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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended March 31, 2005



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: 0-20720



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PROVIDE COMMERCE, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 84-1450019                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|5005 Wateridge Vista Drive San Diego, CA                       |  | 92121                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          



Registrants
Telephone Number, Including Area Code: (858) 638-4900



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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  x



As of March 31, 2005, the registrant had 12,258,026 shares of common stock
outstanding.



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##### Table of Contents

PROVIDE COMMERCE, INC.

QUARTERLY REPORT



FORM 10-Q



TABLE OF CONTENTS



|                              |  |                                                                                               |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | --
|COVER PAGE                    |  |                                                                                              
|                              | 
|TABLE OF CONTENTS             |  |                                                                                              
|                              | 
|PART I. FINANCIAL INFORMATION |  | 1                                                                                            
|                              |  |                                                                                              
|                              |  | ITEM 1.
Financial Statements (unaudited)                                                      |  | 1 
|                              |  |                                                                                              
|                              |  | Balance Sheets as of March 31, 2005 and June 30, 2004                                         |  | 2 
|                              |  |                                                                                              
|                              |  | Statements of Operations for the three and nine months ended March 31, 2005 and 2004          |  | 3 
|                              |  |                                                                                              
|                              |  | Statements of Cash Flows for the nine months ended March 31, 2005 and 2004                    |  | 4 
|                              |  |                                                                                              
|                              |  | Notes to Financial Statements                                                                 |  | 5 
|                              |  |                                                                                              
|                              |  | ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 8 
|                              |  |                                                                                              
|                              |  | ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk                            |  | 32
|                              |  |                                                                                              
|                              |  | ITEM 4.
Controls and Procedures                                                               |  | 32
|                              | 
|PART II. OTHER INFORMATION    |  | 34                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 1.
Legal Proceedings *                                                                   |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 3.
Defaults upon Senior Securities *                                                     |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 4.
Submission of Matters to a Vote of Security Holders *                                 |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 5.
Other Information *                                                                   |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 6.
Exhibits                                                                              |  | 34
|                              | 
|SIGNATURE                     |  | 36                                                                                           

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|* | No information provided due to inapplicability of item.
|- | -------------------------------------------------------



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##### Table of Contents

PROVIDE COMMERCE, INC.



FINANCIAL STATEMENTS



Index



PART I. FINANCIAL INFORMATION



ITEM 1. Financial Statements (unaudited):



|                                                                               |  |  
|------------------------------------------------------------------------------ |  | -
|Balance Sheets  March 31, 2005 and June 30, 2004                              |  | 2
|                                                                               | 
|Statements of Operations  Three and nine months ended March 31, 2005 and 2004 |  | 3
|                                                                               | 
|Statements of Cash Flows  Nine months ended March 31, 2005 and 2004           |  | 4
|                                                                               | 
|Notes to Financial Statements                                                  |  | 5



1



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##### Table of Contents

PROVIDE COMMERCE, INC.

BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                                |  | March 31,2005 |         |   | June 30,2004 |  
|Assets                                                                                                                                                                          |  |               |         |   |              |   |         |  
|Current assets:                                                                                                                                                                 |  |               |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                                       |  | $             | 24,993  |   |              | $ | 18,210  |  
|Marketable securities                                                                                                                                                           |  |               | 45,768  |   |              |   | 41,218  |  
|Accounts receivable, net of allowance for doubtful accounts of $53 and $105 at March 31, 2005 and June 30, 2004, respectively                                                   |  |               | 1,967   |   |              |   | 1,372   |  
|Inventory, net                                                                                                                                                                  |  |               | 3,507   |   |              |   | 1,343   |  
|Prepaid expenses and other current assets                                                                                                                                       |  |               | 1,084   |   |              |   | 652     |  
|Deferred tax assets                                                                                                                                                             |  |               | 4,558   |   |              |   | 4,482   |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total current assets                                                                                                                                                            |  |               | 81,877  |   |              |   | 67,277  |  
|                                                                                                                                                                                |  |              
|Property and equipment, net                                                                                                                                                     |  |               | 6,697   |   |              |   | 4,626   |  
|Deferred tax assets                                                                                                                                                             |  |               | 4,675   |   |              |   | 5,953   |  
|Other assets                                                                                                                                                                    |  |               | 4,553   |   |              |   | 2,369   |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total assets                                                                                                                                                                    |  | $             | 97,802  |   |              | $ | 80,225  |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                            |  |               |         |   |              |   |         |  
|Current liabilities:                                                                                                                                                            |  |               |         |   |              |   |         |  
|Accounts payable and other accrued liabilities                                                                                                                                  |  | $             | 19,213  |   |              | $ | 13,010  |  
|Accrued compensation                                                                                                                                                            |  |               | 2,926   |   |              |   | 2,812   |  
|Income tax payable                                                                                                                                                              |  |               | 316     |   |              |   | 943     |  
|Deferred revenue                                                                                                                                                                |  |               | 623     |   |              |   | 325     |  
|Current portion of capital lease                                                                                                                                                |  |               |        |   |              |   | 48      |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total current liabilities                                                                                                                                                       |  |               | 23,078  |   |              |   | 17,138  |  
|                                                                                                                                                                                |  |              
|Accrued pension costs                                                                                                                                                           |  |               | 826     |   |              |   | 576     |  
|Deferred compensation                                                                                                                                                           |  |               | 1,012   |   |              |   | 186     |  
|                                                                                                                                                                                |  |              
|Stockholders equity:                                                                                                                                                           |  |               |         |   |              |   |         |  
|Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at March 31, 2005 and June 30,
2004.                                                |  |               |        |   |              |   |        |  
|Common stock, $0.001 par value, 50,000,000 shares authorized, 12,258,026 shares and 11,665,913 shares issued and outstanding at March 31, 2005
and June 30, 2004, respectively. |  |               | 12      |   |              |   | 12      |  
|Additional paid-in capital                                                                                                                                                      |  |               | 103,122 |   |              |   | 95,974  |  
|Deferred stock-based compensation                                                                                                                                               |  |               | (3,030  | ) |              |   | (2,663  | )
|Accumulated other comprehensive loss                                                                                                                                            |  |               | (241    | ) |              |   | (53     | )
|Accumulated deficit                                                                                                                                                             |  |               | (26,977 | ) |              |   | (30,945 | )
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                      |  |               | 72,886  |   |              |   | 62,325  |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                      |  | $             | 97,802  |   |              | $ | 80,225  |  
|                                                                                                                                                                                |  |               |         |   |              |   |         |  



See accompanying notes.



2



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PROVIDE COMMERCE, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)



|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|------------------------------------------------- |  | ---------------------------- | ---------- | ---- | --------------------------- | ---------- | ---- |  | ---- | ---------- |  | - | ---------- | -
|                                                  |  | Three Months Ended March 31, |            |      | Nine Months Ended March 31, |           
|                                                  |  | 2005                         |            | 2004 |                             |            | 2005 |  | 2004 |           
|Net sales                                         |  | $                            | 57,162     |      | $                           | 40,689     |      |  | $    | 110,541    |  | $ | 76,917     |  
|Cost of sales                                     |  |                              | 30,324     |      |                             | 21,794     |      |  |      | 58,765     |  |   | 42,239     |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Gross profit                                      |  |                              | 26,838     |      |                             | 18,895     |      |  |      | 51,776     |  |   | 34,678     |  
|Operating expenses:                               |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Selling and marketing                             |  |                              | 12,579     |      |                             | 8,845      |      |  |      | 24,997     |  |   | 16,968     |  
|General and administrative                        |  |                              | 5,592      |      |                             | 4,433      |      |  |      | 14,032     |  |   | 10,109     |  
|Information technology systems                    |  |                              | 1,586      |      |                             | 1,068      |      |  |      | 3,942      |  |   | 2,900      |  
|Stock-based compensation                          |  |                              | 850        |      |                             | 547        |      |  |      | 2,228      |  |   | 1,304      |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Total operating expenses                          |  |                              | 20,607     |      |                             | 14,893     |      |  |      | 45,199     |  |   | 31,281     |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Operating income                                  |  |                              | 6,231      |      |                             | 4,002      |      |  |      | 6,577      |  |   | 3,397      |  
|Other income, net                                 |  |                              | 398        |      |                             | 148        |      |  |      | 981        |  |   | 186        |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Income before income tax                          |  |                              | 6,629      |      |                             | 4,150      |      |  |      | 7,558      |  |   | 3,583      |  
|Income tax provision (benefit)                    |  |                              | 3,148      |      |                             | (11,768    | )    |  |      | 3,590      |  |   | (11,768    | )
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Net income                                        |  |                              | 3,481      |      |                             | 15,918     |      |  |      | 3,968      |  |   | 15,351     |  
|Preferred stock dividend                          |  |                              |           |      |                             |           |      |  |      |           |  |   | (1,500     | )
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Net income attributable to common stockholders    |  | $                            | 3,481      |      | $                           | 15,918     |      |  | $    | 3,968      |  | $ | 13,851     |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Net income per common share:                      |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Basic                                             |  | $                            | 0.29       |      | $                           | 1.40       |      |  | $    | 0.33       |  | $ | 1.74       |  
|Diluted                                           |  | $                            | 0.25       |      | $                           | 1.14       |      |  | $    | 0.29       |  | $ | 1.16       |  
|Weighted average common shares outstanding:       |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Basic                                             |  |                              | 12,198,735 |      |                             | 11,400,147 |      |  |      | 12,001,712 |  |   | 7,967,690  |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Diluted                                           |  |                              | 14,001,293 |      |                             | 13,918,972 |      |  |      | 13,808,304 |  |   | 11,966,640 |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Stock-based compensation is allocated as follows: |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Cost of sales                                     |  | $                            | 2          |      | $                           |           |      |  | $    | 12         |  | $ |           |  
|Selling and marketing                             |  |                              | 216        |      |                             | 167        |      |  |      | 709        |  |   | 489        |  
|General and administrative                        |  |                              | 521        |      |                             | 345        |      |  |      | 1,203      |  |   | 730        |  
|Information technology systems                    |  |                              | 111        |      |                             | 35         |      |  |      | 304        |  |   | 85         |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  
|Total stock-based compensation                    |  | $                            | 850        |      | $                           | 547        |      |  | $    | 2,228      |  | $ | 1,304      |  
|                                                  |  |                              |            |      |                             |            |      |  |      |            |  |   |            |  



See accompanying notes.



3



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PROVIDE COMMERCE, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands, except share and per share data)



|                                                                                         |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Nine Months ended March 31, |        
|                                                                                         |  | 2005                        |         |   | 2004 |  
|Operating activities:                                                                    |  |                             |         |   |      |   |         |  
|Net income                                                                               |  | $                           | 3,968   |   |      | $ | 15,351  |  
|Adjustments to reconcile net income to cash provided by operating activities:            |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |                             | 2,035   |   |      |   | 1,204   |  
|Stock-based compensation                                                                 |  |                             | 2,228   |   |      |   | 1,304   |  
|Tax benefit from the exercise of stock options                                           |  |                             | 2,319   |   |      |   |        |  
|Non-cash interest expense in connection with issuance of warrants for line of credit     |  |                             |        |   |      |   | 24      |  
|Changes in operating assets and liabilities:                                             |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                      |  |                             | (595    | ) |      |   | (338    | )
|Inventory                                                                                |  |                             | (2,164  | ) |      |   | (808    | )
|Prepaid expenses and other current assets                                                |  |                             | (432    | ) |      |   | (905    | )
|Accounts payable and other accrued liabilities                                           |  |                             | 6,203   |   |      |   | 7,221   |  
|Accrued compensation                                                                     |  |                             | 114     |   |      |   | (74     | )
|Accrued pension costs                                                                    |  |                             | 250     |   |      |   |        |  
|Deferred compensation                                                                    |  |                             | 826     |   |      |   |        |  
|Deferred revenue                                                                         |  |                             | 298     |   |      |   | 188     |  
|Accrued and deferred income taxes                                                        |  |                             | 575     |   |      |   | (12,229 | )
|Other assets                                                                             |  |                             | (2,184  | ) |      |   | (1,457  | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                             | 13,441  |   |      |   | 9,481   |  
|                                                                                         |  |                            
|Investing activities:                                                                    |  |                             |         |   |      |   |         |  
|Purchases of property and equipment                                                      |  |                             | (4,106  | ) |      |   | (2,351  | )
|Proceeds from note receivable                                                            |  |                             |        |   |      |   | 27      |  
|Purchases of marketable securities                                                       |  |                             | (41,213 | ) |      |   |        |  
|Sales/maturities of marketable securities                                                |  |                             | 36,475  |   |      |   |        |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                    |  |                             | (8,844  | ) |      |   | (2,324  | )
|                                                                                         |  |                            
|Financing activities:                                                                    |  |                             |         |   |      |   |         |  
|Payment of long-term debt and capital lease obligations                                  |  |                             | (48     | ) |      |   | (93     | )
|Common stock issued in connection with public offerings                                  |  |                             | 1,353   |   |      |   | 34,592  |  
|Dividend paid to preferred stockholders                                                  |  |                             |        |   |      |   | (1,500  | )
|Proceeds from exercise of common stock options and warrants                              |  |                             | 881     |   |      |   | 132     |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                |  |                             | 2,186   |   |      |   | 33,131  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                                |  |                             | 6,783   |   |      |   | 40,288  |  
|Cash and cash equivalents at beginning of the period                                     |  |                             | 18,210  |   |      |   | 11,496  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of the period                                           |  | $                           | 24,993  |   |      | $ | 51,784  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                       |  |                             |         |   |      |   |         |  
|Cash paid during the period for:                                                         |  |                             |         |   |      |   |         |  
|Interest                                                                                 |  | $                           | 1       |   |      | $ | 5       |  
|Income taxes                                                                             |  | $                           | 694     |   |      | $ | 461     |  
|                                                                                         |  |                            
|Non-cash financing activities:                                                           |  |                             |         |   |      |   |         |  
|Stock-based compensation associated with employee and consultant stock options           |  | $                           | 2,228   |   |      | $ | 1,304   |  
|Conversion of preferred stock to common stock in connection with initial public offering |  | $                           |        |   |      | $ | 6       |  
|Tax benefit from the exercise of stock options                                           |  | $                           | 2,319   |   |      | $ |        |  
|Unrealized gain (loss) on marketable securities                                          |  | $                           | (188    | ) |      | $ |        |  



See accompanying notes.



4



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##### Table of Contents

PROVIDE COMMERCE, INC.



NOTES
TO FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)



1. Description of Business



Provide Commerce, Inc. (the
Company) was incorporated in the State of Delaware and commenced operations on February 6, 1998. The Company operates an e-commerce marketplace for perishable goods, such as fresh-cut floral arrangements, potted plants, high quality
meats and fruits, and related merchandise. Products are purchased by customers and shipped directly from the growers/producers for overnight or other prompt delivery.



2. Summary of Significant Accounting Policies



Basis of Presentation and Interim Financial Information



The accompanying unaudited financial statements of the Company have been prepared in
accordance with United States generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, and do not contain all information included in the audited
financial statements and notes thereto. The interim unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Companys annual report on Form 10-K. In the opinion of management,
the information furnished herein reflects all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.



In December 2003, the Company effected a 1-for-3.037716 reverse stock split of
its common stock. The accompanying financial statements give retroactive effect to the reverse stock split for all periods presented.



The balance sheet at June 30, 2004 has been derived from the audited financial statements at that date.



Net Income Per Share



Basic net income per common share is calculated by dividing net income for the period by the weighted average common shares outstanding during the period, less shares
subject to repurchase. Diluted income per share is calculated by dividing the net income for the period by the weighted average common shares outstanding, adjusted for all dilutive potential common shares, which includes shares issuable upon the
exercise of outstanding common stock options, convertible preferred stock and other contingent issuances of common stock to the extent these shares are dilutive, as follows:



|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------------- | ------ | ---- | --------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                         |  | Three months ended March 31,          |        |      | Nine Months ended March 31, |       
|                                                                         |  | 2005                                  |        | 2004 |                             |        | 2005 |  | 2004 |       
|                                                                         |  | (in thousands, except per share data) |       
|Numerator                                                                |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Net income                                                               |  | $                                     | 3,481  |      | $                           | 15,918 |      |  | $    | 3,968  |  | $ | 15,351 |  
|Preferred stock dividends                                                |  |                                       |       |      |                             |       |      |  |      |       |  |   | (1,500 | )
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Net income attributable to common stockholders                           |  | $                                     | 3,481  |      | $                           | 15,918 |      |  | $    | 3,968  |  | $ | 13,851 |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Denominator                                                              |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Basic:                                                                   |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Weighted average common shares outstanding                               |  |                                       | 12,199 |      |                             | 11,408 |      |  |      | 12,002 |  |   | 7,979  |  
|Less: Weighted average shares subject to repurchase                      |  |                                       |       |      |                             | (8     | )    |  |      |       |  |   | (11    | )
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Denominator on basic calculation                                         |  |                                       | 12,199 |      |                             | 11,400 |      |  |      | 12,002 |  |   | 7,968  |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Basic net income per common share                                        |  | $                                     | 0.29   |      | $                           | 1.40   |      |  | $    | 0.33   |  | $ | 1.74   |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Diluted:                                                                 |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Weighted average common shares outstanding                               |  |                                       | 12,199 |      |                             | 11,400 |      |  |      | 12,002 |  |   | 7,968  |  
|Weighted average dilutive effect of convertible Series A preferred stock |  |                                       |       |      |                             |       |      |  |      |       |  |   | 467    |  
|Weighted average dilutive effect of convertible Series B preferred stock |  |                                       |       |      |                             |       |      |  |      |       |  |   | 1,253  |  
|Weighted average dilutive effect of warrants                             |  |                                       | 391    |      |                             | 770    |      |  |      | 427    |  |   | 701    |  
|Weighted average dilutive effect of common stock options                 |  |                                       | 1,411  |      |                             | 1,748  |      |  |      | 1,379  |  |   | 1,578  |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Denominator on diluted calculation                                       |  |                                       | 14,001 |      |                             | 13,919 |      |  |      | 13,808 |  |   | 11,967 |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  
|Diluted net income per common share                                      |  | $                                     | 0.25   |      | $                           | 1.14   |      |  | $    | 0.29   |  | $ | 1.16   |  
|                                                                         |  |                                       |        |      |                             |        |      |  |      |        |  |   |        |  



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##### Table of Contents

PROVIDE COMMERCE, INC.



NOTES TO FINANCIAL STATEMENTS



(Unaudited)



(in thousands, except share and per share data)



Stock-Based Compensation



Effective July 1, 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting
for Stock-Based Compensation (SFAS 123). The Company selected the prospective method, which is one of the six transition methods allowed by SFAS No. 148,Accounting for Stock-Based CompensationTransition and Disclosure,
to transition to the fair value method of measuring stock-based compensation expense. Under the prospective method, the Company expensed only those employee stock options that were granted or modified after July 1, 2002. The majority of awards under
the Companys plans vest over a period of four years. The expense associated with stock compensation is amortized over the vesting period of the individual award using an accelerated method of amortization consistent with the method described
in Financial Accounting Standards Board (FASB) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.



The effect of applying the fair value recognition provisions of SFAS 123 to stock-based employee compensation for all outstanding and
unvested awards in periods prior to July 1, 2002, on net income and earnings per common share for the three or nine months ended March 31, 2005 did not result in pro forma income which is materially different from the reported amount. Therefore,
such pro forma information is not presented herein.



The fair value of each
option granted was estimated on the date of grant using the Black-Scholes option pricing model. As the Black-Scholes option valuation model requires the input of subjective assumptions, the resulting pro forma compensation cost may not be
representative of that to be expected in future periods. The Company used the minimum value method to determine the fair value of options granted prior to its initial filing in September 2003 of a registration statement under the Securities Act of
1933 relating to an initial public offering of the Companys common stock.



Recently Issued Accounting Standards



The Company adopted the fair-value-based method of accounting for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure. Currently, the Company uses the Black-Scholes formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS No. 123(R),Share-Based Payment (SFAS 123(R)) on July 1, 2005. Because SFAS 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS 123
using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS 123 will be recognized under SFAS
123(R). The Company does not anticipate that this will have a material effect on its financial statements. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as
described in the disclosure of pro forma net income and earnings per share in Note 2 to our annual consolidated financial statements. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported
as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot
estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $2,319 for the
nine months ended March 31, 2005 and $246, $0, and $0 in fiscal years ended June 30, 2004, 2003 and 2002, respectively.



3. Stockholders Equity



Common Stock



In September 2003, the Companys Board of Directors approved an amendment to the certificate of incorporation and increased the authorized common stock to 50,000,000
shares, which became effective December 22, 2003 in connection with the Companys initial public offering. During the nine months ended March 31, 2005, the Company issued 492,113 shares of common stock upon the exercise of outstanding options,
warrants and purchases through the employee stock purchase plan.



On July 7,
2004, the Company completed a secondary public offering whereby 1,981,019 shares of common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by the Company and an aggregate of 1,881,019
shares were sold by selling stockholders. The Company received net proceeds of approximately $1,353 in connection with the secondary offering.



Preferred Stock



In August 2003, the Company declared and paid a cash dividend to the holders of the then issued and outstanding Series A and Series B preferred stock in the aggregate
amount of $1,500.



In September 2003, the Companys Board of Directors
approved an amendment to the certificate of incorporation setting the authorized preferred stock to 5,000,000 shares which became effective December 22, 2003 in connection with the Companys initial public offering. The preferred stock is
blank check preferred, which can be created and issued by the Board of Directors without stockholder approval, with rights senior to those of common stock. Prior to December 22, 2003, the Companys Board of Directors was authorized
to issue 7,300,000 shares of preferred stock and had designated 300,000 shares of the Companys preferred stock as Series A preferred stock and 7,000,000 shares as Series B preferred stock.



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##### Table of Contents

PROVIDE COMMERCE, INC.



NOTES TO FINANCIAL STATEMENTS



(Unaudited)



(in thousands, except share and per share data)



On December 22, 2003, in connection with the Companys initial public offering, the Series A preferred stock outstanding of 221,715 shares was converted into 760,383
shares of common stock. In addition, on December 22, 2003, in connection with the Companys initial public offering, the Series B preferred stock outstanding of 5,816,285 shares was reclassified into 2,104,853 shares of common stock.



4. Deferred Compensation Plan



In November 2003, the compensation committee of the Board of Directors approved a Deferred
Compensation Plan which became effective in January 2004. The Deferred Compensation Plan is an unfunded non-qualified plan for the benefit of non-employee directors and certain designated management and highly compensated employees of the Company.
The plan permits participants to defer receipt of certain compensation, as well as certain income for stock option exercises. In addition, the Company may elect to make a matching contribution to any or all of the participants in an amount of fifty
percent (50%) of the participants deferred annual base salary or annual bonus, but in no event shall the matching contributions exceed ten percent (10%) of the participants annual base salary with respect to deferrals of base salary or
ten percent (10%) of the participants annual bonus with respect to deferrals of annual bonus. As of June 30, 2004 and March 31, 2005, the Company had deferred compensation of $186 and $1,012, respectively, related to the Deferred Compensation
Plan.



5. Supplemental Executive Retirement Plan



In November 2003, the compensation committee of the Board of Directors approved a
Supplemental Executive Retirement Plan (the SERP) which became effective in January 2004. The SERP is an unfunded non-qualified plan for the benefit of certain non-employee directors, designated management and highly compensated
employees of the Company. Participants under the SERP will be due a benefit (as defined for purposes of the SERP) upon early or normal retirement, disability, death or other termination of employment. The ordinary benefit is a benefit equal to 0.015
multiplied by the number of years of service to the Company and multiplied by the participants final average compensation, and reduced by amounts paid under the Deferred Compensation Plan. Amounts due under the SERP will be paid in equal
installments over 15 years commencing at normal retirement (age 65). If an ordinary benefit commences prior to normal retirement, the participant will receive the actuarial equivalent of his or her vested benefit at normal retirement, generally to
be paid over 15 years. The benefit for our chairman as of March 31, 2005 is $232 payable annually over 20 years commencing upon retirement. The following is a summary of our net periodic benefit cost including the following components for the three
and nine months ended March 31, 2005:



|                          |  |                              |    |                             |   |      |  |      |     |  |   |   
|------------------------- |  | ---------------------------- | -- | --------------------------- | - | ---- |  | ---- | --- |  | - | --
|                          |  | Three Months Ended March 31, |    | Nine Months Ended March 31,
|                          |  | 2005                         |    | 2004                        |   | 2005 |  | 2004
|Service cost              |  | $                            | 41 |                             | $ | 52   |  | $    | 188 |  | $ | 52
|Interest cost             |  |                              | 8  |                             |   | 10   |  |      | 40  |  |   | 10
|Amortization              |  |                              | 5  |                             |   | 6    |  |      | 22  |  |   | 6 
|                          |  |                              |    |                             |   |      |  |      |     |  |   |   
|Net periodic benefit cost |  | $                            | 54 |                             | $ | 68   |  | $    | 250 |  | $ | 68
|                          |  |                              |    |                             |   |      |  |      |     |  |   |   



The SERP is an unfunded obligation of
the Company in which earned plan benefits will be paid out of general operating funds as they come due. To offset the cost of the plan, the Company has purchased life insurance policies on all of the participants within the plan. The Company is the
sole beneficiary on these policies. Using this structure and professional actuarial guidance, the Company anticipates that there will be no net cost over the full life of the plan.



6. Income Tax



During the three and nine months ended March 31, 2005, the Company recognized a tax expense of $3,148 and $3,590, respectively, an effective tax rate of 47.5%. The high
effective tax rate anticipated for the year is a result of the stock-based compensation recognized under SFAS 123. During the three months ended March 31, 2004, management reassessed the valuation allowance previously established against net
deferred tax assets. Factors considered by management included: the Companys earnings history, projected earnings based on then current operations, and projected future taxable income. Based on these factors, management concluded that it is
more likely than not that the deferred tax assets would be realized. Accordingly, the Company released the remaining valuation allowance of approximately $12,200 against its deferred tax assets which consist primarily of net operating loss
carryforwards.



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##### Table of Contents

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



Caution: You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the
related notes to those statements included elsewhere in this report. This discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed at Risks
and Uncertainties below. This discussion represents our current judgment on the future direction of our business. Such risks and uncertainties could cause actual results to differ materially from any future performance suggested. We undertake
no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date of this quarterly report. This caution is made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.



PROVIDE
COMMERCESM, PROFLOWERS®, UPTOWN PRIME®and CHERRY MOON FARMSSM, are trademarks or service marks of Provide
Commerce, Inc. We have trademark rights in these marks in the U.S. and have registrations issued and pending in the U.S. We also have registrations issued or pending for the trademark PROFLOWERS in Australia, Brazil, Canada, the European Union,
Japan, Mexico, New Zealand and Switzerland. This report also refers to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of
their respective holders.



Overview



We operate an e-commerce marketplace of websites for perishable goods that consistently
delivers fresh, high-quality products direct from the supplier to the customer at competitive prices. We combine an online storefront, proprietary supply chain management technology, established supplier relationships and integrated logistical
relationships with FedEx and UPS to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include value, freshness, quality, accurate fulfillment, direct customer
service and selection, all with a guaranteed delivery date. The benefits to our suppliers include enhanced margins, broader customer reach and better inventory management. We believe our business model is highly scalable with low capital investment
requirements beyond our existing technology and systems and minimal inventory carrying costs.



We were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. Since inception, we have focused on developing our supply chain management technology, refining and
broadening our relationships with our delivery partners, generating flower sales, establishing and promoting our brands, pursuing relationships with other retailers, and preparing to launch websites featuring additional product offerings.



We plan to assess and target additional categories based on our market
platforms ability to add value by streamlining the supply chain for the benefit of customers and suppliers. We have identified premium meat and fresh fruit as initial categories where we believe we can leverage our customer base, marketing and
distribution relationships and infrastructure. In October 2003, we launched and are now operating Uptown Prime at www.uptownprime.com, offering premium meats and seafood, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium
fruits.



In July 2004, we completed a secondary public offering whereby
1,981,019 shares of our common stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by us and an aggregate of 1,881,019 shares were sold by selling stockholders. We received net proceeds of
approximately $1.4 million in connection with the secondary offering.



To date,
we have derived our net sales primarily from the sale of flowers, plants and gifts from our www.proflowers.com website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. For the three months ended March
31, 2005, we reported net sales of $57.2 million, an increase of 40.5% from $40.7 million for the three months ended March 31, 2004 and net income of $3.5 million as compared to net income of $15.9 million for the three months ended



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##### Table of Contents

March 31, 2004. For the nine months ended March 31, 2005, we reported net sales of $110.5 million, an increase of 43.7% from $76.9 million for the nine
months ended March 31, 2004, and net income of $4.0 million as compared to a net income of $15.4 million for the nine months ended March 31, 2004.



Results of Operations



The following table sets forth our results of operations expressed as a percentage of net sales for the three and nine months ended March 31, 2005, and 2004:



|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|------------------------------ |  | ---------------------------- | - |  | --------------------------- | - |  | ----- | - |  | ----- | -
|                               |  | Three Months Ended March 31, |   |  | Nine Months Ended March 31, |  
|                               |  | 2005                         |   |  | 2004                        |   |  | 2005  |   |  | 2004  |  
|Statements of Operations Data: |  |                              |   |  |                             |   |  |       |   |  |       |  
|Net sales                      |  | 100.0                        | % |  | 100.0                       | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                  |  | 53.0                         |   |  | 53.6                        |   |  | 53.2  |   |  | 54.9  |  
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|Gross profit                   |  | 47.0                         |   |  | 46.4                        |   |  | 46.8  |   |  | 45.1  |  
|                               |  |                              |   | 
|Operating expenses:            |  |                              |   |  |                             |   |  |       |   |  |       |  
|Selling and marketing          |  | 22.0                         |   |  | 21.7                        |   |  | 22.6  |   |  | 22.1  |  
|General and administrative     |  | 9.8                          |   |  | 10.9                        |   |  | 12.7  |   |  | 13.1  |  
|Information technology systems |  | 2.8                          |   |  | 2.6                         |   |  | 3.6   |   |  | 3.8   |  
|Stock-based compensation       |  | 1.5                          |   |  | 1.4                         |   |  | 2.0   |   |  | 1.7   |  
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|Total operating expenses       |  | 36.1                         |   |  | 36.6                        |   |  | 40.9  |   |  | 40.7  |  
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|Operating income               |  | 10.9                         |   |  | 9.8                         |   |  | 5.9   |   |  | 4.4   |  
|Other income, net              |  | 0.7                          |   |  | 0.4                         |   |  | 0.9   |   |  | 0.3   |  
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|Income before income tax       |  | 11.6                         |   |  | 10.2                        |   |  | 6.8   |   |  | 4.7   |  
|Income tax provision (benefit) |  | 5.5                          |   |  | (28.9                       | ) |  | 3.2   |   |  | (15.3 | )
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  
|Net income                     |  | 6.1                          | % |  | 39.1                        | % |  | 3.6   | % |  | 20.0  | %
|                               |  |                              |   |  |                             |   |  |       |   |  |       |  



Net Sales



|          |  |                                    |        |      |                             |          |  |      |      |  |      |         |          |   |        |  |      |  
|--------- |  | ---------------------------------- | ------ | ---- | --------------------------- | -------- |  | ---- | ---- |  | ---- | ------- | -------- | - | ------ |  | ---- | -
|          |  | Three Months Ended March 31,       |        |      | Nine Months Ended March 31, |         
|          |  | 2005                               |        | 2004 |                             | % Change |  |      | 2005 |  | 2004 |         | % Change |  
|          |  | (In thousands, except percentages) |       
|Net sales |  | $                                  | 57,162 |      | $                           | 40,689   |  | 40.5 | %    |  | $    | 110,541 |          | $ | 76,917 |  | 43.7 | %



Our net sales are derived primarily
from the sale of flowers, plants and gifts from our www.proflowers.com website and the sale of gourmet food from our www.uptownprime.com and www.cherrymoonfarms.com websites. We also generate net sales from fees that we receive from retailers for
whom we design and operate websites to sell perishable products under their own brands.



The increase in net sales for the three and nine months ended March 31, 2005, compared to the same periods last year resulted primarily from increases in the number of orders by new and existing customers offset by changes in the average
order values, as shown in the following table.



In order to provide better
comparability between accounting periods, the information presented in the following table represents the numbers of customers included in our database at period end, orders placed by existing customers, sales from repeat orders, new customers and
average order value in our core floral business. Results from our activities other than our core floral business are not reflected as they are not material relative to our floral activities. Information for our other activities will be presented in
the future when they become material.



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|                                    |  |                                                             |        |      |                             |          |  |      |      |  |      |        |          |   |        |  |      |  
|----------------------------------- |  | ----------------------------------------------------------- | ------ | ---- | --------------------------- | -------- |  | ---- | ---- |  | ---- | ------ | -------- | - | ------ |  | ---- | -
|                                    |  | Three Months Ended March 31,                                |        |      | Nine Months Ended March 31, |         
|                                    |  | 2005                                                        |        | 2004 |                             | % Change |  |      | 2005 |  | 2004 |        | % Change |  
|                                    |  | (in thousands, except percentages and average order values) |       
|Database of customers at period end |  |                                                             | 3,835  |      |                             | 2,721    |  | 40.9 | %    |  |      | 3,835  |          |   | 2,721  |  | 40.9 | %
|Orders placed by existing customers |  |                                                             | 592    |      |                             | 362      |  | 63.5 | %    |  |      | 1,293  |          |   | 804    |  | 60.8 | %
|Sales from repeat orders            |  | $                                                           | 31,549 |      | $                           | 19,068   |  | 65.5 | %    |  | $    | 65,164 |          | $ | 40,698 |  | 60.1 | %
|New customers                       |  |                                                             | 422    |      |                             | 330      |  | 27.9 | %    |  |      | 742    |          |   | 583    |  | 27.3 | %
|Average order value                 |  | $                                                           | 53.14  |      | $                           | 53.27    |  | (0.2 | )%   |  | $    | 50.02  |          | $ | 49.24  |  | 1.6  | %



Growth in the number of new customers
for the three and nine months ended March 31, 2005 is a result of our advertising and marketing campaigns which are designed to attract and maintain customers. We believe continued strength in repeat orders is a result of our strong customer
satisfaction and our retention marketing efforts.



In October 2003, we launched
and are now operating Uptown Prime at www.uptownprime.com, offering premium meats, and Cherry Moon Farms at www.cherrymoonfarms.com, offering fresh premium fruits. We expect premium meat and fresh premium fruit net sales to grow in significance to
our business as we develop and deploy our premium meat and fresh premium fruit websites. We expect that approximately 4% of our net sales will be derived from premium meats and fresh premium fruits in fiscal 2005. You must consider our prospects for
expanding our premium meat and fresh premium fruit net sales during fiscal 2005 and beyond in light of the risks associated with expanding into new product categories and the other risks outlined in Risks and Uncertainties below.



We will seek opportunities to grow our existing flower and meat, fruit and
other product categories via arrangements with other branded retailers and direct marketers. We offer a variety of arrangements for branded retailers or direct marketers that want to use our market platform to offer perishable products, including a
co-branded website, a private label website or a hybrid of the two. The arrangements are currently structured to involve a combination of revenue sharing and fee-based agreements. For revenue sharing agreements, we pay the retailer a portion of the
revenues generated from its website. Fee-based retailer arrangements involve a combination of up-front development costs and per-transaction fees paid to us by the retailer. Our branded retailer arrangements regardless of the payment structure
represent an immaterial percentage of our net sales for the three and nine months ended March 31, 2005. You must consider our prospects for expanding through relationships with other branded retailers and direct marketers in light of the risks
outlined in Risks and Uncertainties below.



Gross Profit



|                        |  |                                    |        |   |                             |   |        |          |  |      |      |  |   |        |   |  |          |        |   |  |      |  
|----------------------- |  | ---------------------------------- | ------ | - | --------------------------- | - | ------ | -------- |  | ---- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | ---- | -
|                        |  | Three Months Ended March 31,       |        |   | Nine Months Ended March 31, |  
|                        |  | 2005                               |        |   | 2004                        |   |        | % Change |  |      | 2005 |  |   | 2004   |   |  | % Change |       
|                        |  | (In thousands, except percentages) |       
|Gross profit            |  | $                                  | 26,838 |   |                             | $ | 18,895 |          |  | 42.0 | %    |  | $ | 51,776 |   |  | $        | 34,678 |   |  | 49.3 | %
|Gross profit percentage |  |                                    | 47.0   | % |                             |   | 46.4   | %        |  |      |      |  |   | 46.8   | % |  |          | 45.1   | % |  |      |  



Our gross profit consists of net sales
less cost of sales. Our cost of sales consists primarily of flower and other product costs and shipping charges. Other costs included in cost of sales are product and delivery supplies costs, the cost of replacement products, and distribution
facility labor costs.



The increase in the gross profit in absolute dollars for
the three and nine months ended March 31, 2005 compared to the same periods last year was a result of the increase in net sales combined with a higher gross profit percentage. The increase in cost of sales in terms of gross dollars for the three
months ended March 31, 2005 compared to the same period last year was principally attributable to the variable costs associated with purchasing and shipping products to our customers and the cost of purchasing and shipping replacement orders. The
increase in cost of sales in terms of gross dollars for the nine months ended March 31, 2005 compared to the same period last year was principally attributable to the variable cost associated with shipping products to our customers, the direct cost
of purchasing products and the direct costs of purchasing and shipping replacement orders.



The increase in the gross profit percentage for the three and nine months ended March 31, 2005 compared to the same periods last year was a result of a reduction in shipping costs relative to net sales due to
implementing ground delivery for many of our products. In addition, we experienced cost savings in product and accessory costs due to favorable pricing and a more profitable product mix. These cost savings were partially offset by an increase in the
costs associated with the packaging of our products for delivery.



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##### Table of Contents

We expect that our gross profit and gross profit percentage will fluctuate in the future as we increase net sales, expand
into new product categories based upon our product mix, average order value, product costs, shipping costs, product replacement and refund rates and handling and packaging costs for the various products.



Selling and Marketing



|                          |  |                                    |        |   |                             |   |       |          |  |      |      |  |   |        |   |  |          |        |   |  |      |  
|------------------------- |  | ---------------------------------- | ------ | - | --------------------------- | - | ----- | -------- |  | ---- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | ---- | -
|                          |  | Three Months Ended March 31,       |        |   | Nine Months Ended March 31, |  
|                          |  | 2005                               |        |   | 2004                        |   |       | % Change |  |      | 2005 |  |   | 2004   |   |  | % Change |       
|                          |  | (In thousands, except percentages) |       
|Selling and marketing     |  | $                                  | 12,579 |   |                             | $ | 8,845 |          |  | 42.2 | %    |  | $ | 24,997 |   |  | $        | 16,968 |   |  | 47.3 | %
|As a percent of net sales |  |                                    | 22.0   | % |                             |   | 21.7  | %        |  |      |      |  |   | 22.6   | % |  |          | 22.1   | % |  |      |  



Our selling and marketing expenses
consist primarily of advertising costs, payroll and payroll related benefits for our category development and marketing and contract, temporary and permanent customer service staff, customer and other marketing research and promotional expenses.
Advertising costs are generally expensed as incurred. For advertising contracts which cover an extended period of time, the costs are expensed over the life of the contract based on the specifics of the contract, such as orders placed, radio spots
run or Internet advertisements placed. Our advertising efforts target the acquisition of new customers and repeat orders from existing customers.



The increase in the selling and marketing expenses for the three months ended March 31, 2005 compared to the same period last year was primarily due to an increase in
online and offline advertising and promotional costs as a result of our marketing activities designed to generate additional net sales through increases in our number of new customers and repeat purchases by existing customers. In addition, we
experienced an increase in the cost of our customer service personnel as the increase in net sales has increased headcount of contract, permanent and seasonal customer service representatives. We also experienced an increase in payroll and payroll
related costs as we increased our marketing staff headcount in an effort to drive increases in net sales. The increase in the selling and marketing expenses for the nine months ended March 31, 2005 compared to the same period last year was primarily
due to an increase in online and offline advertising and promotional costs as a result of our marketing activities designed to generate additional net sales through increases in our number of new customers and repeat purchases by existing customers.
In addition, in the nine months ended March 31, 2005 compared to the same period last year, we experienced an increase in payroll and payroll related costs as we increased our marketing staff headcount in an effort to drive increases in net sales.
We also experienced an increase in the cost of our customer service personnel as the increase in net sales has increased headcount of contract, permanent and seasonal customer service representatives.



The increase in selling and marketing expenses for the three and nine months ended March 31,
2005 as a percentage of net sales compared to the same periods last year was primarily a result of an increase in contract and temporary customer service personnel which was partially offset by a reduction in customer service payroll and payroll
related costs. These cost increases were also offset by a decrease in online and offline marketing costs relative to the increase in net sales and an increase in customer and market research costs.



We expect selling and marketing expenses to continue to increase in absolute dollars in the
future as a result of continued expansion of our sales and marketing infrastructure in support of a broader product portfolio and expanded sales efforts. For fiscal 2005, we expect selling and marketing expenses to fall within 22% to 23% of net
sales. However, as we identify opportunities to increase our growth in net sales, we may increase our marketing expense to take advantage of additional potential net sales.



General and Administrative



|                           |  |                                    |       |   |                             |   |       |          |  |      |      |  |   |        |   |  |          |        |   |  |      |  
|-------------------------- |  | ---------------------------------- | ----- | - | --------------------------- | - | ----- | -------- |  | ---- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | ---- | -
|                           |  | Three Months Ended March 31,       |       |   | Nine Months Ended March 31, |  
|                           |  | 2005                               |       |   | 2004                        |   |       | % Change |  |      | 2005 |  |   | 2004   |   |  | % Change |       
|                           |  | (In thousands, except percentages) |      
|General and administrative |  | $                                  | 5,592 |   |                             | $ | 4,433 |          |  | 26.1 | %    |  | $ | 14,032 |   |  | $        | 10,109 |   |  | 38.8 | %
|As a percent of net sales  |  |                                    | 9.8   | % |                             |   | 10.9  | %        |  |      |      |  |   | 12.7   | % |  |          | 13.1   | % |  |      |  



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Our general and administrative expenses consist primarily of payroll and payroll related benefits for our employees,
except those associated with fulfillment, customer service, technology and sales and marketing employees. These expenses also include credit card fees, depreciation of fixed assets, facilities costs (other than facilities costs associated with cost
of goods sold), insurance, legal and accounting and other professional fees, travel, phone, utilities, bad debt expense and other general corporate expenses.



The increase in absolute general and administrative expenses for the three months ended March 31, 2005 compared to the same period last year was primarily due to an
increase in the variable credit card transaction fees resulting from an increase in net sales volumes. This increase was partially offset by a decrease in bad debt expense related to chargeback activity from credit card transactions following our
implementation of additional security features on our website to combat the use of fraudulant credit cards. Depreciation expense also increased due to the addition of fixed assets to support the growth in net sales and our corporate infrastructure.
The increase in absolute general and administrative expenses for the nine months ended March 31, 2005 compared to the same period last year was primarily due to an increase in the variable credit card transaction fees resulting from an increase in
net sales volumes and an increase in payroll and payroll related costs as the number of personnel has increased to support the growth of our business. Depreciation expense also increased due to the addition of fixed assets to support the growth in
net sales and our corporate infrastructure. These increases were partially offset by a decrease in chargeback activity from credit card transactions as we have implemented additional security features on our website to combat the use of fraudulant
credit cards.



The decrease in general and administrative expenses as a
percentage of net sales for the three and nine months ended March 31, 2005 compared to the same periods last year was primarily a result of a decrease in bad debt expense related to credit card chargeback activity from credit card transactions
following our implementation of additional security features on our website to combat the use of fraudulent credit cards. We also experienced a reduction in payroll and payroll related costs and in rent expense relative to the increase in net sales.
For the nine months ended March 31, 2005 these costs savings were partially offset by increased depreciation of fixed assets necessary to support the growth in net sales volume and corporate infrastructure.



We expect general and administrative expenses to continue to increase in absolute dollars in
the future as a result of continued expansion of our administrative infrastructure in support of a broader technology and product portfolio. However, we also anticipate that general and administrative expenses will decrease as a percentage of net
sales as a result of net sales growing faster than general and administrative expenses, particularly in high sales volume quarters.



Information Technology Systems



|                               |  |                                    |       |   |                             |   |       |          |  |      |      |  |   |       |   |  |          |       |   |  |      |  
|------------------------------ |  | ---------------------------------- | ----- | - | --------------------------- | - | ----- | -------- |  | ---- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | ---- | -
|                               |  | Three Months Ended March 31,       |       |   | Nine Months Ended March 31, |  
|                               |  | 2005                               |       |   | 2004                        |   |       | % Change |  |      | 2005 |  |   | 2004  |   |  | % Change |      
|                               |  | (In thousands, except percentages) |      
|Information technology systems |  | $                                  | 1,586 |   |                             | $ | 1,068 |          |  | 48.5 | %    |  | $ | 3,942 |   |  | $        | 2,900 |   |  | 35.9 | %
|As a percent of net sales      |  |                                    | 2.8   | % |                             |   | 2.6   | %        |  |      |      |  |   | 3.6   | % |  |          | 3.8   | % |  |      |  



Our information technology systems
expenses consist primarily of payroll and payroll related benefits for information technology personnel, engineering consulting expenses, and outside services, including hosting of our Internet servers. Information technology system expenses are
expensed as incurred. Information technology system expenses are net of software capitalization of major site and product development efforts under Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for
Internal Use.



The increase in information technology costs in absolute
dollars for the three months ended March 31, 2005 compared to the same period last year was a result of an increase in payroll and payroll related costs necessary to support the increase in sales volumes and the growth of our business. In addition
we capitalized fewer costs associated with internally developed software. We capitalized costs associated with internally developed software of approximately $97,000 and $161,000 for the three months ended March 31, 2005 and 2004, respectively, and
approximately $729,000 and $681,000 for the nine months ended March 31, 2005 and 2004, respectively. The increase in information technology costs in absolute dollars for the nine months ended March 31, 2005 compared to the same period last year was
a result of an increase in payroll and payroll related costs necessary to support the increase in sales volumes and the growth of our business. This increase was partially offset by a decrease in contracted information technology personnel.



The increase in information technology expense as a percentage of net sales
for the three months ended March 31, 2005 compared to the same period last year was a result of capitalizing fewer costs of developing software for internal



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use. The decline in information technology expense as a percentage of net sales for the nine months ended March 31, 2005
compared to the same period last year was caused primarily by our net sales growth, which outpaced our growth in information technology system expenses combined with capitalized information technology expenditures. We expect information technology
system expenses to increase in absolute dollars for the remainder of fiscal 2005 compared to fiscal 2004 but to remain at a relatively constant percentage of net sales compared to fiscal 2004 as we continue to invest in our infrastructure to support
the growth of our business.



Stock-Based Compensation



|                          |  |                                    |     |   |                             |   |     |          |  |      |      |  |   |       |   |  |          |       |   |  |      |  
|------------------------- |  | ---------------------------------- | --- | - | --------------------------- | - | --- | -------- |  | ---- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | ---- | -
|                          |  | Three Months Ended March 31,       |     |   | Nine Months Ended March 31, |  
|                          |  | 2005                               |     |   | 2004                        |   |     | % Change |  |      | 2005 |  |   | 2004  |   |  | % Change |      
|                          |  | (In thousands, except percentages) |    
|Stock-based compensation  |  | $                                  | 850 |   |                             | $ | 547 |          |  | 55.4 | %    |  | $ | 2,228 |   |  | $        | 1,304 |   |  | 70.9 | %
|As a percent of net sales |  |                                    | 1.5 | % |                             |   | 1.4 | %        |  |      |      |  |   | 2.0   | % |  |          | 1.7   | % |  |      |  



Stock-based compensation increased
during the three and nine months ended March 31, 2005 compared to the same periods last year due to the amortization of compensation expense related to options granted in connection with the retention of key employees and hiring of new employees.
The increase was due to both an issuance of new options and a higher cost per option as a result of the increase in the market price of our common stock. As a percent of net sales, stock-based compensation increased slightly during the quarter ended
March 31, 2005 as the percentage increase in stock-based compensation expense was slightly greater than the percentage increase in net sales. The increase in stock-based compensation as a percentage of net sales for the nine months ended March 31,
2005, was due to significantly higher amortization during the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004.



Prior to fiscal 2003, we accounted for stock-based employee compensation arrangements under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Effective July 1, 2002, we adopted the fair value recognition provisions of SFAS No. 123. We selected the prospective method of adoption described in SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All grants prior to
our adoption of SFAS No. 123 will continue to be accounted for under the intrinsic value provision of APB No. 25.



Other Income, Net



|                          |  |                                    |     |   |                             |   |     |          |  |       |      |  |   |      |   |  |          |     |   |  |       |  
|------------------------- |  | ---------------------------------- | --- | - | --------------------------- | - | --- | -------- |  | ----- | ---- |  | - | ---- | - |  | -------- | --- | - |  | ----- | -
|                          |  | Three Months Ended March 31,       |     |   | Nine Months Ended March 31, |  
|                          |  | 2005                               |     |   | 2004                        |   |     | % Change |  |       | 2005 |  |   | 2004 |   |  | % Change |    
|                          |  | (In thousands, except percentages) |    
|Other income, net         |  | $                                  | 398 |   |                             | $ | 148 |          |  | 168.9 | %    |  | $ | 981  |   |  | $        | 186 |   |  | 427.4 | %
|As a percent of net sales |  |                                    | 0.7 | % |                             |   | 0.4 | %        |  |       |      |  |   | 0.9  | % |  |          | 0.3 | % |  |       |  



Other income, net included in the
statements of operations primarily consists of interest income and interest expense.



The increase in other income, net for the three and nine months ended March 31, 2005 compared to the same periods last year was a result of an increase in investment income from our cash and marketable securities as a result of additions to
cash levels generated through continuing operations. In addition, we incurred less interest expense related to our obligation under capital lease, which expired in the second quarter of fiscal 2005.



Income Tax Provision



|                               |  |                                    |       |                             |      |   |         |          |  |      |  |   |       |   |  |          |         |    |  |    
|------------------------------ |  | ---------------------------------- | ----- | --------------------------- | ---- | - | ------- | -------- |  | ---- |  | - | ----- | - |  | -------- | ------- | -- |  | ---
|                               |  | Three Months Ended March 31,       |       | Nine Months Ended March 31,
|                               |  | 2005                               |       |                             | 2004 |   |         | % Change |  | 2005 |  |   | 2004  |   |  | % Change
|                               |  | (In thousands, except percentages)
|Income tax provision (benefit) |  | $                                  | 3,148 |                             |      | $ | (11,768 | )        |  | N/A  |  | $ | 3,590 |   |  | $        | (11,768 | )  |  | N/A
|As a percent of net sales      |  |                                    | 5.5   | %                           |      |   | (28.9   | )%       |  |      |  |   | 3.2   | % |  |          | (15.3   | )% |  |    



The income tax expense reflects the
anticipated effective tax rate for the year applied to the income before tax for the three and nine months ended March 31, 2005. The high effective tax rate anticipated for the year is a



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result of the stock-based compensation recognized under SFAS 123, which is not immediately deductible (if at all) for
financial accounting purposes. During the three months ended March 31, 2004, management reassessed the valuation allowance previously established against net deferred tax assets. Factors considered by management included: our earnings history,
projected earnings based on then current operations, and projected future taxable income. Based on these factors, management concluded that it is more likely than not that the deferred tax assets would be realized. Accordingly, we released the
remaining valuation allowance of approximately $12.2 million against its deferred tax assets which consist primarily of net operating loss carryforwards.



Net Income (Loss)



|                          |  |                                    |       |   |                             |   |        |          |  |       |      |  |   |       |   |  |          |        |   |  |       |   
|------------------------- |  | ---------------------------------- | ----- | - | --------------------------- | - | ------ | -------- |  | ----- | ---- |  | - | ----- | - |  | -------- | ------ | - |  | ----- | --
|                          |  | Three Months Ended March 31,       |       |   | Nine Months Ended March 31, |  
|                          |  | 2005                               |       |   | 2004                        |   |        | % Change |  |       | 2005 |  |   | 2004  |   |  | % Change |       
|                          |  | (In thousands, except percentages) |       |   |                             |  
|Net income (loss)         |  | $                                  | 3,481 |   |                             | $ | 15,918 |          |  | (78.1 | )%   |  | $ | 3,968 |   |  | $        | 15,351 |   |  | (74.2 | )%
|As a percent of net sales |  |                                    | 6.1   | % |                             |   | 39.1   | %        |  |       |      |  |   | 3.6   | % |  |          | 20.0   | % |  |       |   



The change in net income is a result
of the changes in net sales and expenses as previously discussed.



Liquidity and Capital Resources



|                          |  |                                    |        |               |   |          |  |      |  
|------------------------- |  | ---------------------------------- | ------ | ------------- | - | -------- |  | ---- | -
|                          |  | March 31, 2005                     |        | June 30, 2004 |   | % Change | 
|                          |  | (In thousands, except percentages) |       
|Working capital           |  | $                                  | 58,799 |               | $ | 50,139   |  | 17.3 | %
|Cash and cash equivalents |  | $                                  | 24,993 |               | $ | 18,210   |  | 37.2 | %
|Marketable securities     |  | $                                  | 45,768 |               | $ | 41,218   |  | 11.0 | %



Since our inception, we have financed
our operations through sales of stock, and, more recently, internally generated cash flows from operations. The increases in working capital and cash and cash equivalents at March 31, 2005 over June 30, 2004 resulted primarily from working capital
generated by operations of approximately $13.4 million combined with the receipt of the net proceeds of $1.4 million from our secondary public offering of common stock, completed in July 2004, reduced by the purchase of fixed assets of approximately
$4.1 million.



Net cash provided by operating activities was $13.4 million for
the nine months ended March 31, 2005. The generation of cash from operations during the period was primarily a result of an increase in accounts payable and other accrued liabilities in combination with cash flow from revenues, less expenses, net of
non-cash expenses such as depreciation and stock-based compensation. The increase in accounts payable and other current liabilities was primarily due to the increase in costs associated with increased sales activity during the period compared to the
same period last year. The increase in current liabilities was partially offset by an increase in current assets.



We use cash in investing activities primarily to purchase computer hardware and software, office equipment and furniture. Investing activities also includes the purchase
and sale of marketable securities in order to provide for cash flow needs or invest excess cash. Cash used in investing activities during the nine months ended March 31, 2005 was primarily a result of the net purchase of marketable securities and
the purchase of fixed assets.



Net cash provided by financing activities was
$2.2 million for the nine months ended March 31, 2005. We currently intend to retain all available funds to support our operations and to finance the growth and development of our business.



In July 2004, we completed a secondary public offering whereby 1,981,019 shares of our common
stock were sold at an offering price of $19.63 per share. Of the 1,981,019 shares sold, 100,000 shares were sold by us and an aggregate of 1,881,019 shares were sold by selling stockholders. We received net proceeds of approximately $1.4 million in
connection with the secondary offering.



The change in marketable securities is
a result of the net sales or purchases of marketable securities to meet our cash requirements or invest additional cash.



We believe that our available cash and cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the
next twelve months. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in Risks and Uncertainties



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below, may cause us to seek additional debt or equity financing in the future. Financing may not be available on
acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock
and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.



Critical Accounting Policies



Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the U.S. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosure
of contingent assets and liabilities. On an on-going basis, estimates are evaluated, including those related to the timing of marketing expense, lives and depreciation of fixed assets, reserves for bad debts and credit card chargebacks, reserves for
inventory and impairment of long-lived assets. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management believes there have been no material changes during the three and nine month periods
ended March 31, 2005 to the critical accounting policies reported in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2004 as filed
with the Securities and Exchange Commission on September 28, 2004.



Recently
Issued Accounting Standards



We adopted the fair-value-based method of
accounting for stock-based payments effective July 1, 2002 using the prospective method described in FASB Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Currently, we use the Black-Scholes formula
to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on July 1, 2005. Because SFAS 123(R) must be applied not only to new awards
but to previously granted awards that are not fully vested on the effective date, and because we adopted SFAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date),
compensation cost for some previously granted awards that were not recognized under SFAS 123 will be recognized under SFAS 123(R). We do not anticipate that this will have a material effect on its financial statements. However, had we adopted SFAS
123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 to our annual consolidated financial statements. SFAS 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $2.3 million for the nine months ended March 31, 2005 and $246,000, $0, and $0 in fiscal years ended June 30, 2004, 2003 and 2002, respectively.



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Risks and Uncertainties



The following information sets forth factors that could cause our actual results to differ materially from those contained in forward-looking statements we have
made in this report and those we may make from time to time. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In addition, there may be other risks of which we are currently
unaware or that we do not currently believe are material that could become important factors that harm our business, financial condition or results of operations. You should also consider the other information described in this report.



Risks Related to Our Business



Our quarterly operating results may fluctuate significantly. You should not rely on them
as an indication of our future results.



Our future net sales and results
of operations may fluctuate significantly from quarter to quarter due to a combination of factors, many of which are outside of our control. The most important of these factors include:



| |  |  | seasonality and timing of holidays;
| | - |  | -----------------------------------



| |  |  | the timing, costs and effectiveness of marketing programs;
| | - |  | ----------------------------------------------------------



| |  |  | our ability to enter into and renew key corporate and strategic partnerships;
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to enter into or renew key marketing arrangements;
| | - |  | --------------------------------------------------------------



| |  |  | our ability to compete with traditional and Internet retailers;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability and the ability of our competitors to deliver high-quality perishable products to customers in a timely manner;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the performance of our third-party carriers, FedEx and UPS;
| | - |  | -----------------------------------------------------------



| |  |  | the condition of the retail economy; and
| | - |  | ----------------------------------------



| |  |  | the timing and effectiveness of capital expenditures.
| | - |  | -----------------------------------------------------



We may be unable to adjust spending quickly enough to offset any unexpected sales shortfall resulting from any of these or other factors. If we have a shortfall in net
sales in relation to our expenses, our operating results will suffer. Our operating results for any particular period may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations
as an indication of our future performance. In future periods, it is possible that our results of operations may be below the expectations of public market analysts and investors. This could cause the trading price of our common stock to fall.



We achieved annual net income for the first time during fiscal 2003, and we
cannot assure you we will continue to operate profitably.



We achieved
annual net income for the first time in our corporate history during fiscal 2003 of $4.3 million and achieved annual net income attributable to common stockholders for fiscal 2004 of $18.0 million, which included a release of a valuation allowance
against deferred tax assets of $12.2 million. However, we may not be able to continue to achieve positive net income in future fiscal years, especially as we introduce new product categories. We expect our operating expenses to increase in the
future, as we, among other things:



| |  |  | expand into new product categories and accessories for our existing product lines;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | continue with our marketing efforts to build our brand names;
| | - |  | -------------------------------------------------------------



| |  |  | expand our customer base;
| | - |  | -------------------------



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| |  |  | establish research and development efforts to advance our proprietary supply chain technology and develop new technology;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | upgrade our operational and financial systems, procedures and controls;
| | - |  | -----------------------------------------------------------------------



| |  |  | continue to absorb the costs and implement the responsibilities of being a public company; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | retain existing personnel and hire additional personnel.
| | - |  | --------------------------------------------------------



After investment in items including those described above, we expect to maintain profitability for fiscal 2005 and for the foreseeable future, although no assurances can
be made that we will be profitable. In order to maintain profitability as we expand into new product categories, we will need to generate net sales exceeding historical levels and/or reduce relative operating expenditures. We do not have significant
experience offering product categories other than flowers. We may not be able to generate the required net sales from flowers and other perishable products or reduce operating expenses sufficiently to sustain or increase operating profitability. If
we have a shortfall in net sales without a corresponding reduction to our expenses, our operating results may suffer. It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause
the trading price of our common stock to fall.



We have
operated our flower category for approximately six years and our premium meat and fresh fruit categories for approximately eighteen months. This limited operating history makes evaluating our business and its prospects difficult.



We have a limited operating history on which an investor can evaluate our business. We
were incorporated in February 1998 and officially launched our website, www.proflowers.com, in August 1998. To date, we have derived our net sales primarily from the sale of flowers, plants and gifts from our www.proflowers.com website. We began
selling premium meat and fresh premium fruit in October 2003. An investor in our common stock must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving online retail markets such as these
we have targeted. If we do not successfully manage these risks or successfully execute our business strategy, our business, results of operations and financial condition will be adversely affected.



Utilization of our deferred tax assets is dependent on future taxable
income.



We have a federal tax net operating loss carryforwards at
June 30, 2004 of approximately $24 million, which represents a substantial amount of our deferred tax assets. In calculating our tax provision, and assessing the likelihood that we will be able to utilize the deferred tax assets, we have considered
and weighed all of the evidence, both positive and negative, and both objective and subjective. We have factored in the inherent risk of forecasting net sales and expenses over an extended period of time. We have also considered the potential risks
associated with our business, as outlined in other risk factors in this report, and have taken into account material permanent differences in the treatment of net sales and expenses for purposes of financial reporting and tax accounting, such as the
treatment of stock options, limitation on meals and entertainment and stock-based compensation.



Based on information available through our third quarter of fiscal 2004, and sufficient positive evidence, particularly the fact that we reported taxable income for the past three fiscal years and forecasted future
book and tax income, we reversed the valuation allowance during fiscal 2004. Although we anticipate generating future taxable income, we cannot guarantee that we will generate sufficient taxable income to fully utilize our deferred tax assets.



If our customers do not find our expanded product
categories appealing or if we are unable to successfully leverage our business strategy into our new product categories, our business may suffer.



We have recently expanded our product lines into other categories of perishable goods. In October 2003, we launched and are now operating two additional websites under
our gourmet food business unit: Uptown Prime, offering premium meats and now premium seafood; and Cherry Moon Farms, offering fresh premium fruits. In any possible future expansion of our categories, we intend to leverage our e-commerce platform,
marketing and shipping relationships and customer base to develop opportunities for us and other retailers using our platform to offer perishable products. While our market platform has been incorporated into and tested in the online floral retail
market, we cannot predict whether it can be successfully applied to other perishable product categories over time. In addition, expansion of our business



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strategy into new product categories may require us to incur significant marketing expenses, develop relationships with
new suppliers and comply with new regulations. These requirements could strain our management, financial and operational resources. Additional challenges that may affect our ability to expand into new product categories include our ability to:



| |  |  | establish or increase awareness of our new brands and product categories;
| | - |  | -------------------------------------------------------------------------



| |  |  | acquire, attract and retain customers at a reasonable cost;
| | - |  | -----------------------------------------------------------



| |  |  | achieve and maintain a critical mass of customers and orders across all of our product categories;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | maintain or improve our gross margins and fulfillment costs;
| | - |  | ------------------------------------------------------------



| |  |  | compete effectively in highly competitive markets for the sale of perishable goods online;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | attract and retain suppliers to provide our expanded line of perishable products to our customers on terms that are acceptable to us; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establish ourselves as an important participant in the market for perishable products, such as premium meat and fresh fruit.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



We cannot be certain that we will be able to successfully address any or all of these
challenges in a manner that will enable us to expand our business into new product categories in a cost-effective or timely manner. If our new product categories are not received favorably by consumers, our reputation and the value of the applicable
new brand and our other brands could be damaged. The lack of market acceptance of our new product categories or our inability to generate satisfactory net sales from any expanded product categories to offset their cost could harm our business.



We depend on two third-party carriers, and the failure
of these carriers to deliver our product offerings in a timely or accurate manner could harm our business.



We currently rely primarily on two third-party carriers, FedEx and UPS, for shipments of our products to customers. We are therefore subject to the risks, including
capacity and volume constraints, security concerns, employee strikes or other labor stoppages, inclement weather, equipment failures or other delays and fluctuations in fuel costs, associated with the carriers ability to provide timely and
cost-effective order fulfillment and delivery services to meet our distribution and shipping needs. Under our contracts with both parties, we have agreed to waive specified refunds and guarantees for service failures and for commitment times during
our seasonal peak periods in exchange for favorable pricing on our shipments with them. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation, our brands and our results of operations.



We re-negotiate various provisions of our agreements with FedEx and UPS on a periodic basis
and are subject to possible terminations upon 60 days prior notice with FedEx and thirty days prior notice with UPS. We may face substantial increases in the cost of delivery services from our delivery partners as a result of increases in the prices
of gasoline and fuel, heightened security measures or other factors. If in the future we fail to negotiate rates or other terms as favorable to us as the existing terms of our agreement, such failure will adversely affect our business and results of
operations. In addition, if for any reason FedEx or UPS is unable or unwilling to deliver products to our customers in a timely manner or on acceptable terms, we may not be able to secure alternative shipping partners on acceptable terms in a timely
manner, or at all.



We depend on three suppliers for
approximately 58% of our flower products, and the loss of any of these suppliers could harm our business.



For the nine months ended March 31, 2005, and for fiscal year 2004 we depended upon three suppliers for approximately 57.5% and 44.2% of our flower products,
respectively. If any one of these three flower suppliers were to become unable or unwilling to continue to supply flowers to our customers, our business could be harmed. We do not have long-term contracts with any of our flower suppliers for order
fulfillment, and these suppliers can terminate their relationships with us at any time. If a flower supplier discontinues its relationship with us, we will be required to obtain a suitable replacement, which may cause delays in delivery or a decline
in product quality, leading to customer dissatisfaction and loss of customers. We expect to encounter similar risks as we develop our premium meat and fruit and other perishable product supplier relationships.



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If our marketing efforts are not effective, our brands may not achieve the broad recognition
necessary to succeed.



We believe that broader recognition and a
favorable consumer perception of our brands, including our Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands, are essential to our future success. Accordingly, we intend to pursue an aggressive brand-enhancement strategy
through a variety of online and offline marketing and promotional techniques, involving the Internet, print, radio, email, direct mail, public relations and television. These initiatives will involve significant expense. If our brand enhancement
strategy is unsuccessful, these expenses may never be recovered and we may be unable to increase future net sales. Successful positioning of the Provide Commerce, ProFlowers, Uptown Prime and Cherry Moon Farms brands will largely depend on:



| |  |  | the success of our advertising and promotional efforts;
| | - |  | -------------------------------------------------------



| |  |  | our ability to provide a consistent, high-quality customer experience; and
| | - |  | --------------------------------------------------------------------------



| |  |  | our ability to continue to provide high-quality products to our customers in a timely manner.
| | - |  | ---------------------------------------------------------------------------------------------



Due to the change in our corporate name in September 2003 and expansion of our product categories in October 2003, our ProFlowers brand is
our only brand that has received broader recognition by customers who associate it with our www.proflowers.com website and the sale of flowers and floral products. To increase awareness of our new corporate name and brands and our other proposed
brands and product offerings, we will need to continue to spend significant amounts on advertising and promotions. These expenditures may not result in a sufficient increase in net sales to cover such advertising and promotional expenses. In
addition, even if brand recognition increases, the number of new customers or the number of transactions on our branded websites may not increase. Also, even if the number of new customers increases, those customers may not purchase products through
our branded websites on a regular basis.



We have
historically experienced seasonality in our business, which we expect to continue and which could cause our operating results to fluctuate.



We have historically experienced seasonality in our ProFlowers business due to the nature of our products, and we expect this seasonality to continue. Our net sales and
earnings are generally lowest in the third calendar quarter, our first fiscal quarter. Sales of our products are highly concentrated in the first calendar quarter due to Valentines Day, in the second calendar quarter due to Mothers Day
and generally Easter, and in the fourth calendar quarter due to the Thanksgiving and end-of-year holidays. In addition, due to variability in the date for Easter, comparisons of quarterly earnings between years can be impacted since Easter can occur
in either the first or second calendar quarters, or our third and fourth fiscal quarters. In anticipation of increased sales activity during these periods, we utilize a significant number of temporary employees to supplement our permanent staff. We
also increase our inventory levels at our distribution facilities. If net sales during these periods do not meet our expectations, we may not generate sufficient net sales to offset these increased costs and our operating results may suffer.



In addition, our business may be adversely affected by the particular day of
the week on which certain major holidays fall due to logistical challenges in delivering shipments on the actual date or the dates immediately prior to such holiday.



The relatively recent launch of our new branded websites targeting premium meat and fresh fruit makes it difficult for us to assess the
impact of seasonal factors on our business in the future. We expect that our new product categories will also be subject to seasonal fluctuations, reflecting a combination of seasonality trends for the products and services offered by our new
branded websites and seasonality patterns affecting Internet use generally. For example, demand for our current and new product offerings is likely to increase during holiday periods, such as Fathers Day and Christmas, while Internet use in
general may decline during the summer months. Our results may also be affected by seasonal fluctuations in the products made available to us for sale by participating suppliers. Cyclical variations for new products we plan to offer may either smooth
or increase our existing seasonality. Unanticipated fluctuations in seasonality could adversely affect our operating results and cause us to miss our internal and third-party earnings projections, which could cause our stock price to decline.



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We face intense competition from both traditional and online retail companies with greater brand
recognition and resources, which may adversely affect our business.



The e-commerce market segments in which we currently compete are intensely competitive, and we have many competitors in different industries. Many of the products we offer can be purchased at supermarkets and warehouse stores as well as
specialty markets. Our floral competitors include traditional florists, catalog and online floral providers such as 1-800-FLOWERS and Hallmark Flowers, and floral wire services such as FTD and Teleflora. In the premium meat and seafood category, we
believe our competitors include specialty butchers, mail order companies, seafood specialty catalogs and other online meat providers, such as Omaha Steaks Company. We believe competitors in the fresh fruit category include local farmers
markets and specialty catalog companies, such as Harry & David. Additionally, we compete with specialty food companies and general gift companies.



Competition in the e-commerce channel may intensify, especially as we expand into product categories in addition to flowers. The nature of the Internet as an electronic
marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce our ability to expand our business, and thus reduce our sales and
operating profits, or both.



Many of our current and potential competitors
enjoy substantial competitive advantages, including:



| |  |  | greater name recognition;
| | - |  | -------------------------



| |  |  | a longer operating history;
| | - |  | ---------------------------



| |  |  | a more extensive customer base;
| | - |  | -------------------------------



| |  |  | broader product and service offerings; and
| | - |  | ------------------------------------------



| |  |  | greater resources for competitive activities, such as sales and marketing, research and development, strategic acquisitions, alliances and joint ventures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



As a result, these current and potential competitors may be able to secure merchandise
from suppliers on more favorable terms, and may be able to adopt more aggressive pricing policies. Other companies in the retail and e-commerce service industries may enter into business combinations or alliances that strengthen their competitive
positions. These business combinations or alliances might prevent them from also entering into relationships with us or prevent us from taking advantage of such combinations or alliances. They also may be able to respond more quickly and effectively
than we can to new or changing opportunities, technologies, standards or customer requirements. Intense competition may lead to:



| |  |  | price reductions, decreased net sales and lower profit margins;
| | - |  | ---------------------------------------------------------------



| |  |  | loss of market share; or
| | - |  | ------------------------



| |  |  | increased marketing expenditures.
| | - |  | ---------------------------------



Failure to provide our customers with high-quality products and customer service may harm our brand and cause our net sales to decline.



We believe that our success in promoting and enhancing our brands will
depend on our success in providing our customers high-quality products and a high level of customer service. Product orders placed by our customers are fulfilled by our third-party suppliers. We work with our suppliers to develop best practices for
quality assurance; however, we do not directly or constantly control any of our suppliers. If our suppliers do not fulfill orders to our customers satisfaction, our customers may not shop with us again. In addition, because we do not have
constant, direct control over these third-party suppliers, interruptions or delays in the products they supply may be difficult to remedy in a timely fashion. If any of our suppliers is incapable of or unwilling to fulfill our product orders, we
will attempt to ship the



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products from another source to guarantee right-day delivery; however, we may not be able to ship the products from an
alternate source in a timely manner or at all. Furthermore, we depend on our customer service department to respond to our customers should they have questions or problems with their orders. During peak periods, we also rely on temporary employees
and outsourced staff to respond to customer inquiries. Temporary employees and outsourced staff may not have the same level of commitment to our customers as our full-time employees. If our customers are dissatisfied with the quality of the products
or the customer service they receive, or if we are unable to deliver products to our customers in a timely manner or at all, our customers may stop purchasing products in the related category from us. Also, they may choose not to purchase products
from another of our product categories, which could adversely affect our business and results of operations.



If the number of customers using our satisfaction guarantee increases, our net income could decrease.



We guarantee that all of our flowers will last at least seven days and our plants at least
14 days. We offer our customers a 100% satisfaction guarantee on our floral, meat and fruit products during the relevant periods. We expect to offer a similar 100% satisfaction guarantee on other products that we may offer in the future. If our
customers are not satisfied with the products they receive, we either send them a replacement product or issue a refund. If a significant number of customers request replacement products or refunds, our net income could decrease and our reputation
as a provider of high-quality products could be harmed.



We are dependent on our strategic relationships to help promote our branded websites and expand our product offerings; if we fail to maintain or enhance these relationships, our development could be hindered.



We believe that our strategic relationships with leading Internet portal
companies, other online retailers, radio advertisers and direct marketers are critical to attract customers, facilitate broad market acceptance of our products and brands and enhance our sales and marketing capabilities. For example, 31.5% of our
total customer orders placed in fiscal 2004 were generated from customers who linked to our website from websites operated by other retailers or Internet portal companies with whom we have a strategic relationship. A failure to maintain existing and
to establish additional strategic online relationships that generate a significant amount of traffic from other websites could limit the growth of our business. Establishing and maintaining relationships with leading Internet portal companies, other
online retailers, radio advertisers and direct marketers is competitive and expensive. In particular, many Internet portal companies have significantly increased their rates. We may not successfully enter into additional relationships or renew
existing ones beyond their current terms. We may also be required to pay significant fees to maintain and expand existing relationships. Further, many Internet portal companies, other online retailers, radio advertisers and direct marketers that we
may approach to establish an advertising presence or with whom we already have an existing relationship may also provide advertising services for our competitors. As a result, these companies may be reluctant to enter into, maintain or expand a
relationship with us. Our net sales may suffer if we fail to enter into new relationships or maintain or expand existing relationships, or if these relationships do not result in traffic sufficient to justify their costs.



In addition, we are subject to many risks beyond our control that influence the success or
failure of our strategic partners. For example, traffic to our branded websites could decrease if the traffic to the website of an Internet portal company on which we advertise decreases. Our business could be harmed if any of our strategic partners
experience financial or operational difficulties or if they experience other corporate developments that adversely affect their performance under our agreements.



If the supply of flowers or any other perishable product we offer for sale becomes limited, the price of these
products could rise or these products may be unavailable and our net sales and gross margins could decline.



Many factors, such as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the
price of our floral products. If the supply of flowers available for sale is limited, prices for flowers could rise, which could cause customer demand for our floral products to be reduced and our net sales and gross margins to decline.
Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternate sources may be of lesser quality and/or may be more expensive than those currently offered by
us. We expect that we will encounter similar risks with premium meat, fresh fruit and other perishable products as we expand our e-commerce platform into these product categories.



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In the third quarter of fiscal 2005 and in fiscal 2004, 61.7% and 60.0%, respectively, of the flowers we sold were grown
by farmers located abroad, primarily in Colombia, Ecuador and Holland, and we expect that this will continue in the future. We also may purchase premium meat, fresh fruit and other perishable products from suppliers in foreign countries. The
availability and price of these products could be affected by a number of other factors affecting foreign suppliers, including:



| |  |  | import duties and quotas;
| | - |  | -------------------------



| |  |  | time-consuming import regulations or controls at airports;
| | - |  | ----------------------------------------------------------



| |  |  | changes in trading status;
| | - |  | --------------------------



| |  |  | economic uncertainties and currency fluctuations;
| | - |  | -------------------------------------------------



| |  |  | changes or uncertainties in oil and fuel prices;
| | - |  | ------------------------------------------------



| |  |  | local and regional weather patterns;
| | - |  | ------------------------------------



| |  |  | foreign government regulations with respect to diseases such as mad cow;
| | - |  | ------------------------------------------------------------------------



| |  |  | political unrest;
| | - |  | -----------------



| |  |  | governmental bans or quarantines; or
| | - |  | ------------------------------------



| |  |  | trade restrictions, including U.S. retaliation against foreign trade practices.
| | - |  | -------------------------------------------------------------------------------



System interruptions, natural disasters and other unexpected problems could prevent us from fulfilling orders for our
customers.



Our computer and telecommunications systems and operations
are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, failure in the Internet backbone service providers or Internet service providers, earthquakes, acts of war or terrorism, acts of God, human error,
computer viruses, physical or electronic break-ins and similar events. Any of these events could lead to system interruptions, delays and loss of critical data, and make our websites or toll-free customer service centers inaccessible to our
customers or prevent us from efficiently fulfilling orders or providing services to other retailers who rely on our market platform to assist them in operating their online businesses. For instance, in January 2004, a router failure at our Internet
service provider caused two hours of degraded website response times and availability. This effect would be magnified if interruptions were to occur during one of our peak selling periods, such as Valentines Day or Mothers Day. We do not
have fully redundant systems in different geographical areas or a formally tested disaster recovery plan. Our business interruption insurance may be inadequate to compensate for all losses that may occur.



Despite any precautions we may take, the occurrence of a natural disaster, the closure of a
hosting facility we are using without adequate notice for financial reasons or other unanticipated problems could result in lengthy interruptions in our services. In addition, the failure by our hosting facilities to provide our required data
communications capacity could result in interruptions in our service. Any slowdown, damage to or failure of our systems could result in interruptions in our service. We cannot assure you that we will adequately, and in a timely manner, implement
systems to improve the speed, security and availability of our Internet and telecommunications systems. Frequent or long service delays or interruptions in our service or disruptions during a peak holiday season will reduce our net sales and
profits, and our reputation and future net sales and profits will be harmed if our customers believe that our system is unreliable.



We may not be able to increase capacity or introduce enhancements to our branded websites in a timely manner or without service interruptions.



A key element of our strategy is to generate a high volume of traffic
on our branded websites. As traffic on our branded websites grows, we may not be able to accommodate all of the growth in user demand on our branded websites and in our toll-free customer service center. Our inability to add additional hardware and
software to upgrade



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our existing technology or network infrastructure to accommodate in a timely manner increased traffic on our branded
websites, in our toll-free customer service centers and increased sales volume, may cause decreased levels of customer service and satisfaction. Failure to implement new systems effectively or within a reasonable period of time could adversely
affect our business, results of operations and financial condition.



We also
intend to introduce additional or enhanced features and services to retain current customers and attract new customers to our branded websites. If we introduce a feature or a service that is not favorably received, our current customers may not use
our branded websites as frequently, and we may not be successful in attracting new customers. We may also experience difficulties that could delay or prevent us from introducing new services and features. Furthermore, these new services or features
may contain errors that are discovered only after they are introduced. We may need to significantly modify the design of these services or features to correct errors. If customers encounter difficulty with or do not accept new services or features,
our business, results of operations and financial condition could be adversely affected.



We fulfill a significant portion of our flower orders through our Miami distribution facility.



We fulfilled 19.4% of our total flower orders in the nine months ended March 31, 2005 and in fiscal year 2004 through our Miami distribution facility. In the future, we
may be unable to fulfill our customers orders through the Miami distribution facility in a timely manner, or at all, due to a number of factors, including:



| |  |  | a failure to maintain or renew our existing lease agreement for our Miami distribution facility;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | a prolonged power or equipment failure;
| | - |  | ---------------------------------------



| |  |  | an employee strike or other labor stoppage;
| | - |  | -------------------------------------------



| |  |  | a disruption in the transportation infrastructure including bridges and roads;
| | - |  | ------------------------------------------------------------------------------



| |  |  | a refrigeration failure; or
| | - |  | ---------------------------



| |  |  | a fire, flood, hurricane or other disaster.
| | - |  | -------------------------------------------



In the event that we are unable to fulfill our customers orders through the Miami distribution facility, we will attempt to re-ship the orders from another source
to ensure timely delivery. However, we cannot guarantee that our other suppliers and distribution facilities will have the capacity or the variety of flowers to fulfill all orders from the Miami distribution facility or that we will be able to
deliver the affected orders in a timely manner. In addition, if operations from our Miami distribution facility become permanently disrupted due to any of the above or other factors, we may not be able to secure a replacement distribution facility
in a location on terms acceptable to us or at all. Our business and results of operations could be materially and adversely affected if we experience temporary or permanent disruptions at our Miami distribution facility.



If we fail to protect our intellectual property rights, our ability to
compete could be harmed.



Protection of our intellectual property is
critical to our success. Patent, trademark, copyright and trade secret laws and confidentiality and other contractual provisions afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive
advantage. We face numerous risks in protecting our intellectual property rights, including the following:



| |  |  | our pending patent applications, copyrights, trademarks, trade secrets and other intellectual property rights may be challenged or invalidated by our competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we only have three U.S. patent applications pending in the United States Patent and Trademark Office and none of the patent applications have yet to issue;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our pending patent applications may not issue, or, if issued, may not provide meaningful protection for related products or proprietary rights;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | in the event one or more of our pending patent applications issue into a patent, there may be prior art in existence that the United States Patent and Trademark Office has not
considered which may invalidate one or more patent claims;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees, consultants or advisors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the laws of foreign countries, including Australia, Brazil, Canada, the European Union, Japan, Mexico, New Zealand and Switzerland where we have issued or pending trademarks, may
not protect our intellectual property rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate in foreign countries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our competitors may lawfully develop proprietary software or other technology that competes with our proprietary supply chain technology; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to successfully identify or prosecute unauthorized uses of our proprietary technology.
| | - |  | -------------------------------------------------------------------------------------------------------



As a result, our means of protecting our intellectual property rights and brands may not be adequate. Furthermore, despite our efforts,
third parties may have violated and may in the future violate, or attempt to violate, our intellectual property rights. Infringement claims and lawsuits would likely be expensive to resolve and would require substantial management time and
resources. In addition, we have not sought, and do not intend to seek, trademark, patent and other intellectual property protections in most foreign countries. In countries where we do not have such protection, businesses may use our trademarks to
sell products or to develop a distribution method that incorporates our patented technology.



We may be sued by third parties for alleged infringement of their proprietary rights.



Companies that participate in the e-commerce and supply chain management industries or others may hold a large number of patents, patent applications, trademarks and
copyrights. Participants in these industries are involved in litigation based on allegations of patent infringement or other violations of intellectual property rights. Intellectual property disputes frequently involve highly complex and costly
technical or scientific matters, and each party generally has the right to seek a trial by jury which adds additional costs and uncertainty. Accordingly, intellectual property contests, with or without merit, could be costly and time-consuming to
litigate or settle, and could divert managements attention from executing our business plan. In addition, our distribution technology may not be able to withstand any third-party claims against its use. If we were unable to obtain any
necessary license following a determination of infringement or an adverse determination in litigation or in interference or other administrative proceedings, we may need to redesign some of our distribution technology to avoid infringing a
third-partys patent and could be required to temporarily or permanently discontinue using the related aspect of our technology.



Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs.



Recently enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements. The Sarbanes-Oxley Act mandates, among other
things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and
criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations. In particular, we expect to incur additional administrative expense and devote substantial management time as
we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our independent registered public accounting firm to attest to, our internal controls. In addition, The Nasdaq National Market, on which our common stock
is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting
and disclosure practices, which could harm our results of operations and divert managements attention from business operations. We also expect these developments to make it more difficult and more expensive for us to obtain director and
officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Further, our



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directors and executive officers could face an increased risk of personal liability in connection with the performance of
their duties. As a result, we may have difficultly attracting and retaining qualified directors and executive officers, which would adversely affect our business.



Current and future governmental and industry regulations may significantly limit our business opportunities.



New laws or regulations may be enacted with respect to the Internet
or existing laws may be applied or interpreted to apply to the Internet, which may decrease the growth in the use of the Internet or our branded websites. As use of the Internet continues to evolve, we expect that there will be an increasing number
of laws and regulations pertaining to the Internet in the U.S. and throughout the world. These laws and regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy,
taxation and quality of products and services sold over the Internet. Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel,
employment, personal privacy and other issues is uncertain and developing. Further, the growth and development of online commerce may prompt calls for more stringent consumer protection laws, both in the U.S. and abroad. We also may be subject to
regulation not specifically related to the Internet, including laws affecting direct marketers and advertisers. The adoption of or modification of laws applicable to the Internet could affect our ability to market our products, decrease the demand
for our products, increase our costs or otherwise adversely affect our business.



We are affected by regulations applicable to the importation of flowers and the sale and handling of food items.



Our importation of certain flower offerings and our sale and handling of premium meat and fresh fruit offerings subject us to various federal, state and local
government regulations, including regulations imposed by the United States Food & Drug Administration, or FDA, the United States Department of Labor, Occupational Safety and Health Administration, or OSHA, the United States Department of
Agriculture, or USDA, and Animal and Plant Health Inspection Service, or APHIS. We have designed our importation procedures and our food handling operations to comply with such regulations. However, the FDA, OSHA, USDA, APHIS or another federal,
state or local food regulatory authority may require changes to our importation procedures and food sales and handling operations. We may not be able to make the requested governmental changes or obtain any required permits, licenses or approvals in
a timely manner, or at all. Failure to make requested changes or to obtain or maintain a required permit, license or approval could cause us to incur substantial compliance costs and delay the availability of, or cancel, certain product offerings.
In addition, any inquiry or investigation from a regulatory authority could have a negative impact on our reputation. Any of these events would harm our business and adversely affect our results of operations.



Various legal rules and regulations related to the collection,
dissemination and security of personal information may affect our ability to solicit our customers and potential customers with emails or telephone calls and to collect or disseminate personal data about our customers.



A growing body of laws designed to protect the privacy of personally identifiable
information as well as to protect against its misuse may adversely affect the growth of our business and our marketing efforts. These laws include the Federal Trade Commission Act, the Childrens Online Privacy Protection Act and Federal Trade
Commission, or FTC, regulations implementing that act, the Fair Credit Reporting Act, the Gramm Leach Bliley Act and related regulations as well as other legal provisions. The FTC has the authority to protect against the misuse of consumer
information by targeting companies that collect, disseminate or maintain personal information in an unfair or deceptive manner, as well as companies that fail to notify parents and obtain parental consent before collecting information from children.
The FTC has conducted dozens of investigations into the privacy and security practices of companies that collect information on the Internet. The provisions of these laws and related regulations are complicated, and we do not have extensive
experience in complying with them. The evolving nature of the FTCs and other governmental bodies enforcement efforts, and the possibility of new laws in this area, may adversely affect our ability to collect and disseminate or share
demographic and personal information from users and our ability to email or telephone users, all of which could adversely affect our marketing efforts and business. In addition, even technical violations of these laws can result in significant
penalties. Given the volume of transactions we process as a consumer-focused e-commerce company, any violations of applicable privacy laws could expose us to significant liability.



Our branded websites use various cookies without the customers knowledge or consent. These cookies may or may not be saved
on customers hard drives. We use cookies for a variety of reasons, including the collection of data derived from the customers Internet activity. Most currently available web browsers allow users to remove cookies at



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any time or to prevent cookies from being stored on their hard drive. Some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of cookies or other data collecting tools. Any reduction or limitation in the use of cookies or other data collecting tools could limit the effectiveness of our sales and marketing
efforts. We could incur expenses if new regulations concerning the use of personal information are introduced or if our privacy practices are investigated.



We depend on continued use of the Internet and growth of the online perishables retail market.



Our net sales may not grow if the Internet does not continue to grow as an accepted medium
for commerce in flowers and other perishable product categories. Consumer use of the Internet as a medium for commerce, and especially commerce in perishable products, is a recent phenomenon that is subject to a level of uncertainty. A number of
factors may inhibit Internet usage, including:



| |  |  | inadequate network infrastructure;
| | - |  | ----------------------------------



| |  |  | consumer concerns for Internet privacy and security;
| | - |  | ----------------------------------------------------



| |  |  | inconsistent quality of service;
| | - |  | --------------------------------



| |  |  | lack of availability of cost-effective, high-speed service; and
| | - |  | ---------------------------------------------------------------



| |  |  | consumer concerns over purchasing perishable goods over the Internet.
| | - |  | ---------------------------------------------------------------------



If use of the Internet as a medium for commerce in perishable products does not continue to grow, or grows at a slower rate than we anticipate, our sales will be lower
than expected and our business will be harmed.



We are
dependent on other retailers using our marketplace to sell perishable products to their customers. Any failure by us to recruit additional retailers to use our marketplace, or any loss of our current users, could harm our business.



We intend to grow a portion of our business and product categories
through relationships with other branded retailers and direct marketers that use our platform to sell under their brands. We currently have arrangements with Martha Stewart Living Omnimedia, Albertsons, Inc., another two Fortune 100 retailers
and other retailers. Under our agreement with Martha Stewart Living Omnimedia, we use our platform to operate the floral website of Martha Stewart Living Omnimedia. Our agreement with Martha Stewart Living Omnimedia may be terminated by either party
upon 120 days prior notice. Under our agreement with Albertsons, we provide our market platform and products for Albertsons online floral business. Our agreement with Albertsons is for a three-year term, automatically renewable for
additional one-year periods, unless prior notice is given. Our agreement with Albertsons may be terminated by either party for specified reasons, including bankruptcy or cessation of business by the other party. It may also be terminated by
the non-breaching party sixty days after notification of an uncured breach of the agreement. While we are not dependent on these agreements and while these agreements represented an immaterial percentage of our net sales in fiscal 2004 and 2003, any
termination of these agreements, or failure to enter into similar agreements, could adversely affect this aspect of our business model.



Our accounting and financial system is not integrated with our transaction processing system.



We use an internally developed system for substantially all aspects of transaction
processing, including order management, credit card processing and shipping. Our accounting and financial system is purchased from a third-party. Because our current transaction processing system, which provides frequent operational reports, is not
integrated with our accounting and financial system, we must manually input data in order to prepare information for accounting and financial reporting. This manual input of data may make it more difficult for management to obtain accurate financial
statements and reporting information on a timely basis. We intend to integrate our transaction processing and accounting systems. We cannot guarantee that we will complete this integration in a fast and effective manner. Any inability to do so may
have a material adverse effect on our business, financial condition and results of operations.



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Online security breaches could harm our business.



The secure transmission of confidential information over the Internet is essential in
maintaining consumer confidence in our branded websites. Even occasional security breaches of our system or other Internet-based systems could significantly harm our business and damage our reputation. Any penetration of our network security or
other misappropriation of our customers personal information could subject us to potential liability. We may be subject to claims based on unauthorized purchases with credit card information, or aiding and abetting identity theft or other
similar fraud claims. Claims could also be based on other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation and financial liability. We rely on licensed encryption and
authentication technology to effect the secure transmission of confidential information, including credit card numbers. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or
breach of the technology that we use to protect customer transaction data.



We
may incur substantial expense to protect against and remedy security breaches and their consequences. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Our insurance
policies limits may not be adequate to reimburse us for losses caused by security breaches. We cannot guarantee that our security measures will prevent security breaches.



Consumer spending on flowers and other perishable products we sell or intend to sell may vary with general economic
conditions in the U.S.



Negative trends in the general economy,
including trends resulting from actual or threatened military action by the U.S. and threats of terrorist attacks on the U.S. and abroad, could cause a decrease in consumer spending on flowers, premium meats, fresh fruits and perishable products in
general. Also, any reduction in consumer confidence or disposable income in general may affect the demand for our products. If general economic conditions do not improve or deteriorate further and our customers have less disposable income, consumers
may spend less on our products and our quarterly operating results may suffer.



We may not successfully address problems encountered in connection with any future acquisitions.



In December 1999, we purchased Flower Farm Direct, Inc. Subsequently, we amortized and wrote off approximately $9.0 million of goodwill related to the acquisition. We
expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our technical capabilities, complement our current products and services or expand the breadth of our
markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve numerous risks, including:



| |  |  | problems assimilating the purchased technologies, products or business operations;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | problems maintaining uniform standards, procedures, controls and policies;
| | - |  | --------------------------------------------------------------------------



| |  |  | unanticipated costs associated with the acquisition, including accounting charges and transaction expenses;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risks associated with entering markets in which we have no or limited prior experience; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | potential loss of key employees of acquired organizations.
| | - |  | ----------------------------------------------------------



If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations, our business may
be disrupted, and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our existing stockholders would be diluted.



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We may have difficulty managing any growth that we might experience.



We expect to continue to experience growth in the scope of our operations and the number of
our employees. If this growth continues, it will place a significant strain on our management team and on our operational and financial systems, procedures and controls. Our future success will depend in part on the ability of our management team to
manage any growth effectively. This will require our management to:



| |  |  | maintain our cost structure at an appropriate level based on the net sales we generate;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | manage multiple, concurrent development projects;
| | - |  | -------------------------------------------------



| |  |  | hire and train additional personnel;
| | - |  | ------------------------------------



| |  |  | implement and improve our operational and financial systems, procedures and controls; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | manage operations in multiple time zones.
| | - |  | -----------------------------------------



Any failure to successfully manage our growth could distract managements attention, and result in our failure to execute our business plan.



If we are required to collect sales and use taxes on the products we
sell in additional jurisdictions, we may be subject to liability for past sales and our future sales may decrease.



In accordance with current industry practice and our interpretation of current law, as of March 31, 2005, we did not collect sales and use taxes or other such taxes with
respect to shipments of goods into states other than California, Florida, Indiana, Kansas, Massachusetts, Minnesota, Mississippi, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas and Washington. The operation of our distribution
facilities, the operations of any future distribution facilities and other aspects of our evolving business may, however, result in increased sales and use tax obligations. Some states have sought or are now seeking to impose sales or other tax
collection obligations on companies that engage in electronic commerce as we do. Federal legislation limits the imposition of U.S. state and local taxes on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom Act, which placed a
moratorium on state and local taxes on Internet access, unless such tax was already imposed prior to October 1, 1998, and on discriminatory taxes on electronic commerce. This moratorium expired in November 2003. Congress is currently debating
several proposals to retain the moratorium. If no moratorium proposals are adopted, state and local governments may be free to impose new taxes on electronically purchased goods. Congress could also pass alternative proposals allowing state and
local governments to impose taxes on electronic commerce. In either event, we could be required to pay past and collect future sales and use taxes in states other than those in which we already collect such taxes.



We are dependent on our management team and key employees, and the loss
of any of them could harm our business.



Our success depends, in part,
upon the continued availability and contributions of our senior management team, particularly William Strauss, our chief executive officer, and Abraham Wynperle, our president and chief operating officer. Important factors that could cause the loss
of key personnel include:



| |  |  | members of our management team may terminate their employment with us at any time;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | we do not maintain key-man life insurance on any of our employees;
| | - |  | ------------------------------------------------------------------



| |  |  | significant portions of the stock options held by the members of our management team are vested; and
| | - |  | ----------------------------------------------------------------------------------------------------



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| |  |  | many of the stock options held by our executive officers provide for accelerated vesting in the event of a sale or change of control of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



The loss of key personnel or an inability to attract qualified personnel in a timely manner
could slow our technology and product development and harm our ability to execute our business plan.



If third parties acquire rights to use similar domain names or phone numbers or if we lose the right to use our domain names or phone numbers, our
brands may be damaged and we may lose sales.



Our Internet domain
names are an important aspect of our brand recognition. We cannot practically acquire rights to all domain names similar to www.providecommerce.com, www.proflowers.com, www.uptownprime.com or www.cherrymoonfarms.com. If third parties obtain rights
to similar domain names, these third parties may confuse our customers and cause our customers to inadvertently place orders with these third parties, which would result in lost sales for us and could damage our brand.



The phone number that spells 1-888-FRESHEST is also important to our brand and business.
While we have obtained the right to use the phone numbers 1-888-FRESHEST, 1-800-FRESHEST and 1-800-PROFLOW, as well as common toll-free FRESHEST and PROFLOW misdials, we may not be able to obtain rights to use the FRESHEST
and PROFLOW phone numbers as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells FRESHEST or PROFLOW with a different
prefix, these parties may also confuse our customers and impede our customer service efforts, causing lost sales and potential damage to our brands. In addition, under applicable Federal Communication Commission, or FCC, rules, ownership rights to
phone numbers cannot be acquired. Accordingly, the FCC may rescind our right to use any of its phone numbers, including 1-888-FRESHEST and 1-800-PROFLOW.



If our third-party technology providers do not adequately maintain our telephone service, we may experience system failures and our business may
suffer.



We are largely dependent on AT&T and SBC Pacific Bell to
provide telephone service to our customer service centers. If AT&T or SBC Pacific Bell experience system failures or fail to adequately maintain our systems, we would experience interruptions and our customers might not continue to utilize our
services. Frequent or long system failures or interruptions in our service or disruptions during a peak holiday season could materially harm our business and results of operations.



If we lose our telephone service, we will be unable to operate a significant portion of our customer service. Our future success depends
upon these third-party relationships because we do not have the resources to maintain telephone services without these or other third parties. Failure to maintain these relationships or replace them on financially attractive terms may disrupt our
operations or require us to incur significant unanticipated costs.



Our business would be injured by extensive credit card fraud.



Our general and administrative expense would increase if we experience significant credit card fraud or fraud with respect to our bill-me-later functionality, a third party payment option similar to traditional credit cards. A failure to
adequately control fraudulent credit card transactions or bill-me-later transactions would increase our general and administrative expense because we do not carry insurance against this risk. We have developed technology to help detect the
fraudulent use of credit card information. Nonetheless, to date, we have suffered losses as a result of orders placed with fraudulent credit card data even though the associated financial institution or bill-me-later service provider approved
payment of the orders. Under current credit card practices, we are liable for fraudulent credit card transactions if we do not obtain a cardholders signature.



Product liability claims may subject us to increased costs.



Several of the products we sell and intend to sell, including perishable food products, may
expose us to product liability claims in the event that the use or consumption of these products results in personal injury. We may incur significant costs in defense of product liability claims. Product liability claims often create negative
publicity, which could materially damage our reputation and our brands. Although we maintain insurance against product liability claims, our coverage may be inadequate to cover any liabilities we may incur.



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Health concerns relating to the consumption of beef, fruit or other food products could have a
negative impact on our premium meat, fruit and related product offerings and could negatively impact our results of operations.



The success of our premium meat website and other planned perishable product offerings could be affected by health concerns related to the consumption of beef or fruit or
negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning e-coli, mad cow or foot-and-mouth disease. This negative publicity may adversely affect demand for our premium
meat or fruit products which could materially harm our business and results of operations.



Risks Related to the Securities Markets



We expect that the price of our common stock will fluctuate substantially.



The market price of our common stock has been, and is likely to continue to be, highly volatile. The market price may fluctuate substantially due to many factors,
including:



| |  |  | actual or anticipated fluctuations in our results of operations;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in securities analysts expectations or our failure to meet those expectations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | announcements of significant contracts by us or our competitors;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in our pricing policies or the pricing policies of our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | inability to maintain our current relationship with our delivery carriers, FedEx and UPS;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | developments with respect to intellectual property rights;
| | - |  | ----------------------------------------------------------



| |  |  | the introduction of new products or product enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the commencement of or our involvement in litigation;
| | - |  | -----------------------------------------------------



| |  |  | our sale of common stock or other securities in the future;
| | - |  | -----------------------------------------------------------



| |  |  | conditions and trends in the e-commerce industry;
| | - |  | -------------------------------------------------



| |  |  | changes in market valuation or earnings of our competitors;
| | - |  | -----------------------------------------------------------



| |  |  | the trading volume of our common stock;
| | - |  | ---------------------------------------



| |  |  | changes in the estimation of the future size and growth rate of our markets; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | general economic conditions.
| | - |  | ----------------------------



In addition, the stock market in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further, the market prices of securities of e-commerce companies have been particularly volatile, including our stock price since our initial public offering in December 2003. These
broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a companys securities, securities
class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of managements attention and resources.



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Because of the significant stock ownership of our largest stockholder, our largest stockholder will
be able to exert significant influence over us and our significant corporate decisions.



As of March 31, 2005, our largest stockholder and persons affiliated with our largest stockholder beneficially owned 33.5% of our outstanding common stock. In addition, as of the same date, our executive officers,
directors and other stockholders holding more than 5% of our outstanding capital stock and their affiliates, in the aggregate, beneficially owned approximately 53.9% of our outstanding common stock. These persons, acting together, may have the
ability to control our management and affairs. Our majority stockholder and persons affiliated with our majority stockholder will have the ability to exert significant influence over the outcome of all matters submitted to our stockholders for
approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may harm the market price of our common stock by, among other things:



| |  |  | delaying, deferring or preventing a change in control of our company;
| | - |  | ---------------------------------------------------------------------



| |  |  | impeding a merger, consolidation, takeover or other business combination involving our company;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



Future sales of our common stock may depress our stock price.



If our common stockholders sell substantial amounts of common stock in
the public market, or if the market perceives that these sales may occur, the market price of our common stock may decline. Certain of our directors and executive officers, including our chairman and our chief executive officer, have established
programmed selling plans under Rule 10b5-1 for the purpose of effecting sales of common stock. We have also registered all shares of common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in
the public market upon issuance, subject to restrictions under the securities laws. In addition, the holders of up to 5,585,724 shares of common stock, based upon shares outstanding as of March 31, 2005 and assuming exercise of such holders
outstanding options and warrants, will have rights, subject to some conditions, to require us to file registration statements covering the resale of their shares or to include their shares in registration statements that we may file for ourselves or
other stockholders. These registration rights of our stockholders could impair our ability to raise capital by depressing the price at which we could sell our common stock.



An active trading market for our common stock may not be sufficiently developed.



Prior to our initial public offering in December 2003, there was no public market for our
common stock. An active trading market may not be sufficiently developed or sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of
an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using
our shares as consideration.



Our future capital needs
are uncertain and we may need to raise additional funds in the future, and such funds may not be available on acceptable terms or at all.



Our capital requirements will depend on many factors, including:



| |  |  | changes in our operating plan;
| | - |  | ------------------------------



| |  |  | lower than anticipated net sales;
| | - |  | ---------------------------------



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| |  |  | increased expenses in new technology and research and development projects;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the number and timing of acquisitions and other strategic transactions; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the costs associated with our expansion, if any.
| | - |  | ------------------------------------------------



Our existing sources of cash and cash flows, may not be sufficient to fund our activities. As a result, we may need to raise additional funds, and such funds may not be
available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and
privileges senior to those of our existing stockholders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products and execute our business plan, take advantage of future opportunities, or respond to
competitive pressures or unanticipated customer requirements. This may materially harm our business, results of operations and financial condition.



Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market
price of our stock.



Our amended and restated certificate of
incorporation and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions:



| |  |  | authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of our common
stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit stockholders from removing directors without cause, calling special stockholder meetings or taking action by written consent;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit stockholders from filling board vacancies; and
| | - |  | ----------------------------------------------------



| |  |  | require advance written notice of stockholder proposals and director nominations.
| | - |  | ---------------------------------------------------------------------------------



In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business
combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, restated bylaws and Delaware law could make it more difficult for stockholders or
potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or
prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk represents the risk of loss arising from adverse changes in market rates and foreign exchange rates. At March 31, 2005, we did not have any balances outstanding under any bank line of credit arrangement;
however, the amount of outstanding debt at any time may fluctuate and we may from time to time be subject to refinancing risk. We do not believe that a change of 100 basis points in interest rates would have a material effect on our results of
operations or financial condition. We derive substantially all of our net sales from sales within the U.S. We have business relationships with foreign growers and other vendors. Approximately $332,000 or 43.3% of total payments to these foreign
growers and vendors for the nine months ended March 31, 2005 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 56.7% of total payments to foreign vendors, the amount is less than 1% of total payments to
all vendors and suppliers. Since transactions in foreign currencies are immaterial to us as a whole, we do not consider it necessary to hedge against currency risk at this time.



ITEM 4. CONTROLS AND PROCEDURES



We maintain
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 our management, including our



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chief executive officer and principal 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 management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer
and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on their evaluation, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures were (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) effective at the reasonable assurance level 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 principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.



There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. During the second and third quarters of fiscal 2005, we have retained the services of an outside consulting
firm to assist us in documenting and evaluating the effectiveness of our internal control over financial reporting in accordance with the Committee of Sponsoring Organizations, framework in compliance with the requirements of the Sarbanes-Oxley Act.
As a result we have implemented various enhancements to our internal control structure in order to facilitate the monitoring and auditing of our controls. We believe that the enhancements to our existing controls have not materially affected, or are
not reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



ITEM 1.Legal Proceedings



None.



ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds



(a)During the quarter ended March 31, 2005, we issued the following securities:



On March 25, 2005, we issued 26,595 shares of our common stock upon the cashless exercise of a previously issued warrant to
purchase shares of our common stock.



This transaction did not
involve a public offering. Appropriate legends were affixed to the stock certificate, as applicable in such transaction. The shares of our common stock identified above were issued under a claim of exemption under Regulation D promulgated by the
SEC, or, alternatively, under Section 4(2) of the Securities Act. We believe the warrant holder had adequate access to information about us to make an informed investment and was an accredited investor within the meaning of Rule 501 of Regulation D.



(b)Our initial public offering of common stock, $0.001
par value, was effected through a Registration Statement on Form S-1 (File No. 333-109009) that was declared effective by the Securities and Exchange Commission on December 16, 2003. The net offering proceeds to us, after deducting underwriting
discounts and commissions and estimated offering expenses, were approximately $34.8 million. As of March 31, 2005, we have not used any of the net proceeds from the offering. We intend to use the net proceeds from the offering for: (i) sales and
marketing activities; (ii) promotion of existing and future product categories; and (iii) general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the
right to use complementary technologies. We have no commitments with respect to any acquisition or investment.



The amounts actually expended for each of the purposes listed above and the timing of our actual expenditures will depend on numerous factors, including
the status of our efforts to increase our number of relationships with other retailers to use our market platform, sales and marketing activities, technological advances, amount of cash generated or used by our operations and competition. We have
not determined the amount or timing of expenditures in the areas listed above and will retain broad discretion in the allocation and use of the net proceeds. Pending the uses described above, we have invested the net proceeds in short-term,
interest-bearing, investment-grade securities.



ITEM 3.Defaults Upon Senior Securities



None.



ITEM 4.Submission of Matters to a Vote of Security Holders



None.



ITEM 5.Other Information



None.



ITEM 6.Exhibits



|            |     |  |                                                                                             
|----------- | --- |  | --------------------------------------------------------------------------------------------
|Exhibit 3.1 | (1) |  | Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.4).    
|            |    
|Exhibit 3.2 | (1) |  | Bylaws of the Company, as amended (Filed as Exhibit 3.6).                                   
|            |    
|Exhibit 4.1 | (1) |  | Specimen stock certificate for shares of Common Stock of the Company (Filed as Exhibit 4.2).

|
|



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|                 |  |                                                                                                                                                                                
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 4.2(1)   |  | Investors Rights Agreement, dated December 29, 1999 by and among us and the parties named therein (Filed as Exhibit 10.3).                                                    
|                 | 
|Exhibit 4.3(1)   |  | Amendment Number One to the Investors Rights Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.5).                              
|                 | 
|Exhibit 4.4(1)   |  | Amendment No. 1 to the Investors Rights Agreement, dated May 18, 2000 by and among us and parties named therein (Filed as Exhibit 10.6).                                      
|                 | 
|Exhibit 4.5(1)   |  | Amended and Restated Stockholders Agreement, dated December 29, 1999, by and among us and parties named therein (Filed as Exhibit 10.4).                                       
|                 | 
|Exhibit 4.6(1)   |  | Amendment Number One to the Amended and Restated Stockholders Agreement, dated March 31, 2000, by and among us and parties named therein (Filed as Exhibit 10.7).              
|                 | 
|Exhibit 4.7(1)   |  | Amendment Number Two to the Amended and Restated Stockholders Agreement, dated August 11, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).             
|                 | 
|Exhibit 4.8(1)   |  | Amendment Number Three to the Amended and Restated Stockholders Agreement, dated June 25, 2000, by and among us and parties named therein (Filed as Exhibit 10.8).             
|                 | 
|Exhibit 10.47(2) |  | Third Amendment to Sublease, dated March 9, 2005, between us and Epicor Software Corporation.                                                                                  
|                 | 
|Exhibit 31.1     |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                      
|                 | 
|Exhibit 31.2     |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                      
|                 | 
|Exhibit 32*      |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

---

|(1) | Incorporated by reference to the numbered exhibit filed with the Companys Registration Statement on Form S-1 (No. 333-109009) filed on September 22, 2003, as amended
thereafter.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Current Report on Form 8-K filed on March 15, 2005.
|--- | ------------------------------------------------------------------------------------

|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Provide Commerce, Inc., whether made before or after the date hereof, regardless of any general incorporate language in such filing.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE



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



Date: April 29, 2005



Provide Commerce, Inc.By:

/s/ Rex E. BosenRex E. BosenVice President, Finance and Accounting




36