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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 September 30, 2004



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, 2nd Floor 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 October 31, 2004, the registrant had
11,889,893 shares of common stock outstanding.



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PROVIDE COMMERCE, INC.

QUARTERLY REPORT



FORM 10-Q



TABLE OF CONTENTS



|                              |  |                                                                                               |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | --
|                              | 
|COVER PAGE                    |  |                                                                                              
|                              | 
|TABLE OF CONTENTS             |  |                                                                                              
|                              | 
|PART I. FINANCIAL INFORMATION |  |                                                                                              
|                              |  |                                                                                              
|                              |  | ITEM 1.
Financial Statements (unaudited)                                                      |  | 1 
|                              |  |                                                                                              
|                              |  | Balance Sheets as of September 30, 2004 and June 30, 2004                                     |  | 2 
|                              |  |                                                                                              
|                              |  | Statements of Operations for the three months ended September 30, 2004 and 2003               |  | 3 
|                              |  |                                                                                              
|                              |  | Statements of Cash Flows for the three months ended September 30, 2004 and 2003               |  | 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                            |  | 33
|                              |  |                                                                                              
|                              |  | ITEM 4.
Controls and Procedures                                                               |  | 33
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                              
|                              |  |                                                                                              
|                              |  | ITEM 1.
Legal Proceedings *                                                                   |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34
|                              |  |                                                                                              
|                              |  | ITEM 3.
Defaults upon Senior Securities *                                                     |  | 35
|                              |  |                                                                                              
|                              |  | ITEM 4.
Submission of Matters to a Vote of Security Holders *                                 |  | 35
|                              |  |                                                                                              
|                              |  | ITEM 5.
Other Information *                                                                   |  | 35
|                              |  |                                                                                              
|                              |  | ITEM 6.
Exhibits                                                                              |  | 35
|                              | 
|SIGNATURE                     |  | 36                                                                                           

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



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PROVIDE COMMERCE, INC.



FINANCIAL STATEMENTS



Index



PART I. FINANCIAL INFORMATION



ITEM 1. Financial Statements (unaudited):



Balance Sheets  September 30, 2004 and June 30, 2004

Statements of Operations  Three months ended September 30, 2004
and 2003

Statements of Cash Flows  Three months ended September 30, 2004 and 2003

Notes to Financial Statements



1



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PROVIDE COMMERCE, INC.



BALANCE
SHEETS

(Unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                                             |  | September 30,2004 |         |   | June 30,2004 |  
|Assets                                                                                                                                                                       |  |                   |         |   |              |   |         |  
|Current assets:                                                                                                                                                              |  |                   |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 20,958  |   |              | $ | 18,210  |  
|Marketable securities                                                                                                                                                        |  |                   | 34,893  |   |              |   | 41,218  |  
|Accounts receivable, net of allowance for doubtful accounts of $75 and $105 at September 30, 2004 and June 30, 2004,
respectively                                            |  |                   | 1,628   |   |              |   | 1,372   |  
|Inventory, net                                                                                                                                                               |  |                   | 1,201   |   |              |   | 1,343   |  
|Prepaid expenses and other current assets                                                                                                                                    |  |                   | 880     |   |              |   | 652     |  
|Deferred tax assets                                                                                                                                                          |  |                   | 4,564   |   |              |   | 4,482   |  
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total current assets                                                                                                                                                         |  |                   | 64,124  |   |              |   | 67,277  |  
|                                                                                                                                                                             |  |                  
|Property and equipment, net                                                                                                                                                  |  |                   | 5,556   |   |              |   | 4,626   |  
|Deferred tax assets                                                                                                                                                          |  |                   | 6,048   |   |              |   | 5,953   |  
|Other assets                                                                                                                                                                 |  |                   | 2,121   |   |              |   | 2,369   |  
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total assets                                                                                                                                                                 |  | $                 | 77,849  |   |              | $ | 80,225  |  
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                         |  |                   |         |   |              |   |         |  
|Current liabilities:                                                                                                                                                         |  |                   |         |   |              |   |         |  
|Accounts payable and other accrued liabilities                                                                                                                               |  | $                 | 10,158  |   |              | $ | 13,010  |  
|Accrued compensation                                                                                                                                                         |  |                   | 1,720   |   |              |   | 2,812   |  
|Income tax payable                                                                                                                                                           |  |                   |        |   |              |   | 943     |  
|Deferred revenue                                                                                                                                                             |  |                   | 245     |   |              |   | 325     |  
|Current portion of capital lease                                                                                                                                             |  |                   | 16      |   |              |   | 48      |  
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total current liabilities                                                                                                                                                    |  |                   | 12,139  |   |              |   | 17,138  |  
|                                                                                                                                                                             |  |                  
|Accrued pension costs                                                                                                                                                        |  |                   | 674     |   |              |   | 576     |  
|Deferred compensation                                                                                                                                                        |  |                   | 688     |   |              |   | 186     |  
|                                                                                                                                                                             |  |                  
|Commitments                                                                                                                                                                  |  |                   |         |   |              |   |         |  
|                                                                                                                                                                             |  |                  
|Stockholders equity:                                                                                                                                                        |  |                   |         |   |              |   |         |  
|Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued and outstanding at September 30, 2004 and June 30,
2004.                                         |  |                   |        |   |              |   |        |  
|Common stock, $0.001 par value, 50,000,000 shares authorized, 11,876,090 and 11,665,913 shares issued and outstanding at September 30, 2004
and June 30, 2004, respectively. |  |                   | 12      |   |              |   | 12      |  
|Additional paid-in capital                                                                                                                                                   |  |                   | 98,364  |   |              |   | 95,974  |  
|Deferred stock-based compensation                                                                                                                                            |  |                   | (2,558  | ) |              |   | (2,663  | )
|Other comprehensive loss                                                                                                                                                     |  |                   | (28     | ) |              |   | (53     | )
|Accumulated deficit                                                                                                                                                          |  |                   | (31,442 | ) |              |   | (30,945 | )
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                                   |  |                   | 64,348  |   |              |   | 62,325  |  
|                                                                                                                                                                             |  |                   |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $                 | 77,849  |   |              | $ | 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 endedSeptember 30, |           
|                                                  |  | 2004                            |            |   | 2003 |  
|Net sales                                         |  | $                               | 19,921     |   |      | $ | 12,950    |  
|Cost of sales                                     |  |                                 | 10,608     |   |      |   | 7,335     |  
|                                                  |  |                                 |            |   |      |   |           |  
|Gross profit                                      |  |                                 | 9,313      |   |      |   | 5,615     |  
|Operating expenses:                               |  |                                 |            |   |      |   |           |  
|Selling and marketing                             |  |                                 | 4,889      |   |      |   | 2,785     |  
|General and administrative                        |  |                                 | 3,875      |   |      |   | 2,579     |  
|Information technology systems                    |  |                                 | 1,139      |   |      |   | 812       |  
|Stock-based compensation                          |  |                                 | 626        |   |      |   | 188       |  
|                                                  |  |                                 |            |   |      |   |           |  
|Total operating expenses                          |  |                                 | 10,529     |   |      |   | 6,364     |  
|                                                  |  |                                 |            |   |      |   |           |  
|Loss from operations                              |  |                                 | (1,216     | ) |      |   | (749      | )
|Other income, net                                 |  |                                 | 270        |   |      |   | 12        |  
|                                                  |  |                                 |            |   |      |   |           |  
|Loss from operations before income tax benefit    |  |                                 | (946       | ) |      |   | (737      | )
|Income tax benefit                                |  |                                 | (449       | ) |      |   |          |  
|                                                  |  |                                 |            |   |      |   |           |  
|Net loss                                          |  |                                 | (497       | ) |      |   | (737      | )
|Preferred stock dividend                          |  |                                 |           |   |      |   | (1,500    | )
|                                                  |  |                                 |            |   |      |   |           |  
|Net loss attributable to common stockholders      |  | $                               | (497       | ) |      | $ | (2,237    | )
|                                                  |  |                                 |            |   |      |   |           |  
|Net loss per common share:                        |  |                                 |            |   |      |   |           |  
|Basic                                             |  | $                               | (0.04      | ) |      | $ | (0.39     | )
|Diluted                                           |  | $                               | (0.04      | ) |      | $ | (0.39     | )
|Weighted average common shares outstanding:       |  |                                 |            |   |      |   |           |  
|Basic                                             |  |                                 | 11,844,949 |   |      |   | 5,801,412 |  
|                                                  |  |                                 |            |   |      |   |           |  
|Diluted                                           |  |                                 | 11,844,949 |   |      |   | 5,801,412 |  
|                                                  |  |                                 |            |   |      |   |           |  
|Stock-based compensation is allocated as follows: |  |                                 |            |   |      |   |           |  
|Cost of sales                                     |  | $                               | 5          |   |      | $ |          |  
|Selling and marketing                             |  |                                 | 216        |   |      |   | 101       |  
|General and administrative                        |  |                                 | 321        |   |      |   | 72        |  
|Information technology systems                    |  |                                 | 84         |   |      |   | 15        |  
|                                                  |  |                                 |            |   |      |   |           |  
|Total stock-based compensation                    |  | $                               | 626        |   |      | $ | 188       |  
|                                                  |  |                                 |            |   |      |   |           |  



See accompanying notes.



3



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PROVIDE COMMERCE, INC.



STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands, except share and per share data)



|                                                                                     |  |                                 |        |   |      |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                     |  | Three months endedSeptember 30, |       
|                                                                                     |  | 2004                            |        |   | 2003 |  
|Operating activities:                                                                |  |                                 |        |   |      |   |        |  
|Net loss                                                                             |  | $                               | (497   | ) |      | $ | (737   | )
|Adjustments to reconcile net loss to cash used in operating activities:              |  |                                 |        |   |      |   |        |  
|Depreciation and amortization                                                        |  |                                 | 599    |   |      |   | 346    |  
|Stock-based compensation                                                             |  |                                 | 626    |   |      |   | 188    |  
|Tax benefit from the exercise of stock options                                       |  |                                 | 340    |   |      |   |       |  
|Non-cash interest expense in connection with issuance of warrants for line of credit |  |                                 |       |   |      |   | 11     |  
|Changes in operating assets and liabilities:                                         |  |                                 |        |   |      |   |        |  
|Accounts receivable                                                                  |  |                                 | (256   | ) |      |   | 99     |  
|Inventory                                                                            |  |                                 | 142    |   |      |   | 254    |  
|Prepaid expenses and other current assets                                            |  |                                 | (228   | ) |      |   | 64     |  
|Accounts payable and other accrued liabilities                                       |  |                                 | (2,852 | ) |      |   | (1,503 | )
|Accrued compensation                                                                 |  |                                 | (1,092 | ) |      |   | (956   | )
|Accrued pension costs                                                                |  |                                 | 98     |   |      |   |       |  
|Deferred compensation                                                                |  |                                 | 502    |   |      |   |       |  
|Deferred revenue                                                                     |  |                                 | (80    | ) |      |   | (21    | )
|Accrued and deferred income taxes                                                    |  |                                 | (1,120 | ) |      |   |       |  
|Other assets                                                                         |  |                                 | 248    |   |      |   | (753   | )
|                                                                                     |  |                                 |        |   |      |   |        |  
|Net cash used in operating activities                                                |  |                                 | (3,570 | ) |      |   | (3,008 | )
|                                                                                     |  |                                
|Investing activities:                                                                |  |                                 |        |   |      |   |        |  
|Purchases of property and equipment                                                  |  |                                 | (1,529 | ) |      |   | (491   | )
|Purchases of marketable securities                                                   |  |                                 | (7,599 | ) |      |   |       |  
|Sales/maturities of marketable securities                                            |  |                                 | 13,950 |   |      |   |       |  
|                                                                                     |  |                                 |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                  |  |                                 | 4,822  |   |      |   | (491   | )
|                                                                                     |  |                                
|Financing activities:                                                                |  |                                 |        |   |      |   |        |  
|Payment of long-term debt and capital lease obligations                              |  |                                 | (32    | ) |      |   | (30    | )
|Common stock issued in connection with secondary public offering                     |  |                                 | 1,299  |   |      |   |       |  
|Dividend paid to preferred stockholders                                              |  |                                 |       |   |      |   | (1,500 | )
|Proceeds from exercise of common stock options and warrants                          |  |                                 | 229    |   |      |   | 36     |  
|                                                                                     |  |                                 |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                  |  |                                 | 1,496  |   |      |   | (1,494 | )
|                                                                                     |  |                                 |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                 |  |                                 | 2,748  |   |      |   | (4,993 | )
|Cash and cash equivalents at beginning of the period                                 |  |                                 | 18,210 |   |      |   | 11,496 |  
|                                                                                     |  |                                 |        |   |      |   |        |  
|Cash and cash equivalents at end of the period                                       |  | $                               | 20,958 |   |      | $ | 6,503  |  
|                                                                                     |  |                                 |        |   |      |   |        |  
|Supplemental disclosures of cash flow information:                                   |  |                                 |        |   |      |   |        |  
|Cash paid during the period for:                                                     |  |                                 |        |   |      |   |        |  
|Interest                                                                             |  | $                               | 1      |   |      | $ | 1      |  
|Income taxes                                                                         |  | $                               | 516    |   |      | $ | 330    |  
|Non-cash financing activities:                                                       |  |                                 |        |   |      |   |        |  
|Stock-based compensation associated with employee and consultant stock options       |  | $                               | 626    |   |      | $ | 188    |  
|Unrealized gain on marketable securities                                             |  | $                               | 25     |   |      | $ |       |  
|Tax benefit from the exercise of stock options                                       |  | $                               | 340    |   |      | $ |       |  



See accompanying notes.



4



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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 Loss Per Share



Basic net loss per common share is calculated by dividing net loss for the period by the weighted average common shares outstanding during the period, less shares subject
to repurchase. Diluted loss per share is calculated by dividing the net loss 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. The Company incurred losses for the three months ended September 30, 2004 and 2003, and,
accordingly, has excluded all convertible preferred stock, shares issuable upon exercise of common stock options, warrants and shares subject to repurchase from the calculation of diluted net loss per common share for that period as follows:



|                                                               |  |                                  |            |   |      |   |           |  
|-------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | --------- | -
|                                                               |  | Three months ended September 30, |           
|                                                               |  | 2004                             |            |   | 2003 |  
|Numerator                                                      |  |                                  |            |   |      |   |           |  
|Net loss                                                       |  | $                                | (497       | ) |      | $ | (737      | )
|Preferred stock dividends                                      |  |                                  |           |   |      |   | (1,500    | )
|                                                               |  |                                  |            |   |      |   |           |  
|Net loss attributable to common stockholders                   |  | $                                | (497       | ) |      | $ | (2,237    | )
|                                                               |  |                                  |            |   |      |   |           |  
|Denominator                                                    |  |                                  |            |   |      |   |           |  
|Basic:                                                         |  |                                  |            |   |      |   |           |  
|Weighted average common shares outstanding                     |  |                                  | 11,845,851 |   |      |   | 5,815,492 |  
|Less: Weighted average shares subject to repurchase            |  |                                  | (902       | ) |      |   | (14,080   | )
|                                                               |  |                                  |            |   |      |   |           |  
|Denominator on basic calculation                               |  |                                  | 11,844,949 |   |      |   | 5,801,412 |  
|                                                               |  |                                  |            |   |      |   |           |  
|Basic net loss attributable to common stockholders per share   |  | $                                | (0.04      | ) |      | $ | (0.39     | )
|                                                               |  |                                  |            |   |      |   |           |  
|Diluted:                                                       |  |                                  |            |   |      |   |           |  
|Weighted average common shares outstanding                     |  |                                  | 11,844,949 |   |      |   | 5,801,412 |  
|                                                               |  |                                  |            |   |      |   |           |  
|Denominator on diluted calculation                             |  |                                  | 11,844,949 |   |      |   | 5,801,412 |  
|                                                               |  |                                  |            |   |      |   |           |  
|Diluted net loss attributable to common stockholders per share |  | $                                | (0.04      | ) |      | $ | (0.39     | )
|                                                               |  |                                  |            |   |      |   |           |  



The following table summarizes
potential common shares that are not included in the denominator used in net loss per common share for the three months ended September 30, 2004 and 2003, because to do so would be anti-dilutive for the periods presented:



|                                     |  |                                 |  |          
|------------------------------------ |  | ------------------------------- |  | ---------
|                                     |  | Three months endedSeptember 30,
|                                     |  | 2004                            |  | 2003     
|Options to purchase common stock     |  | 1,242,204                       |  | 1,997,759
|Series A convertible preferred stock |  |                                |  | 760,384  
|Series B convertible preferred stock |  |                                |  | 2,039,009
|Warrants to purchase common stock    |  | 502,449                         |  | 974,537  
|                                     |  |                                 |  |          
|Total                                |  | 1,744,653                       |  | 5,771,689
|                                     |  |                                 |  |          



5



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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 three 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 FASB Interpretation No. 28.



The effect of applying the fair value recognition provisions of SFAS 123 to stock-based employee compensation to all outstanding and unvested awards in periods prior to July 1, 2003, on net income (loss) and earnings per common share for
the three months ended September 30, 2004 did not result in a pro forma loss 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.



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 three months ended September 30, 2004,
the Company issued 210,177 shares of common stock upon the closing of the Companys secondary public offering and upon the exercise of outstanding options and warrants.



At September 30, 2004, 902 shares were subject to repurchase at the original issuance price. The shares are subject to repurchase at the
election of the company in the event the employees are terminated. There will be little or no consideration paid for these shares in the event they are repurchased.



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 $1,300 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.



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.



6



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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 September 30, 2004, the Company had deferred compensation of $688 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 September 30, 2004 is $232 payable annually over 20 years commencing upon retirement. The following is a summary of our net periodic benefit cost included the following components for the
three months ended September 30, 2004:



|                                   |  |                                      |   
|---------------------------------- |  | ------------------------------------ | --
|                                   |  | Three months endedSeptember 30, 2004
|Service cost                       |  | $                                    | 74
|Interest cost                      |  |                                      | 16
|Amortization of prior service cost |  |                                      | 8 
|                                   |  |                                      |   
|Net periodic benefit cost          |  | $                                    | 98
|                                   |  |                                      |   



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 months ended September 30, 2004, the Company recognized a tax benefit of $449. The high effective tax rate anticipated for the year is a result of the
stock based compensation recognized under SFAS 123. No benefit or expense was recorded during the three months ended September 30, 2003 due to the valuation allowance against net deferred tax assets at that time.



7



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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 PRIMESM, CHERRY MOON FARMSSM, FLOWERFARM.COM®, FRESHNESS FACTOR®, and THE ART OF
FRESHER FLOWERSSMare 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 an integrated logistical
relationship with FedEx to create a market platform that bypasses traditional supply chains of wholesalers, distributors and retailers. The benefits to our customers include freshness, quality, price 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 our relationship with FedEx, 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 now premium 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 $1.3 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. For the three months ended September 30, 2004, we reported net sales of $19.9 million, an increase of 53.1% from $13.0 million for the three months ended September 30, 2003, and a net (loss) of
$(0.5) million as compared to a net (loss) of $(0.7) million for the three months ended September 30, 2003.



8



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Results of Operations



The following table sets forth our results of operations expressed as a percentage of net sales for the three months ended September 30, 2004, and 2003:



|                                             |  |                                  |    |  |       |   
|-------------------------------------------- |  | -------------------------------- | -- |  | ----- | --
|                                             |  | Three Months Ended September 30, |   
|                                             |  | 2004                             |    |  | 2003  |   
|Statement of Operations Data:                |  |                                  |    |  |       |   
|                                             |  |                                 
|Net sales                                    |  | 100.0                            | %  |  | 100.0 | % 
|Cost of sales                                |  | 53.2                             |    |  | 56.6  |   
|                                             |  |                                  |    |  |       |   
|Gross profit                                 |  | 46.8                             |    |  | 43.4  |   
|                                             |  |                                 
|Operating expenses:                          |  |                                  |    |  |       |   
|Selling and marketing                        |  | 24.6                             |    |  | 21.5  |   
|General and administrative                   |  | 19.5                             |    |  | 19.9  |   
|Information technology systems               |  | 5.7                              |    |  | 6.3   |   
|Stock-based compensation                     |  | 3.1                              |    |  | 1.5   |   
|                                             |  |                                  |    |  |       |   
|Total operating expenses                     |  | 52.9                             |    |  | 49.2  |   
|                                             |  |                                  |    |  |       |   
|Operating loss                               |  | (6.1                             | )  |  | (5.8  | ) 
|Other income, net                            |  | 1.4                              |    |  | 0.1   |   
|                                             |  |                                  |    |  |       |   
|Loss before income tax                       |  | (4.7                             | )  |  | (5.7  | ) 
|Income tax (benefit)                         |  | (2.3                             | )  |  |      |   
|                                             |  |                                  |    |  |       |   
|Net loss                                     |  | (2.5                             | )  |  | (5.7  | ) 
|Preferred stock dividend                     |  |                                 |    |  | (11.6 | ) 
|                                             |  |                                  |    |  |       |   
|Net loss attributable to common stockholders |  | (2.5                             | )% |  | (17.3 | )%
|                                             |  |                                  |    |  |       |   



Net Sales



|          |  |                                   |      |      |   |                      |  |      |  
|--------- |  | --------------------------------- | ---- | ---- | - | -------------------- |  | ---- | -
|          |  | Three Months Ended September 30,  |     
|          |  | 2004                              |      | 2003 |   | % Increase(Decrease) | 
|          |  | (In millions, except percentages) |     
|Net sales |  | $                                 | 19.9 |      | $ | 13.0                 |  | 53.1 | %



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 months ended September 30, 2004, compared to the same period last year resulted primarily from an increase in the number of orders by new and existing customers, as shown below.



9



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|                                    |  |                                  |              |      |   |                      |  |      |  
|----------------------------------- |  | -------------------------------- | ------------ | ---- | - | -------------------- |  | ---- | -
|                                    |  | Three Months Ended September 30, |             
|                                    |  | 2004                             |              | 2003 |   | % Increase(Decrease) | 
|Database of customers at period end |  |                                  | 3,200,000    |      |   | 2,200,000            |  | 45.5 | %
|Orders placed by existing customers |  |                                  | 270,000      |      |   | 163,000              |  | 65.6 | %
|Net sales from repeat orders        |  | $                                | 13.0 million |      | $ | 7.8 million          |  | 66.7 | %
|New customers                       |  |                                  | 117,000      |      |   | 90,000               |  | 30.0 | %
|Average order value                 |  | $                                | 46.96        |      | $ | 46.56                |  | 0.9  | %



Growth in the number of new customers
for the three months ended September 30, 2004 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 3% 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 intend to grow our existing flower and new 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 months ended September 30, 2004. 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 September 30,  |     
|                        |  | 2004                              |      |   | 2003 |   |      | % Increase(Decrease) | 
|                        |  | (In millions, except percentages) |     
|Gross profit            |  | $                                 | 9.3  |   |      | $ | 5.6  |                      |  | 66.1 | %
|Gross profit percentage |  |                                   | 46.8 | % |      |   | 43.4 | %                    |  |      |  



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 producer and delivery supply costs, distribution facility labor costs and the cost of
replacement products.



The increase in the gross profit margin in absolute
dollars for the three months ended September 30, 2004 compared to the same period last year is 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 is
principally attributable to the cost of shipping products to our customers, the direct cost of products and packaging costs.



The increase in the gross profit percentage for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was a result of cost
savings in product and accessory costs due to negotiated cost savings and a more profitable product mix. These savings were partially offset by an increase in the costs of product packing. We have also benefited from our fixed production costs
remaining relatively flat while net sales have increased in these two periods.



10



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



Selling and Marketing



|                          |  |                                   |      |   |      |   |      |                      |  |    |  
|------------------------- |  | --------------------------------- | ---- | - | ---- | - | ---- | -------------------- |  | -- | -
|                          |  | Three Months Ended September 30,  |     
|                          |  | 2004                              |      |   | 2003 |   |      | % Increase(Decrease) | 
|                          |  | (In millions, except percentages) |     
|Selling and marketing     |  | $                                 | 4.9  |   |      | $ | 2.8  |                      |  | 75 | %
|As a percent of net sales |  |                                   | 24.6 | % |      |   | 21.5 | %                    |  |    |  



Our selling and marketing expenses
consist primarily of advertising costs, wages and related payroll benefits for our category development and marketing and customer service staff, focus groups and other marketing research and promotional expenses. Advertising expenses 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 September 30, 2004 compared to the same period last year is primarily due to an increase in
on-line and off line advertising and promotional costs which, as a percentage of the prior period expense, grew faster than our increase in net sales as a result of increased marketing activities in an effort to generate additional net sales. In
addition, we experienced an increase in wages and wage related expenses as our marketing staff headcount has increased in an effort to drive increases in net sales. We also incurred additional outside consulting and professional services in our
efforts to maximize our customers overall experience.



The increase in
marketing costs for the three months ended September 30, 2004 as a percentage of sales compared to the same period last year is primarily a result of increased costs related to online and direct mail advertising. These costs were partially offset by
a reduction, as a percentage of sales, in our fixed marketing and advertising costs as these costs do not increase proportionately to the increase in net sales.



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. While we currently expect selling and marketing expenses to increase in absolute dollars, we expect them to remain generally comparable to prior years as a
percentage of net sales for fiscal 2005. 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 September 30,  |     
|                           |  | 2004                              |      |   | 2003 |   |      | % Increase(Decrease) | 
|                           |  | (In millions, except percentages) |     
|General and administrative |  | $                                 | 3.9  |   |      | $ | 2.6  |                      |  | 50.0 | %
|As a percent of net sales  |  |                                   | 19.5 | % |      |   | 19.9 | %                    |  |      |  



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



11



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The increase in absolute general and administrative expenses for the quarter ended September 30, 2004 compared to the
same quarter last year is primarily due to increases in depreciation of fixed assets, payroll and employee benefits, and the cost of retirement plan benefits. The increase in depreciation is a result of investments in fixed assets to support our
increased sales volumes. The increase in payroll and employee benefits is a result of increasing headcount in order to support the growth of our company. The increase in the cost of retirement plan benefits is a result of the retirement plans which
we adopted effective January 2004 as explained in notes to the financial statements.



The decline as a percentage of net sales was caused primarily by our rapid net sales growth, which outpaced our growth in general and administrative expenses.



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 and increased expenses associated with being a public company. However, we also anticipate that general and
administrative expenses will continue to decrease as a percentage of net sales as a result of net sales growing faster than general and administrative expenses.



Information Technology Systems



|                               |  |                                   |     |   |      |   |     |                       |  |      |  
|------------------------------ |  | --------------------------------- | --- | - | ---- | - | --- | --------------------- |  | ---- | -
|                               |  | Three Months Ended September 30,  |    
|                               |  | 2004                              |     |   | 2003 |   |     | % Increase (Decrease) | 
|                               |  | (In millions, except percentages) |    
|Information technology systems |  | $                                 | 1.1 |   |      | $ | 0.8 |                       |  | 37.5 | %
|As a percent of net sales      |  |                                   | 5.7 | % |      |   | 6.3 | %                     |  |      |  



Our information technology systems
expenses consist primarily of wages and related payroll 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 quarter ended September 30, 2004 compared to the same quarter last year is a result of an increase in payroll and related benefits and an increase in the cost of maintaining our servers. These costs were partially offset by an
increase in the capitalized costs associated with internally developed software of approximately $334,000 and approximately $246,000 for the three months ended September 30, 2004 and 2003, respectively. The increases in payroll, benefits, and server
maintenance are necessary to support the infrastructure necessary for continued growth of our business.



The decline as a percentage of net sales for the three months ended September 30, 2004 compared to the same period last year was caused primarily by our rapid 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 in 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 September 30,  |     
|                          |  | 2004                              |      |   | 2003 |   |      | % Increase(Decrease) | 
|                          |  | (In millions, except percentages) |     
|Stock-based compensation  |  | $                                 | 0.63 |   |      | $ | 0.19 |                      |  | 231.6 | %
|As a percent of net sales |  |                                   | 3.1  | % |      |   | 1.5  | %                    |  |       |  



Stock-based compensation increased
during the quarter ended September 30, 2004 compared to the same period 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
is due to both an increase in the number of options issued and a higher cost per option as a result of the increase in the market price of our common stock. Prior to fiscal 2003, we accounted for stock-based employee compensation



12



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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 September 30,  |     
|                          |  | 2004                              |      |   | 2003 |   |      | % Increase(Decrease) | 
|                          |  | (In millions, except percentages) |     
|Other income, net         |  | $                                 | 0.27 |   |      | $ | 0.01 |                      |  | 2,600.0 | %
|As a percent of net sales |  |                                   | 1.4  | % |      |   | 0.1  | %                    |  |         |  



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 quarter ended September 30, 2004 compared to the same quarter last year was a result of an increase in investment income from our cash and marketable securities following our initial and secondary
public offerings and additions to cash levels generated through continuing operations. In addition, we incurred less interest expense related to the obligation under capital leases.



Income Tax Benefit



|                   |  |                                   |     |      |   |                      |  |    
|------------------ |  | --------------------------------- | --- | ---- | - | -------------------- |  | ---
|                   |  | Three Months Ended September 30, 
|                   |  | 2004                              |     | 2003 |   | % Increase(Decrease)
|                   |  | (In millions, except percentages)
|Income tax benefit |  | $                                 | 0.4 |      | $ |                     |  | N/A



The income tax benefit reflects a
reduction in anticipated income tax payable as a result of the loss incurred in the first fiscal quarter of 2005. The high effective tax rate anticipated for the year is a result of the stock-based compensation recognized under SFAS 123. No benefit
or expense was recorded during the three months ended September 30, 2003 due to the valuation allowance against net deferred tax assets at that time.



Net Loss



|                          |  |                                   |      |    |      |   |      |                      |  |      |  
|------------------------- |  | --------------------------------- | ---- | -- | ---- | - | ---- | -------------------- |  | ---- | -
|                          |  | Three Months Ended September 30,  |     
|                          |  | 2004                              |      |    | 2003 |   |      | % Increase(Decrease) | 
|                          |  | (In millions, except percentages) |     
|Net loss                  |  | $                                 | (0.5 | )  |      | $ | (0.7 | )                    |  | 28.6 | %
|As a percent of net sales |  |                                   | (2.5 | )% |      |   | (5.7 | )%                   |  |      |  



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



Liquidity and Capital Resources



|                                  |  |                                   |      |               |   |                       |  |       |   
|--------------------------------- |  | --------------------------------- | ---- | ------------- | - | --------------------- |  | ----- | --
|                                  |  | September 30, 2004                |      | June 30, 2004 |   | % Increase (Decrease) | 
|                                  |  | (In millions, except percentages) |     
|Working capital                   |  | $                                 | 52.0 |               | $ | 50.1                  |  | 3.8   | % 
|Cash and cash equivalents balance |  | $                                 | 21.0 |               | $ | 18.2                  |  | 15.4  | % 
|Marketable securities balance     |  | $                                 | 34.9 |               | $ | 41.2                  |  | (15.3 | )%



13



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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 at September 30, 2004 over June 30, 2004 resulted primarily from the receipt of the net proceeds of $1.3 million from our secondary public offering of common stock, completed in
July 2004, combined with working capital generated by operations of approximately $1.8 million reduced by the purchase of fixed assets of approximately $1.5 million.



Net cash used in operating activities was $(3.6) million for the three months ended September 30, 2004 as compared to $(3.0) million for the
three months ended September 30, 2003. The use of cash in operations during the three months ended September 30, 2004 is primarily a result of an decrease in accounts payable and current liabilities, including accrued compensation and accrued income
taxes. The decrease in accounts payable was primarily a result of payments related to the previous fiscal quarter which is our highest net sales quarter. The reduction in accrued compensation is a result of payments of our annual employee bonus. The
reduction in accrued income taxes is a result of cash payments to tax authorities in various jurisdictions.



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 provided by investing activities totaled $4.8 million in the three months ended September 30, 2004.



Net cash provided by financing activities was $1.5 million for the three months ended September 30, 2004. Cash provided by financing activities for the quarter consists
primarily of proceeds from our secondary public offering net of associated costs. 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 $1.3 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 12 months. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in Risks and Uncertainties 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 month period ended September 30, 2004 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.



14



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Recently Issued Accounting Standards



None



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;
| | - | ------------



| |  | the timing 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;
| | - | ---------------------------------------------------------------



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



| |  | 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.



15



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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. 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;
| | - | -------------------------



| |  | 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 one year. 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. We have generated substantially all of our net sales during the past six years from the sale of flowers. 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
$25.1 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



16



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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 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.



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



We
currently rely primarily on a single third-party carrier, FedEx, 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 FedExs ability to provide timely and cost-effective order fulfillment and delivery services to meet our distribution and shipping
needs. Under our contract with FedEx, 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 FedEx. Failure to
deliver products to our customers in a timely and accurate manner would harm our reputation, our brands and our results of operations.



Our contract with FedEx provides us with negotiated shipment rates for all FedEx services other than FedEx First Overnight and FedExs freight services. Our contract
with FedEx provides for annual renewal and annual pricing adjustments, based upon FedExs guideline rates, and permits either FedEx or us to terminate the agreement upon 60 days prior notice. We re-negotiate various provisions of our agreement
with FedEx on an annual basis. We may face substantial increases in the cost of delivery services from FedEx or any alternative delivery service 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 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 50% of our flower
products, and the loss of any of these suppliers could harm our business.



For the three months ended September 30, 2004, and for fiscal year 2004 we depended upon three suppliers for approximately 53.2% 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.



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



18



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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, the second calendar quarter, due to Mothers Day and Easter, and the fourth calendar quarter, due to the Thanksgiving and end-of-year holidays. 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 also be adversely affected by the particular day of the week on which certain major holidays fall. For example, because Valentines Day
will fall on a Monday in 2005, we may experience less demand for our product related to our 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.



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 and floral wire services such as FTD, 1-800-FLOWERS 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 premium 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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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 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.



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



20



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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.



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 60 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.



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 first quarter of fiscal 2005 and fiscal 2004, 59.2% 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;
| | - | ------------------------------------------------



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



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 our other products. If 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.



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.



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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 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 27.1% of our flower orders in the three months ended September 30, 2004 and 19.4% of our flower orders 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.



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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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.



24



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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 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.



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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.



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.



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.



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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.



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 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.



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.
| | - | ----------------------------------------------------------



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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.



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 September 30, 2004, 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, Mississippi, New Jersey, Ohio, Pennsylvania, 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
| | - | ----------------------------------------------------------------------------------------------------



| |  | 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.



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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.



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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.



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



An active trading market for our common stock may not develop.



Prior to our initial public offering in December 2003, there was no public market for our common stock. An active trading market may not
develop or, if developed, may not be 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.



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 failures 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 carrier, FedEx;
| | - | --------------------------------------------------------------------------------



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



30



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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.



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 October 31, 2004, our largest stockholder and persons affiliated with our largest
stockholder beneficially owned 35.0% 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 46.3% 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 approximately 6,170,870 shares of common stock, based upon shares outstanding as of October 31, 2004 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.



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;
| | - | ---------------------------------



| |  | 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.



31



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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.



32



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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 September 30, 2004, we did not have any balances outstanding under our bank line of credit
arrangement (which we terminated in October 2003); 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 $45,000 or
47.7% of total payments to these foreign growers and vendors for the three months ended September 30, 2004 was made in U.S. dollars. Although transactions in foreign currencies represent approximately 52.3% 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 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 have been no changes in our internal controls 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 controls over financial reporting.



33



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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 September 30, 2004, we issued the following securities to certain of holders of the previously issued warrants to
purchase shares of our common stock:



On July 1, 2004, we
issued 2,592 shares of our common stock upon the cash exercise of a previously issued warrant to purchase shares of our common stock.



On July 6, 2004, we issued 39,255 shares of our common stock upon the cash exercise of a previously issued warrant to purchase shares of our common stock.



On August 20, 2004, we issued 1,296 shares of our common stock
upon the cash exercise of a previously issued warrant to purchase shares of our common stock.



On August 31, 2004, we issued 2,592 shares of our common stock upon the cash exercise of a previously issued warrant to purchase shares of our common stock.



On September 1, 2004, we issued 2,026 shares of our common stock upon the
cashless exercise of a previously issued warrant to purchase shares of our common stock.



On September 27, 2004, we issued 6,277 shares of our common stock upon the cashless exercise of a previously issued warrant to purchase shares of our common stock.



On September 30, 2004, we issued 30 shares of our common stock upon the
cashless exercise of a previously issued warrant to purchase shares of our common stock.



These transactions did not involve a public offering. Appropriate legends were affixed to the stock certificates, as applicable in such transactions. 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 each transferee had adequate access to information about us to make an informed investment and each transferee is
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 $34.6 million. As of September 30, 2004, 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.



34



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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).                                                                                   
|                  | 
|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 10.31(2)# |  | First Amendment to Employment Agreement, dated September 24, 2004, between us and William Strauss.                                                                             
|                  | 
|Exhibit 10.42     |  | Warrant to Purchase Common Stock, dated November 29, 1999 and reissued upon partial exercise July 7, 2004, issued by us to Vantage Venture Partners, L.P.                      
|                  | 
|Exhibit 10.43#    |  | Form of Stock Option Agreement for the 2003 Stock Incentive Plan.                                                                                                              
|                  | 
|Exhibit 10.44#    |  | Form of Stock Issuance Agreement for the 2003 Stock Incentive Plan.                                                                                                            
|                  | 
|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 Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
|--- | ----------------------------------------------------------------------------------------------------

|# | Indicates management contract or compensatory plan.
|- | ---------------------------------------------------

|* | 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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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PROVIDE COMMERCE, INC.



September 30, 2004



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.



|                        |  |                        |  |                                       
|----------------------- |  | ---------------------- |  | --------------------------------------
|                        |  | Provide Commerce, Inc.
|                        |  |                       
|Date: November 10, 2004 |  | By:                    |  | /s/ Rex E. Bosen                      
|                        |  |                        |  | Rex E. Bosen                          
|                        |  |                        |  | Vice President, Finance and Accounting



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