assets and liabilities:                                                                                                   |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Trade accounts receivable and other receivables                                                                                                |  |                        | 733     |   |                        |   | 367      |                        |  |   | (4,171   | )
|Inventories                                                                                                                                    |  |                        | 9,621   |   |                        |   | (6,378   | )                      |  |   | (6,576   | )
|Deferred catalog expenses and other assets                                                                                                     |  |                        | (284    | ) |                        |   | (997     | )                      |  |   | (5,060   | )
|Accounts payable                                                                                                                               |  |                        | (4,884  | ) |                        |   | 3,903    |                        |  |   | 6,591    |  
|Accrued liabilities                                                                                                                            |  |                        | (5,003  | ) |                        |   | 7,680    |                        |  |   | 2,308    |  
|Income taxes                                                                                                                                   |  |                        | 24,272  |   |                        |   | (218     | )                      |  |   | (309     | )
|Accrued pension liability                                                                                                                      |  |                        | (5,450  | ) |                        |   | (2,716   | )                      |  |   | 4,639    |  
|Deferred revenue                                                                                                                               |  |                        | 472     |   |                        |   | (3,523   | )                      |  |   | 2,211    |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net cash provided by operating activities from continuing operations                                                                           |  |                        | 25,482  |   |                        |   | 46,496   |                        |  |   | 20,810   |  
|Net cash provided by (used in) operating activities from discontinued operations                                                               |  |                        | 3,147   |   |                        |   | (12,674  | )                      |  |   | 22       |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net cash provided by operating activities                                                                                                      |  |                        | 28,629  |   |                        |   | 33,822   |                        |  |   | 20,832   |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Investing activities                                                                                                                           |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Acquisition of fixed assets                                                                                                                    |  |                        | (17,855 | ) |                        |   | (21,459  | )                      |  |   | (17,374  | )
|Acquisition of Wolfermans business                                                                                                            |  |                        | (22,784 | ) |                        |   |         |                        |  |   |         |  
|Proceeds from the sale of fixed assets                                                                                                         |  |                        | 32      |   |                        |   | 17       |                        |  |   | 30       |  
|Purchases of available-for-sale securities                                                                                                     |  |                        | (10,000 | ) |                        |   |         |                        |  |   |         |  
|Purchases of held-to-maturity securities                                                                                                       |  |                        | (4,964  | ) |                        |   | (51,838  | )                      |  |   |         |  
|Proceeds from income on available-for-sale securities                                                                                          |  |                        | 195     |   |                        |   |         |                        |  |   |         |  
|Proceeds from the sale of held-to-maturity securities                                                                                          |  |                        | 24,978  |   |                        |   | 27,429   |                        |  |   |         |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net cash used in investing activities from continuing operations                                                                               |  |                        | (30,398 | ) |                        |   | (45,851  | )                      |  |   | (17,344  | )
|Net cash provided by (used in) investing activities from discontinued operations                                                               |  |                        | 4,161   |   |                        |   | 42,860   |                        |  |   | (289     | )
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net cash used in investing activities                                                                                                          |  |                        | (26,237 | ) |                        |   | (2,991   | )                      |  |   | (17,633  | )
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Financing activities                                                                                                                           |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Borrowings of revolving debt                                                                                                                   |  |                        | 63,000  |   |                        |   | 108,500  |                        |  |   | 104,000  |  
|Repayments of revolving debt                                                                                                                   |  |                        | (63,000 | ) |                        |   | (108,500 | )                      |  |   | (104,000 | )
|Repayments of long-term debt                                                                                                                   |  |                        | (9,405  | ) |                        |   |         |                        |  |   |         |  
|Repayments of notes payable                                                                                                                    |  |                        |        |   |                        |   |         |                        |  |   | (268     | )
|Repayments of capital lease obligations                                                                                                        |  |                        | (1,684  | ) |                        |   | (1,077   | )                      |  |   |         |  
|Payments for deferred financing costs                                                                                                          |  |                        | (10     | ) |                        |   |         |                        |  |   | (3,017   | )
|Proceeds from exercise of stock options                                                                                                        |  |                        | 91      |   |                        |   | 1,017    |                        |  |   | 1,646    |  
|Dividends paid                                                                                                                                 |  |                        |        |   |                        |   |         |                        |  |   | (2,600   | )
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Net cash used in financing activities from continuing operations                                                                               |  |                        | (11,008 | ) |                        |   | (60      | )                      |  |   | (4,239   | )
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                                                               |  |                        | (8,616  | ) |                        |   | 30,771   |                        |  |   | (1,040   | )
|Cash and cash equivalents, beginning of period                                                                                                 |  |                        | 49,408  |   |                        |   | 18,637   |                        |  |   | 19,677   |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  
|Cash and cash equivalents, end of period                                                                                                       |  | $                      | 40,792  |   |                        | $ | 49,408   |                        |  | $ | 18,637   |  
|                                                                                                                                               |  |                        |         |   |                        |   |          |                        |  |   |          |  



See accompanying
Notes to Consolidated Financial Statements.



F-6



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands)

NOTE 1BUSINESS

Harry & David Holdings, Inc. and subsidiaries (the Company) is a vertically integrated
multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and gifts marketed under the Harry and David® and Wolfermans® brands. The Company markets its products through catalogs distributed through the mail, the Internet, business-to-business, and consumer telemarketing, Harry and David Stores, and wholesale
distribution to other retailers.

Sales of the Companys products are subject to a variety of agricultural risks, fuel and energy price fluctuations,
delivery rate increases, and extreme weather conditions, and are subject to regulation and inspection by various governmental agencies. Historically, the Companys business has been subject to substantial seasonal variations in demand. A
significant portion of the Companys net sales and net earnings are realized during the holiday selling season from October through December, and levels of net sales and net earnings are significantly lower during the period from January to
September. Accordingly, operating results will vary based on the timing of holidays and the ripening of seasonal fruits, which, if delayed, can cause delays in product shipments.

NOTE 2OWNERSHIP AND CAPITAL STRUCTURE

On June 17, 2004, the Company purchased all of the outstanding
shares of common stock of Harry & David Operations Corp. (formerly Bear Creek Corporation) (the Predecessor) from Yamanouchi Consumer Inc. (YCI) (referred to herein as the 2004 Acquisition). In
conjunction with the 2004 Acquisition, the Company issued 1,000,000 shares of $.01 par value stock to Wasserstein & Company, LP (Wasserstein) and affiliates of funds sponsored by Highfields Capital Management LP
(Highfields). The 2004 Acquisition was accounted for as a purchase in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations.The purchase price was allocated to the
assets acquired and liabilities assumed based on their relative fair values. As of June 28, 2008, affiliates of Wasserstein, together with current and former members of management, own a 66% controlling interest in the Company, and Highfields
owns 34%.

NOTE 3SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany transactions have been eliminated in consolidation. The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP)
for financial information and with the instructions to Form 10-K.

The results of operations of the divested Jackson & Perkins businesses, the
revenues and expenses associated with the transitional services the Company is providing to the buyer, as well as the gain on sale of the Jackson & Perkins business are separately accounted for on the consolidated statement of operations as
discontinued operations. See Note 6 Discontinued Operations.

Prior year information has been reclassified to conform to current year
presentation as follows: capitalized catalog costs, which were previously classified as prepaid catalog expenses or within other current assets, were reclassified to deferred catalog expenses on the consolidated balance sheets. This reclassification
had no impact on the consolidated statement of operations, consolidated statement of cash flows, or working capital for any period.

All dollar amounts
presented in the accompanying consolidated financial statements and theses notes are in thousands except per share data.

Fiscal year

The Companys fiscal year ends the last Saturday in June, based on a 52/53-week year. The fiscal year ended June 30, 2007 contained 53 weeks, while the fiscal
years ended June 28, 2008 and June 24, 2006 both contained 52 weeks.



F-7



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##### Table of Contents

Use of estimates



The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and 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. The estimates and assumptions are evaluated on an ongoing basis
and are based on historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.



Financial instruments



SFAS No. 107, Disclosures about Fair Value of Financial Instruments,requires disclosure of the fair value of certain financial instruments. The
Companys financial instruments consist principally of short-term investments, cash and cash equivalents, accounts receivable, accounts payable, certain accrued liabilities, capital lease obligations and the Senior Floating Rate Notes due
March 1, 2012 and Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The estimated carrying value of these instruments (other than the Senior Notes) approximates fair value due to their short-term maturities.



The following table provides the carrying
value and fair value of the Companys Senior Notes:



|                           |  |               |         |               |   |            |  |            |         |  |   |        
|-------------------------- |  | ------------- | ------- | ------------- | - | ---------- |  | ---------- | ------- |  | - | -------
|                           |  | June 28, 2008 |         | June 30, 2007
|                           |  | Book value    |         | Fair value    |   | Book value |  | Fair value
|Senior Floating Rate Notes |  | $             | 68,000  |               | $ | 59,840     |  | $          | 70,000  |  | $ | 70,700 
|Senior Fixed Rate Notes    |  | $             | 167,000 |               | $ | 146,960    |  | $          | 175,000 |  | $ | 177,625
|                           |  |               |         |               |   |            |  |            |         |  |   |        
|Total Long-term debt       |  | $             | 235,000 |               | $ | 206,800    |  | $          | 245,000 |  | $ | 248,325
|                           |  |               |         |               |   |            |  |            |         |  |   |        



The
fair values are based on quoted market prices.



Cash and cash equivalents



Cash and cash equivalents are carried at cost, which approximates market
value. Cash equivalents include third-party credit card receivables because such amounts generally convert to cash within three days with little or no default risk, as well as investments in commercial paper with a purchased maturity of 90 days or
less. Third-party credit card receivables totaled $1,035 and $1,111 as of June 28, 2008 and June 30, 2007, respectively. Cash and cash equivalents consist primarily of deposits at federally insured financial institutions. Deposits with these banks
may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk.



Short-term investments



Investments are classified as held-to-maturity, trading, or available-for-sale at the time of purchase based on, among other factors, the Companys short-term
liquidity requirements. The cost of the securities is based on the specific identification method. Held-to-maturity securities are stated at amortized cost as it is the intent of the Company to hold these securities until maturity.
Available-for-sale securities are recorded at fair value and are classified as current assets due to the Companys intent to hold these investments for less than one year. As of June 28, 2008, $4,995 and $10,038 of investments were
classified as held-to-maturity and available-for-sale, respectively. As of June 30, 2007, all short-term investments were classified as held-to-maturity and totaled $24,816. All short-term investments approximated fair value at the respective
balance sheet dates.



Accounts receivable



Accounts receivable consists primarily of amounts due from customers. The Company sells its
products to individuals and companies located primarily in the United States. Products sold to companies are generally on open credit terms consistent with the Companys evaluation of customer creditworthiness. The Company generally does not
require collateral. No customer accounted for more than 10% of consolidated net sales.



The Company conducts ongoing credit evaluations and maintains an allowance for doubtful accounts to address the risk of bad debts. The Company analyzes historical bad debts, customer creditworthiness, and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. The allowance is calculated on a historical percentage of accounts in default as a percentage of sales. The Company generally writes off non-corporate accounts more than 180 days past
due. Past-due corporate accounts are written off when management deems that collectibility is remote. Losses from bad debts have historically been within managements expectations.



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Inventories



Inventories in the Direct Marketing, Wholesale, and Other segments are valued at the lower of standard cost (which approximates actual cost on a first-in, first-out
basis) or market. Inventories in the Stores segment are valued at the lower of cost, (which approximates actual cost on a first-in, first-out basis) or market using the retail inventory method. The total amount of retail inventory at June 28,
2008 and June 30, 2007 was $15,569 and $15,510, respectively. The Company estimates a provision for damaged, obsolete, excess, and slow-moving inventory based on specific identification and inventory aging reports. The Company provides for
excess and obsolete inventories in the period when excess and obsolescence are determined to have occurred.



The Company capitalizes into inventory both direct and indirect production costs. Indirect production costs include indirect labor and overhead costs related to growing, manufacturing and assembly. Costs of
unharvested crops are included in inventory and include direct labor and other expenses related to nursery stock and unharvested fruit, including the amortization of orchard development costs. Fruit crop inventories are accounted for on a crop year
that spans from November to October.



Deferred catalog expenses and
advertising expenses



Deferred catalog expenses are incurred in connection
with the direct response marketing of certain products. Catalog costs consist of creative design, photography, separations, paper, print, distribution, postage, and list costs for all direct response catalogs. Such costs are capitalized as deferred
catalog expenses and are amortized over their expected periods of future benefit based on the estimated sales curve of each promotion. Each catalog is generally amortized over 3 to 4 months. However, for sales that extend up to 12 months, such as
multiple club shipments, catalog expense is generally amortized up to a 12-month period. Prepaid catalog expenses are evaluated for realizability at each reporting period by comparing the carrying amount associated with each catalog to the estimated
remaining future net revenues associated with that promotion. Estimated future revenues are based on various factors such as the total number of catalogs and pages circulated, the probability and likely magnitude of consumer response, and the
assortment of merchandise offered. If the carrying amount is in excess of estimated future net revenues, the excess is expensed in the reporting period. Non-direct response advertising is expensed as incurred.



Total advertising expenses from continuing operations, which are primarily comprised of
catalog expenses, totaled $65,097, $60,932 and $59,691 for fiscal 2008, 2007 and 2006, respectively. Advertising expenses from discontinued operations totaled $7,501 and $12,563 for fiscal 2007 and 2006, respectively. There were no significant
advertising expenses from discontinued operations in fiscal 2008.



Fixed
assets



Fixed assets are stated at cost. Orchard development costs,
consisting of direct labor and material, supervision, and other items, are capitalized as part of capital projects-in-process until the orchard produces fruit in commercial quantities. Upon attaining commercial levels of production, these costs are
transferred to land improvements.



Depreciation and amortization are computed
using the straight-line method, with estimated useful lives of the related assets as follows:



|                                                |  |                                                                                      
|----------------------------------------------- |  | -------------------------------------------------------------------------------------
|Land improvements and orchard development costs |  | 1035 years                                                                          
|                                                | 
|Buildings and improvements                      |  | 1040 years                                                                          
|                                                | 
|Machinery and equipment                         |  | 310 years                                                                           
|                                                | 
|Purchased and internally developed software     |  | 38 years                                                                            
|                                                | 
|Leasehold improvements                          |  | Shorter of estimated useful life or lease term (generally 5-10 years; up to 20 years)



Repair and maintenance costs are expensed in the year in which they are incurred.



Interest costs related to assets under construction and software projects are capitalized during the construction or development period. Interest costs capitalized during fiscal 2008, 2007, and 2006 totaled $528,
$253, and $236, respectively. At June 28, 2008, the estimated cost to complete capital projects-in-process was $22,286.



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Internally developed software costs are capitalized in accordance with American Institute of Certified Public Accountants
(AICPA) Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

In accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company evaluates its long-lived assets for impairment. Recoverability of assets is measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value, which
is calculated on a discounted cash flow basis.

Intangible assets

Intangible assets primarily consist of trade names, trademarks, a proprietary recipe, customer mailing and rental lists and favorable lease agreements. The trade names, trademarks and the recipe have indefinite lives.
The customer lists have a remaining estimated useful life of six years. The favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases, ranging from two to five years. Goodwill and intangible
assets with indefinite lives are tested for impairment annually using the guidance and criteria described in SFAS No. 142, Goodwill and Other Intangible Assets. The impairment testing compares carrying values to fair values, and
generally, if the carrying value of these assets is in excess of fair value, which is calculated on a discounted cash flow basis, an impairment loss would be recognized. The customer mailing lists and rental lists are amortized using a
weighted-average method over the remaining estimated useful lives and favorable lease agreements are amortized using the straight-line method.

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the Companys acquisition of
Wolfermans (see Note 5-Acquisition). Under SFAS No. 142, goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. SFAS No. 142
requires that goodwill be tested for impairment using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the
related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting units goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting
units carrying amount exceeds its estimated fair value, the second step test must be performed to measure the amount of the goodwill impairment loss, if any. If the carrying amount of the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

As required by FAS No. 142, the Company identified the
Wolfermans direct marketing division, within the Companys Direct Marketing segment, as the reporting unit to which all goodwill was allocated and, therefore, the level at which goodwill is tested for potential impairment. The allocation
of goodwill was based on the assignment of operating responsibilities and the reporting of financial results of the acquired business.

Deferred
financing costs

Debt financing costs are deferred and amortized to interest expense using the straight-line method over the term of the related debt
instrument. The straight-line method approximates the effective interest method. See Note 8Borrowing Arrangements.

Deferred rent

For leases that contain fixed escalations of the minimum annual lease payment during the original term of the lease and other lease incentives, the Company
recognizes rental expense on a straight-line basis over the lease term and records the difference between rent expense and the amount that is payable as deferred rent. Current deferred rent liabilities totaling $173 and $23 were included in other
current liabilities and non-current deferred rent liabilities totaling $1,858 and $1,568 were included in other long-term liabilities in the accompanying consolidated balance sheets as of June 28, 2008, and June 30, 2007, respectively.

Asset retirement obligations

The Company has accrued
for future asset retirement obligations resulting from the Companys contractual obligation to restore a store location to its original condition upon lease termination. The accrual is estimated based on historical costs incurred to restore a
location to its original condition after a store closure. Asset retirement obligation liabilities totaling $948 and $895 were included in other liabilities in the accompanying consolidated balance sheets as of June 28, 2008 and June 30,
2007, respectively.



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Revenue recognition



In accordance with Staff Accounting Bulletin No.104, Revenue Recognition, the Company recognizes revenue from product sales when the following four revenue
recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.



For the Companys direct marketing revenue and a portion of wholesale revenue, product
sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are recorded upon shipment as the Companys or its customers standard terms and conditions provide for transfer of title upon delivery to the
carrier. For certain wholesale customers, revenue is recognized upon receipt by the customer, at which time title passes to the customer in accordance with the terms of the sale. The Company records a reserve for estimated product returns and
allowances in each reporting period. If returns were to increase or decrease, changes to the reserves could be required. Sales taxes are presented on a net basis. Finance charges on credit sales totaled $145, $196, and $196 for fiscal 2008, 2007 and
2006, respectively, and are included in selling, general and administrative expenses from continuing operations in the consolidated statement of operations.



Deferred revenue represents amounts received from customers for merchandise to be shipped in subsequent periods. The Company defers incremental direct costs of order
processing related to those orders for which revenue is deferred. Deferred order processing costs of $425 and $658 were included in other current assets in the accompanying consolidated balance sheets at June 28, 2008 and June 30, 2007,
respectively.



Revenues from sales of gift cards and gift certificates are
deferred until redeemed. The Companys gift cards and certificates do not lose value over time and do not expire. Unredeemed gift cards or certificates that are subject to escheatment ultimately revert to the appropriate state and are not
recorded as income. Unredeemed gift cards or certificates not subject to escheatment are recognized in income after being outstanding for ten years at which time we consider the possibility of redemption to be remote. Income from unredeemed gift
cards and gift certificates of $160 and $332 was recognized in fiscal 2008 and 2007, respectively, and is included in net sales in the consolidated statement of operations. There were no such amounts recognized in fiscal 2006.



Classification of costs and expenses



Cost of goods sold includes cost of goods, occupancy expenses for manufacturing and
distribution facilities, warehouse and fulfillment costs and product delivery costs. Cost of goods consists of raw materials, manufacturing costs, costs of externally purchased merchandise, freight, and other inventory-related costs. Occupancy
expenses are primarily comprised of depreciation, rent and utilities. Warehouse and fulfillment costs primarily consist of labor, storage and equipment.



Selling, general and administrative expenses consist of costs for occupancy associated with our stores and corporate facility, advertising, credit, call center,
depreciation and amortization for store leasehold improvements and fixtures, corporate facilities, IT equipment and software, and corporate administrative functions. Occupancy expenses associated with the stores and corporate facility primarily
include rent, common area maintenance and utilities. Corporate administrative function costs primarily include the costs for executive administration, legal, human resources, finance, insurance and information technology.



Research and development



Costs incurred in research and development were primarily for developing new rose varieties
and were expensed as incurred in the Jackson & Perkins segment and therefore are included in discontinued operations. A total of $1,114 and $1,641 of these costs were incurred in fiscal 2007 and 2006, respectively. There were no such costs
incurred in fiscal 2008.



Income taxes



The Company accounts for income taxes under the liability method pursuant to SFAS
No. 109, Accounting for Income Taxes. Under this method, deferred income tax liabilities and assets are based on the difference between the financial statements and tax basis of assets and liabilities multiplied by the expected tax rate
in the year the differences are expected to reverse. Deferred income tax expense or benefit results from the change in the net deferred tax asset or liability between periods.



The Company records a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. The
Company has considered carryback and carryforward periods, historical and forecasted income, the apportioned earnings in the jurisdictions in which the Company and its subsidiaries operate, and tax planning strategies in estimating a valuation
allowance against the Companys deferred tax assets. If the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized, an adjustment to the deferred tax assets is charged to
earnings in the period in which such a determination is made. Conversely, if the Company determines that it is more likely than not that the deferred tax assets will be realized, the applicable portion of the previously estimated valuation allowance
would be reversed.



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The amount of income taxes the Company pays is subject to periodic audits by federal and state tax authorities and these
audits may result in proposed deficiency assessments. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN
48) which clarifies the accounting for uncertainty in income taxes in an enterprises financial statements in accordance with SFAS No. 109.FIN 48 prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted FIN 48 as of July 1, 2007.



Stock-based
compensation



Stock options granted to employees are accounted for under
SFAS No. 123R,Share-Based Payment. The fair value of stock-based awards to employees is calculated by us using the Black-Scholes option valuation model, which requires that we make certain subjective assumptions. These assumptions
include future stock price volatility and the expected life of the stock option, which affect the calculated fair values. For the majority of the granted options, forfeitures are assumed to equal 10% of the total grant amount of the options. The
expected term of options granted is derived from the time between the date of final vesting and the expiration of the option. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of
grant. The calculated compensation expense is recognized on a straight-line basis over each vesting period. See Note 11Stock Option Plan.



Pension Plans



Effective June 30, 2007, the Company adopted SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106,
and 132(R). The Companys pension benefit costs and liabilities are developed from actuarial valuations. Inherent in these valuations are assumptions the Company determines after consultation with its actuaries, including discount rates,
expected returns on plan assets and rates of compensation increases. In determining the expected rates and returns, the Company is required to consider current market conditions, including changes in interest rates.



Material changes in the Companys pension and post-retirement benefit costs may occur in
the future, resulting from changes in assumptions or other management decisions. For further discussion, see Note 9  Benefit Programs.



Earnings (loss) per share



Basic earnings (loss) per share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the
weighted-average common shares outstanding for the period including the dilutive effect of stock awards as determined under the treasury stock method. See Note 12Earnings (Loss) Per Share.



NOTE 4RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS



In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. SFAS 162 is effective 60 days following the Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Presenting Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact of the adoption of SFAS 162 and does not expect there to be
a material effect on its consolidated financial statements.



In
December 2007, the FASB issued SFAS No. 141R (revised 2007), Business Combinations, which replaces SFAS No. 141. SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (on or after June 28, 2009 of fiscal 2010). Early adoption is not permitted. After the effective date, the Company will apply the requirements of SFAS No. 141R to any future business combinations.



The Company adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Retirement Plans, effective June 30, 2007. SFAS No. 158 requires an employer to recognize the funded status of each of its defined benefit post-retirement plans as an asset or liability and to recognize changes in funded status as a
component of accumulated other comprehensive income. Upon adoption, current liabilities were increased by $223, noncurrent liabilities were reduced by $2,003, deferred taxes were increased by $661, and stockholders equity was increased by
$1,119, net of tax.



In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which requires
assets or liabilities to be carried at fair value. This statement gives entities the option to record certain financial assets and liabilities at fair value with the changes in fair value recorded in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007. The Company is not planning to elect the option to record certain financial assets and liabilities at fair value and, therefore, this pronouncement is not expected
to have a material impact on the Companys consolidated financial statements.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes guidelines for
measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and to allow additional time to resolve certain issues, the FASB delayed the effective date for one year for certain types of nonfinancial assets
and nonfinancial liabilities, via FSP No. FAS 157-2, Effective Date of FASB Statement No.157. The Company does not expect adoption of this statement to have a material impact on its consolidated financial statements.

In June 2006, the FASB FIN 48, Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109). FIN 48 establishes a single model to address
accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was adopted by the Company as of July 1, 2007 and required a cumulative adjustment to equity upon
adoption for the accounting differences for uncertain tax positions under FIN 48 as opposed to SFAS No. 5, Accounting for Contingencies. For further information, see Note 10  Income Taxes.

In June 2006, the Emerging Issues Task Force (EITF) ratified the consensus reached on Issue No. 06-2, Accounting for Sabbatical Leave and Other
Similar Benefits Pursuant to Financial Accounting Standards Board Statement No. 43, Accounting for Compensated Absences (EITF 06-2). EITF 06-2 concludes that companies should accrue for employee sabbatical leave over
the service period in which employees earn the right to sabbatical leave. The Company adopted EITF 06-2 in the first quarter of fiscal year 2008. The impact on the Companys financial statements was a cumulative adjustment to retained earnings
totaling $256, net of taxes of $164. In addition, for fiscal 2008, a net charge of $26, or $0.03 per share on basic and diluted pre-tax basis, was recorded in payroll expense, classified within selling, general and administrative expenses in the
consolidated statement of operations pursuant to EITF 06-2.

NOTE 5ACQUISITION

On January 15, 2008, the Company completed the acquisition of Wolfermans, LLC, a direct-marketing
company specializing in English muffins and other breakfast products sold primarily under the Wolfermans® brand, from Williams Foods, Inc., for a net purchase price of $22,784, which
included $622 of transaction related expenses. The Company paid for the acquisition of Wolfermans with available cash. Williams Foods, Inc. has agreed to provide certain transitional services, as needed, through September 2008.

The results of operations of Wolfermans are included in the consolidated statements of operations for the periods which include January 15, 2008 through
June 28, 2008.

The allocation of the purchase price is based on managements estimates and assumptions, and other information compiled by
management utilizing established valuation techniques appropriate for the retail industry. The purchase price will be finalized upon ultimate payment of severance and costs associated with the exit of existing fulfillment locations as discussed
below. The following table presents the preliminary allocation of the purchase price of the acquisition, including professional fees and other related acquisition costs, to the net assets acquired based on their fair values (in thousands):



|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|Current assets        |  | $ | 2,525  |  
|Fixed assets          |  |   | 134    |  
|Intangible assets     |  |   | 18,850 |  
|Goodwill              |  |   | 3,690  |  
|                      |  |   |        |  
|Total assets acquired |  |   | 25,199 |  
|Current liabilities   |  |   | (2,415 | )
|                      |  |   |        |  
|Net assets acquired   |  | $ | 22,784 |  
|                      |  |   |        |  

The acquired intangible assets are comprised of Wolfermans trademarks and a proprietary recipe totaling
$13,550 and customer lists of $5,300. The trademarks and proprietary recipe have indefinite lives, while the customer lists will be amortized on a weighted basis over a six year period. The $3,690 of goodwill is allocated to the Direct Marketing
segment and is expected to be fully deductible for tax purposes. While goodwill represents the excess purchase over the fair value of net assets purchased, the Company anticipates the acquisition will leverage its existing infrastructure and
generate operating and marketing synergies and productivity improvements for both its Harry and David and Wolfermans businesses.

In accordance with
EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the Company recorded a liability of $377 for severance costs related to managements plan for a reduction in force and the closure
of the existing Wolfermans fulfillment locations. Managements plan for reduction in force and closure of fulfillment locations was developed concurrently with the acquisition and requires the transition of certain functions to our



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existing personnel and fulfillment locations. Costs incurred for fiscal 2008 totaled $459 for severance and $159 for closures of fulfillment locations. As of
June 28, 2008, $361 remained unpaid related to the reduction in force. The plan is expected to be complete by the first quarter of fiscal 2009.



The following unaudited pro forma consolidated results of operations have been prepared as if the Wolfermans acquisition had occurred at the beginning of the
respective periods below (in thousands, except per share data):



|                                                      |  |                        |         |                        |   |        
|----------------------------------------------------- |  | ---------------------- | ------- | ---------------------- | - | -------
|                                                      |  | Fiscal 2008(unaudited) |         | Fiscal 2007(unaudited)
|Net sales                                             |  | $                      | 565,200 |                        | $ | 583,057
|Gross profit                                          |  |                        | 260,174 |                        |   | 276,324
|Operating income                                      |  |                        | 31,507  |                        |   | 49,578 
|Income from continuing operations before income taxes |  |                        | 9,332   |                        |   | 8,878  
|Net income                                            |  |                        | 4,828   |                        |   | 31,155 
|Basic net income per share                            |  | $                      | 4.68    |                        | $ | 30.35  
|Diluted net income per share                          |  | $                      | 4.63    |                        | $ | 30.35  



Prior to the acquisition,
Wolfermans utilized a calendar year for their fiscal year. No adjustments have been made to conform the activity to the Companys historical fiscal calendar.



The unaudited pro forma consolidated results of operations do not purport to be indicative of results that may be obtained in the future and do not include
any cost savings related to synergies expected to be obtained as the Wolfermans business is integrated into the Companys operations. The unaudited pro forma consolidated results of operations include adjustments to net income to give
effect to amortization of intangibles acquired, depreciation and related adjustments to fixed assets based on the fair value assigned to those assets and income taxes.



NOTE 6DISCONTINUED OPERATIONS



During the fourth quarter of fiscal 2007, the Company completed the sale of its Jackson & Perkins businesses. In a separate transaction, the Company sold its
land and the associated buildings of its Wasco facility, which was primarily utilized to support rose growing operations of Jackson & Perkins.



In connection with the sale of the business, the Company entered into a transitional services agreement (the TSA) with the buyers to provide certain
transitional services through June of fiscal 2008, which has been extended through October of fiscal 2009. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,the services rendered pursuant to
the TSA are not considered significant continuing involvement and, as such, the results of operations of the sold entities, as well as the revenues and expenses associated with the TSA, are accounted for as discontinued operations for fiscal 2008,
2007 and 2006. Cash flows related to the TSA are expected to continue through the second fiscal quarter of fiscal 2009.



As of June 28, 2008, the remaining portion of the note receivable due from the buyer was $1,000, gross of the remaining unamortized discount of $83. The implied
interest rate on the note is 9.0% with the final $1,000 principal payment due in June 2009. In addition, the current and noncurrent portions of remaining deferred product credits related to the sale were $447 and $484, respectively, and are included
in the consolidated balance sheets as of June 28, 2008.



The financial results included in discontinued operations in the consolidated statement of operations were as follows:



|                                                                |  |      |       |      |   |        |  |   |        |  
|--------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | ------ | -
|                                                                |  | 2008 |       | 2007 |   | 2006   | 
|Net sales                                                       |  | $    | 5,127 |      | $ | 64,947 |  | $ | 73,820 |  
|Gain on sale of discontinued operations                         |  |      | 282   |      |   | 6,713  |  |   |       |  
|Provision (benefit) for income taxes on discontinued operations |  |      | 19    |      |   | 1,127  |  |   | (2,459 | )
|Net income (loss) from discontinued operations                  |  |      | 271   |      |   | 1,304  |  |   | (4,052 | )



Net sales from discontinued operations
of $73,820 for all of fiscal 2006 and approximately $57,300 for part of fiscal 2007 represented sales activity that occurred prior to the completion of the sale of the Jackson & Perkins business on April 10, 2007. Net sales from
discontinued operations in fiscal 2008 and for a portion of fiscal 2007 subsequent to the date of sale, were primarily comprised of revenues associated with the TSA and residual farm crop sales.



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NOTE 7BALANCE SHEET INFORMATION



Inventories



Inventories consist of the following:



|                                                   |  |              |  |             
|-------------------------------------------------- |  | ------------ |  | ------------
|                                                   |  | June 28,2008 |  | June 30,2007
|Finished goods                                     |  | $19,492      |  | $19,540     
|Materials, packaging supplies, and work-in process |  | 28,222       |  | 36,056      
|Growing crops                                      |  | 6,749        |  | 6,810       
|                                                   |  |              |  |             
|Total                                              |  | $54,463      |  | $62,406     
|                                                   |  |              |  |             



Fixed Assets



Fixed assets consist of the following:



|                                                |  |              |  |             
|----------------------------------------------- |  | ------------ |  | ------------
|                                                |  | June 28,2008 |  | June 30,2007
|Land                                            |  | $19,607      |  | $19,607     
|Land improvements and orchard development costs |  | 30,485       |  | 29,749      
|Buildings and improvements                      |  | 55,699       |  | 55,309      
|Machinery and equipment                         |  | 64,470       |  | 55,734      
|Leasehold improvements                          |  | 12,940       |  | 9,509       
|Purchased and internally developed software     |  | 34,732       |  | 22,129      
|Capital projects-in-progress                    |  | 5,987        |  | 15,611      
|                                                |  |              |  |             
|                                                |  | 223,920      |  | 207,648     
|Accumulated depreciation and amortization       |  | (61,706)     |  | (44,375)    
|                                                |  |              |  |             
|Total                                           |  | $162,214     |  | $163,273    
|                                                |  |              |  |             



As of June 28, 2008 and
June 30, 2007, purchased and internally developed software included software licenses acquired for $1,863 and $968, respectively, which were obtained through capital lease agreements. See Note 8  Borrowing Arrangements for
terms and conditions of the Companys capital lease obligations. Accumulated amortization of purchased and internally developed software costs was $13,607 and $9,652 as of June 28, 2008 and June 30, 2007, respectively. Amortization of
software costs from continuing operations, which include software assets financed by capital leases, were $4,146, $3,813, and $3,492 for fiscal 2008, 2007, and 2006, respectively.



During fiscal 2008 the Company determined that 14 underperforming stores were impaired and recorded a non-cash charge for the impairment of
certain fixed assets and other long-lived assets in the amount of $1,190. In addition, an impairment loss of $375 related to certain information technology software was recognized in the fourth quarter of fiscal 2007; $120 of this amount was
recorded in discontinued operations. There were no material impairment losses in fiscal 2006. Impairment charges for continuing operations are included in selling, general and administrative expenses in the consolidated statement of operations and
in the loss on disposal and impairment of long-lived assets in the consolidated statement of cash flows for fiscal 2008 and 2007.



Intangible Assets



Goodwill and intangible assets with indefinite lives are tested for impairment annually using the guidance and criteria described in SFAS No. 142, Goodwill and Other Intangible Assets. The impairment
testing compares carrying values to fair values, and generally, if the carrying value of these assets is in excess of fair value, an impairment loss would be recognized. Based on the results of the Companys annual impairment testing performed
in the last quarter of the fiscal year, the Company does not consider there to be any indication of impairment of its goodwill, trade names, trademarks, recipe, and customer lists as of June 28, 2008. Analysis of individual store division
performance resulted in the impairment of favorable lease agreements of $108, and, in addition, $32 of favorable lease agreements were written off upon store closure. Both amounts are included in selling, general and administrative expenses in the
consolidated statement of operations and in the loss on disposal and impairment of long-lived assets in the consolidated statement of cash flows for fiscal 2008.



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Amortization expense was $2,122, $1,976, and $2,112 for fiscal 2008, 2007 and 2006, respectively, and is included within
selling, general and administrative expenses in the accompanying consolidated statements of operations.



Goodwill and intangible assets as of June 28, 2008 include those assets acquired in the Companys acquisition of the Wolfermans business. See Note-5 Acquisition for further information. The
following is a summary of intangible assets:



|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|------------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                           |  | June 28, 2008       |        | June 30, 2007          
|                                           |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names, trademarks and recipe         |  | $                   | 40,471 |                         | $ |       |                   |  | $                   | 40,471 |                         | $ | 26,921 |                   | $ |       |   |  | $ | 26,921
|Goodwill                                   |  |                     | 3,690  |                         |   |       |                   |  |                     | 3,690  |                         |   |       |                   |   |       |   |  |   |      
|Direct marketing customer and rental lists |  |                     | 11,952 |                         |   | (7,158 | )                 |  |                     | 4,794  |                         |   | 6,652  |                   |   | (5,311 | ) |  |   | 1,341 
|Favorable lease agreements                 |  |                     | 1,805  |                         |   | (1,393 | )                 |  |                     | 412    |                         |   | 1,971  |                   |   | (1,144 | ) |  |   | 827   
|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|                                           |  | $                   | 57,918 |                         | $ | (8,551 | )                 |  | $                   | 49,367 |                         | $ | 35,544 |                   | $ | (6,455 | ) |  | $ | 29,089
|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       



The
estimated amortization expense for each of the next five fiscal years and thereafter is as follows:



|               |  |                                          |       |                          |   |                          |  |   |      
|-------------- |  | ---------------------------------------- | ----- | ------------------------ | - | ------------------------ |  | - | -----
|Fiscal Period: |  | Direct MarketingCustomer andRental Lists |       | FavorableLeaseAgreements |   | TotalAmortizationExpense
|2009           |  |                                          | 3,559 |                          |   | 187                      |  |   | 3,746
|2010           |  |                                          | 1,026 |                          |   | 127                      |  |   | 1,153
|2011           |  |                                          | 174   |                          |   | 70                       |  |   | 244  
|2012           |  |                                          | 29    |                          |   | 28                       |  |   | 57   
|2013           |  |                                          | 6     |                          |   |                         |  |   | 6    
|               |  |                                          |       |                          |   |                          |  |   |      
|Total          |  | $                                        | 4,794 |                          | $ | 412                      |  | $ | 5,206
|               |  |                                          |       |                          |   |                          |  |   |      



NOTE 8BORROWING ARRANGEMENTS



Revolving Credit Facilities



The Companys current revolving credit agreement (the Credit Agreement) has
a borrowing capacity of $125,000, secured by substantially all of the assets of the Company. The Credit Agreement has a maturity date of March 20, 2011. Borrowings under the Credit Agreement may be used for the Companys general corporate
purposes, including capital expenditures, subject to certain limitations. Interest on the borrowings is payable at a base rate or a Eurocurrency rate, plus an applicable margin and fees.



In connection with this facility and related amendments, the Company has remaining deferred financing costs of $3,416 and $4,659 on its
consolidated balance sheets as of June 28, 2008 and June 30, 2007, respectively.



On June 21, 2007, the Credit Agreement was amended to increase the capital expenditure limitations and modify the borrowing base calculation. The Company did not incur any debt issuance fees related to this
amendment.



On November 30, 2007, Harry and David, the Companys
subsidiary, entered into an assumption agreement with the lenders party to the Credit Agreement to assume the obligations of Harry & David Operations, Corp. under the Credit Agreement.



On August 8, 2008, the Company completed the acquisition of substantially all of the
assets of Cushman Fruit Company, Inc. The Companys Credit Agreement was amended to permit the acquisition and to address other administrative matters on August 8, 2008. See Note 21  Subsequent Events for further
information.



All of the above amendments to the Credit Agreement were with the
same primary creditor for purposes of applying the guidance set forth in EITF 98-14, Debtors Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements.



As of June 28, 2008, there were no outstanding borrowings and unused borrowings under the revolving credit facility were $124,300,
excluding $700 in letters of credit outstanding. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at June 28, 2008 was $3,783.
The Company is required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitments fees are payable on the last day of each calendar year quarter and the associated expense is included within
interest expense in the Consolidated Statement of Operations.



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The revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities
of this type, including, but not limited to, limitations on the incurrence of indebtedness, capital expenditures, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. These
covenants significantly limit the Companys ability to obtain funds from its subsidiaries in the form of loans, dividends or other advances other than dividends paid to the Company by Harry and David for the purpose of paying (i) income
taxes when and as due, (ii) management fees payable to Wasserstein under the management agreement, or (iii) operating expenses incurred in the ordinary course of business and other corporate overhead costs and expenses (including legal and
accounting expenses and similar expenses and customary fees to non-officer directors in an amount not to exceed $350 in any fiscal year). At June 28, 2008, the Company was in compliance with these covenants.

Long-Term Debt

In February 2005, the Companys subsidiary,
Harry & David Operations, Inc., issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). In fiscal 2006, Harry & David
Operations Corp. completed the public exchange offer for the Senior Notes. The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 7.68% and 10.36% at
June 28, 2008 and June 30, 2007, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December. Subsequent to the debt prepayment
described below, there were $68,000 in Senior Floating Rate Notes and $167,000 in Senior Fixed Rate outstanding as of June 28, 2008.

The fees
associated with original issuance and public exchange costs are being amortized over the remaining life of the associated Senior Notes. As of June 28, 2008 and June 30, 2007, respectively, $5,850 and $7,485 remained on the balance sheet as
deferred financing costs. As described below in Long-Term Debt Prepayment the Company wrote-off $284 of deferred financing costs associated with a partial prepayment of the Senior Notes during the second quarter of fiscal 2008.

In the fourth quarter of fiscal 2007, the Company completed the sale of the Jackson &
Perkins businesses, including the direct marketing and wholesale business, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventories and in a separate
transaction, completed the sale of the land and assets used by the Jackson & Perkins rose growing operations. As the Company has applied the net proceeds from the sale of Jackson & Perkins businesses and assets to pay down the
Companys revolver for working capital and for capital expenditures and for the purchase of Wolfermans, LLC as described in Note 5Acquisition, the Company has complied with the asset sale covenant under the indenture and
was not required to make an offer to repurchase the Senior Notes.

On November 30, 2007, in connection with an internal corporate re-organization,
Harry & David Operations Corp. merged with and into Harry and David, its wholly-owned subsidiary, and Harry and David assumed all of Harry & David Operations Corp.s obligations under the Senior Notes pursuant to a
supplemental indenture.

The Senior Notes represent the senior unsecured obligations of Harry and David, and are guaranteed on a senior unsecured
basis by Harry & David Holdings, Inc. and all of the Companys current subsidiaries. Refer to Note 19Condensed Consolidating Financial Statements for additional information related to the Companys internal
re-organization in November of fiscal 2008. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments,
dividends and other restricted payments, liens and transactions with affiliates. These covenants significantly limit the Companys ability to obtain funds from its subsidiaries in the form of loans, dividends or other advances other than
(i) dividends or loans in limited circumstances if its fixed charge coverage ratio reaches specified levels or (ii) dividends paid to the Company by Harry and David for the purpose of paying (A) management fees not to exceed $1,000
per year (excluding out of pocket expenses, (B) consolidated income taxes when and as due, and (C) up to $2,000 (since the date of the indenture) relating to expenses associated with an initial public offering. With respect to dividends
other than as described in the preceding sentence, even if the fixed charge coverage ratio threshold has been met, Harry and David may only pay the Company dividends up to a specified amount based upon, among other things, consolidated net income
and any cash proceeds received by Harry and David from the sale of equity securities or contributions to equity. The Company was in compliance with all of the covenants contained in the indenture under the Senior Notes at June 28, 2008.

Long-Term Debt Prepayment

During the year ended
June 28, 2008, the Company purchased $9,405 of its fixed and floating rate Senior Notes in open market purchases. This debt prepayment resulted in a net gain of $303, comprised of a $595 discount on the repayment of $10,000 of outstanding
principal of the Senior Notes, partially offset by the write-off of $284 of unamortized deferred financing costs and third-party expenses of $8 in connection therewith.



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Amortization of Deferred Financing Costs

Total amortization expenses of all deferred financing costs were $2,604, $2,669, and $2,473 for fiscal 2008, 2007 and 2006, respectively, and are included within interest expense in the accompanying consolidated
statements of operations.

Capital Lease Obligations

In the fourth quarter of fiscal 2008, the Company acquired a software license for $895, financed by a capital lease agreement. The interest rate on the agreement is 5.99% due in three annual installments of principal and interest. The
current and long-term portions of the remaining obligation in the consolidated balance sheet as of June 28, 2008 were $296 and $599, respectively. In fiscal 2007, the Company acquired a software license for $968, also financed by a capital
lease agreement. The obligation is due in three annual installments of principal and interest with an interest rate of 10.36%. The current portion of the remaining obligation in the consolidated balance sheet as of June 28, 2008 was $351.

In fiscal 2007, the Company acquired an Enterprise Resource Planning (ERP) software package for $2,144, financed through a capital lease agreement. The
agreement had an implied interest rate of 22.4% due in installments of principal and interest of $584. The obligation was fully paid-off in the first quarter of fiscal 2008 and, as such, there was no amount outstanding as of June 28, 2008.

NOTE 9BENEFIT PROGRAMS

Pension Plans

The Company has a defined benefit pension plan that covers substantially all employees on an active basis as of June 25, 2006. Benefits under the plan
are generally based on the employees compensation level and years of service. Benefits fully vest after five years of qualifying service. The required level of funding of this plan changes each year depending on the funding status of the plan
and the annual actuarial valuation report provided by our actuaries.

Additionally, the Company has a non-qualified unfunded excess benefit plan. Under
this plan, certain key employees are entitled to receive additional pension benefits from the Company. These benefits mainly consist of the difference between the benefits they would have received under the qualified pension plan in the absence of
the limitations imposed on benefits by the Internal Revenue Code and the amount they will actually receive subject to such limitations.

The Companys
qualified pension plan was partially frozen effective as of June 25, 2006, whereby no new participants would qualify to enter into the plan. A full freeze of the plan became effective June 30, 2007, whereby pension benefits were no longer
accrued for participants. Under the provisions of SFAS No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88),these benefit changes
resulted in the recognition of a non-cash net curtailment gain of $13,959 in fiscal 2007. In addition, the Company froze its non-qualified pension plan effective June 30, 2007, and recognized an additional non-cash net curtailment gain of
$1,885 in fiscal 2007. After July 1, 2007, the Company has a continuing obligation to fund these plans and will continue to recognize net periodic pension cost under SFAS 87, Employers Accounting for Pensions (SFAS
No. 87).

While the Companys pension plans are now frozen, the Company contributed $5,917 to its pension plans in fiscal 2008 and
expects to contribute approximately $3,100 to its pension plans in fiscal 2009 to fulfill ongoing funding obligations.



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##### Table of Contents

The following tables set forth combined information regarding the Companys qualified and non-qualified plans as of
June 28, 2008 and June 30, 2007. The measurement dates used in accumulating such information were June 28, 2008 and June 30, 2007, respectively.



|                                               |  |              |         |   |              |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|Change in projected benefit obligation         |  | June 28,2008 |         |   | June 30,2007 |  
|Benefit obligation, beginning of period        |  | $            | 50,098  |   |              | $ | 64,508  |  
|Service cost                                   |  |              |        |   |              |   | 4,384   |  
|Interest cost                                  |  |              | 2,873   |   |              |   | 2,886   |  
|Curtailment gain                               |  |              |        |   |              |   | (16,869 | )
|Actuarial gain/loss                            |  |              | 1,917   |   |              |   | 4,297   |  
|Benefits paid                                  |  |              | (10,499 | ) |              |   | (9,108  | )
|                                               |  |              |         |   |              |   |         |  
|Benefit obligation, end of period              |  | $            | 44,389  |   |              | $ | 50,098  |  
|                                               |  |              |         |   |              |   |         |  
|                                               |  |             
|Change in plan assets                          |  | June 28,2008 |         |   | June 30,2007 |  
|Fair value of plan assets, beginning of period |  | $            | 34,371  |   |              | $ | 31,892  |  
|Actual return on plan assets                   |  |              | (2,894  | ) |              |   | 5,204   |  
|Company contributions                          |  |              | 5,917   |   |              |   | 6,383   |  
|Benefits paid                                  |  |              | (10,499 | ) |              |   | (9,108  | )
|                                               |  |              |         |   |              |   |         |  
|Fair value of plan assets, end of period       |  | $            | 26,895  |   |              | $ | 34,371  |  
|                                               |  |              |         |   |              |   |         |  



|                                                           |  |      |        |   |      |   |         |      |  |   |        |  
|---------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|Components of pension expense                              |  | 2008 |        |   | 2007 |   |         | 2006 | 
|Service cost                                               |  | $    |       |   |      | $ | 4,384   |      |  | $ | 4,560  |  
|Interest cost                                              |  |      | 2,873  |   |      |   | 2,886   |      |  |   | 3,702  |  
|Expected return on assets                                  |  |      | (2,779 | ) |      |   | (2,890  | )    |  |   | (2,751 | )
|Prior service cost amortization                            |  |      |       |   |      |   |        |      |  |   | 9      |  
|                                                           |  |      |        |   |      |   |         |      |  |   |        |  
|Net period pension expense                                 |  | $    | 94     |   |      | $ | 4,380   |      |  | $ | 5,520  |  
|Curtailment gain                                           |  |      |       |   |      |   | (15,844 | )    |  |   |       |  
|Settlement (gain) loss                                     |  |      | 150    |   |      |   | (264    | )    |  |   |       |  
|                                                           |  |      |        |   |      |   |         |      |  |   |        |  
|Net period pension expense with curtailment and settlement |  | $    | 244    |   |      | $ | (11,728 | )    |  | $ | 5,520  |  
|                                                           |  |      |        |   |      |   |         |      |  |   |        |  
|                                                           |  |      |       
|Weighted-average assumptions for net periodic pension cost |  | 2008 |        |   | 2007 |   |         | 2006 | 
|Discount rate                                              |  |      | 6.9    | % |      |   | 6.3     | %    |  |   | 6.3    | %
|Expected return on plan assets                             |  |      | 8.5    | % |      |   | 8.5     | %    |  |   | 8.5    | %
|Rate of compensation increase                              |  |      | N/A    |   |      |   | 3.0     | %    |  |   | 3.0    | %

Expected benefit payments related to the Companys pension plans for each of the next five fiscal years, and
in the aggregate for the next five fiscal years thereafter as of June 28, 2008 are as follows:



|        |  |                          |       
|------- |  | ------------------------ | ------
|        |  | Expected benefitpayments
|2009    |  |                          | 1,484 
|2010    |  |                          | 1,710 
|2011    |  |                          | 1,736 
|2012    |  |                          | 10,600
|2013    |  |                          | 3,554 
|2014-18 |  |                          | 20,388
|        |  |                          |       
|Total   |  | $                        | 39,472
|        |  |                          |       

The Companys asset allocation strategy is designed to balance the objectives of achieving the asset return
assumption consistently over the long-term while minimizing the volatility of the plans funded status and the Companys pension expense. Asset classes with differing expected rates of return, return volatility and correlations are
utilized to control risk and



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provide diversification. For fiscal 2008, the assets of the Companys benefit plans were invested in 68% equity securities, 20% debt securities and 12%
in real estate investments. For fiscal 2007, investments were 69% equity securities, 20% debt securities and 11% in real estate investments.



Amounts recognized in the consolidated balance sheet consist of:



|                        |  |              |         |   |              |   |         |  
|----------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                        |  | June 28,2008 |         |   | June 30,2007 |  
|Current liabilities     |  | $            |        |   |              | $ | (223    | )
|Non-current liabilities |  |              | (17,494 | ) |              |   | (15,504 | )
|                        |  |              |         |   |              |   |         |  
|Funded status           |  |              | (17,494 | ) |              |   | (15,727 | )
|                        |  |              |         |   |              |   |         |  



As of June 28, 2008, the amount
in accumulated other comprehensive income of $5,660 that has not yet been recognized as components of net periodic benefit cost is entirely comprised of unrecognized net gain or loss and approximately $186 is expected to be recognized in fiscal
2009.



During the third quarter of fiscal 2008, the Company recorded a non-cash
settlement charge of $55 related to lump sum distributions from our benefit pension plans. Statement No. 88 Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits (SFAS 88), requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension
expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plans projected benefit obligation. Immediately prior to the calculation of
the settlement charge, the Company re-measured the funded status of the associated pension liabilities, in light of the unfavorable performance of its pension plan assets, and recorded an adjustment to other comprehensive income (loss) of $3,123,
net of taxes in the amount of $2,157. In the fourth quarter of fiscal 2008, the Company recorded an additional adjustment to other comprehensive income (loss) of $1,554, net of taxes of $606, resulting in a year-to-date total adjustment to other
comprehensive income (loss) of $4,677, net of taxes of $2,763. These adjustments were recorded under the guidance in Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of
FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158).



The Companys funding policy is generally designed to make the minimum annual contribution required by the Employee Retirement Income Security Act of 1974. Current projections indicate cash contributions to fund the qualified benefit
plan by fiscal year from 2009 through 2013 will be as follows:



|      |  |                       |       
|----- |  | --------------------- | ------
|      |  | Expectedcontributions
|2009  |  | $                     | 3,100 
|2010  |  |                       | 2,800 
|2011  |  |                       | 3,100 
|2012  |  |                       | 2,800 
|2013  |  |                       | 2,600 
|      |  |                       |       
|Total |  | $                     | 14,400
|      |  |                       |       



As the Companys excess benefit
plan is unfunded, the expected future benefit payments for fiscal 2009 through 2013 indicate that cash contributions of $2,802 and $7 will be required in 2012 and 2013, respectively.



Post-retirement plan



The Company sponsors a post-retirement plan, which currently covers three eligible participants and will be covering three additional participants once they become
eligible. The Company funds benefits as they occur. At June 28, 2008 and June 30 2007, the Company has accrued $123 and $182, respectively, as its estimated liability under this plan. There are no plan assets at either date. Expenses from
continuing operations related to the plan totaled $14, $23 and $14, respectively, in fiscal 2008, 2007 and 2006.



401(k) plan



Salaried and hourly employees, including management, become eligible to participate in the Companys 401(k) plan upon completing a minimum of 1,000 hours of service during the 12-month period subsequent to hire
date. Effective January 1, 2008, the Company began providing matching contributions equal to 100% of the participants contributions for the first 5% of the participants earnings, subject to statutory limitations on the amount of the
participants earnings that may be taken into account. Prior to that date, matching contributions were equal to 100% of the participants contributions for the first 3% of the participants earnings, and 50% of the participants
contributions for the next 2% of the participants earnings, subject to statutory limitations on the amount of the participants earnings that may be taken into account.



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##### Table of Contents

The Companys contributions to the 401(k) plan were $3,017, $2,615, and $2,385 in fiscal 2008, 2007 and 2006,
respectively.



Incentive compensation plan



The Companys bonus plan covers eligible salaried employees and also applies to hourly
employees on a discretionary basis. Benefits under this plan are generally based on various performance standards and are payable currently. For fiscal 2008, 2007 and 2006, total expense was $0, $11,100 and $275, respectively.



Deferred compensation plans



All of our compensation plans that are subject to Section 409A of the Internal Revenue
Code are intended to comply with such law. Should a plan be determined not to comply, however, we are not responsible for any additional tax or interest imposed on any employee.



Self-insured liabilities



The Company is primarily self-insured for employee health benefits. Estimated costs of these self-insurance programs are accrued at the undiscounted value of actuarially
determined projected settlements for known and anticipated claims incurred. These liabilities, totaling $2,624 and $2,345 at June 28, 2008 and June 30, 2007, respectively, are classified within accrued payroll and benefits.



NOTE 10INCOME TAXES



The components of the Companys total provision
(benefit) for income taxes are as follows:



|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------ | ----------- |  | - | ------ | --
|                                                                                                                           |  | Fiscal 2008 |         |   | Fiscal 2007 |   |        | Fiscal 2006 | 
|Continuing operations                                                                                                      |  | $           | 4,648   |   |             | $ | 11,156 |             |  | $ | 2,548  |   
|Discontinued operations                                                                                                    |  | $           | 19      |   |             | $ | 1,127  |             |  | $ | (2,459 | ) 
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|Total provision (benefit) for income taxes                                                                                 |  | $           | 4,667   |   |             | $ | 12,283 |             |  | $ | 89     |   
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|                                                                                                                          
|For continuing operations, the components of the Companys provision (benefit) for income taxes are as
follows:            | 
|                                                                                                                           |  |             |        
|Income (loss) from continuing operations before income taxes                                                               |  | $           | 8,985   |   |             | $ | 41,853 |             |  | $ | (3,113 | ) 
|Current:                                                                                                                   |  |             |         |   |             |   |        |             |  |   |        |   
|Federal                                                                                                                    |  |             | 22,734  |   |             |   |       |             |  |   | 80     |   
|State                                                                                                                      |  |             | 4,830   |   |             |   | 338    |             |  |   | 252    |   
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|                                                                                                                           |  |             | 27,564  |   |             |   | 338    |             |  |   | 332    |   
|Deferred:                                                                                                                  |  |             |         |   |             |   |        |             |  |   |        |   
|Federal                                                                                                                    |  |             | (19,821 | ) |             |   | 11,588 |             |  |   | 961    |   
|State                                                                                                                      |  |             | (3,095  | ) |             |   | (770   | )           |  |   | 1,255  |   
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|                                                                                                                           |  |             | (22,916 | ) |             |   | 10,818 |             |  |   | 2,216  |   
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|Provision (benefit) for income taxes from continuing operations                                                            |  | $           | 4,648   |   |             | $ | 11,156 |             |  | $ | 2,548  |   
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|                                                                                                                          
|The Companys effective tax rate for continuing operations differed from the federal statutory income tax rate as follows: | 
|                                                                                                                           |  |             |        
|                                                                                                                           |  | Fiscal 2008 |         |   | Fiscal 2007 |   |        | Fiscal 2006 | 
|Federal statutory rate                                                                                                     |  |             | 35.0    | % |             |   | 35.0   | %           |  |   | 35.0   | % 
|State tax rate, net of federal tax effect                                                                                  |  |             | 11.6    |   |             |   | 1.3    |             |  |   | 3.8    |   
|Cumulative effect of state tax rate change                                                                                 |  |             | 9.6     |   |             |   |       |             |  |   | 5.6    |   
|Adjustments to cumulative deferred differences                                                                             |  |             |        |   |             |   |       |             |  |   | (21.7  | ) 
|Valuation allowance                                                                                                        |  |             | (8.9    | ) |             |   | (7.9   | )           |  |   | (102.0 | ) 
|Tax reserves under FIN 48                                                                                                  |  |             | 9.8     |   |             |   |       |             |  |   |       |   
|Charitable deductions                                                                                                      |  |             | (4.2    | ) |             |   |       |             |  |   |       |   
|Tax Credits                                                                                                                |  |             | (2.3    | ) |             |   |       |             |  |   |       |   
|Other                                                                                                                      |  |             | 1.1     |   |             |   | (1.7   | )           |  |   | (2.6   | ) 
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   
|Effective tax rate                                                                                                         |  |             | 51.7    | % |             |   | 26.7   | %           |  |   | (81.9  | )%
|                                                                                                                           |  |             |         |   |             |   |        |             |  |   |        |   



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In fiscal 2008, the effective tax rate for continuing operations was higher than the statutory rate primarily due to a
mid-year structural reorganization that resulted in a higher state tax expense and cumulative adjustment to deferred tax items of $686 due to changes in the state tax rate, an increase in tax reserves under FIN 48 of $881, offset by the reversal of
the remaining valuation allowance of $795. In fiscal 2007, the effective tax rate for continuing operations was lower than the statutory rate primarily due to a reversal of the valuation of $3,309. In fiscal 2006, the effective tax rate was
significantly lower primarily due to the additional valuation allowance of $3,176 offset by the cumulative effect of a state effective tax rate change. This cumulative adjustment was the result of refinements in our estimates of state statutory tax
rates and the applicable apportionment factors being applied to the deferred tax items. In fiscal 2008, $2,763 of income tax was allocated to other comprehensive income reflecting the tax effect of pension liability adjustments and $164 of tax
expense was allocated to equity reflecting tax effect of adopting EITF 06-2.



Significant components of the Companys deferred tax assets and liabilities for federal and state income taxes consist of the following:



|                                   |  |              |         |   |              |   |         |  
|---------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|                                   |  | June 28,2008 |         |   | June 30,2007 |  
|Deferred tax assets:               |  |              |         |   |              |   |         |  
|Reserve for future liabilities     |  | $            | (4,066  | ) |              | $ | (6,565  | )
|Pension                            |  |              | (6,166  | ) |              |   | (5,490  | )
|Inventories                        |  |              | (1,126  | ) |              |   | (733    | )
|Net operating loss carryforwards   |  |              | (2,248  | ) |              |   | (16,317 | )
|Tax credits                        |  |              | (523    | ) |              |   | (252    | )
|Other                              |  |              | (4,849  | ) |              |   | (4,283  | )
|                                   |  |              |         |   |              |   |         |  
|                                   |  |              | (18,978 | ) |              |   | (33,640 | )
|Valuation allowance                |  |              |        |   |              |   | 888     |  
|                                   |  |              |         |   |              |   |         |  
|Total deferred tax assets          |  |              | (18,978 | ) |              |   | (32,752 | )
|Deferred tax liabilities:          |  |              |         |   |              |   |         |  
|Deferred income                    |  |              |        |   |              |   | 38,799  |  
|Fixed assets                       |  |              | 16,311  |   |              |   | 17,124  |  
|Catalog costs                      |  |              | 2,307   |   |              |   | 1,476   |  
|State deferred liability           |  |              | 236     |   |              |   | 2,445   |  
|Other                              |  |              | 968     |   |              |   |        |  
|                                   |  |              |         |   |              |   |         |  
|Total deferred tax liabilities     |  |              | 19,822  |   |              |   | 59,844  |  
|                                   |  |              |         |   |              |   |         |  
|Total net deferred tax liabilities |  | $            | 844     |   |              | $ | 27,092  |  
|                                   |  |              |         |   |              |   |         |  



At June 28, 2008, the Company has
utilized all remaining federal net operating loss carryforwards of $12,961 and state net operating losses carryforwards of $1,108, leaving deferred tax assets of approximately $2,248 relating to various state net operating loss carryforwards, which
expire under current statute between 2008 and 2026.



The Company routinely
reviews the future realization of tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. The Company underwent a structural reorganization in November
2007 which will allow efficient use of the existing state net operating losses. As of June 28, 2008, the Company believes that no valuation allowance is required to reduce the related deferred tax assets to an amount that is more likely than
not to be realized, reflecting a decrease of $888 in the valuation allowance in fiscal 2008.



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The Company adopted the provision of FIN 48 on July 1, 2007. As a result of the adoption of FIN 48, the Company
recorded a cumulative effect adjustment which reduced retained earnings by $430 as of July 1, 2007. On the date of adoption, the gross amount of unrecognized tax benefits was $3,819, excluding penalty and interest; a net amount of $1,589
was recorded as a reduction to existing net operating losses; and a net amount of $2,662 was recorded in other long-term liabilities. A reconciliation of the beginning and ending gross amount of the unrecognized tax benefits is as follows:



|                                                             |  |   |      
|------------------------------------------------------------ |  | - | -----
|Gross unrecognized tax benefits at July 1, 2007              |  | $ | 3,819
|Additions based on tax positions related to the current year |  |   | 593  
|                                                             |  |   |      
|Gross unrecognized tax benefits at June 28, 2008             |  | $ | 4,412
|                                                             |  |   |      

As of June 28, 2008, the gross amount of unrecognized tax benefits is $4,412, excluding penalty and interest,
while a net amount of $4,925, including penalty and interest, is recorded in other long-term liabilities. Of these amounts, if recognized, $2,540 would favorably impact the effective tax rate.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Interest and penalties, net of tax, of $288, or $0.28
per share, were accrued for the fiscal year-end. The Company had accrued interest and penalties, net of tax, of approximately $1,519 and $1,230 at June 28, 2008 and July 1, 2007, respectively. The Company believes that it is reasonably
possible that the total amount of unrecognized tax benefits will decrease in the next twelve months by $788 due to the expiration of certain statutes of limitation.

The Company defines the federal jurisdiction as well as various multi-state jurisdictions as major jurisdictions (within the meaning of FIN 48). As of June 28, 2008, the Company is not subject to
federal and state examinations for years prior to 2004. Tax years subsequent to June 17, 2004 remain open to examination by these major jurisdictions.

NOTE 11STOCK OPTION PLAN

The Company has a Non-Qualified Stock Option Plan (the Plan) which provides for the
grant of incentive stock options and non-qualified stock options, exercisable for shares of the Companys common stock. A total of 150,000 shares of the Companys common stock are available for option grants under the Plan. The Plan
provides for forfeited options to be automatically returned to the authorized number of shares available for issuance under the Plan.

The Plan is
administered by the Companys board of directors or a committee of such board. Options may be exercised only to the extent they have vested. Options granted generally vest and become exercisable 20% on June 17 for each of the first two
years after the grant date then vest 5% quarterly over the remaining option term. Upon vesting, all options are exercisable provided that the holder of such options is an employee of, or consultant to, the Company on the vesting date unless
otherwise stipulated in individual option agreements. Vesting of all options will accelerate upon a termination of employment without cause within a year following a change of control of the Company or as otherwise defined in the relevant option
agreements. Shares issuable upon exercise of the options may be either treasury shares or newly issued shares. Options granted under the Plan expire ten years after the grant date. In case of termination of employment or other service by reason of
death, disability, or normal or early retirement, or in the case of hardship or other special circumstances of an optionee holding options that have not vested, the administrator of the Plan may, in its sole discretion, accelerate the time at which
such option may be exercised. The option agreement for any grant may provide for a share repurchase right or right of first refusal in favor of the Company upon the occurrence of certain specified events. Any repurchase of such shares is to be made
by the Company at the fair value at the time of the repurchase.

The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. Expected volatilities are based on an average historical volatility of the publicly traded stock of a representative set of comparable companies. The expected term of options granted is derived from the time
between the date of final vesting and the expiration of the option. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. For the majority of the grants an
assumption of a ten percent pre-vesting forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized. The assumptions used for fiscal 2008 and 2007 awards granted are noted in the following table (there were no
awards granted in fiscal 2006):



|                    |  |      |           |   |      |   |           |  
|------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                    |  | 2008 |           |   | 2007 |  
|Expected volatility |  |      | 41.0      | % |      |   | 38.8      | %
|Expected dividends  |  | $    | 0         |   |      | $ | 0         |  
|Expected term       |  |      | 6.1 years |   |      |   | 4.5 years |  
|Risk-free rate      |  |      | 3.93      | % |      |   | 4.52      | %



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##### Table of Contents

A summary of option activity under the Plan for fiscal 2008 is presented below:



|                             |  |              |   |  |                               |        |                                          |          
|---------------------------- |  | ------------ | - |  | ----------------------------- | ------ | ---------------------------------------- | ---------
|Options                      |  | Optionshares |   |  | Weighted-averageexerciseprice |        | Weighted-averageremainingcontractualterm
|Outstanding at June 30, 2007 |  | 66,251       |   |  | $                             | 112.9  |                                          | 8.2 years
|Granted                      |  | 1,539        |   |  |                               | 300.0  |                                          | 9.4 years
|Exercised                    |  | (1,054       | ) |  |                               | 85.96  |                                          |         
|Forfeited                    |  | (4,206       | ) |  |                               | 147.13 |                                          |         
|                             |  |              |   |  |                               |        |                                          |          
|Outstanding at June 28, 2008 |  | 62,530       |   |  | $                             | 115.63 |                                          | 7.2 years
|                             |  |              |   |  |                               |        |                                          |          

The weighted-average grant-date fair value of options issued in fiscal 2008 and 2007 was $31.67 and $11.50,
respectively. As of June 28, 2008, 62,530 options were outstanding, of which 37,511 were fully vested and exercisable. The weighted average remaining contractual term of vested options was 7.0 years. The total grant date fair value of all
options outstanding at June 28, 2008 and June 30, 2007 was $1,582 and $1,096, respectively.

A summary of the status of the Companys
nonvested option shares as of June 28, 2008, and changes during fiscal year ended June 28, 2008, are presented below:



|                                         |  |                               |   |  |                                         |      
|---------------------------------------- |  | ----------------------------- | - |  | --------------------------------------- | -----
|                                         |  | Weighted-averageoption shares |   |  | Estimatedgrant-datefair valueof options
|Nonvested option shares at June 30, 2007 |  | 45,694                        |   |  | $                                       | 23.98
|Granted options                          |  | 1,539                         |   |  |                                         | 31.67
|Vested                                   |  | (19,437                       | ) |  |                                         | 26.72
|Forfeited                                |  | (2,777                        | ) |  |                                         | 16.48
|                                         |  |                               |   |  |                                         |      
|Nonvested option shares at June 28, 2008 |  | 25,019                        |   |  | $                                       | 23.15
|                                         |  |                               |   |  |                                         |      

The total fair value of shares vested during fiscal 2008, 2007, and 2006 was $519, $520, and $502, respectively.
The Company recognized stock compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $552, $577 and $444, for fiscal 2008, 2007, and 2006, respectively, and the total tax benefit
(provision) recognized for these periods was $168, $69 and $(53), respectively. As of June 28, 2008, there was $579 of total unrecognized pre-tax compensation cost related to nonvested share-based compensation arrangements granted under the
Plan that will be recognized over the remaining vesting period. The weighted-average period of the remaining cost is 1.8 years. Cash received from options exercised under the share-based payment arrangement for fiscal 2008, 2007, and 2006 was $91,
$1,017 and $1,646, respectively.

NOTE 12EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the weighted-average common shares outstanding for the
period, including the dilutive effect of stock options as determined under the treasury stock method. For the fiscal year ended June 28, 2008, weighted-average common shares outstanding for the period include the dilutive effect of stock
options of 10,894 for the calculation of diluted earnings per share. For fiscal 2008, 2007 and 2006, common shares relating to the stock options of 17,876, 66,251 and 63,377, respectively, are excluded from the diluted earnings per share calculation
as the related impact would have been anti-dilutive. The calculations are as follows (dollar amounts are in thousands except per share data):



|                                               |  |      |       |      |   |        |  |   |        |  
|---------------------------------------------- |  | ---- | ----- | ---- | - | ------ |  | - | ------ | -
|                                               |  | 2008 |       | 2007 |   | 2006   | 
|Net income (loss) from continuing operations   |  |      | 4,337 |      |   | 30,697 |  |   | (5,661 | )
|Net income (loss) from discontinued operations |  |      | 271   |      |   | 1,304  |  |   | (4,052 | )
|                                               |  |      |       |      |   |        |  |   |        |  
|Net income (loss)                              |  | $    | 4,608 |      | $ | 32,001 |  | $ | (9,713 | )
|                                               |  |      |       |      |   |        |  |   |        |  
|Basic net income (loss) per share:             |  |      |       |      |   |        |  |   |        |  
|Continuing operations                          |  |      | 4.20  |      |   | 29.90  |  |   | (5.58  | )
|Discontinued operations                        |  |      | 0.26  |      |   | 1.27   |  |   | (4.00  | )
|                                               |  |      |       |      |   |        |  |   |        |  
|Total basic net income (loss) per share        |  | $    | 4.46  |      | $ | 31.17  |  | $ | (9.58  | )
|                                               |  |      |       |      |   |        |  |   |        |  
|Diluted net income (loss) per share:           |  |      |       |      |   |        |  |   |        |  
|Continuing operations                          |  |      | 4.16  |      |   | 29.90  |  |   | (5.58  | )



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##### Table of Contents

|                                                        |  |      |           |      |   |           |  |   |           |  
|------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | -
|                                                        |  | 2008 |           | 2007 |   | 2006      | 
|Discontinued operations                                 |  |      | 0.26      |      |   | 1.27      |  |   | (4.00     | )
|                                                        |  |      |           |      |   |           |  |   |           |  
|Total diluted net income (loss) per share               |  | $    | 4.42      |      | $ | 31.17     |  | $ | (9.58     | )
|                                                        |  |      |           |      |   |           |  |   |           |  
|Weighted-average shares used in per share calculations: |  |      |           |      |   |           |  |   |           |  
|Basic                                                   |  |      | 1,032,577 |      |   | 1,026,604 |  |   | 1,013,650 |  
|                                                        |  |      |           |      |   |           |  |   |           |  
|Diluted                                                 |  |      | 1,043,471 |      |   | 1,026,604 |  |   | 1,013,650 |  
|                                                        |  |      |           |      |   |           |  |   |           |  



Per share amounts are calculated
separately for net income (loss) from continuing operations and discontinued operations and total net income and, as such, the per share amounts for continuing operations and discontinued operations may not sum to the total net income per share.



NOTE 13LEASES



The Company leases certain properties consisting primarily of retail stores, distribution
centers, and equipment with original terms ranging primarily from 3 to 10 years and up to 22 years. Certain leases contain renewal options; generally for five year periods, with rent payments during the lease term dependant on the defined percent
increase or increases based on certain indexes, in each case as defined within the individual lease agreements. In accordance with SFAS No. 13, Accounting for Leases, for leases that contain fixed escalations of the minimum annual lease
payment during the original term of the lease and other lease incentives, the Company recognizes rental expense on a straight-line basis over the lease term and records the difference between rent expense and the amount that is payable as deferred
rent. In addition to minimum rental payments, certain of the Companys retail store leases require the Company to make contingent rental payments, which are typically structured as either minimum rent plus additional rent based on a percentage
of store sales if a specified store sales threshold is exceeded, or rent based on a negotiated threshold of sales after which a percent of sales is paid to the landlord. Extra payments such as common area maintenance and property taxes are also
required on certain leases. Such contingent rental expense is accrued in each reporting period if achievement of any factor is considered probable.



Total rental expense for all operating leases was as follows:



|                        |  |      |        |      |   |        |  |   |       
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                        |  | 2008 |        | 2007 |   | 2006  
|Minimum rent expense    |  | $    | 24,299 |      | $ | 24,111 |  | $ | 23,499
|Contingent rent expense |  |      | 297    |      |   | 461    |  |   | 382   
|                        |  |      |        |      |   |        |  |   |       
|Total rent expense      |  | $    | 24,596 |      | $ | 24,572 |  | $ | 23,881
|                        |  |      |        |      |   |        |  |   |       



Minimum rental expense from
discontinued operations included in the above totals was $1,464 and $1,347 for fiscal 2007 and 2006, respectively. There was no minimum rental expense from discontinued operations for fiscal 2008 and there was no contingent rent expense from
discontinued operations for any period presented.



The aggregate future minimum
rental payments under non-cancelable operating leases and payments of principal and interest on our capital lease obligations in effect at June 28, 2008, were as follows for the following fiscal years:



|           |  |                 |         |               |   |               |  |   |        
|---------- |  | --------------- | ------- | ------------- | - | ------------- |  | - | -------
|           |  | OperatingLeases |         | CapitalLeases |   | TotalPayments
|2009       |  | $               | 21,206  |               | $ | 710           |  | $ | 21,916 
|2010       |  |                 | 17,911  |               |   | 322           |  |   | 18,233 
|2011       |  |                 | 15,220  |               |   | 323           |  |   | 15,543 
|2012       |  |                 | 12,958  |               |   |              |  |   | 12,958 
|2013       |  |                 | 7,170   |               |   |              |  |   | 7,170  
|Thereafter |  |                 | 49,677  |               |   |              |  |   | 49,677 
|           |  |                 |         |               |   |               |  |   |        
|Total      |  | $               | 124,142 |               | $ | 1,355         |  | $ | 125,497
|           |  |                 |         |               |   |               |  |   |        



NOTE 14COMMITMENTS AND CONTINGENCIES



The Company is a
party to legal proceedings in the ordinary course of, and which are incidental to, the Companys business. The Companys management believes that the ultimate liability, if any, resulting from such proceedings would not have a material
effect on the Companys results of operations, financial position or cash flows.



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##### Table of Contents

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify another party from
losses arising in connection with the Companys products or services. The Company also enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its contractors,
customers and landlords. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Companys activities or, in some cases, as a
result of the indemnified partys activities under the agreement. These indemnification provisions generally survive termination of the underlying agreement. In addition, the Company has entered into indemnification agreements with its officers
and directors that indemnify such persons for certain liabilities they may incur in connection with their services as an officer or director, and the Company has agreed to indemnify certain investors for certain liabilities they may incur in
connection with the sale of the senior notes to the initial purchasers and the 2005 exchange offer relating to the senior notes. The maximum potential amount of future payments the Company could be required to make under these indemnification
provisions is generally unlimited. As the Company believes that the occurrence of any events that would trigger payments under these contracts is remote, no liabilities have been recorded in the consolidated financial statements for these
indemnifications.



The Companys food and horticultural products are
subject to regulation and inspection by various governmental agencies, and involve the risk of injury to consumers. As such, the Company may be required to recall some of its products. The Company maintains product liability insurance in an amount
that it believes is adequate to cover the costs associated with these recalls.



In fiscal 2006, the Company reached a settlement for $3,500 with an insurance company on a claim arising out of inventory losses that occurred in 2001. In accordance with an agreement between the Company and Yamanouchi Consumer Inc.
(YCI), the former owner of Harry & David Operations, Inc., the Company paid 43% of the gross proceeds, or $1,505, to YCI. The net proceeds to the Company of $1,995 were offset by $275 in related legal expenses and other fees and
recorded in other income in the Companys results of operations for fiscal 2006.



In addition to minimum rental payments, certain of the Companys retail store leases require the Company to make contingent rental payments, which are based upon certain factors, such as sales volume and property taxes. Such contingent
rental expense is accrued in each reporting period if achievement of any factor is considered probable. See Note 13Leases.



On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior management team who had received stock options under the
2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,372 or 7.5% of the portion of the proceeds from the sale of notes which were distributed on February 25, 2005 to the
Companys equity sponsors as a return of capital. The amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of
the award vested on June 17, 2005, an additional 20% of the award vested on June 17, 2006, and 5% vest in the next twelve quarters.



As of June 28, 2008, 80% of the award was vested, representing $4,912 which also reflects forfeitures. In each case, vesting occurs so long as the award recipient is
an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs;
(ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable, non-cash
consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change of
control either at the time of the change of control or, in some circumstances, at a later specified date. As of June 28, 2008, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity
Event Award Program for the fiscal year then ended.



NOTE
15RELATED-PARTY TRANSACTIONS



The Company has entered into an
agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement.
The fees are accrued to the extent that they are not paid in any such period. During fiscal 2008, 2007 and 2006, the Company paid $1,000, $1,068 and $1,000, respectively, in connection with this agreement. These amounts were charged to selling,
general and administrative expenses  related party. During fiscal 2006, the Company paid a $2,600 cash dividend to Wasserstein who further distributed the funds to other stockholders of record as of that date.



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##### Table of Contents

NOTE 16SEGMENT REPORTING



Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and
capital investment requirements. Reportable segments are strategic business units that offer similar products and are managed separately because the business units utilize distinct marketing strategies. The accounting policies of the segments, where
applicable, are the same as those described in the summary of significant accounting polices.



The results of the Jackson & Perkins business are included as discontinued operations in the consolidated statement of operations and footnotes for all periods presented.



The Direct Marketing segment generates
net sales of premium gift-quality fruit, gourmet food products and gifts under the Harry and David® and Wolfermans® brands
by marketing through the Harry & David and Wolfermans catalogs, Internet (harryanddavid.com and wolfermans.com), business-to-business and consumer telemarketing operations. The Companys catalogs reach customers throughout the
United States and, to a lesser extent, in Canada. The Stores segment generates net sales of primarily Harry and David® merchandise at various retail locations (outlet stores, specialty
stores, and a Country Village Store). As of June 28, 2008, the Company operated 143 Stores in 38 states in the United States. The Wholesale segment generates net sales by selling Harry and David® brand and Wolfermans® brand wholesale products to national retailers. Business units not disclosed separately for segment reporting purposes are
grouped in the Other segment and include commercial sales of surplus, non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon, and business units that support the Companys operations, including
orchards, product supply, distribution, customer operations, facilities, information technology services, and administrative and marketing support functions.



Net intersegment sales were $162,236, $183,993, and $181,897 for the fiscal 2008, 2007 and 2006, respectively. Total assets in the Other segment include corporate cash
and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets, including the Companys manufacturing and
distribution facilities.



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##### Table of Contents

The following table presents key financial statement data by segment for the periods indicated:



|                                                             |  |                 |         |        |   |         |           |  |   |        |   |  |                           |         |   |  |   |         |  
|------------------------------------------------------------ |  | --------------- | ------- | ------ | - | ------- | --------- |  | - | ------ | - |  | ------------------------- | ------- | - |  | - | ------- | -
|                                                             |  | DirectMarketing |         | Stores |   |         | Wholesale |  |   | Other  |   |  | TotalContinuingOperations |        
|Fiscal 2008                                                  |  |                 |         |        |   |         |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Net external sales                                           |  | $               | 372,552 |        | $ | 138,129 |           |  | $ | 32,481 |   |  | $                         | 1,902   |   |  | $ | 545,064 |  
|Depreciation and amortization expense                        |  |                 | 1,852   |        |   | 3,989   |           |  |   |       |   |  |                           | 14,651  |   |  |   | 20,492  |  
|Operating income (loss) from continuing operations           |  |                 | 39,184  |        |   | (8,858  | )         |  |   | 812    |   |  |                           | 24      |   |  |   | 31,162  |  
|Interest expense, net from continuing operations             |  |                 | 30      |        |   | 3       |           |  |   | (8     | ) |  |                           | 22,494  |   |  |   | 22,519  |  
|Income (loss) from continuing operations before income taxes |  |                 | 39,193  |        |   | (8,839  | )         |  |   | 820    |   |  |                           | (22,189 | ) |  |   | 8,985   |  
|Capital expenditures                                         |  |                 | 9       |        |   | 5,440   |           |  |   |       |   |  |                           | 12,406  |   |  |   | 17,855  |  
|Total assets                                                 |  |                 | 59,597  |        |   | 32,654  |           |  |   | 2,308  |   |  |                           | 262,078 |   |  |   | 356,637 |  
|Fiscal 2007                                                  |  |                 |         |        |   |         |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Net external sales                                           |  | $               | 384,439 |        | $ | 139,478 |           |  | $ | 35,061 |   |  | $                         | 2,039   |   |  | $ | 561,017 |  
|Depreciation and amortization expense                        |  |                 | 1,612   |        |   | 3,657   |           |  |   |       |   |  |                           | 13,829  |   |  |   | 19,098  |  
|Operating income (loss) from continuing operations           |  |                 | 47,558  |        |   | (1,328  | )         |  |   | 4,475  |   |  |                           | 29      |   |  |   | 50,734  |  
|Interest expense, net from continuing operations             |  |                 |        |        |   |        |           |  |   |       |   |  |                           | 25,073  |   |  |   | 25,073  |  
|Income (loss) from continuing operations before income taxes |  |                 | 50,987  |        |   | (543    | )         |  |   | 4,528  |   |  |                           | (13,119 | ) |  |   | 41,853  |  
|Capital expenditures                                         |  |                 |        |        |   | 4,492   |           |  |   |       |   |  |                           | 16,967  |   |  |   | 21,459  |  
|Total assets                                                 |  |                 | 36,687  |        |   | 33,839  |           |  |   | 1,627  |   |  |                           | 298,365 |   |  |   | 370,518 |  
|Fiscal 2006                                                  |  |                 |         |        |   |         |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Net external sales                                           |  | $               | 369,815 |        | $ | 132,143 |           |  | $ | 20,428 |   |  | $                         | 1,998   |   |  | $ | 524,384 |  
|Depreciation and amortization expense                        |  |                 | 1,726   |        |   | 3,109   |           |  |   |       |   |  |                           | 13,333  |   |  |   | 18,168  |  
|Operating income (loss) from continuing operations           |  |                 | 24,265  |        |   | (3,535  | )         |  |   | 2,046  |   |  |                           |        |   |  |   | 22,776  |  
|Interest expense, net from continuing operations             |  |                 | 6       |        |   | (4      | )         |  |   |       |   |  |                           | 24,677  |   |  |   | 24,679  |  
|Income (loss) from continuing operations before income taxes |  |                 | 25,073  |        |   | (3,387  | )         |  |   | 2,058  |   |  |                           | (26,857 | ) |  |   | (3,113  | )
|Capital expenditures                                         |  |                 |        |        |   | 3,697   |           |  |   |       |   |  |                           | 13,677  |   |  |   | 17,374  |  

Depreciation and amortization expense from discontinued operations was $599 and $1,206 for fiscal 2007 and 2006,
respectively and capital expenditures from discontinued operations were $185 and $289 for fiscal 2007 and 2006, respectively. There were no such amounts in fiscal 2008.



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##### Table of Contents

NOTE 17QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth certain quarterly income statement information of the Company for the fiscal 2008 and 2007. The Company reports results using a fiscal
quarter method whereby each quarter is reported as a Saturday in September (Q1), December (Q2), March (Q3) or June (Q4) of the twelve or thirteen week period based on a 52/53 week year. As discussed in Note 6Discontinued
Operations, in fiscal 2007, the Jackson & Perkins business was discontinued. All periods presented reflect the accounting for discontinued operations. Dollars are in thousands, except per share amounts.



|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|------------------------------------------------------------- |  | ---- | ------- | - | -- | - | ------- |  | - | ------- | - |  | ----- | ------- | - |  | - | -------
|                                                              |  | 2008
|                                                              |  | Q1   |         |   | Q2 |   | Q3      |  |   | Q4      |   |  | Total
|Net sales                                                     |  | $    | 55,454  |   |    | $ | 363,978 |  | $ | 68,315  |   |  | $     | 57,317  |   |  | $ | 545,064
|Cost of goods sold                                            |  |      | 36,135  |   |    |   | 167,468 |  |   | 48,546  |   |  |       | 43,745  |   |  |   | 295,894
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Gross profit                                                  |  |      | 19,319  |   |    |   | 196,510 |  |   | 19,769  |   |  |       | 13,572  |   |  |   | 249,170
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Income (loss) from continuing operations before taxes         |  |      | (25,350 | ) |    |   | 103,788 |  |   | (32,224 | ) |  |       | (37,229 | ) |  |   | 8,985  
|Provision (benefit) for income taxes on continuing operations |  |      | (9,355  | ) |    |   | 37,915  |  |   | (11,227 | ) |  |       | (12,685 | ) |  |   | 4,648  
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Net income (loss) from continuing operations                  |  |      | (15,995 | ) |    |   | 65,873  |  |   | (20,997 | ) |  |       | (24,544 | ) |  |   | 4,337  
|Net income (loss) from discontinued operations                |  |      | (159    | ) |    |   | 95      |  |   | 206     |   |  |       | 129     |   |  |   | 271    
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Net income (loss)                                             |  | $    | (16,154 | ) |    | $ | 65,968  |  | $ | (20,791 | ) |  | $     | (24,415 | ) |  | $ | 4,608  
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Basic net income (loss) per share:                            |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Continuing operations                                         |  | $    | (15.50  | ) |    | $ | 63.80   |  | $ | (20.33  | ) |  | $     | (23.76  | ) |  | $ | 4.20   
|Discontinued operations                                       |  | $    | (0.15   | ) |    | $ | 0.09    |  | $ | 0.20    |   |  | $     | 0.12    |   |  | $ | 0.26   
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Total basic income (loss) per share                           |  | $    | (15.65  | ) |    | $ | 63.89   |  | $ | (20.14  | ) |  | $     | (23.64  | ) |  | $ | 4.46   
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Diluted net income (loss) per share:                          |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Continuing operations                                         |  | $    | (15.50  | ) |    | $ | 63.12   |  | $ | (20.33  | ) |  | $     | (23.76  | ) |  | $ | 4.16   
|Discontinued operations                                       |  | $    | (0.15   | ) |    | $ | 0.09    |  | $ | 0.20    |   |  | $     | 0.12    |   |  | $ | 0.26   
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Total diluted net income (loss) per share                     |  | $    | (15.65  | ) |    | $ | 63.21   |  | $ | (20.14  | ) |  | $     | (23.64  | ) |  | $ | 4.42   
|                                                              |  |      |         |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        



|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|------------------------------------------------------------- |  | ---- | ------ | - | -- | - | ------- |  | - | ------- | - |  | ----- | ------- | - |  | - | -------
|                                                              |  | 2007
|                                                              |  | Q1   |        |   | Q2 |   | Q3      |  |   | Q4      |   |  | Total
|Net sales                                                     |  | $    | 62,214 |   |    | $ | 362,569 |  | $ | 73,329  |   |  | $     | 62,905  |   |  | $ | 561,017
|Cost of goods sold                                            |  |      | 39,525 |   |    |   | 169,478 |  |   | 43,929  |   |  |       | 42,279  |   |  |   | 295,211
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Gross profit                                                  |  |      | 22,689 |   |    |   | 193,091 |  |   | 29,400  |   |  |       | 20,626  |   |  |   | 265,806
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Income (loss) from continuing operations before taxes         |  |      | (7,272 | ) |    |   | 101,496 |  |   | (21,645 | ) |  |       | (30,726 | ) |  |   | 41,853 
|Provision (benefit) for income taxes on continuing operations |  |      | (2,790 | ) |    |   | 39,791  |  |   | (8,671  | ) |  |       | (17,174 | ) |  |   | 11,156 
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Net income (loss) from continuing operations                  |  |      | (4,482 | ) |    |   | 61,705  |  |   | (12,974 | ) |  |       | (13,552 | ) |  |   | 30,697 
|Net income (loss) from discontinued operations                |  |      | (1,380 | ) |    |   | 843     |  |   | (3,862  | ) |  |       | 5,703   |   |  |   | 1,304  
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Net income (loss)                                             |  | $    | (5,862 | ) |    | $ | 62,548  |  | $ | (16,836 | ) |  | $     | (7,849  | ) |  | $ | 32,001 
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Net income (loss) per share - basic and diluted:              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Continuing operations                                         |  | $    | (4.39  | ) |    | $ | 60.30   |  | $ | (12.58  | ) |  | $     | (13.13  | ) |  | $ | 29.90  
|Discontinued operations                                       |  | $    | (1.35  | ) |    | $ | 0.82    |  | $ | (3.74   | ) |  | $     | 5.53    |   |  | $ | 1.27   
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        
|Total net income (loss) per share                             |  | $    | (5.75  | ) |    | $ | 61.12   |  | $ | (16.32  | ) |  | $     | (7.61   | ) |  | $ | 31.17  
|                                                              |  |      |        |   |    |   |         |  |   |         |   |  |       |         |   |  |   |        



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##### Table of Contents

The sum of the quarterly per share amounts will not necessarily equal the annual net earnings per share as each quarter
is calculated independently. Per share amounts are also calculated separately for net income (loss) from continuing operations and discontinued operations and total net income (loss). As such, the per share amounts for continuing operations and
discontinued operations may not sum to the total net income (loss) per share.



F-30



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##### Table of Contents

NOTE 18VALUATION AND QUALIFYING ACCOUNTS



|                                            |  |                              |       |                             |   |        |            |  |   |                         |         |  |   |      
|------------------------------------------- |  | ---------------------------- | ----- | --------------------------- | - | ------ | ---------- |  | - | ----------------------- | ------- |  | - | -----
|                                            |  | Balance atbeginningof period |       | Charged tocosts andexpenses |   |        | Deductions |  |   | Balance at endof period
|Year ended June 28, 2008                    |  |                              |       |                             |   |        |            |  |   |                         |         |  |   |      
|Allowance for doubtful accounts             |  | $                            | 15    |                             | $ | 157    |            |  | $ | (133                    | )       |  | $ | 39   
|Valuation allowance for deferred tax assets |  | $                            | 888   |                             | $ | (888   | )(c)       |  | $ |                        |         |  | $ |     
|Year ended June 30, 2007                    |  |                              |       |                             |   |        |            |  |   |                         |         |  |   |      
|Allowance for doubtful accounts             |  | $                            | 80    |                             |   | 670    |            |  |   | (735                    | )(a)(b) |  | $ | 15   
|Valuation allowance for deferred tax assets |  | $                            | 4,545 |                             |   | (3,657 | )(c)       |  |   |                        |         |  | $ | 888  
|Year ended June 24, 2006                    |  |                              |       |                             |   |        |            |  |   |                         |         |  |   |      
|Allowance for doubtful accounts             |  | $                            | 150   |                             |   | 321    |            |  |   | (391                    | )(a)    |  | $ | 80   
|Valuation allowance for deferred tax assets |  | $                            | 797   |                             |   | 3,748  | (c)        |  |   |                        |         |  | $ | 4,545

---

|(a) | Uncollectible amounts written off, net of recoveries.
|--- | -----------------------------------------------------



|(b) | Amount includes $395 of reserves related to certain receivables sold with recourse, which were reclassified to other
accrued liabilities in connection with the sale of Jackson & Perkins.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Consolidated amount includes amount from continuing operations of $(686), $(3,309) and $3,176 for fiscal 2008, 2007 and
2006, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



NOTE 19CONDENSED CONSOLIDATING
FINANCIAL STATEMENTS



On November 30, 2007, Harry & David
Operations, Corp., (the Predecessor), effected an internal corporate reorganization pursuant to which its wholly-owned subsidiaries, Bear Creek Stores, Inc. and Bear Creek Direct Marketing, Inc. (both being guarantors under the Indenture
referred to below), merged with and into Harry and David, an Oregon corporation and subsidiary guarantor of the Predecessor (the Successor), (collectively, the Reorganization). As a result of the Reorganization, the
Predecessor entered into the First Supplemental Indenture (the Supplemental Indenture) among the Successor, the Company, Bear Creek Orchards, Inc., Harry & David Operations, Inc., (formerly Bear Creek Operations, Inc.) and Wells
Fargo Bank, N.A., as Trustee (the Trustee) to the Indenture, among the Predecessor, the Successor, as a guarantor, Harry & David Holdings, Inc., Bear Creek Orchards, Inc., Bear Creek Operations, Inc., the other guarantors party
thereto, and the Trustee under which the Senior Notes were issued. Pursuant to the Supplemental Indenture, the Successor assumed all of the rights and obligations of the Predecessor under the Indenture and the Senior Notes and each of the
Predecessor, Bear Creek Stores, Inc. and Bear Creek Direct Marketing, Inc. was released and discharged from their respective obligations under the Indenture.



The following consolidating financial information presents financial information which reflects the Reorganization, in separate columns, for (i) the Company (on a
parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) subsidiaries of the Company that guarantee the Senior Notes on a combined basis,
(iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of June 28, 2008 and June 30, 2007,
and for fiscal 2008, 2007 and 2006. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of its existing and future domestic restricted subsidiaries, which are 100% owned, directly or
indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain restrictions on the payment of dividends, other payments or distributions by the Company and
between the guarantors.



F-31



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##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Balance Sheet

As of June 28, 2008



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 1,570   |   |                 | $ | 9,723    |                       |  | $ | 29,499                           |   |  | $            |         |   |  | $ | 40,792  |  
|Short-term investments                               |  |                                          |        |   |                 |   |         |                       |  |   | 15,033                           |   |  |              |         |   |  |   | 15,033  |  
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 1,928    |                       |  |   | 156                              |   |  |              |         |   |  |   | 2,084   |  
|Other receivables                                    |  |                                          |        |   |                 |   | 1,094    |                       |  |   | 1,749                            |   |  |              |         |   |  |   | 2,843   |  
|Inventories                                          |  |                                          |        |   |                 |   | 18,320   |                       |  |   | 36,143                           |   |  |              |         |   |  |   | 54,463  |  
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 6,258    |                       |  |   |                                 |   |  |              |         |   |  |   | 6,258   |  
|Deferred income taxes                                |  |                                          | 3,230   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 3,230   |  
|Other current assets                                 |  |                                          |        |   |                 |   | 2,273    |                       |  |   | 5,218                            |   |  |              |         |   |  |   | 7,491   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 4,800   |   |                 |   | 39,596   |                       |  |   | 87,798                           |   |  |              |         |   |  |   | 132,194 |  
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 15,320   |                       |  |   | 146,894                          |   |  |              |         |   |  |   | 162,214 |  
|Goodwill                                             |  |                                          |        |   |                 |   | 3,690    |                       |  |   |                                 |   |  |              |         |   |  |   | 3,690   |  
|Intangibles, net                                     |  |                                          |        |   |                 |   | 45,677   |                       |  |   |                                 |   |  |              |         |   |  |   | 45,677  |  
|Investment in subsidiaries                           |  |                                          | 195,041 |   |                 |   | (59,765  | )                     |  |   |                                 |   |  |              | (135,276 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 9,266    |                       |  |   |                                 |   |  |              |         |   |  |   | 9,266   |  
|Other assets                                         |  |                                          | 2,464   |   |                 |   | 358      |                       |  |   | 774                              |   |  |              |         |   |  |   | 3,596   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 202,305 |   |                 | $ | 54,142   |                       |  | $ | 235,466                          |   |  | $            | (135,276 | ) |  | $ | 356,637 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 9,631    |                       |  | $ | 9,350                            |   |  | $            |         |   |  | $ | 18,981  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 7,396    |                       |  |   | 6,656                            |   |  |              |         |   |  |   | 14,052  |  
|Income taxes payable                                 |  |                                          | 23,622  |   |                 |   | (12      | )                     |  |   |                                 |   |  |              |         |   |  |   | 23,610  |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 13,667   |                       |  |   |                                 |   |  |              |         |   |  |   | 13,667  |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 5,523    |                       |  |   |                                  |   |  |              |         |   |  |   | 5,523   |  
|Other accrued liabilities                            |  |                                          | (34     | ) |                 |   | 5,577    |                       |  |   | 2,389                            |   |  |              |         |   |  |   | 7,932   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                 |   | 647      |                       |  |   |                                 |   |  |              |         |   |  |   | 647     |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 23,588  |   |                 |   | 42,429   |                       |  |   | 18,395                           |   |  |              |         |   |  |   | 84,412  |  
|Long-term debt and capital lease obligations         |  |                                          |        |   |                 |   | 235,599  |                       |  |   |                                 |   |  |              |         |   |  |   | 235,599 |  
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 17,494                           |   |  |              |         |   |  |   | 17,494  |  
|Deferred income taxes                                |  |                                          | 4,074   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 4,074   |  
|Other long-term liabilities                          |  |                                          | 4,925   |   |                 |   | 4,798    |                       |  |   | 1,183                            |   |  |              |         |   |  |   | 10,906  |  
|Intercompany debt                                    |  |                                          | 165,566 |   |                 |   | (423,725 | )                     |  |   | 258,159                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 198,153 |   |                 |   | (140,899 | )                     |  |   | 295,231                          |   |  |              |         |   |  |   | 352,485 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 6,191   |   |                 |   | 232,518  |                       |  |   | 53,785                           |   |  |              | (286,303 | ) |  |   | 6,191   |  
|Accumulated other comprehensive loss, net of tax     |  |                                          | (3,558  | ) |                 |   |         |                       |  |   | (3,558                           | ) |  |              | 3,558    |   |  |   | (3,558  | )
|Retained earnings (accumulated deficit)              |  |                                          | 1,509   |   |                 |   | (37,478  | )                     |  |   | (109,992                         | ) |  |              | 147,470  |   |  |   | 1,509   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | 4,152   |   |                 |   | 195,041  |                       |  |   | (59,765                          | ) |  |              | (135,276 | ) |  |   | 4,152   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 202,305 |   |                 | $ | 54,142   |                       |  | $ | 235,466                          |   |  | $            | (135,276 | ) |  | $ | 356,637 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



F-32



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Balance Sheet

As of June 30, 2007



|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|-------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | -------------------------------- | ------- |  | ------------ | -------- | - |  | - | ------- | -
|                                                   |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  | EliminationsandReclassifications |         |  | Consolidated |         
|Assets                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Current assets:                                    |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Cash and cash equivalents                          |  | $                                        | 1,480   |   |                 | $ | 9,953    |                       |  | $                                | 37,975  |  | $            |         |   |  | $ | 49,408  |  
|Short-term investments                             |  |                                          |        |   |                 |   |         |                       |  |                                  | 24,816  |  |              |         |   |  |   | 24,816  |  
|Trade accounts receivable, net                     |  |                                          |        |   |                 |   | 1,788    |                       |  |                                  | 312     |  |              |         |   |  |   | 2,100   |  
|Other receivables                                  |  |                                          |        |   |                 |   | 2,375    |                       |  |                                  | 8,532   |  |              |         |   |  |   | 10,907  |  
|Inventories                                        |  |                                          |        |   |                 |   | 17,818   |                       |  |                                  | 44,588  |  |              |         |   |  |   | 62,406  |  
|Deferred catalog expenses                          |  |                                          |        |   |                 |   | 3,840    |                       |  |                                  | 358     |  |              |         |   |  |   | 4,198   |  
|Prepaid income taxes                               |  |                                          | 774     |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 774     |  
|Other current assets                               |  |                                          | 7       |   |                 |   | 5,248    |                       |  |                                  | 4,597   |  |              |         |   |  |   | 9,852   |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total current assets                               |  |                                          | 2,261   |   |                 |   | 41,022   |                       |  |                                  | 121,178 |  |              |         |   |  |   | 164,461 |  
|Fixed assets, net                                  |  |                                          |        |   |                 |   | 44,981   |                       |  |                                  | 118,292 |  |              |         |   |  |   | 163,273 |  
|Intangibles, net                                   |  |                                          |        |   |                 |   | 29,089   |                       |  |                                  |        |  |              |         |   |  |   | 29,089  |  
|Investment in subsidiaries                         |  |                                          | 198,762 |   |                 |   | 109,832  |                       |  |                                  |        |  |              | (308,594 | ) |  |   |        |  
|Deferred financing costs, net                      |  |                                          |        |   |                 |   | 12,144   |                       |  |                                  |        |  |              |         |   |  |   | 12,144  |  
|Other assets                                       |  |                                          |        |   |                 |   | 505      |                       |  |                                  | 1,046   |  |              |         |   |  |   | 1,551   |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total assets                                       |  | $                                        | 201,023 |   |                 | $ | 237,573  |                       |  | $                                | 240,516 |  | $            | (308,594 | ) |  | $ | 370,518 |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity               |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Current liabilities:                               |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Accounts payable                                   |  | $                                        |        |   |                 | $ | 12,710   |                       |  | $                                | 10,223  |  | $            | (33      | ) |  | $ | 22,900  |  
|Accrued payroll and benefits                       |  |                                          |        |   |                 |   | 13,012   |                       |  |                                  | 8,163   |  |              |         |   |  |   | 21,175  |  
|Deferred revenue                                   |  |                                          |        |   |                 |   | 12,914   |                       |  |                                  |        |  |              |         |   |  |   | 12,914  |  
|Deferred income taxes                              |  |                                          | 18,670  |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 18,670  |  
|Accrued interest                                   |  |                                          |        |   |                 |   | 5,921    |                       |  |                                  |        |  |              |         |   |  |   | 5,921   |  
|Other accrued liabilities                          |  |                                          |        |   |                 |   | 6,362    |                       |  |                                  | 1,047   |  |              |         |   |  |   | 7,409   |  
|Current portion of capital lease obligations       |  |                                          |        |   |                 |   | 1,366    |                       |  |                                  |        |  |              |         |   |  |   | 1,366   |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total current liabilities                          |  |                                          | 18,670  |   |                 |   | 52,285   |                       |  |                                  | 19,433  |  |              | (33      | ) |  |   | 90,355  |  
|Long-term debt and capital lease obligations       |  |                                          |        |   |                 |   | 245,669  |                       |  |                                  |        |  |              |         |   |  |   | 245,669 |  
|Accrued pension liability                          |  |                                          |        |   |                 |   |         |                       |  |                                  | 15,504  |  |              |         |   |  |   | 15,504  |  
|Deferred income taxes                              |  |                                          | 8,422   |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 8,422   |  
|Intercompany debt                                  |  |                                          | 168,626 |   |                 |   | (263,418 | )                     |  |                                  | 94,759  |  |              | 33       |   |  |   |        |  
|Other long-term liabilities                        |  |                                          | 1,041   |   |                 |   | 4,275    |                       |  |                                  | 988     |  |              |         |   |  |   | 6,304   |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities                                  |  |                                          | 196,759 |   |                 |   | 38,811   |                       |  |                                  | 130,684 |  |              |         |   |  |   | 366,254 |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Stockholders equity:                              |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Common stock                                       |  |                                          | 10      |   |                 |   | 1        |                       |  |                                  | 100     |  |              | (101     | ) |  |   | 10      |  
|Additional paid-in capital                         |  |                                          | 5,548   |   |                 |   | 232,428  |                       |  |                                  | 94,114  |  |              | (326,542 | ) |  |   | 5,548   |  
|Accumulated other comprehensive income, net of tax |  |                                          | 1,119   |   |                 |   |         |                       |  |                                  | 1,119   |  |              | (1,119   | ) |  |   | 1,119   |  
|Retained earnings (accumulated deficit)            |  |                                          | (2,413  | ) |                 |   | (33,667  | )                     |  |                                  | 14,499  |  |              | 19,168   |   |  |   | (2,413  | )
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total stockholders equity                         |  |                                          | 4,264   |   |                 |   | 198,762  |                       |  |                                  | 109,832 |  |              | (308,594 | ) |  |   | 4,264   |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity         |  | $                                        | 201,023 |   |                 | $ | 237,573  |                       |  | $                                | 240,516 |  | $            | (308,594 | ) |  | $ | 370,518 |  
|                                                   |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  



F-33



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Operations

For the year ended June 28, 2008



|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   |  | Consolidated |         
|Net sales                                             |  | $                                        |       |   |                 | $ | 543,563 |                       |  | $ | 163,745                          |   |  | $            | (162,244 | ) |  | $ | 545,064 |  
|Cost of goods sold                                    |  |                                          |       |   |                 |   | 294,408 |                       |  |   | 163,730                          |   |  |              | (162,244 | ) |  |   | 295,894 |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gross profit                                          |  |                                          |       |   |                 |   | 249,155 |                       |  |   | 15                               |   |  |              |         |   |  |   | 249,170 |  
|Selling, general and administrative                   |  |                                          |       |   |                 |   | 217,189 |                       |  |   | 819                              |   |  |              |         |   |  |   | 218,008 |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income (loss)                               |  |                                          |       |   |                 |   | 31,966  |                       |  |   | (804                             | ) |  |              |         |   |  |   | 31,162  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Other (income) expense:                               |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                       |  |                                          |       |   |                 |   | (8      | )                     |  |   | (2,700                           | ) |  |              |         |   |  |   | (2,708  | )
|Interest expense                                      |  |                                          |       |   |                 |   | 25,188  |                       |  |   | 39                               |   |  |              |         |   |  |   | 25,227  |  
|Gain on debt prepayment                               |  |                                          |       |   |                 |   | (303    | )                     |  |   |                                 |   |  |              |         |   |  |   | (303    | )
|Other (income) expense, net                           |  |                                          | (183   | ) |                 |   | 144     |                       |  |   |                                 |   |  |              |         |   |  |   | (39     | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (9,092 | ) |                 |   | (1,978  | )                     |  |   |                                 |   |  |              | 11,070   |   |  |   |        |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (9,275 | ) |                 |   | 23,043  |                       |  |   | (2,661                           | ) |  |              | 11,070   |   |  |   | 22,177  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 9,275  |   |                 |   | 8,923   |                       |  |   | 1,857                            |   |  |              | (11,070  | ) |  |   | 8,985   |  
|Provision for income taxes                            |  |                                          | 4,648  |   |                 |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 4,648   |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 4,627  |   |                 |   | 8,923   |                       |  |   | 1,857                            |   |  |              | (11,070  | ) |  |   | 4,337   |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Discontinued operations:                              |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                                          |       |   |                 |   |        |                       |  |   | 282                              |   |  |              |         |   |  |   | 282     |  
|Operating income (loss) from discontinued operations  |  |                                          |       |   |                 |   | 169     |                       |  |   | (161                             | ) |  |              |         |   |  |   | 8       |  
|Provision for income taxes on discontinued operations |  |                                          | 19     |   |                 |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 19      |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (19    | ) |                 |   | 169     |                       |  |   | 121                              |   |  |              |         |   |  |   | 271     |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income                                            |  | $                                        | 4,608  |   |                 | $ | 9,092   |                       |  | $ | 1,978                            |   |  | $            | (11,070  | ) |  | $ | 4,608   |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



F-34



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Operations

For the year ended June 30, 2007



|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   |  | Consolidated |         
|Net sales                                             |  | $                                        |        |   |                 | $ | 558,977 |                       |  | $ | 186,033                          |   |  | $            | (183,993 | ) |  | $ | 561,017 |  
|Cost of goods sold                                    |  |                                          |        |   |                 |   | 293,189 |                       |  |   | 186,015                          |   |  |              | (183,993 | ) |  |   | 295,211 |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gross profit                                          |  |                                          |        |   |                 |   | 265,788 |                       |  |   | 18                               |   |  |              |         |   |  |   | 265,806 |  
|Selling, general and administrative                   |  |                                          |        |   |                 |   | 215,144 |                       |  |   | (72                              | ) |  |              |         |   |  |   | 215,072 |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income                                      |  |                                          |        |   |                 |   | 50,644  |                       |  |   | 90                               |   |  |              |         |   |  |   | 50,734  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Other (income) expense:                               |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                       |  |                                          |        |   |                 |   | (35     | )                     |  |   | (3,091                           | ) |  |              |         |   |  |   | (3,126  | )
|Interest expense                                      |  |                                          | (2      | ) |                 |   | 28,097  |                       |  |   | 104                              |   |  |              |         |   |  |   | 28,199  |  
|Pension curtailment gain                              |  |                                          |        |   |                 |   |        |                       |  |   | (15,844                          | ) |  |              |         |   |  |   | (15,844 | )
|Other (income) expense, net                           |  |                                          |        |   |                 |   | 54      |                       |  |   | (402                             | ) |  |              |         |   |  |   | (348    | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (44,282 | ) |                 |   | (19,115 | )                     |  |   |                                 |   |  |              | 63,397   |   |  |   |        |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total Other (income) expense                          |  |                                          | (44,284 | ) |                 |   | 9,001   |                       |  |   | (19,233                          | ) |  |              | 63,397   |   |  |   | 8,881   |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 44,284  |   |                 |   | 41,643  |                       |  |   | 19,323                           |   |  |              | (63,397  | ) |  |   | 41,853  |  
|Provision for income taxes                            |  |                                          | 11,156  |   |                 |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 11,156  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 33,128  |   |                 |   | 41,643  |                       |  |   | 19,323                           |   |  |              | (63,397  | ) |  |   | 30,697  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Discontinued operations:                              |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                                          |        |   |                 |   | 2,584   |                       |  |   | 4,129                            |   |  |              |         |   |  |   | 6,713   |  
|Operating income (loss) from discontinued operations  |  |                                          |        |   |                 |   | 55      |                       |  |   | (4,337                           | ) |  |              |         |   |  |   | (4,282  | )
|Provision for income taxes on discontinued operations |  |                                          | 1,127   |   |                 |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 1,127   |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (1,127  | ) |                 |   | 2,639   |                       |  |   | (208                             | ) |  |              |         |   |  |   | 1,304   |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income                                            |  | $                                        | 32,001  |   |                 | $ | 44,282  |                       |  | $ | 19,115                           |   |  | $            | (63,397  | ) |  | $ | 32,001  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



F-35



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

Condensed Consolidating Statement of Operations

For the year ended June 24, 2006



|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                                |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   |  | Consolidated |         
|Net sales                                                       |  | $                                        |        |   |                 | $ | 522,386 |                       |  | $ | 183,896                          |   |  | $            | (181,898 | ) |  | $ | 524,384 |  
|Cost of goods sold                                              |  |                                          |        |   |                 |   | 300,480 |                       |  |   | 183,807                          |   |  |              | (181,898 | ) |  |   | 302,389 |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gross profit                                                    |  |                                          |        |   |                 |   | 221,906 |                       |  |   | 89                               |   |  |              |         |   |  |   | 221,995 |  
|Selling, general and administrative                             |  |                                          |        |   |                 |   | 199,130 |                       |  |   | 89                               |   |  |              |         |   |  |   | 199,219 |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income                                                |  |                                          |        |   |                 |   | 22,776  |                       |  |   |                                 |   |  |              |         |   |  |   | 22,776  |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Other (income) expense:                                         |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                                 |  |                                          | (12     | ) |                 |   |        |                       |  |   | (1,768                           | ) |  |              |         |   |  |   | (1,780  | )
|Interest expense                                                |  |                                          |        |   |                 |   | 26,433  |                       |  |   | 26                               |   |  |              |         |   |  |   | 26,459  |  
|Other (income) expense, net                                     |  |                                          |        |   |                 |   | 1,210   |                       |  |   |                                 |   |  |              |         |   |  |   | 1,210   |  
|Equity in earnings of consolidated subsidiaries                 |  |                                          | 9,725   |   |                 |   | 4,859   |                       |  |   |                                 |   |  |              | (14,584  | ) |  |   |        |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total other (income) expense                                    |  |                                          | 9,713   |   |                 |   | 32,502  |                       |  |   | (1,742                           | ) |  |              | (14,584  | ) |  |   | 25,889  |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income (loss) from continuing operations before income taxes    |  |                                          | (9,713  | ) |                 |   | (9,726  | )                     |  |   | 1,742                            |   |  |              | 14,584   |   |  |   | (3,113  | )
|Provision for income taxes                                      |  |                                          | 2,548   |   |                 |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 2,548   |  
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss) from continuing operations                    |  |                                          | (12,261 | ) |                 |   | (9,726  | )                     |  |   | 1,742                            |   |  |              | 14,584   |   |  |   | (5,661  | )
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Discontinued operations:                                        |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating loss from discontinued operations                     |  |                                          |        |   |                 |   |        |                       |  |   | (6,511                           | ) |  |              |         |   |  |   | (6,511  | )
|Provision (benefit) for income taxes on discontinued operations |  |                                          | (2,548  | ) |                 |   | (1      | )                     |  |   | 90                               |   |  |              |         |   |  |   | (2,459  | )
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations                  |  |                                          | 2,548   |   |                 |   | 1       |                       |  |   | (6,601                           | ) |  |              |         |   |  |   | (4,052  | )
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net loss                                                        |  | $                                        | (9,713  | ) |                 | $ | (9,725  | )                     |  | $ | (4,859                           | ) |  | $            | 14,584   |   |  | $ | (9,713  | )
|                                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



F-36



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

Condensed Consolidating Statement of Cash Flows

For the year ended June 28, 2008



|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------- | - | ------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   | Consolidated |  
|Operating activities                                  |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) operating activities   |  | $                                        | (1,861 | ) |                 | $ | 12,406  |                       |  | $ | 18,084                           |   |              | $ |  |  | $ | 28,629  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Investing activities                                  |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                           |  |                                          |       |   |                 |   | (9,144  | )                     |  |   | (8,711                           | ) |              |   |  |  |   | (17,855 | )
|Acquisition of Wolfermans business                   |  |                                          |       |   |                 |   | (22,784 | )                     |  |   |                                 |   |              |   |  |  |   | (22,784 | )
|Proceeds from sale of Jackson & Perkins business      |  |                                          |       |   |                 |   |        |                       |  |   | 4,161                            |   |              |   |  |  |   | 4,161   |  
|Proceeds from the sale of fixed assets                |  |                                          |       |   |                 |   |        |                       |  |   | 32                               |   |              |   |  |  |   | 32      |  
|Purchases of available-for sale securities            |  |                                          |       |   |                 |   |        |                       |  |   | (10,000                          | ) |              |   |  |  |   | (10,000 | )
|Purchases of held-to-maturity securities              |  |                                          |       |   |                 |   |        |                       |  |   | (4,964                           | ) |              |   |  |  |   | (4,964  | )
|Proceeds from income on available-for sale securities |  |                                          |       |   |                 |   |        |                       |  |   | 195                              |   |              |   |  |  |   | 195     |  
|Proceeds from sale of held-to-maturity securities     |  |                                          |       |   |                 |   |        |                       |  |   | 24,978                           |   |              |   |  |  |   | 24,978  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities   |  |                                          |       |   |                 |   | (31,928 | )                     |  |   | 5,691                            |   |              |   |  |  |   | (26,237 | )
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Financing Activities                                  |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                          |  |                                          |       |   |                 |   | 63,000  |                       |  |   |                                 |   |              |   |  |  |   | 63,000  |  
|Repayments of revolving debt                          |  |                                          |       |   |                 |   | (63,000 | )                     |  |   |                                 |   |              |   |  |  |   | (63,000 | )
|Repayments of long-term debt                          |  |                                          |       |   |                 |   | (9,405  | )                     |  |   |                                 |   |              |   |  |  |   | (9,405  | )
|Repayments of capital lease obligation                |  |                                          |       |   |                 |   | (1,684  | )                     |  |   |                                 |   |              |   |  |  |   | (1,684  | )
|Payments for deferred financing costs                 |  |                                          |       |   |                 |   | (10     | )                     |  |   |                                 |   |              |   |  |  |   | (10     | )
|Proceeds for exercise of stock options                |  |                                          | 91     |   |                 |   |        |                       |  |   |                                 |   |              |   |  |  |   | 91      |  
|Net (payments) receipts on intercompany debt          |  |                                          | 1,860  |   |                 |   | 30,391  |                       |  |   | (32,251                          | ) |              |   |  |  |   |        |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities   |  |                                          | 1,951  |   |                 |   | 19,292  |                       |  |   | (32,251                          | ) |              |   |  |  |   | (11,008 | )
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents      |  |                                          | 90     |   |                 |   | (230    | )                     |  |   | (8,476                           | ) |              |   |  |  |   | (8,616  | )
|Cash and cash equivalents, beginning of period        |  |                                          | 1,480  |   |                 |   | 9,953   |                       |  |   | 37,975                           |   |              |   |  |  |   | 49,408  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period              |  | $                                        | 1,570  |   |                 | $ | 9,723   |                       |  | $ | 29,499                           |   |              | $ |  |  | $ | 40,792  |  
|                                                      |  |                                          |        |   |                 |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  



F-37



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##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

Condensed Consolidating Statement of Cash Flows

For the year ended June 30, 2007



|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|--------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                    |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) operating activities |  | $                                        | 16,056  |   |                 | $ | 24,880   |                       |  | $ | (7,114                           | ) |              | $ |  |  | $ | 33,822   |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                          |        |   |                 |   | (14,435  | )                     |  |   | (7,209                           | ) |              |   |  |  |   | (21,644  | )
|Cash proceeds from sale of business                 |  |                                          |        |   |                 |   |         |                       |  |   | 43,045                           |   |              |   |  |  |   | 43,045   |  
|Proceeds from the sale of fixed assets              |  |                                          |        |   |                 |   | (8       | )                     |  |   | 25                               |   |              |   |  |  |   | 17       |  
|Purchases of short-term investments                 |  |                                          |        |   |                 |   |         |                       |  |   | (51,838                          | ) |              |   |  |  |   | (51,838  | )
|Proceeds from sale of short-term investments        |  |                                          |        |   |                 |   |         |                       |  |   | 27,429                           |   |              |   |  |  |   | 27,429   |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities |  |                                          |        |   |                 |   | (14,443  | )                     |  |   | 11,452                           |   |              |   |  |  |   | (2,991   | )
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Financing Activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                          |        |   |                 |   | 108,500  |                       |  |   |                                 |   |              |   |  |  |   | 108,500  |  
|Repayments of revolving debt                        |  |                                          |        |   |                 |   | (108,500 | )                     |  |   |                                 |   |              |   |  |  |   | (108,500 | )
|Repayments of capital lease obligation              |  |                                          |        |   |                 |   | (1,077   | )                     |  |   |                                 |   |              |   |  |  |   | (1,077   | )
|Proceeds for exercise of stock options              |  |                                          | 1,017   |   |                 |   |         |                       |  |   |                                 |   |              |   |  |  |   | 1,017    |  
|Net (payments) receipts on intercompany debt        |  |                                          | (16,056 | ) |                 |   | (3,788   | )                     |  |   | 19,844                           |   |              |   |  |  |   |         |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                                          | (15,039 | ) |                 |   | (4,865   | )                     |  |   | 19,844                           |   |              |   |  |  |   | (60      | )
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Increase in cash and cash equivalents               |  |                                          | 1,017   |   |                 |   | 5,572    |                       |  |   | 24,182                           |   |              |   |  |  |   | 30,771   |  
|Cash and cash equivalents, beginning of period      |  |                                          | 463     |   |                 |   | 4,381    |                       |  |   | 13,793                           |   |              |   |  |  |   | 18,637   |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                        | 1,480   |   |                 | $ | 9,953    |                       |  | $ | 37,975                           |   |              | $ |  |  | $ | 49,408   |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  



F-38



---

##### Table of Contents

NOTE 19CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)

Condensed Consolidating Statement of Cash Flows

For the year ended June 24, 2006



|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                    |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry and David |   |          | Guarantorsubsidiaries |  |   | Eliminationsandreclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) operating activities |  |                                          | 1,462  |   |                 |   | 23,074   |                       |  |   | (3,704                           | ) |              |   |  |  |   | 20,832   |  
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                          |       |   |                 |   | (10,590  | )                     |  |   | (7,073                           | ) |              |   |  |  |   | (17,663  | )
|Proceeds from the sale of fixed assets              |  |                                          |       |   |                 |   | 31       |                       |  |   | (1                               | ) |              |   |  |  |   | 30       |  
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash used in investing activities               |  |                                          |       |   |                 |   | (10,559  | )                     |  |   | (7,074                           | ) |              |   |  |  |   | (17,633  | )
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Financing activities                                |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                          |       |   |                 |   | 104,000  |                       |  |   |                                 |   |              |   |  |  |   | 104,000  |  
|Repayments of revolving debt                        |  |                                          |       |   |                 |   | (104,000 | )                     |  |   |                                 |   |              |   |  |  |   | (104,000 | )
|Repayments of notes payable                         |  |                                          |       |   |                 |   | (268     | )                     |  |   |                                 |   |              |   |  |  |   | (268     | )
|Payments for deferred financing costs               |  |                                          |       |   |                 |   | (3,017   | )                     |  |   |                                 |   |              |   |  |  |   | (3,017   | )
|Proceeds from exercise of stock options             |  |                                          | 1,646  |   |                 |   |         |                       |  |   |                                 |   |              |   |  |  |   | 1,646    |  
|Net (payments) receipts on intercompany debt        |  |                                          | (1,450 | ) |                 |   | (15,155  | )                     |  |   | 16,605                           |   |              |   |  |  |   |         |  
|Dividends paid                                      |  |                                          | (2,600 | ) |                 |   |         |                       |  |   |                                 |   |              |   |  |  |   | (2,600   | )
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                                          | (2,404 | ) |                 |   | (18,440  | )                     |  |   | 16,605                           |   |              |   |  |  |   | (4,239   | )
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents    |  |                                          | (942   | ) |                 |   | (5,925   | )                     |  |   | 5,827                            |   |              |   |  |  |   | (1,040   | )
|Cash and cash equivalents, beginning of period      |  |                                          | 1,405  |   |                 |   | 10,306   |                       |  |   | 7,966                            |   |              |   |  |  |   | 19,677   |  
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                        | 463    |   |                 | $ | 4,381    |                       |  | $ | 13,793                           |   |              | $ |  |  | $ | 18,637   |  
|                                                    |  |                                          |        |   |                 |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  



F-39



---

##### Table of Contents

NOTE 20SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION



|                                                                                                            |  |      |        |      |   |        |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                                                                                                            |  | 2008 |        | 2007 |   | 2006   | 
|Cash paid for:                                                                                              |  |      |        |      |   |        |  |   |        |  
|Interest, net of capitalized interest of $528, $253, and $236 for fiscal 2008, 2007, and 2006, respectively |  | $    | 22,981 |      | $ | 25,190 |  | $ | 24,540 |  
|                                                                                                            |  |      |        |      |   |        |  |   |        |  
|Taxes                                                                                                       |  | $    | 2,410  |      | $ | 768    |  | $ | 363    |  
|                                                                                                            |  |      |        |      |   |        |  |   |        |  
|Non-cash items:                                                                                             |  |      |        |      |   |        |  |   |        |  
|Non-cash portion of proceeds on sale of Jackson & Perkins                                                   |  | $    |       |      | $ | 6,303  |  | $ |       |  
|                                                                                                            |  |      |        |      |   |        |  |   |        |  
|Equipment acquired through a capital lease                                                                  |  | $    | 895    |      | $ | 3,112  |  | $ |       |  
|                                                                                                            |  |      |        |      |   |        |  |   |        |  
|Adjustments to original purchase accounting allocation                                                      |  | $    |       |      | $ |       |  | $ | (1,902 | )
|                                                                                                            |  |      |        |      |   |        |  |   |        |  



NOTE 21SUBSEQUENT EVENTS



Acquisition of Cushman Fruit Company



On August 8, 2008, the Company completed the acquisition of substantially all of the
assets of Cushman Fruit Company, Inc., a privately held, multi-channel direct marketer of specialty foods, primarily Florida citrus, for a net purchase price of approximately $8,615, excluding deal costs, subject to customary final working capital
adjustments to be completed 60 days after the transaction date. The Company paid for the acquisition of Cushmans with available cash balances. The Companys revolving credit agreement was amended to permit the acquisition and to address
other administrative matters, on August 8, 2008. Cushmans has agreed to provide certain transitional services, as needed, for 60 days after the transaction date. The acquisition was completed subsequent to the Companys fiscal year
ended June 28, 2008 and, as such, Cushmans results of operations are not included in the fiscal 2008 results herein.



Cushmans was founded in 1945, is based in West Palm Beach, Florida, and is best known for its Cushman
HoneyBells® citrus, a rare natural hybrid of Dancy Tangerine and Duncan Grapefruit.



Long-Term Debt Prepayment



In the first quarter of fiscal 2009, the Company completed the prepayment of $7,107 of its fixed rate Senior Notes in open market purchases. The debt prepayment resulted
in a net gain of approximately $2,843, comprised of a $3,093 discount on the repayment of $10,200 of outstanding principal of the Senior Notes, partially offset by the write-off of $250 in unamortized deferred financing costs.



F-40