---



United States Securities and Exchange Commission

Washington, DC 20549



FORM 10-Q



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



For the quarterly period ended December 24, 2005



or



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



For the transition period from
 to



Commission File Number 333-128870



Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 20-0884389                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|2500 South Pacific Highway, Medford, OR                        |  | 97501                                  
|(Address of Principal Executive Offices)                       |  | (Zip Code)                             



541-864-2362

(Registrants telephone number including area code)



None

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



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



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

Large accelerated ̈Accelerated filer ̈Non-accelerated filer  x



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



Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date:



|                             |  |                                   
|---------------------------- |  | ----------------------------------
|Class                        |  | Outstanding as of February 7, 2006
|Common stock $0.01 par value |  | 1,014,888                         



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---

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES



INDEX



|                               |  |                                                                                                                  |  |     
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                  |  | Page
|Part I.  Financial Information |  |                                                                                                                 
|                               |  |                                                                                                                 
|Item 1.                        |  | Condensed Consolidated (unaudited) Financial Statements                                                          |  |     
|                               |  |                                                                                                                 
|                               |  | Condensed Consolidated Balance Sheets  as of December 25, 2004, June 25, 2005 and December 24, 2005             |  | 3   
|                               |  |                                                                                                                 
|                               |  | Condensed Consolidated Statements of Operations  Thirteen weeks ended December 25, 2004 and December 24, 2005   |  | 4   
|                               |  |                                                                                                                 
|                               |  | Condensed Consolidated Statements of Operations  Twenty-six weeks ended December 25, 2004 and December 24, 2005 |  | 5   
|                               |  |                                                                                                                 
|                               |  | Condensed Consolidated Statements of Cash Flows  Twenty-six weeks ended December 25, 2004 and December 24, 2005 |  | 6   
|                               |  |                                                                                                                 
|                               |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 7   
|                               |  |                                                                                                                 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 25  
|                               |  |                                                                                                                 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 35  
|                               |  |                                                                                                                 
|Item 4.                        |  | Controls and Procedures                                                                                          |  | 35  
|                               | 
|Part II.  Other Information    |  |                                                                                                                 
|                               |  |                                                                                                                 
|Item 1.                        |  | Legal Proceedings                                                                                                |  | 37  
|                               |  |                                                                                                                 
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 37  
|                               |  |                                                                                                                 
|Item 3.                        |  | Defaults upon Senior Securities                                                                                  |  | 37  
|                               |  |                                                                                                                 
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                              |  | 37  
|                               |  |                                                                                                                 
|Item 5.                        |  | Other Information                                                                                                |  | 37  
|                               |  |                                                                                                                 
|Item 6.                        |  | Exhibits                                                                                                         |  | 37  
|                               |  |                                                                                                                 
|Signatures                     |  |                                                                                                                  |  | 38  



2



---

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



Harry & David Holdings, Inc. and Subsidiaries



Condensed Consolidated Balance Sheets

(in Thousands, Except Share Data)



|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | ------------ | - | ------- | -------------------------- |  | - | -------
|                                                                                                                                                                                                      |  | December 25,2004 Unaudited |         | June 25,2005 |   |         | December 24,2005 Unaudited
|Assets                                                                                                                                                                                                |  |                            |         |              |   |         |                            |  |   |        
|Current assets:                                                                                                                                                                                       |  |                            |         |              |   |         |                            |  |   |        
|Cash and cash equivalents                                                                                                                                                                             |  | $                          | 155,166 |              | $ | 24,854  |                            |  | $ | 147,141
|Trade accounts receivable, net                                                                                                                                                                        |  |                            | 23,200  |              |   | 8,434   |                            |  |   | 27,874 
|Other receivables                                                                                                                                                                                     |  |                            | 3,508   |              |   | 2,025   |                            |  |   | 5,617  
|Inventories, net                                                                                                                                                                                      |  |                            | 61,068  |              |   | 68,660  |                            |  |   | 70,197 
|Prepaid catalog expenses                                                                                                                                                                              |  |                            | 5,284   |              |   | 3,811   |                            |  |   | 5,376  
|Income taxes receivable                                                                                                                                                                               |  |                            | 19,053  |              |   | 247     |                            |  |   | 381    
|Other current assets                                                                                                                                                                                  |  |                            | 10,404  |              |   | 6,220   |                            |  |   | 9,006  
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total current assets                                                                                                                                                                                  |  |                            | 277,683 |              |   | 114,251 |                            |  |   | 265,592
|                                                                                                                                                                                                      |  |                            |        
|Property, plant, and equipment, net                                                                                                                                                                   |  |                            | 160,920 |              |   | 165,006 |                            |  |   | 163,521
|Software, net                                                                                                                                                                                         |  |                            | 11,848  |              |   | 11,705  |                            |  |   | 10,710 
|Intangibles, net                                                                                                                                                                                      |  |                            | 36,171  |              |   | 35,084  |                            |  |   | 34,023 
|Deferred financing costs, net                                                                                                                                                                         |  |                            | 7,393   |              |   | 14,269  |                            |  |   | 14,317 
|Deferred income taxes                                                                                                                                                                                 |  |                            | 599     |              |   | 5,869   |                            |  |   | 8,663  
|Other assets                                                                                                                                                                                          |  |                            | 975     |              |   | 628     |                            |  |   | 573    
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total assets                                                                                                                                                                                          |  | $                          | 495,589 |              | $ | 346,812 |                            |  | $ | 497,399
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Liabilities and stockholders equity (deficit)                                                                                                                                                        |  |                            |         |              |   |         |                            |  |   |        
|Current liabilities:                                                                                                                                                                                  |  |                            |         |              |   |         |                            |  |   |        
|Accounts payable                                                                                                                                                                                      |  | $                          | 46,838  |              | $ | 18,759  |                            |  | $ | 74,249 
|Accrued payroll and benefits                                                                                                                                                                          |  |                            | 20,454  |              |   | 15,943  |                            |  |   | 18,449 
|Deferred revenue                                                                                                                                                                                      |  |                            | 42,375  |              |   | 15,002  |                            |  |   | 41,084 
|Deferred income taxes                                                                                                                                                                                 |  |                            | 50,455  |              |   | 24,127  |                            |  |   | 45,272 
|Accrued interest                                                                                                                                                                                      |  |                            | 3,819   |              |   | 5,940   |                            |  |   | 5,769  
|Accrued restructuring costs                                                                                                                                                                           |  |                            | 5,299   |              |   | 2,224   |                            |  |   | 1,196  
|Other accrued liabilities                                                                                                                                                                             |  |                            | 17,683  |              |   | 6,996   |                            |  |   | 19,845 
|Notes payable                                                                                                                                                                                         |  |                            | 13,900  |              |   | 268     |                            |  |   | 15     
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total current liabilities                                                                                                                                                                             |  |                            | 200,823 |              |   | 89,259  |                            |  |   | 205,879
|                                                                                                                                                                                                      |  |                            |        
|Long-term debt                                                                                                                                                                                        |  |                            | 147,621 |              |   | 245,000 |                            |  |   | 245,000
|Accrued pension liability                                                                                                                                                                             |  |                            | 29,997  |              |   | 30,982  |                            |  |   | 33,389 
|Other long-term liabilities                                                                                                                                                                           |  |                            | 944     |              |   | 1,798   |                            |  |   | 2,711  
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total liabilities                                                                                                                                                                                     |  |                            | 379,385 |              |   | 367,039 |                            |  |   | 486,979
|Commitments and Contingencies                                                                                                                                                                         |  |                            |        |              |   |        |                            |  |   |       
|Stockholders equity (deficit):                                                                                                                                                                       |  |                            |         |              |   |         |                            |  |   |        
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,000,000; 1,000,000 and 1,014,888 shares at
December 25, 2004, June 25, 2005 and December 24, 2005, respectively |  |                            | 10      |              |   | 10      |                            |  |   | 10     
|Additional paid-in capital                                                                                                                                                                            |  |                            | 83,992  |              |   | 1,864   |                            |  |   | 3,320  
|Retained earnings (accumulated deficit)                                                                                                                                                               |  |                            | 32,202  |              |   | (22,101 | )                          |  |   | 7,090  
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total stockholders equity (deficit)                                                                                                                                                                  |  |                            | 116,204 |              |   | (20,227 | )                          |  |   | 10,420 
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        
|Total liabilities and stockholders equity (deficit)                                                                                                                                                  |  | $                          | 495,589 |              | $ | 346,812 |                            |  | $ | 497,399
|                                                                                                                                                                                                      |  |                            |         |              |   |         |                            |  |   |        



See accompanying
notes.



3



---

Harry & David Holdings, Inc. and Subsidiaries



Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)



|                                                        |  |                      |           |   |                   |   |           |  
|------------------------------------------------------- |  | -------------------- | --------- | - | ----------------- | - | --------- | -
|                                                        |  | Thirteen weeks ended |          
|                                                        |  | December 25, 2004    |           |   | December 24, 2005 |  
|Net Sales                                               |  | $                    | 334,938   |   |                   | $ | 362,392   |  
|Costs and expenses:                                     |  |                      |           |   |                   |   |           |  
|Cost of goods sold                                      |  |                      | 160,180   |   |                   |   | 185,211   |  
|Selling, general and administrative                     |  |                      | 82,418    |   |                   |   | 86,529    |  
|Selling, general and administrative  related party     |  |                      | 294       |   |                   |   | 250       |  
|                                                        |  |                      |           |   |                   |   |           |  
|                                                        |  |                      | 242,892   |   |                   |   | 271,990   |  
|                                                        |  |                      |           |   |                   |   |           |  
|Operating income                                        |  |                      | 92,046    |   |                   |   | 90,402    |  
|Other (income) expense:                                 |  |                      |           |   |                   |   |           |  
|Interest income                                         |  |                      | (37       | ) |                   |   | (156      | )
|Interest expense                                        |  |                      | 5,017     |   |                   |   | 7,104     |  
|Other (income) expense                                  |  |                      | (302      | ) |                   |   | 2,180     |  
|                                                        |  |                      |           |   |                   |   |           |  
|                                                        |  |                      | 4,678     |   |                   |   | 9,128     |  
|                                                        |  |                      |           |   |                   |   |           |  
|Income before income taxes                              |  |                      | 87,368    |   |                   |   | 81,274    |  
|Provision for income taxes                              |  |                      | 17,732    |   |                   |   | 32,217    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Net income                                              |  | $                    | 69,636    |   |                   | $ | 49,057    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Earnings per share:                                     |  |                      |           |   |                   |   |           |  
|Basic and diluted                                       |  | $                    | 69.64     |   |                   | $ | 48.34     |  
|                                                        |  |                      |           |   |                   |   |           |  
|Weighted-average shares used in per share calculations: |  |                      |           |   |                   |   |           |  
|Basic and diluted                                       |  |                      | 1,000,000 |   |                   |   | 1,014,888 |  
|                                                        |  |                      |           |   |                   |   |           |  



See accompanying
notes.



4



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Harry & David Holdings, Inc. and Subsidiaries



Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)



|                                                        |  |                        |           |   |                   |   |           |  
|------------------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | -
|                                                        |  | Twenty-six weeks ended |          
|                                                        |  | December 25, 2004      |           |   | December 24, 2005 |  
|Net Sales                                               |  | $                      | 388,648   |   |                   | $ | 420,115   |  
|Costs and expenses:                                     |  |                        |           |   |                   |   |           |  
|Cost of goods sold                                      |  |                        | 198,369   |   |                   |   | 227,967   |  
|Selling, general and administrative                     |  |                        | 119,158   |   |                   |   | 126,065   |  
|Selling, general and administrative  related party     |  |                        | 594       |   |                   |   | 500       |  
|                                                        |  |                        |           |   |                   |   |           |  
|                                                        |  |                        | 318,121   |   |                   |   | 354,532   |  
|                                                        |  |                        |           |   |                   |   |           |  
|Operating income                                        |  |                        | 70,527    |   |                   |   | 65,583    |  
|Other (income) expense:                                 |  |                        |           |   |                   |   |           |  
|Interest income                                         |  |                        | (45       | ) |                   |   | (258      | )
|Interest expense                                        |  |                        | 9,983     |   |                   |   | 13,557    |  
|Other (income) expense                                  |  |                        | (302      | ) |                   |   | 2,180     |  
|                                                        |  |                        |           |   |                   |   |           |  
|                                                        |  |                        | 9,636     |   |                   |   | 15,479    |  
|                                                        |  |                        |           |   |                   |   |           |  
|Income before income taxes                              |  |                        | 60,891    |   |                   |   | 50,104    |  
|Provision for income taxes                              |  |                        | 11,961    |   |                   |   | 18,313    |  
|                                                        |  |                        |           |   |                   |   |           |  
|Net income                                              |  | $                      | 48,930    |   |                   | $ | 31,791    |  
|                                                        |  |                        |           |   |                   |   |           |  
|Earnings per share:                                     |  |                        |           |   |                   |   |           |  
|Basic and diluted                                       |  | $                      | 48.93     |   |                   | $ | 31.41     |  
|                                                        |  |                        |           |   |                   |   |           |  
|Weighted-average shares used in per share calculations: |  |                        |           |   |                   |   |           |  
|Basic and diluted                                       |  |                        | 1,000,000 |   |                   |   | 1,012,171 |  
|                                                        |  |                        |           |   |                   |   |           |  



See accompanying
notes.



5



---

Harry & David Holdings, Inc. and Subsidiaries



Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                  |  |                        |         |   |                   |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | -------- | -
|                                                                                  |  | Twenty-six weeks ended |        
|                                                                                  |  | December 25, 2004      |         |   | December 24, 2005 |  
|Operating activities                                                              |  |                        |         |   |                   |   |          |  
|Net income                                                                        |  | $                      | 48,930  |   |                   | $ | 31,791   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |         |   |                   |   |          |  
|Depreciation                                                                      |  |                        | 5,432   |   |                   |   | 7,130    |  
|Amortization                                                                      |  |                        | 2,564   |   |                   |   | 2,728    |  
|Stock option compensation expense                                                 |  |                        |        |   |                   |   | 226      |  
|Amortization of deferred financing costs                                          |  |                        | 954     |   |                   |   | 1,166    |  
|Write-off of deferred IPO costs                                                   |  |                        |        |   |                   |   | 2,180    |  
|Loss on disposal of property, plant, equipment, and software                      |  |                        | 50      |   |                   |   | 304      |  
|Deferred income taxes                                                             |  |                        | 52,255  |   |                   |   | 18,352   |  
|Changes in operating assets and liabilities:                                      |  |                        |         |   |                   |   |          |  
|Accounts receivable                                                               |  |                        | (10,112 | ) |                   |   | (23,032  | )
|Inventories                                                                       |  |                        | 3,514   |   |                   |   | (1,537   | )
|Prepaid advertising and other assets                                              |  |                        | (40,914 | ) |                   |   | (6,411   | )
|Accounts payable and accrued liabilities                                          |  |                        | 44,365  |   |                   |   | 72,966   |  
|Deferred revenue                                                                  |  |                        | 28,015  |   |                   |   | 26,082   |  
|                                                                                  |  |                        |         |   |                   |   |          |  
|Net cash provided by operating activities                                         |  |                        | 135,053 |   |                   |   | 131,945  |  
|Investing activities                                                              |  |                        |         |   |                   |   |          |  
|Acquisition of property, plant, equipment, and software                           |  |                        | (3,542  | ) |                   |   | (6,832   | )
|Proceeds from the sale of property, plant, and equipment                          |  |                        | 26      |   |                   |   | 11       |  
|                                                                                  |  |                        |         |   |                   |   |          |  
|Net cash used in investing activities                                             |  |                        | (3,516  | ) |                   |   | (6,821   | )
|Financing activities                                                              |  |                        |         |   |                   |   |          |  
|Borrowings of revolving debt                                                      |  |                        | 90,000  |   |                   |   | 104,000  |  
|Payments of revolving debt                                                        |  |                        | (90,000 | ) |                   |   | (104,000 | )
|Payments of notes payable                                                         |  |                        |        |   |                   |   | (253     | )
|Payments for deferred financing costs                                             |  |                        |        |   |                   |   | (1,214   | )
|Proceeds from exercise of stock options                                           |  |                        |        |   |                   |   | 1,230    |  
|Dividends paid                                                                    |  |                        |        |   |                   |   | (2,600   | )
|                                                                                  |  |                        |         |   |                   |   |          |  
|Net cash used in financing activities                                             |  |                        |        |   |                   |   | (2,837   | )
|                                                                                  |  |                        |         |   |                   |   |          |  
|Increase in cash and cash equivalents                                             |  |                        | 131,537 |   |                   |   | 122,287  |  
|Cash and cash equivalents, beginning of period                                    |  |                        | 23,629  |   |                   |   | 24,854   |  
|                                                                                  |  |                        |         |   |                   |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                      | 155,166 |   |                   | $ | 147,141  |  
|                                                                                  |  |                        |         |   |                   |   |          |  



See accompanying
notes.



6



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



1. BUSINESS



Harry & David
Holdings, Inc. (the Company, we, us and our) is a vertically-integrated multichannel specialty retailer and producer of branded premium gift-quality fruit gourmet food products and gifts marketed under the Harry and David®brand, and premium rose plants, horticultural products, and home and garden décor marketed
under the Jackson & Perkins®brand. The Company markets its products through
catalogs distributed through the mail, the Internet, business-to-business and consumer telemarketing, Harry and David stores and wholesale distribution to other retailers.



During the fourth quarter of fiscal 2005 and the first two quarters of fiscal 2006, the Company incurred approximately $2,180 of legal,
accounting and other professional fees related to a planned initial public offering (IPO) of the Companys common stock (the Offering). However, given current market conditions and other factors, the Company has postponed the Offering and has
decided to expense these costs in the second fiscal quarter as the Company anticipates that the planned IPO will not take place in fiscal 2006.



2. BASIS OF PRESENTATION



These financial statements include the consolidated results of the Company and its wholly owned subsidiaries. The Condensed Consolidated Balance Sheets as of
December 25, 2004 and December 24, 2005, the Condensed Consolidated Statements of Operations for the thirteen and twenty-six week periods ended December 25, 2004 and December 24, 2005, and the Condensed Consolidated Statements of
Cash Flows for the twenty-six week periods ended December 25, 2004 and December 24, 2005 have been prepared from our unaudited condensed consolidated financial statements. In managements opinion, the condensed consolidated financial
statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six week periods then ended.
Significant intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 25, 2005 presented herein has been derived from our audited balance sheet not included herein.



The results of operations for the interim periods shown are not necessarily
indicative of results to be expected for the fiscal year. In the second quarter of each fiscal year, the Company typically realizes its highest sales of the fiscal year as it includes the most significant holidays that drive the largest portion of
the gift-giving component of the Companys sales. It is also the period where the Company is incurring significant cost of goods sold in connection with the increased sales in the second quarter of the year, which are typically the highest of
the fiscal year. The Companys fiscal year ends on the last Saturday in June, based on a fifty-two/fifty-three-week year.



The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the United States for comparable
annual financial statements. Certain notes and other information have been condensed or omitted from the interim condensed consolidated financial statements presented in this Quarterly Report. For further information, refer to the consolidated
financial statements and the notes thereto for the year ended June 25, 2005, not included herein.



3. NEW ACCOUNTING PRONOUNCEMENTS



Accounting for Rental Costs Incurred during a Construction Period: On October 6, 2005, the FASB issued FASB Staff Position FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (FSP 13-1), which
requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. FSP 13-1 is effective for the first reporting period beginning after December 15,
2005. The Company has historically expensed rental costs incurred during a construction period; therefore, the adoption of this guidance will not have an impact on our net earnings, cash flows or financial position.



Amortization Period for Leasehold Improvements:On June 29, 2005, the Financial
Accounting Standards Board (FASB) ratified the Emerging Issues Task Force (EITF) No. 05-06, Determining the Amortization Period for Leasehold Improvements.EITF No. 05-06 provides that the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception of a lease be the shorter of (a) the useful life of the assets or (b) a term that includes required lease periods and renewals that are reasonably assured
upon the acquisition or the purchase. The provisions of EITF No. 05-06 are effective on a prospective basis for leasehold improvements purchased or acquired



7



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



3. NEW ACCOUNTING PRONOUNCEMENTS (continued)



beginning in our second quarter of fiscal 2006. The adoption of this guidance did not have a material impact on our net earnings, cash flows or financial
position.



American Jobs Creation Act: In the preceding interim
financial reporting period, the Company indicated that it was evaluating the impact of the American Jobs Creation Act of 2004 in the context of a special deduction associated with the taxable income of companies with U.S. manufacturing activities.
The Act provides that this deduction is effective with the Companys tax year ending November 2006, which ends within the Companys fiscal year ending June 2007. The benefit of such provisions will be phased-in during tax years November
2006 through November 2011. Accordingly, the Company has concluded that these provisions of the Act do not apply to the Company at this time.



Accounting for Conditional Asset Retirement Obligations:In March 2005, the FASB issued Financial Accounting Standards Board Interpretation (FIN) No. 47,
Accounting for Conditional Asset Retirement Obligations. This interpretation clarifies the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, and is effective no later
than the end of fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material effect on its consolidated financial statements.



4. INVENTORIES



Inventories consist of the following:



|                                                   |  |                   |        |                  |   |       
|-------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                   |  | December 25, 2004 |        | December 24,2005
|Finished goods                                     |  | $                 | 26,440 |                  | $ | 31,872
|Materials, packaging supplies, and work-in process |  |                   | 18,159 |                  |   | 24,013
|Growing crops                                      |  |                   | 16,469 |                  |   | 14,312
|                                                   |  |                   |        |                  |   |       
|Total                                              |  | $                 | 61,068 |                  | $ | 70,197
|                                                   |  |                   |        |                  |   |       



5. INCOME TAXES



At the end of each interim financial reporting period, the Company determines an estimate of
the effective income tax rate expected to be applicable for the fiscal year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent periods. The effective tax rate for fiscal 2006 is estimated to be
30.54%, and the rate for fiscal 2005 was 27.15%. The difference in the Companys effective tax rate from the federal statutory rate is principally attributable to estimated state taxes in the current year and adjustments associated with state
taxes for prior periods. The provision for income taxes for the thirteen weeks ended December 24, 2005 was $32,217, reflecting an effective tax rate of 39.64%, as compared to $17,732 in the thirteen weeks ended December 25, 2004,
reflecting an effective tax rate of 20.30%. The provision for income taxes for the twenty-six weeks ended December 24, 2005 was $18,313, reflecting an effective tax rate of 36.55%, as compared to $11,961 in the twenty-six weeks ended
December 25, 2004, reflecting an effective tax rate of 19.64%. The rates for the current fiscal year and interim periods differ from the similar periods in fiscal 2005 principally as a result of lower utilization of net operating losses at the
state level in fiscal 2005 for which a tax benefit is recorded.



6. ACCRUED
RESTRUCTURING COSTS



On June 17, 2004, the Company purchased all of
the outstanding shares of common stock of Harry & David Operations Corp. from Yamanouchi Consumer Inc. (YCI), (the Acquisition). In accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination, the Company recorded a liability for restructuring costs associated with the Acquisition. The restructuring liability consisted of $7,304 in estimated costs to implement managements plan for
a reduction in force that began in August 2004. Additionally, the restructuring liability consisted of $3,173 in estimated costs to implement managements plan to close nineteen underperforming Harry and David retail stores. As of
December 24, 2005, the Company has closed fourteen of these stores. Of the $3,173,



8



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



6. ACCRUED RESTRUCTURING COSTS (continued)



approximately $300 is for severance costs related to terminated store management personnel and corporate positions directly associated with the stores
division. These stores were identified for closure by the new ownership team based on historical and pro forma operating results. Management anticipates that all of the planned restructuring activities will be substantially completed as soon as
reasonably possible. The following table summarizes the Companys accrued restructuring costs.



|                        |  |                                        |       |                                        |   |        |                   |  |                    |       |               |   |       |                      |   |     |                   |  |   |     |   |  |   |      
|----------------------- |  | -------------------------------------- | ----- | -------------------------------------- | - | ------ | ----------------- |  | ------------------ | ----- | ------------- | - | ----- | -------------------- | - | --- | ----------------- |  | - | --- | - |  | - | -----
|                        |  | Thirteen weeks ended December 25, 2004 |       | Thirteen weeks ended December 24, 2005
|                        |  | September 25, 2004                     |       | Cash Payments                          |   |        | December 25, 2004 |  | September 24, 2005 |       | Cash Payments |   |       | Non-Cash Adjustments |   |     | December 24, 2005
|Reduction in force      |  | $                                      | 4,694 |                                        | $ | (2,372 | )                 |  | $                  | 2,322 |               | $ | 108   |                      | $ | (27 | )                 |  | $ | (81 | ) |  | $ |     
|Store closures          |  |                                        | 2,873 |                                        |   | (196   | )                 |  |                    | 2,677 |               |   | 1,101 |                      |   | (55 | )                 |  |   |    |   |  |   | 1,046
|Store closure severance |  |                                        | 300   |                                        |   |       |                   |  |                    | 300   |               |   | 150   |                      |   |    |                   |  |   |    |   |  |   | 150  
|                        |  |                                        |       |                                        |   |        |                   |  |                    |       |               |   |       |                      |   |     |                   |  |   |     |   |  |   |      
|Total                   |  | $                                      | 7,867 |                                        | $ | (2,568 | )                 |  | $                  | 5,299 |               | $ | 1,359 |                      | $ | (82 | )                 |  | $ | (81 | ) |  | $ | 1,196
|                        |  |                                        |       |                                        |   |        |                   |  |                    |       |               |   |       |                      |   |     |                   |  |   |     |   |  |   |      



|                        |  |                                          |        |               |   |        |                   |  |   |      
|----------------------- |  | ---------------------------------------- | ------ | ------------- | - | ------ | ----------------- |  | - | -----
|                        |  | Twenty-six weeks ended December 25, 2004
|                        |  | June 17, 2004                            |        | Cash Payments |   |        | December 25, 2004
|Reduction in force      |  | $                                        | 7,304  |               | $ | (4,982 | )                 |  | $ | 2,322
|Store closures          |  |                                          | 2,873  |               |   | (196   | )                 |  |   | 2,677
|Store closure severance |  |                                          | 300    |               |   |       |                   |  |   | 300  
|                        |  |                                          |        |               |   |        |                   |  |   |      
|Total                   |  | $                                        | 10,477 |               | $ | (5,178 | )                 |  | $ | 5,299
|                        |  |                                          |        |               |   |        |                   |  |   |      



|                        |  |                                          |       |               |   |      |                      |  |   |                   |   |                             |   |                      |  |   |       |  |   |       
|----------------------- |  | ---------------------------------------- | ----- | ------------- | - | ---- | -------------------- |  | - | ----------------- | - | --------------------------- | - | -------------------- |  | - | ----- |  | - | ------
|                        |  | Twenty-six weeks ended December 24, 2005 |       |               |   |     
|                        |  | June 25, 2005                            |       | Cash Payments |   |      | Non-Cash Adjustments |  |   | December 24, 2005 |   | Total Cash Payments to Date |   | Total Expected Costs
|Reduction in force      |  | $                                        | 869   |               | $ | (788 | )                    |  | $ | (81               | ) |                             | $ |                     |  | $ | 7,223 |  | $ | 7,040 
|Store closures          |  |                                          | 1,205 |               |   | (159 | )                    |  |   |                  |   |                             |   | 1,046                |  |   | 1,827 |  |   | 2,731 
|Store closure severance |  |                                          | 150   |               |   |     |                      |  |   |                  |   |                             |   | 150                  |  |   | 150   |  |   | 300   
|                        |  |                                          |       |               |   |      |                      |  |   |                   |   |                             |   |                      |  |   |       |  |   |       
|Total                   |  | $                                        | 2,224 |               | $ | (947 | )                    |  | $ | (81               | ) |                             | $ | 1,196                |  | $ | 9,200 |  | $ | 10,071
|                        |  |                                          |       |               |   |      |                      |  |   |                   |   |                             |   |                      |  |   |       |  |   |       



The $81 non-cash adjustment represents
the unutilized portion of the reserve for reduction in force, once all these costs were completed this quarter. This reserve reversal was included in selling, general and administrative expense on our condensed consolidated statement of operations.



The store closure severance paid to employees as part of the restructuring was
substantially complete as of December 24, 2005, and the remaining planned store closings will be completed as soon as reasonably possible. The remaining store closure reserve is primarily for anticipated lease termination fees.



9



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



7. BORROWING ARRANGEMENTS



Revolving Credit Facilities



On June 17, 2004, the Company entered into a revolving credit agreement with a bank that provides for $150,000 of revolving credit secured by the assets of the
Company. In conjunction with a refinancing, this agreement was amended to reduce the revolving credit to $125,000. During the thirteen and twenty-six week periods ending December 25, 2004 and December 24, 2005, the Company borrowed and
repaid $90,000 and $104,000, respectively. At each of the periods ended December 25, 2004, June 25, 2005 and December 24, 2005, there were letters of credit in the amount of $4,000 outstanding and $146,000, $121,000 and $121,000
available for borrowings, respectively. The interest rate on this facility is variable, and as of December 25, 2004 and December 24, 2005, was set at LIBOR plus 3.0% and 2.25%, respectively. This agreement contains certain restrictive loan
covenants, including financial covenants requiring the Company to maintain a maximum leverage ratio, minimum interest coverage ratio, minimum fixed charge coverage ratio, minimum liquidity, and maximum capital expenditures. As of December 24,
2005, the Company was in compliance with all its bank covenants under the revolving credit facility. However, due to weaker than anticipated earnings results in the quarter ended December 24, 2005 and based on current trends in the
Companys business, the Company believes it is probable that as of March 25, 2006, the next quarterly measurement date, it will be in violation of certain financial covenants under the revolving credit facility, including the debt coverage
ratio, interest coverage ratio and fixed coverage ratio. The Company will be working diligently with its lenders to renegotiate these covenants and to obtain, where needed, sufficient waivers.



If subsequent to December 24, 2005 the Company violates any of its quarterly revolving
credit facility covenant tests, it is possible that the Companys lenders may limit the size of the Companys seasonal $125,000 revolver. If the Companys revolving credit facility was limited in size or not renewed for some reason,
the Company would likely be required to find alternative seasonal funding sources. However, the Company believes that it has the necessary cash resources and liquidity to fund its business while pursuing alternative means of bank financing. As of
December 24, 2005, the Company had no debt outstanding under its revolving credit agreement and had $4,000 in outstanding letters of credit, which the Company believes could be funded through other sources, if necessary. While the Company
believes it will be able to renegotiate its covenants or obtain sufficient waivers on its revolving credit facility, there is no assurance that alternative funding, if needed, would be available to the Company on similar or acceptable terms.



Notes Payable



On June 17, 2004, the Company entered into an unsecured note agreement with a financial
institution in the amount of $13,900. The interest rate on the facility was variable and set at LIBOR plus 1.5% with interest payments every three months. At December 25, 2004, $13,900 remained outstanding. This note was repaid in full on
February 25, 2005.



Notes payable at June 25, 2005, consisted of $268
for short-term financing of software for the Company, of which $15 remained outstanding at December 24, 2005. The remaining balance of the note was paid in full in January 2006.



Long-Term Debt



In February 2005, the Company issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due March 1, 2013. The
Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 8.33% and 9.41% at June 25, 2005 and December 24, 2005, respectively. The $175,000 of Senior
Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments commencing on December 1, 2005. These notes represent the senior unsecured obligations of Harry & David Operations Corp., a wholly
owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc and all of the Companys current and future domestic subsidiaries. The indenture governing the
notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with
affiliates. The Company was in compliance with all covenants at December 24, 2005. Absent waivers or a covenant renegotiation, the Companys risk of a probable violation of its revolving credit facility covenants as of the quarter ending
March 25, 2006, would not create a cross default with the senior notes.



10



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



7. BORROWING ARRANGEMENTS (continued)



Registration Statement



On November 4, 2005, the Securities and Exchange Commission (SEC) declared the Companys Registration Statement on Form S-4
(Registration No. 333-128870) as amended, effective. The Form S-4 related to the Companys offer to exchange all of its outstanding floating rate notes and senior notes for an equal principal amount of such notes which have been registered
under the Securities Act of 1933, as amended. Upon the effective date of the Form S-4 Registration Statement, the Company became subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. Accordingly, the Company
has been and will continue to file annual, quarterly and periodic reports with the SEC as required. The Company completed the exchange offer on December 16, 2005.



8. STOCK OPTION PLAN



In February 2005, the Company adopted a Non-Qualified Stock Option Plan (Plan). The Company accounts for stock-based compensation using the fair-value method under SFAS
123(R). The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on an average historical volatility
of the publicly traded stock of a representative set of comparable companies. The expected term of options granted is derived from the time between initial grant and date of final vesting, as is a customary assumption for stock options in private
equity-controlled companies. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



|                         |  |                                                     
|------------------------ |  | ----------------------------------------------------
|                         |  | Thirteen and Twenty-sixweeks ended December 24, 2005
|Expected volatility      |  | 44.97%                                              
|Expected dividends       |  | $0                                                  
|Expected term (in years) |  | 4.3 years                                           
|Risk-free rate           |  | 4.12%                                               



A summary of option activity under the
Plan for the thirteen weeks and twenty-six weeks ended December 24, 2005 is presented below:



Thirteen weeks ended December 24, 2005



|                                  |  |              |   |  |                               |       |                                          |           
|--------------------------------- |  | ------------ | - |  | ----------------------------- | ----- | ---------------------------------------- | ----------
|Options                           |  | OptionShares |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm
|Outstanding at September 24, 2005 |  | 68,638       |   |  | $                             | 82.60 |                                          | 8.75 years
|Granted                           |  |             |   |  |                               |      |                                          |          
|Exercised                         |  |             |   |  |                               |      |                                          |          
|Forfeited                         |  | (220         | ) |  |                               | 82.60 |                                          |          
|                                  |  |              |   |  |                               |       |                                          |           
|Outstanding at December 24, 2005  |  | 68,418       |   |  | $                             | 82.60 |                                          | 8.5 years 
|                                  |  |              |   |  |                               |       |                                          |           



11



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



Twenty-six weeks ended December 24, 2005



|                                 |  |              |   |  |                               |       |                                          |          
|-------------------------------- |  | ------------ | - |  | ----------------------------- | ----- | ---------------------------------------- | ---------
|Options                          |  | OptionShares |   |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm
|Outstanding at June 25, 2005     |  | 83,581       |   |  | $                             | 82.60 |                                          | 9.0 years
|Granted                          |  |             |   |  |                               |      |                                          |         
|Exercised                        |  | (14,888      | ) |  |                               | 82.60 |                                          |         
|Forfeited                        |  | (275         | ) |  |                               | 82.60 |                                          |         
|                                 |  |              |   |  |                               |       |                                          |          
|Outstanding at December 24, 2005 |  | 68,418       |   |  | $                             | 82.60 |                                          | 8.5 years
|                                 |  |              |   |  |                               |       |                                          |          



Of the 68,418 options outstanding at
December 24, 2005, 1,773 were fully vested and exercisable. The weighted average remaining contractual term of vested options was 8.5 years. The total value of all options outstanding at December 24, 2005 was $2,055.



A summary of the status of the Companys nonvested option shares as of December 24,
2005, and changes during the thirteen and twenty-six weeks ended December 24, 2005, is presented below:



Thirteen weeks ended December 24, 2005



|                                  |  |              |   |  |                                                |      
|--------------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares           |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at September 24, 2005 |  | 66,821       |   |  | $                                              | 30.04
|Granted options                   |  |             |   |  |                                                |     
|Vested                            |  |             |   |  |                                                |     
|Forfeited                         |  | (176         | ) |  |                                                | 30.04
|                                  |  |              |   |  |                                                |      
|Outstanding at December 24, 2005  |  | 66,645       |   |  | $                                              | 30.04
|                                  |  |              |   |  |                                                |      



Twenty-six weeks ended
December 24, 2005



|                                 |  |              |   |  |                                                |      
|-------------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares          |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at June 25, 2005     |  | 66,865       |   |  | $                                              | 30.04
|Granted options                  |  |             |   |  |                                                |     
|Vested                           |  |             |   |  |                                                |     
|Forfeited                        |  | (220         | ) |  |                                                | 30.04
|                                 |  |              |   |  |                                                |      
|Outstanding at December 24, 2005 |  | 66,645       |   |  | $                                              | 30.04
|                                 |  |              |   |  |                                                |      



For the thirteen and twenty-six week
periods ended December 24, 2005, the Company recognized $113 and $226 of stock compensation expense, respectively. The total income tax benefit recognized for these periods was $45 and $90, respectively. As of December 24, 2005, there
remains a total of $1,645 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years. An
assumption of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.



12



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



9. BENEFIT PROGRAMS



The following represents the components of net periodic pension and postretirement costs in accordance with revised SFAS No. 132, Employers Disclosure
About Pensions and Other Postretirement Benefits.The components of net periodic benefits for the Companys qualified benefit and excess benefit plans are as follows:



|                                   |  |                      |       |   |                        |   |       |                  |  |   |                  |   |  |   |        |  
|---------------------------------- |  | -------------------- | ----- | - | ---------------------- | - | ----- | ---------------- |  | - | ---------------- | - |  | - | ------ | -
|                                   |  | Thirteen weeks ended |       |   | Twenty-six weeks ended |  
|                                   |  | December 25,2004     |       |   | December 24,2005       |   |       | December 25,2004 |  |   | December 24,2005 |  
|Service cost                       |  | $                    | 1,094 |   |                        | $ | 1,148 |                  |  | $ | 1,992            |   |  | $ | 2,280  |  
|Interest cost                      |  |                      | 969   |   |                        |   | 913   |                  |  |   | 1,941            |   |  |   | 1,851  |  
|Expected return on plan assets     |  |                      | (677  | ) |                        |   | (614  | )                |  |   | (1,531           | ) |  |   | (1,376 | )
|Amortization of prior service cost |  |                      |      |   |                        |   | 3     |                  |  |   |                 |   |  |   | 5      |  
|Settlement gain                    |  |                      |      |   |                        |   | 13    |                  |  |   |                 |   |  |   |       |  
|                                   |  |                      |       |   |                        |   |       |                  |  |   |                  |   |  |   |        |  
|Net periodic benefit expense       |  | $                    | 1,386 |   |                        | $ | 1,463 |                  |  | $ | 2,402            |   |  | $ | 2,760  |  
|                                   |  |                      |       |   |                        |   |       |                  |  |   |                  |   |  |   |        |  



During the thirteen and twenty-six
weeks ended December 24, 2005, the Company made a $0 and $350 contribution to its defined benefit plans, respectively.



10. EARNINGS PER SHARE



Earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period, as follows (in thousands, except share and per share data):



|                                           |  |                      |           |                        |   |                  |  |                  |           |  |   |          
|------------------------------------------ |  | -------------------- | --------- | ---------------------- | - | ---------------- |  | ---------------- | --------- |  | - | ---------
|                                           |  | Thirteen weeks ended |           | Twenty-six weeks ended
|                                           |  | December 25,2004     |           | December 24,2005       |   | December 25,2004 |  | December 24,2005
|Net income                                 |  | $                    | 69,636    |                        | $ | 49,057           |  | $                | 48,930    |  | $ | 31,791   
|                                           |  |                      |           |                        |   |                  |  |                  |           |  |   |          
|Weighted average common shares outstanding |  |                      | 1,000,000 |                        |   | 1,014,888        |  |                  | 1,000,000 |  |   | 1,012,171
|                                           |  |                      |           |                        |   |                  |  |                  |           |  |   |          
|Basic and diluted earnings per share       |  | $                    | 69.64     |                        | $ | 48.34            |  | $                | 48.93     |  | $ | 31.41    
|                                           |  |                      |           |                        |   |                  |  |                  |           |  |   |          



Options with an exercise price equal
to the average market price of common shares were 0 and 68,437 for the thirteen weeks and 0 and 71,275 for the twenty-six weeks ended December 25, 2004 and December 24, 2005, respectively, and were not included in the computation of
diluted earnings per share, as their inclusion would be anti-dilutive.



11.
INTANGIBLES



Intangible assets primarily consisted of trade names,
trademarks, customer mailing lists and favorable lease agreements. The trade names and trademarks have indefinite lives. The customer mailing lists and favorable lease agreements are being amortized using the straight-line method over their
estimated useful lives. The aggregate amortization expense was $594 and $570 for the thirteen week periods ended December 25, 2004 and December 24, 2005, respectively, and $1,187 and $1,154 for the twenty-six week periods ended
December 25, 2004 and December 24, 2005, respectively, included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.



13



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



11. INTANGIBLES (continued)



The following is a summary of intangible assets:



|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|----------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                          |  | December 25, 2004   |        | December 24, 2005      
|                                          |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names and trademarks                |  | $                   | 28,765 |                         | $ |       |                   |  | $                   | 28,765 |                         | $ | 28,765 |                   | $ |       |   |  | $ | 28,765
|Harry and David customer and rental lists |  |                     | 6,805  |                         |   | (1,079 | )                 |  |                     | 5,726  |                         |   | 6,805  |                   |   | (2,934 | ) |  |   | 3,871 
|Favorable lease agreements                |  |                     | 1,877  |                         |   | (197   | )                 |  |                     | 1,680  |                         |   | 1,971  |                   |   | (584   | ) |  |   | 1,387 
|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|                                          |  | $                   | 37,447 |                         | $ | (1,276 | )                 |  | $                   | 36,171 |                         | $ | 37,541 |                   | $ | (3,518 | ) |  | $ | 34,023
|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       



The increase of $94 in the gross
carrying amount of the favorable lease agreements, as of December 24, 2005, is due to the closure of a store with a lease greater than the fair value at the time of the acquisition. The customer mailing and rental lists have estimated useful
lives ranging from one to four years. The favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases ranging from three to ten years.



Amortization expense for fiscal 2006 is projected to be $2,212. The estimated amortization expense for each of the next five years is as
follows:



|                 |  |   |      
|---------------- |  | - | -----
|Fiscal year 2007 |  | $ | 1,935
|Fiscal year 2008 |  |   | 1,725
|Fiscal year 2009 |  |   | 244  
|Fiscal year 2010 |  |   | 171  
|Fiscal year 2011 |  |   | 126  



12. COMMITMENTS AND CONTINGENCIES



The Company is a defendant in various lawsuits that arise in the normal
course of business. Management believes that the Company is adequately covered by insurance and that the ultimate liability, if any, resulting from such claims would not have a materially adverse effect on the Companys results of operations or
financial position.



The Companys food and horticultural products are
subject to regulation and inspection by various governmental agencies, and involve the risk of injury to consumers. During the first twenty-six weeks of fiscal 2006, the Company was required to recall some of its products. The Company maintains
product liability insurance in an amount that it believes is adequate to cover the costs associated with these recalls.



The Company leases certain properties consisting primarily of retail stores, distribution centers, and equipment with original terms ranging from three to twenty years.
Certain leases contain purchase options and renewal options. In addition to minimum rental payments, certain of the Companys retail store leases require the Company to make contingent rental payments, which are based upon certain factors,
such as sales volume and property taxes. Such contingent rental expense is accrued in each reporting period if achievement of any factor is considered probable.



14



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



12. COMMITMENTS AND CONTINGENCIES (continued)



Total rental expense for all operating leases was as follows:



|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       
|----------------------- |  | -------------------- | ----- | ---------------------- | - | ---------------- |  | ---------------- | ------ |  | - | ------
|                        |  | Thirteen weeks ended |       | Twenty-six weeks ended
|                        |  | December 25,2004     |       | December 24,2005       |   | December 25,2004 |  | December 24,2005
|Minimum rent expense    |  | $                    | 8,179 |                        | $ | 8,285            |  | $                | 14,234 |  | $ | 13,462
|Contingent rent expense |  |                      | 13    |                        |   | 94               |  |                  | 53     |  |   | 138   
|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       
|Total rent expense      |  | $                    | 8,192 |                        | $ | 8,379            |  | $                | 14,287 |  | $ | 13,600
|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       



In connection with the Acquisition,
the Company entered into an agreement with its shareholders Wasserstein and Highfields for financial management, consulting, and advisory services. We have agreed to pay fees of $1,000 annually (excluding out of pocket reimbursements) under this
agreement. To the extent the management fees are not paid in any year, they will be accrued. If the Companys proposed initial public offering is completed, the management agreement is expected to terminate and Wasserstein and Highfields will
be paid a termination fee from a portion of the net proceeds of the proposed initial public offering. The termination fee will not exceed $10,000 based on the expected present value of the fees Wasserstein and Highfields would have received over the
life of the management agreement. During the thirteen week periods ended December 25, 2004 and December 24, 2005, the Company paid $294 and $250, respectively, and during the twenty-six week periods ended December 25, 2004 and
December 24, 2005, the Company paid $594 and $500, respectively, in such management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and administrative expenses.



Some of the agricultural lands owned by the Company receive water supply by facilities
improved by or owned and operated by the United States government acting through the BOR (Bureau of Reclamation). Generally, the Reclamation Reform Act, or RRA, governs a landholders entitlement to receive water from federal reclamation
projects, which requires filings to be submitted to the BOR. The Company owns approximately 4,000 acres considered by the BOR to be reportable. On December 22, 2005, the Company was successful in receiving permanent legislative relief to
resolve these filing requirements. The legal and administrative fees for this legislative relief had an immaterial effect on our financial statements. The Company paid $243 to the BOR on January 6, 2006, for total settlement of all federal BOR
repayment obligations, thus removing the reporting obligations on those lands. There remains approximately 40 acres of leased lands in southern Oregon that, if repayment is not made, the Company will be required to elect to either not receive water
on that acreage or file reports for all remaining reportable acreage.



On
February 18, 2005, the Company established a liquidity event award plan for each member of our senior management team who received stock options under the 2004 Stock Option Plan (described above) as of February 18, 2005. The aggregate
amount of all potential awards to senior management is equal to $6,197, or 7.5% of the portion of the proceeds from the sale of notes that was distributed on February 25, 2005 to the Companys equity sponsors as a return of capital. The
amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20%
of the award will vest on June 17, 2006, and 5% will vest quarterly thereafter, in each case, so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will
not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by our equity
sponsors exceeds a certain level; (iii) we have available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be
payable in cash or, in some circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of December 24, 2005, we have concluded
that we are not obligated to accrue a liability or recognize any expense for the thirteen or twenty-six week period then ended.



13. SEGMENT REPORTING



The Company has three reportable segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins. The Harry and David Direct Marketing segment markets premium gift-quality fruit,
gourmet food products and gifts under the Harry and David®brand through the Harry and
David catalog, Internet (harryanddavid.com), business-to-business and consumer telemarketing operations. The Harry and David Stores segment sells similar products through retail locations (outlet stores, specialty stores and a Country Village
store). The Jackson & Perkins segment markets horticultural products and gifts through the Jackson & Perkins catalog, Internet (jacksonandperkins.com), consumer telemarketing and wholesale



15



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



13. SEGMENT REPORTING (continued)



operations. These reportable segments are strategic business units that offer similar products. They are managed separately because the business units
utilize distinct marketing strategies. Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and capital investment requirements. The accounting policies of the
segments, where applicable, are the same as those described in the summary of significant accounting polices. Transactions between reportable segments are generally recorded at cost. Other assets include corporate cash and cash equivalents,
short-term investments, the net book value of corporate facilities and related information systems, deferred income taxes, third-party and intercompany debt and other corporate long-lived assets, including manufacturing facilities. Business units
not required to be disclosed separately for segment reporting purposes are grouped in Other and include Harry and David wholesale, commercial sales of non-gift-quality fruit and business units that support the Companys operations,
including orchards, product supply, distribution, customer operations, facilities, information technology services and administrative and marketing support functions.



|                                         |  |                                |          |   |                       |   |         |                 |  |   |        |   |  |       |         |   |  |   |         |  
|---------------------------------------- |  | ------------------------------ | -------- | - | --------------------- | - | ------- | --------------- |  | - | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|Dollars in thousands                     |  | Harry andDavid DirectMarketing |          |   | Harry andDavid Stores |   |         | Jackson&Perkins |  |   | Other  |   |  | Total |        
|Thirteen weeks ended December 25, 2004   |  |                                |          |   |                       |   |         |                 |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                       |  | $                              | 240,171  |   |                       | $ | 65,051  |                 |  | $ | 24,537 |   |  | $     | 5,179   |   |  | $ | 334,938 |  
|Net intersegment sales                   |  |                                | (72,131  | ) |                       |   | (12,846 | )               |  |   | (3,880 | ) |  |       | 88,857  |   |  |   |        |  
|Operating income (loss)                  |  |                                | 76,684   |   |                       |   | 16,411  |                 |  |   | (209   | ) |  |       | (840    | ) |  |   | 92,046  |  
|Net interest (expense) income            |  |                                |         |   |                       |   |        |                 |  |   |       |   |  |       | (4,980  | ) |  |   | (4,980  | )
|Pretax income (loss)                     |  |                                | 76,717   |   |                       |   | 16,401  |                 |  |   | (209   | ) |  |       | (5,541  | ) |  |   | 87,368  |  
|Net income (loss)                        |  |                                | 81,514   |   |                       |   | 16,252  |                 |  |   | 1,053  |   |  |       | (29,183 | ) |  |   | 69,636  |  
|Total assets                             |  |                                | 70,384   |   |                       |   | 34,428  |                 |  |   | 52,627 |   |  |       | 338,150 |   |  |   | 495,589 |  
|                                         |  |                                |          |   |                      
|Thirteen weeks ended December 24, 2005   |  |                                |          |   |                       |   |         |                 |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                       |  | $                              | 257,866  |   |                       | $ | 66,471  |                 |  | $ | 26,016 |   |  | $     | 12,039  |   |  | $ | 362,392 |  
|Net intersegment sales                   |  |                                | (83,945  | ) |                       |   | (12,392 | )               |  |   | (3,375 | ) |  |       | 99,712  |   |  |   |        |  
|Operating income (loss)                  |  |                                | 72,441   |   |                       |   | 16,714  |                 |  |   | (826   | ) |  |       | 2,073   |   |  |   | 90,402  |  
|Net interest (expense) income            |  |                                |         |   |                       |   | 4       |                 |  |   |       |   |  |       | (6,952  | ) |  |   | (6,948  | )
|Pretax income (loss)                     |  |                                | 72,441   |   |                       |   | 16,718  |                 |  |   | (826   | ) |  |       | (7,059  | ) |  |   | 81,274  |  
|Net income (loss)                        |  |                                | 46,558   |   |                       |   | 11,315  |                 |  |   | 155    |   |  |       | (8,971  | ) |  |   | 49,057  |  
|Total assets                             |  |                                | 78,942   |   |                       |   | 44,268  |                 |  |   | 59,495 |   |  |       | 314,694 |   |  |   | 497,399 |  
|                                         |  |                                |          |   |                      
|Twenty-six weeks ended December 25, 2004 |  |                                |          |   |                       |   |         |                 |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                       |  | $                              | 264,923  |   |                       | $ | 87,342  |                 |  | $ | 28,676 |   |  | $     | 7,707   |   |  | $ | 388,648 |  
|Net intersegment sales                   |  |                                | (92,236  | ) |                       |   | (19,472 | )               |  |   | (4,231 | ) |  |       | 115,939 |   |  |   |        |  
|Operating income (loss)                  |  |                                | 64,680   |   |                       |   | 10,390  |                 |  |   | (3,715 | ) |  |       | (828    | ) |  |   | 70,527  |  
|Net interest (expense) income            |  |                                |         |   |                       |   | 1       |                 |  |   |       |   |  |       | (9,939  | ) |  |   | (9,938  | )
|Pretax income (loss)                     |  |                                | 64,713   |   |                       |   | 10,381  |                 |  |   | (3,715 | ) |  |       | (10,488 | ) |  |   | 60,891  |  
|Net income (loss)                        |  |                                | 74,605   |   |                       |   | 12,926  |                 |  |   | (893   | ) |  |       | (37,708 | ) |  |   | 48,930  |  
|Total assets                             |  |                                | 70,384   |   |                       |   | 34,428  |                 |  |   | 52,627 |   |  |       | 338,150 |   |  |   | 495,589 |  
|                                         |  |                                |          |   |                      
|Twenty-six weeks ended December 24, 2005 |  |                                |          |   |                       |   |         |                 |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                       |  | $                              | 283,951  |   |                       | $ | 88,228  |                 |  | $ | 31,700 |   |  | $     | 16,236  |   |  | $ | 420,115 |  
|Net intersegment sales                   |  |                                | (106,637 | ) |                       |   | (18,801 | )               |  |   | (3,631 | ) |  |       | 129,069 |   |  |   |        |  
|Operating income (loss)                  |  |                                | 56,768   |   |                       |   | 10,652  |                 |  |   | (4,394 | ) |  |       | 2,557   |   |  |   | 65,583  |  
|Net interest (expense) income            |  |                                |         |   |                       |   | 7       |                 |  |   |       |   |  |       | (13,306 | ) |  |   | (13,299 | )
|Pretax income (loss)                     |  |                                | 56,768   |   |                       |   | 10,659  |                 |  |   | (4,394 | ) |  |       | (12,929 | ) |  |   | 50,104  |  
|Net income (loss)                        |  |                                | 35,085   |   |                       |   | 6,763   |                 |  |   | (2,788 | ) |  |       | (7,269  | ) |  |   | 31,791  |  
|Total assets                             |  |                                | 78,942   |   |                       |   | 44,268  |                 |  |   | 59,495 |   |  |       | 314,694 |   |  |   | 497,399 |  



16



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS



Harry & David Operations Corp. issued $70,000 of Senior Floating Rate Notes due
2012 and $175,000 of Senior Fixed Rate Notes due 2013 (collectively, the Notes) in February 2005 (see Note 7). In connection with Harry & David Operations Corp.s completed exchange of the Notes for an equal principal amount of such
notes registered under the Securities Act of 1933, the following consolidating financial information presents, in separate columns, financial information for (i) the Company (on a parent only basis) with its investment in its subsidiaries
recorded under the equity method, (ii) Harry & David Operations Corp. (the subsidiary issuer), (iii) Harry & David Holdings, Inc. (guarantor) subsidiaries of the Company that guarantee the Notes on a combined basis,
(iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of December 25, 2004 and
December 24, 2005 and for the thirteen and twenty-six week periods ended December 25, 2004 and December 24, 2005. The Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of its existing
and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Notes place certain restrictions on the payment
of dividends, other payments or distributions by the Company and between the guarantors. The Company has not presented separate financial information for each of the subsidiary guarantors, because management believes that such financial information
would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.



17



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Balance Sheet

As of December 25, 2004

(in Thousands)

(Unaudited)



|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|---------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | -------
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated
|Assets                                               |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current assets:                                      |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Cash and cash equivalents                            |  | $                                          | 1,404   |   |                                | $ | 46,657   |                        |  | $ | 107,105                          |   |  | $            |         |   |  | $ | 155,166
|Trade accounts and other receivable, net             |  |                                            |        |   |                                |   | 258      |                        |  |   | 26,450                           |   |  |              |         |   |  |   | 26,708 
|Inventories, net                                     |  |                                            |        |   |                                |   |         |                        |  |   | 61,068                           |   |  |              |         |   |  |   | 61,068 
|Prepaid catalog expenses                             |  |                                            |        |   |                                |   |         |                        |  |   | 5,284                            |   |  |              |         |   |  |   | 5,284  
|Income taxes receivable                              |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              | 19,053   |   |  |   | 19,053 
|Other current assets                                 |  |                                            |        |   |                                |   | 1,900    |                        |  |   | 8,049                            |   |  |              | 455      |   |  |   | 10,404 
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current assets                                 |  |                                            | 1,404   |   |                                |   | 48,815   |                        |  |   | 207,956                          |   |  |              | 19,508   |   |  |   | 277,683
|Property, plant, and equipment, net                  |  |                                            |        |   |                                |   | 8,337    |                        |  |   | 152,583                          |   |  |              |         |   |  |   | 160,920
|Software, net                                        |  |                                            |        |   |                                |   | 11,187   |                        |  |   | 661                              |   |  |              |         |   |  |   | 11,848 
|Intangibles, net                                     |  |                                            |        |   |                                |   |         |                        |  |   | 36,171                           |   |  |              |         |   |  |   | 36,171 
|Investment in subsidiaries                           |  |                                            | 84,005  |   |                                |   | 158,578  |                        |  |   |                                 |   |  |              | (242,583 | ) |  |   |       
|Deferred financing costs, net                        |  |                                            | (418    | ) |                                |   | 7,811    |                        |  |   |                                 |   |  |              |         |   |  |   | 7,393  
|Deferred income taxes                                |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              | 599      |   |  |   | 599    
|Other assets                                         |  |                                            |        |   |                                |   | 326      |                        |  |   | 649                              |   |  |              |         |   |  |   | 975    
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total assets                                         |  | $                                          | 84,991  |   |                                | $ | 235,054  |                        |  | $ | 398,020                          |   |  | $            | (222,476 | ) |  | $ | 495,589
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Liabilities and stockholders equity (deficit)       |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current liabilities:                                 |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Accounts payable                                     |  | $                                          | (1,073  | ) |                                | $ | 13,969   |                        |  | $ | 33,942                           |   |  | $            |         |   |  | $ | 46,838 
|Accrued payroll and benefits                         |  |                                            |        |   |                                |   | 3,287    |                        |  |   | 17,167                           |   |  |              |         |   |  |   | 20,454 
|Income taxes payable                                 |  |                                            |        |   |                                |   | (19,029  | )                      |  |   | (24                              | ) |  |              | 19,053   |   |  |   |       
|Deferred revenue                                     |  |                                            |        |   |                                |   |         |                        |  |   | 42,375                           |   |  |              |         |   |  |   | 42,375 
|Deferred income taxes                                |  |                                            | (557    | ) |                                |   | 51,012   |                        |  |   |                                 |   |  |              |         |   |  |   | 50,455 
|Accrued interest                                     |  |                                            | 87      |   |                                |   | 3,731    |                        |  |   | 1                                |   |  |              |         |   |  |   | 3,819  
|Accrued restructuring costs                          |  |                                            | (4,989  | ) |                                |   | 7,675    |                        |  |   | 2,613                            |   |  |              |         |   |  |   | 5,299  
|Other taxes payable                                  |  |                                            |        |   |                                |   | (267     | )                      |  |   | (188                             | ) |  |              | 455      |   |  |   |       
|Other accrued liabilities                            |  |                                            |        |   |                                |   |         |                        |  |   | 17,683                           |   |  |              |         |   |  |   | 17,683 
|Current portion of long-term debt                    |  |                                            | 13,900  |   |                                |   |         |                        |  |   |                                 |   |  |              |         |   |  |   | 13,900 
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current liabilities                            |  |                                            | 7,368   |   |                                |   | 60,378   |                        |  |   | 113,569                          |   |  |              | 19,508   |   |  |   | 200,823
|Long-term debt                                       |  |                                            | 609     |   |                                |   | 147,012  |                        |  |   |                                 |   |  |              |         |   |  |   | 147,621
|Accrued pension liability                            |  |                                            |        |   |                                |   |         |                        |  |   | 29,997                           |   |  |              |         |   |  |   | 29,997 
|Deferred income taxes                                |  |                                            |        |   |                                |   | (599     | )                      |  |   |                                 |   |  |              | 599      |   |  |   |       
|Intercompany debt                                    |  |                                            | 92,846  |   |                                |   | (173,000 | )                      |  |   | 80,154                           |   |  |              |         |   |  |   |       
|Other long-term liabilities                          |  |                                            |        |   |                                |   |         |                        |  |   | 944                              |   |  |              |         |   |  |   | 944    
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities                                    |  |                                            | 100,823 |   |                                |   | 33,791   |                        |  |   | 224,664                          |   |  |              | 20,107   |   |  |   | 379,385
|Stockholders equity (deficit):                      |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Common stock                                         |  |                                            |        |   |                                |   | 11       |                        |  |   | 2                                |   |  |              | (3       | ) |  |   | 10     
|Additional paid-in capital                           |  |                                            |        |   |                                |   | 221,024  |                        |  |   | 105,548                          |   |  |              | (242,580 | ) |  |   | 83,992 
|Retained earnings (accumulated deficit)              |  |                                            | (15,832 | ) |                                |   | (19,772  | )                      |  |   | 67,806                           |   |  |              |         |   |  |   | 32,202 
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total stockholders equity (deficit)                 |  |                                            | (15,832 | ) |                                |   | 201,263  |                        |  |   | 173,356                          |   |  |              | (242,583 | ) |  |   | 116,204
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities and stockholders equity (deficit) |  | $                                          | 84,991  |   |                                | $ | 235,054  |                        |  | $ | 398,020                          |   |  | $            | (222,476 | ) |  | $ | 495,589
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        



18



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Balance Sheet

As of December 24, 2005

(in Thousands)

(Unaudited)



|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|---------------------------------------------------- |  | ------------------------------------------ | -------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | -------
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |          |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated
|Assets                                               |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current assets:                                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Cash and cash equivalents                            |  | $                                          | 46       |   |                                | $ | 21,205   |                        |  | $ | 125,890                          |   |  | $            |         |   |  | $ | 147,141
|Trade accounts and other receivable, net             |  |                                            | 165      |   |                                |   | (15,674  | )                      |  |   | 49,000                           |   |  |              |         |   |  |   | 33,491 
|Inventories, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 70,197                           |   |  |              |         |   |  |   | 70,197 
|Prepaid catalog expenses                             |  |                                            |         |   |                                |   |         |                        |  |   | 5,376                            |   |  |              |         |   |  |   | 5,376  
|Income taxes receivable                              |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 381      |   |  |   | 381    
|Other current assets                                 |  |                                            |         |   |                                |   | 1,685    |                        |  |   | 6,872                            |   |  |              | 449      |   |  |   | 9,006  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current assets                                 |  |                                            | 211      |   |                                |   | 7,216    |                        |  |   | 257,335                          |   |  |              | 830      |   |  |   | 265,592
|Property, plant, and equipment, net                  |  |                                            |         |   |                                |   | 14,266   |                        |  |   | 149,255                          |   |  |              |         |   |  |   | 163,521
|Software, net                                        |  |                                            |         |   |                                |   | 9,826    |                        |  |   | 884                              |   |  |              |         |   |  |   | 10,710 
|Intangibles, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 34,023                           |   |  |              |         |   |  |   | 34,023 
|Investment in subsidiaries                           |  |                                            | 84,005   |   |                                |   | 158,578  |                        |  |   |                                 |   |  |              | (242,583 | ) |  |   |       
|Deferred financing costs, net                        |  |                                            |         |   |                                |   | 14,317   |                        |  |   |                                 |   |  |              |         |   |  |   | 14,317 
|Deferred income taxes, net                           |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 8,663    |   |  |   | 8,663  
|Other assets                                         |  |                                            |         |   |                                |   | 326      |                        |  |   | 247                              |   |  |              |         |   |  |   | 573    
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total assets                                         |  | $                                          | 84,216   |   |                                | $ | 204,529  |                        |  | $ | 441,744                          |   |  | $            | (233,090 | ) |  | $ | 497,399
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Liabilities and stockholders equity (deficit)       |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current liabilities:                                 |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Accounts payable                                     |  | $                                          |         |   |                                | $ | 9,370    |                        |  | $ | 64,879                           |   |  | $            |         |   |  | $ | 74,249 
|Accrued payroll and benefits                         |  |                                            | 61       |   |                                |   | 3,469    |                        |  |   | 14,919                           |   |  |              |         |   |  |   | 18,449 
|Income taxes payable                                 |  |                                            | (17      | ) |                                |   | (107     | )                      |  |   | (706                             | ) |  |              | 830      |   |  |   |       
|Deferred revenue                                     |  |                                            |         |   |                                |   |         |                        |  |   | 41,084                           |   |  |              |         |   |  |   | 41,084 
|Deferred income taxes                                |  |                                            | (368     | ) |                                |   | (3,278   | )                      |  |   | 48,918                           |   |  |              |         |   |  |   | 45,272 
|Accrued interest                                     |  |                                            |         |   |                                |   | 5,769    |                        |  |   |                                 |   |  |              |         |   |  |   | 5,769  
|Accrued restructuring costs                          |  |                                            |         |   |                                |   |         |                        |  |   | 1,196                            |   |  |              |         |   |  |   | 1,196  
|Other accrued liabilities                            |  |                                            |         |   |                                |   | 2,264    |                        |  |   | 17,581                           |   |  |              |         |   |  |   | 19,845 
|Notes payable                                        |  |                                            |         |   |                                |   | 15       |                        |  |   |                                 |   |  |              |         |   |  |   | 15     
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current liabilities                            |  |                                            | (324     | ) |                                |   | 17,502   |                        |  |   | 187,871                          |   |  |              | 830      |   |  |   | 205,879
|Long-term debt                                       |  |                                            |         |   |                                |   | 245,000  |                        |  |   |                                 |   |  |              |         |   |  |   | 245,000
|Accrued pension liability                            |  |                                            |         |   |                                |   |         |                        |  |   | 33,389                           |   |  |              |         |   |  |   | 33,389 
|Deferred income taxes                                |  |                                            | (301     | ) |                                |   | (13,608  | )                      |  |   | 5,246                            |   |  |              | 8,663    |   |  |   |       
|Intercompany debt                                    |  |                                            | 185,295  |   |                                |   | (250,877 | )                      |  |   | 65,582                           |   |  |              |         |   |  |   |       
|Other long-term liabilities                          |  |                                            |         |   |                                |   |         |                        |  |   | 2,711                            |   |  |              |         |   |  |   | 2,711  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities                                    |  |                                            | 184,670  |   |                                |   | (1,983   | )                      |  |   | 294,799                          |   |  |              | 9,493    |   |  |   | 486,979
|Stockholders equity (deficit):                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Common stock                                         |  |                                            |         |   |                                |   | 11       |                        |  |   | 2                                |   |  |              | (3       | ) |  |   | 10     
|Additional paid-in capital                           |  |                                            | (80,642  | ) |                                |   | 221,024  |                        |  |   | 105,518                          |   |  |              | (242,580 | ) |  |   | 3,320  
|Retained earnings (accumulated deficit)              |  |                                            | (19,812  | ) |                                |   | (14,523  | )                      |  |   | 41,425                           |   |  |              |         |   |  |   | 7,090  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total stockholders equity (deficit)                 |  |                                            | (100,454 | ) |                                |   | 206,512  |                        |  |   | 146,945                          |   |  |              | (242,583 | ) |  |   | 10,420 
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities and stockholders equity (deficit) |  | $                                          | 84,216   |   |                                | $ | 204,529  |                        |  | $ | 441,744                          |   |  | $            | (233,090 | ) |  | $ | 497,399
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        



19



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 25, 2004

(in Thousands)

(Unaudited)



|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------------------ | ---- | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only) |      |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net Sales                                       |  | $                                          |     |   |                                | $ |        |                        |  | $ | 427,253                          |   |  | $            | (92,315 | ) |  | $ | 334,938 |  
|Costs and expenses:                             |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cost of goods sold                              |  |                                            |     |   |                                |   |        |                        |  |   | 252,495                          |   |  |              | (92,315 | ) |  |   | 160,180 |  
|Selling, general and administrative             |  |                                            |     |   |                                |   | 1,181   |                        |  |   | 81,531                           |   |  |              |        |   |  |   | 82,712  |  
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                |  |                                            |     |   |                                |   | 1,181   |                        |  |   | 334,026                          |   |  |              | (92,315 | ) |  |   | 242,892 |  
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income (loss)                         |  |                                            |     |   |                                |   | (1,181  | )                      |  |   | 93,227                           |   |  |              |        |   |  |   | 92,046  |  
|Other (income) expense:                         |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                 |  |                                            |     |   |                                |   | (5      | )                      |  |   | (32                              | ) |  |              |        |   |  |   | (37     | )
|Interest expense                                |  |                                            | 565  |   |                                |   | 4,466   |                        |  |   | (14                              | ) |  |              |        |   |  |   | 5,017   |  
|Other income                                    |  |                                            |     |   |                                |   | (280    | )                      |  |   | (22                              | ) |  |              |        |   |  |   | (302    | )
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                |  |                                            | 565  |   |                                |   | 4,181   |                        |  |   | (68                              | ) |  |              |        |   |  |   | 4,678   |  
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) before provision for income taxes |  |                                            | (565 | ) |                                |   | (5,362  | )                      |  |   | 93,295                           |   |  |              |        |   |  |   | 87,368  |  
|Provision (benefit) for income taxes            |  |                                            | (396 | ) |                                |   | 22,099  |                        |  |   | (3,971                           | ) |  |              |        |   |  |   | 17,732  |  
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                               |  | $                                          | (169 | ) |                                | $ | (27,461 | )                      |  | $ | 97,266                           |   |  | $            |        |   |  | $ | 69,636  |  
|                                                |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  



Condensed Consolidating
Statement of Operations

For the Thirteen Weeks Ended December 24, 2005

(in Thousands)

(Unaudited)



|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------------------ | -- | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only) |    |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net Sales                                       |  | $                                          |   |   |                                | $ |        |                        |  | $ | 465,442                          |   |  | $            | (103,050 | ) |  | $ | 362,392 |  
|Costs and expenses:                             |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cost of goods sold                              |  |                                            |   |   |                                |   |        |                        |  |   | 288,261                          |   |  |              | (103,050 | ) |  |   | 185,211 |  
|Selling, general and administrative             |  |                                            |   |   |                                |   |        |                        |  |   | 86,779                           |   |  |              |         |   |  |   | 86,779  |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                |  |                                            |   |   |                                |   |        |                        |  |   | 375,040                          |   |  |              | (103,050 | ) |  |   | 271,990 |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                            |   |   |                                |   |        |                        |  |   | 90,402                           |   |  |              |         |   |  |   | 90,402  |  
|Other (income) expense:                         |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                            | (6 | ) |                                |   |        |                        |  |   | (150                             | ) |  |              |         |   |  |   | (156    | )
|Interest expense                                |  |                                            |   |   |                                |   | 7,098   |                        |  |   | 6                                |   |  |              |         |   |  |   | 7,104   |  
|Other expense                                   |  |                                            |   |   |                                |   | 2,180   |                        |  |   |                                 |   |  |              |         |   |  |   | 2,180   |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                |  |                                            | (6 | ) |                                |   | 9,278   |                        |  |   | (144                             | ) |  |              |         |   |  |   | 9,128   |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income (loss) before provision for income taxes |  |                                            | 6  |   |                                |   | (9,278  | )                      |  |   | 90,546                           |   |  |              |         |   |  |   | 81,274  |  
|Provision for income taxes                      |  |                                            | 7  |   |                                |   | 2,015   |                        |  |   | 30,195                           |   |  |              |         |   |  |   | 32,217  |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                          | (1 | ) |                                | $ | (11,293 | )                      |  | $ | 60,351                           |   |  | $            |         |   |  | $ | 49,057  |  
|                                                |  |                                            |    |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  



20



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Operations

For the Twenty-six Weeks Ended December 25, 2004

(in Thousands)

(Unaudited)



|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------ | - | ---------------------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry & DavidOperationsCorp. |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net Sales                                       |  | $                                        |       |   |                              | $ |        |                       |  | $ | 508,590                          |   |  | $            | (119,942 | ) |  | $ | 388,648 |  
|Costs and expenses:                             |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cost of goods sold                              |  |                                          |       |   |                              |   |        |                       |  |   | 318,311                          |   |  |              | (119,942 | ) |  |   | 198,369 |  
|Selling, general and administrative             |  |                                          |       |   |                              |   | 1,532   |                       |  |   | 118,220                          |   |  |              |         |   |  |   | 119,752 |  
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                |  |                                          |       |   |                              |   | 1,532   |                       |  |   | 436,531                          |   |  |              | (119,942 | ) |  |   | 318,121 |  
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income (loss)                         |  |                                          |       |   |                              |   | (1,532  | )                     |  |   | 72,059                           |   |  |              |         |   |  |   | 70,527  |  
|Other (income) expense:                         |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                          |       |   |                              |   | (13     | )                     |  |   | (32                              | ) |  |              |         |   |  |   | (45     | )
|Interest expense                                |  |                                          | 1,042  |   |                              |   | 8,379   |                       |  |   | 562                              |   |  |              |         |   |  |   | 9,983   |  
|Other income                                    |  |                                          |       |   |                              |   | (280    | )                     |  |   | (22                              | ) |  |              |         |   |  |   | (302    | )
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                |  |                                          | 1,042  |   |                              |   | 8,086   |                       |  |   | 508                              |   |  |              |         |   |  |   | 9,636   |  
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income (loss) before provision for income taxes |  |                                          | (1,042 | ) |                              |   | (9,618  | )                     |  |   | 71,551                           |   |  |              |         |   |  |   | 60,891  |  
|Provision (benefit) for income taxes            |  |                                          | (601   | ) |                              |   | 26,492  |                       |  |   | (13,930                          | ) |  |              |         |   |  |   | 11,961  |  
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                        | (441   | ) |                              | $ | (36,110 | )                     |  | $ | 85,481                           |   |  | $            |         |   |  | $ | 48,930  |  
|                                                |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



Condensed Consolidating
Statement of Operations

For the Twenty-six Weeks Ended December 24, 2005

(in Thousands)

(Unaudited)



|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------- |  | ---------------------------------------- | --- | - | ---------------------------- | - | ------ | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                         |  | Harry & DavidHoldings, Inc.(Parent-Only) |     |   | Harry & DavidOperationsCorp. |   |        | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net Sales                                |  | $                                        |    |   |                              | $ |       |                       |  | $ | 552,829                          |   |  | $            | (132,714 | ) |  | $ | 420,115 |  
|Costs and expenses:                      |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cost of goods sold                       |  |                                          |    |   |                              |   |       |                       |  |   | 360,681                          |   |  |              | (132,714 | ) |  |   | 227,967 |  
|Selling, general and administrative      |  |                                          |    |   |                              |   |       |                       |  |   | 126,565                          |   |  |              |         |   |  |   | 126,565 |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                         |  |                                          |    |   |                              |   |       |                       |  |   | 487,246                          |   |  |              | (132,714 | ) |  |   | 354,532 |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income                         |  |                                          |    |   |                              |   |       |                       |  |   | 65,583                           |   |  |              |         |   |  |   | 65,583  |  
|Other (income) expense:                  |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                          |  |                                          | (12 | ) |                              |   |       |                       |  |   | (246                             | ) |  |              |         |   |  |   | (258    | )
|Interest expense                         |  |                                          |    |   |                              |   | 13,552 |                       |  |   | 5                                |   |  |              |         |   |  |   | 13,557  |  
|Other expense                            |  |                                          |    |   |                              |   | 2,180  |                       |  |   |                                 |   |  |              |         |   |  |   | 2,180   |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                         |  |                                          | (12 | ) |                              |   | 15,732 |                       |  |   | (241                             | ) |  |              |         |   |  |   | 15,479  |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income before provision for income taxes |  |                                          | 12  |   |                              |   | 15,732 |                       |  |   | 65,824                           |   |  |              |         |   |  |   | 50,104  |  
|Provision (benefit) for income taxes     |  |                                          | 4   |   |                              |   | (5,750 | )                     |  |   | 24,059                           |   |  |              |         |   |  |   | 18,313  |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss)                        |  | $                                        | 8   |   |                              | $ | (9,982 | )                     |  | $ | 41,765                           |   |  | $            |         |   |  | $ | 31,791  |  
|                                         |  |                                          |     |   |                              |   |        |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



21



---

Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 25, 2004

(in Thousands)

(Unaudited)



|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---------------------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                          |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry & DavidOperationsCorp. |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Operating activities                                                                      |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                                                         |  | $                                        | (441   | ) |                              | $ | (36,110 | )                     |  | $ | 85,481                           |   |  | $            |        |   |  | $ | 48,930  |  
|Adjustments to reconcile net loss to net cash provided by (used) in operating activities: |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Depreciation                                                                              |  |                                          |       |   |                              |   | 809     |                       |  |   | 4,623                            |   |  |              |        |   |  |   | 5,432   |  
|Amortization                                                                              |  |                                          |       |   |                              |   | 1,508   |                       |  |   | 1,056                            |   |  |              |        |   |  |   | 2,564   |  
|Amortization of deferred financing costs                                                  |  |                                          | 954    |   |                              |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 954     |  
|Loss on disposal of property, plant, equipment & software                                 |  |                                          |       |   |                              |   | (2      | )                     |  |   | 52                               |   |  |              |        |   |  |   | 50      |  
|Deferred income taxes                                                                     |  |                                          |       |   |                              |   | 52,255  |                       |  |   |                                 |   |  |              |        |   |  |   | 52,255  |  
|Changes in operating assets and liabilities:                                              |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Accounts receivable                                                                       |  |                                          | 1,405  |   |                              |   | 447     |                       |  |   | (11,940                          | ) |  |              | (24     | ) |  |   | (10,112 | )
|Inventories                                                                               |  |                                          |       |   |                              |   |        |                       |  |   | 3,514                            |   |  |              |        |   |  |   | 3,514   |  
|Prepaid advertising and other assets                                                      |  |                                          |       |   |                              |   | (390    | )                     |  |   | (5,666                           | ) |  |              | (34,858 | ) |  |   | (40,914 | )
|Accounts payable and accrued liabilities                                                  |  |                                          | (6,320 | ) |                              |   | (4,580  | )                     |  |   | 20,383                           |   |  |              | 34,882  |   |  |   | 44,365  |  
|Deferred revenue                                                                          |  |                                          |       |   |                              |   |        |                       |  |   | 28,015                           |   |  |              |        |   |  |   | 28,015  |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                                          | (4,402 | ) |                              |   | 13,937  |                       |  |   | 125,518                          |   |  |              |        |   |  |   | 135,053 |  
|Investing activities                                                                      |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Acquisition of property, plant, equipment, and software                                   |  |                                          |       |   |                              |   | (1,655  | )                     |  |   | (1,887                           | ) |  |              |        |   |  |   | (3,542  | )
|Proceeds from the sale of property, plant, and equipment                                  |  |                                          |       |   |                              |   | 14      |                       |  |   | 12                               |   |  |              |        |   |  |   | 26      |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net cash used in investing activities                                                     |  |                                          |       |   |                              |   | (1,641  | )                     |  |   | (1,875                           | ) |  |              |        |   |  |   | (3,516  | )
|Financing activities                                                                      |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Borrowings of revolving debt                                                              |  |                                          |       |   |                              |   | 90,000  |                       |  |   |                                 |   |  |              |        |   |  |   | 90,000  |  
|Repayments of revolving debt                                                              |  |                                          |       |   |                              |   | (90,000 | )                     |  |   |                                 |   |  |              |        |   |  |   | (90,000 | )
|Net (payments) receipts on intercompany debt                                              |  |                                          | 5,806  |   |                              |   | 13,136  |                       |  |   | (18,942                          | ) |  |              |        |   |  |   |        |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net cash provided by (used in) financing activities                                       |  |                                          | 5,806  |   |                              |   | 13,136  |                       |  |   | (18,942                          | ) |  |              |        |   |  |   |        |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Increase in cash and cash equivalents                                                     |  |                                          | 1,404  |   |                              |   | 25,432  |                       |  |   | 104,701                          |   |  |              |        |   |  |   | 131,537 |  
|Cash and cash equivalents, beginning of period                                            |  |                                          |       |   |                              |   | 21,225  |                       |  |   | 2,404                            |   |  |              |        |   |  |   | 23,629  |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cash and cash equivalents, end of period                                                  |  | $                                        | 1,404  |   |                              | $ | 46,657  |                       |  | $ | 107,105                          |   |  | $            |        |   |  | $ | 155,166 |  
|                                                                                          |  |                                          |        |   |                              |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



22



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (continued)



Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 24, 2005

(in Thousands)

(Unaudited)



|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---------------------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ---- | - |  | - | -------- | -
|                                                                                                   |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry & DavidOperationsCorp. |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |     
|Operating activities                                                                               |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Net income (loss)                                                                                  |  | $                                        | 8      |   |                              | $ | (9,982   | )                     |  | $ | 41,765                           |   |  | $            |     |   |  | $ | 31,791   |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Depreciation                                                                                       |  |                                          |       |   |                              |   | 1,490    |                       |  |   | 5,640                            |   |  |              |     |   |  |   | 7,130    |  
|Amortization                                                                                       |  |                                          |       |   |                              |   | 1,642    |                       |  |   | 1,086                            |   |  |              |     |   |  |   | 2,728    |  
|Stock option compensation expense                                                                  |  |                                          | 226    |   |                              |   |         |                       |  |   |                                 |   |  |              |     |   |  |   | 226      |  
|Amortization of deferred financing costs                                                           |  |                                          |       |   |                              |   | 1,166    |                       |  |   |                                 |   |  |              |     |   |  |   | 1,166    |  
|Write-off of deferred IPO costs                                                                    |  |                                          |       |   |                              |   | 2,180    |                       |  |   |                                 |   |  |              |     |   |  |   | 2,180    |  
|Loss on disposal of property, plant, equipment & software                                          |  |                                          |       |   |                              |   | (291     | )                     |  |   | 670                              |   |  |              | (75  | ) |  |   | 304      |  
|Deferred income taxes                                                                              |  |                                          | 5,024  |   |                              |   | 793      |                       |  |   | 12,535                           |   |  |              |     |   |  |   | 18,352   |  
|Changes in operating assets and liabilities:                                                       |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Accounts receivable                                                                                |  |                                          |       |   |                              |   | 222      |                       |  |   | (23,254                          | ) |  |              |     |   |  |   | (23,032  | )
|Inventories                                                                                        |  |                                          |       |   |                              |   |         |                       |  |   | (1,537                           | ) |  |              |     |   |  |   | (1,537   | )
|Prepaid advertising and other assets                                                               |  |                                          |       |   |                              |   | (2,188   | )                     |  |   | (3,640                           | ) |  |              | (583 | ) |  |   | (6,411   | )
|Accounts payable and accrued liabilities                                                           |  |                                          | 44     |   |                              |   | 23,908   |                       |  |   | 48,431                           |   |  |              | 583  |   |  |   | 72,966   |  
|Deferred revenue                                                                                   |  |                                          |       |   |                              |   |         |                       |  |   | 26,082                           |   |  |              |     |   |  |   | 26,082   |  
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                                          | 5,302  |   |                              |   | 18,940   |                       |  |   | 107,778                          |   |  |              | (75  | ) |  |   | 131,945  |  
|Investing activities                                                                               |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Acquisition of property, plant, equipment, and software                                            |  |                                          |       |   |                              |   | (2,750   | )                     |  |   | (4,082                           | ) |  |              |     |   |  |   | (6,832   | )
|Proceeds from the sale of property, plant, and equipment                                           |  |                                          |       |   |                              |   |         |                       |  |   | 11                               |   |  |              |     |   |  |   | 11       |  
|Transfer of property, plant and equipment                                                          |  |                                          |       |   |                              |   | 183      |                       |  |   | (258                             | ) |  |              | 75   |   |  |   |         |  
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Net cash provided by (used in) investing activities                                                |  |                                          |       |   |                              |   | (2,567   | )                     |  |   | (4,329                           | ) |  |              | 75   |   |  |   | (6,821   | )
|Financing activities                                                                               |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Borrowings of revolving debt                                                                       |  |                                          |       |   |                              |   | 104,000  |                       |  |   |                                 |   |  |              |     |   |  |   | 104,000  |  
|Repayments of revolving debt                                                                       |  |                                          |       |   |                              |   | (104,000 | )                     |  |   |                                 |   |  |              |     |   |  |   | (104,000 | )
|Repayments of notes payable                                                                        |  |                                          |       |   |                              |   | (253     | )                     |  |   |                                 |   |  |              |     |   |  |   | (253     | )
|Payments for deferred financing costs                                                              |  |                                          | (3,214 | ) |                              |   | 2,000    |                       |  |   |                                 |   |  |              |     |   |  |   | (1,214   | )
|Net (payments) receipts on intercompany debt                                                       |  |                                          | (2,077 | ) |                              |   | (10,646  | )                     |  |   | 12,723                           |   |  |              |     |   |  |   |         |  
|Proceeds from exercise of stock options                                                            |  |                                          | 1,230  |   |                              |   |         |                       |  |   |                                 |   |  |              |     |   |  |   | 1,230    |  
|Dividends to stockholders                                                                          |  |                                          | (2,600 | ) |                              |   |         |                       |  |   |                                 |   |  |              |     |   |  |   | (2,600   | )
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Net cash provided by (used in) financing activities                                                |  |                                          | (6,661 | ) |                              |   | (8,899   | )                     |  |   | 12,723                           |   |  |              |     |   |  |   | (2,837   | )
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                   |  |                                          | (1,359 | ) |                              |   | 7,474    |                       |  |   | 116,172                          |   |  |              |     |   |  |   | 122,287  |  
|Cash and cash equivalents, beginning of period                                                     |  |                                          | 1,405  |   |                              |   | 13,731   |                       |  |   | 9,718                            |   |  |              |     |   |  |   | 24,854   |  
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  
|Cash and cash equivalents, end of period                                                           |  | $                                        | 46     |   |                              | $ | 21,205   |                       |  | $ | 125,890                          |   |  | $            |     |   |  | $ | 147,141  |  
|                                                                                                   |  |                                          |        |   |                              |   |          |                       |  |   |                                  |   |  |              |      |   |  |   |          |  



23



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Harry & David Holdings, Inc. and Subsidiaries



Notes to Condensed Consolidated Financial Statements (continued)



15. STOCKHOLDERS EQUITY (DEFICIT)



|                                    |  |              |  |                          |    |                            |   |       |       |   |         |   |  |   |         |  
|----------------------------------- |  | ------------ |  | ------------------------ | -- | -------------------------- | - | ----- | ----- | - | ------- | - |  | - | ------- | -
|                                    |  | Common Stock |  | AdditionalPaid InCapital |    | Accumulated(Deficit)Income |   |       | Total |  
|                                    |  | Shares       |  | Value                    |    |                            |  
|Balance at September 24, 2005       |  | 1,014,888    |  | $                        | 10 |                            | $ | 3,207 |       | $ | (39,367 | ) |  | $ | (36,150 | )
|Exercise of common stock options    |  |             |  |                          |   |                            |   |      |       |   |        |   |  |   |        |  
|Stock compensation expense          |  |             |  |                          |   |                            |   | 113   |       |   |        |   |  |   | 113     |  
|Dividends paid                      |  |             |  |                          |   |                            |   |      |       |   | (2,600  | ) |  |   | (2,600  | )
|Net income and comprehensive income |  |             |  |                          |   |                            |   |      |       |   | 49,057  |   |  |   | 49,057  |  
|                                    |  |              |  |                          |    |                            |   |       |       |   |         |   |  |   |         |  
|Balance at December 24, 2005        |  | 1,014,888    |  | $                        | 10 |                            | $ | 3,320 |       | $ | 7,090   |   |  | $ | 10,420  |  
|                                    |  |              |  |                          |    |                            |   |       |       |   |         |   |  |   |         |  
|                                    |  |              |  |                         
|                                    |  | Common Stock |  | AdditionalPaid InCapital |    | Accumulated(Deficit)Income |   |       | Total |  
|                                    |  | Shares       |  | Value                    |    |                            |  
|Balance at June 25, 2005            |  | 1,000,000    |  | $                        | 10 |                            | $ | 1,864 |       | $ | (22,101 | ) |  | $ | (20,227 | )
|Exercise of common stock options    |  | 14,888       |  |                          |   |                            |   | 1,230 |       |   |        |   |  |   | 1,230   |  
|Stock compensation expense          |  |             |  |                          |   |                            |   | 226   |       |   |        |   |  |   | 226     |  
|Dividends paid                      |  |             |  |                          |   |                            |   |      |       |   | (2,600  | ) |  |   | (2,600  | )
|Net income and comprehensive income |  |             |  |                          |   |                            |   |      |       |   | 31,791  |   |  |   | 31,791  |  
|                                    |  |              |  |                          |    |                            |   |       |       |   |         |   |  |   |         |  
|Balance at December 24, 2005        |  | 1,014,888    |  | $                        | 10 |                            | $ | 3,320 |       | $ | 7,090   |   |  | $ | 10,420  |  
|                                    |  |              |  |                          |    |                            |   |       |       |   |         |   |  |   |         |  



The Companys comprehensive
income and net income are the same for the thirteen and twenty-six week periods ended December 25, 2004 and December 24, 2005.



15. SUBSEQUENT EVENTS



On January 9, 2006 the Company reached a settlement with Factory Mutual Insurance on a claim arising out of inventory losses that occurred in 2001 at Hanson Cold Storage in Lafayette, Indiana. The Companys
signatures on the settlement document were completed on January 26, 2006, which authorized the depositing of the payment of $3,500, which is the gross settlement amount. In accordance with the agreement between the Company and YCI, the Company
will pay 43% of the gross proceeds, or $1,505, to YCI. The net proceeds to the Company of $1,995 will be offset by approximately $200 in related legal expenses and other fees.



24



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



FORWARD-LOOKING STATEMENTS



The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto, which are included elsewhere in this report. This Quarterly Report contains forward-looking statements that are not statements of historical fact and may involve a number of risks and
uncertainties. We have used the words anticipate, believe, could, estimate, expect, intend, may, plan, predict, project and
similar terms and phrases, including references to assumptions, in this Quarterly Report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and
are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters
expressed in or implied by these forward-looking statements. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements.



The following information describes certain significant risks and
uncertainties inherent in our business. You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks and uncertainties actually occurs,
our business, financial condition or operating results could differ materially from the plans, projections, and other forward-looking statements included in the section titled Managements Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this report and in other public filings.



The following factors are among those that may cause actual results to differ materially from our forward-looking statements:



| |  |  | market demand for branded gift-quality fruit and gourmet food products and gifts as well as premium rose plants and horticultural products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our production capabilities;
| | - |  | ----------------------------



| |  |  | our relationships with, and other conditions affecting, our customers;
| | - |  | ----------------------------------------------------------------------



| |  |  | our plans and objectives for future operations and expansion or consolidation;
| | - |  | ------------------------------------------------------------------------------



| |  |  | unexpected maintenance and equipment failure;
| | - |  | ---------------------------------------------



| |  |  | future economic or capital market conditions;
| | - |  | ---------------------------------------------



| |  |  | environmental laws and regulations, including those directly affecting our plant and food production;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | employee benefits costs;
| | - |  | ------------------------



| |  |  | future legislation and changes in regulations or governmental policies or changes in interpretations thereof;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our liquidity, results of operations and financial condition; and
| | - |  | -----------------------------------------------------------------



| |  |  | the other risks described under Risk Factors in our Registration Statement on Form S-4 on file with the SEC.
| | - |  | --------------------------------------------------------------------------------------------------------------



You should keep in mind that any forward-looking statement made by us in this Quarterly
Report speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the
forward-looking statements in this Quarterly Report after the date of this Quarterly Report, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this
Quarterly Report or elsewhere might not occur.



OVERVIEW



We are a leading multi-channel specialty retailer and producer of branded premium
gift-quality fruit and gourmet food products and other gifts marketed under the Harry and David®brand, and premium rose plants, horticultural products and gifts, and other premium home and garden décor products marketed under the Jackson & Perkins®brand. We market our products through multiple channels, including direct mail, the Internet, business-to-business and consumer
telemarketing, as well as our Harry and David retail stores and wholesale distribution through select retailers.



We grow, manufacture, design and/or package products that account for the significant majority of our annual sales. In addition, we have created a substantial and
scalable state-of-the-art infrastructure through recent significant capital expenditures in our production, fulfillment and distribution capabilities, our information technology systems and our retail



25



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stores network. Our vertically integrated operations allow us to efficiently manage our costs, quality assurance, manufacturing flexibility and inventory.
Accordingly, we expect to derive cost structure and operating margin benefits as revenues increase. We believe that our vertical integration allows us to maintain a high degree of control over product quality compared with that of our competitors as
we rely less heavily on third-party suppliers, particularly during peak periods. In addition, our vertical integration generally lowers our product sourcing costs, allows us to optimally adjust the assortment of products we offer and enables us to
adjust product inventory levels to quickly respond to changes in customer demand.



Net sales consist of direct-to-customer sales and retail sales. Direct-to-customer sales include sales of merchandise to customers through catalogs and the Internet, as well as delivery income. Retail sales include sales of merchandise to
customers at our retail stores. Delivery income consists of revenues received from customers for delivery of merchandise. Sales are net of sales returns, adjustments and other discounts.



Net sales are derived primarily from our three operating segments, Harry and David Direct Marketing, Harry and David Stores and
Jackson & Perkins, as follows:



| |  |  | Harry and David Direct Marketing net sales are generated by sales of Harry and David merchandise through our catalog, Internet, business-to-business and consumer telemarketing
operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Harry and David Stores net sales are generated by sales of Harry and David merchandise at our stores; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Jackson & Perkins net sales are generated by sales of Jackson & Perkins merchandise through our catalog, Internet, consumer telemarketing and wholesale operations.
Net sales also includes royalty income generated from the licensing of our patented products and the licensing of patented products of our licensors and sales of rotational farm crops grown at our Wasco, California facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We derive other net sales from sales of Harry and David
merchandise through the wholesale channel and commercial sales of non-gift-quality fruit.



During fiscal 2006, we have enhanced an existing proprietary database by extracting additional data from our order entry/customer service system, which enables us to track customer feedback, merchandising issues and
other core operations. These improvements also provide us with timely information and this allows us to react quickly to customer and merchandising issues to reduce cancellations, returns and replacements. Our new primary carrier agreement,
negotiated in the first fiscal quarter of 2006, resulted in positive delivery service efficiencies and fewer customer service complaints. Examples of these delivery efficiencies include increased support for last-minute order volumes, improved
delivery service and enhanced package tracking.



We believe that several
long-term economic and industry trends and factors that can impact our business, results of operations, liquidity and financial condition include:



| |  |  | Rising fuel and energy prices. Fuel and energy costs are a significant component of our production and delivery costs. Our fuel and energy costs have, and are expected to,
fluctuate significantly. Our energy and fuel costs increased steadily in fiscal 2005 and in the first two quarters of fiscal 2006 and may continue to rise in the near-term. Rising fuel costs may also reduce consumers discretionary spending,
which may adversely affect our sales.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Postal rate increases. In January 2006, U.S. Postal rates rose an average of 5.4% for mail and parcels. This increase as well as future increases will affect advertising
costs for our catalogs and delivery rates for our customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Catastrophic weather events. Catastrophic weather events in the United States such as Hurricane Katrina, can impact demand from our customers or the delivery of catalogs or
products to our customers and stores.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing labor and medical costs. Increased labor and medical costs can not only affect the costs of our manufactured products but also affect our access to adequate labor.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability of seasonal workforce.We require a large number of seasonal workers to meet the product demand during our peak season.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



Our substantial leverage can impact our business, results of operations, liquidity and
financial condition, which could:



| |  |  | increase our sensitivity to interest rate fluctuations;
| | - |  | -------------------------------------------------------



| |  |  | limit our ability to obtain additional financing to fund working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our
business plan;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

| |  |  | require us to dedicate a substantial portion of our cash flows from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of that cash
flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | cause our suppliers to institute more onerous payment terms generally or require us to purchase letters of credit for this purpose;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our ability to enter into new store leases or renew existing store leases;
| | - |  | --------------------------------------------------------------------------------



| |  |  | make us more sensitive to any future reduction in our long-term credit rating, which could result in reduced access to the capital markets and higher interest costs on future
financings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lead us to have less favorable credit terms, which would increase the amount of working capital necessary to conduct our business; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt.
| | - |  | ---------------------------------------------------------------------------------------



Additionally, our revolving credit facility contains financial and other restrictive covenants that may limit our ability to engage in
activities that may be in our long-term interests such as selling assets, strategic acquisitions, paying dividends and borrowing additional funds. Our failure to comply with those covenants could result in an event of default which, if not cured or
waived, could result in the acceleration of all of our debt which could leave us unable to meet some or all of our obligations. See Note 7 to our condensed consolidated financial statements included elsewhere in this report.



RESULTS OF OPERATIONS



NET SALES



The following table summarizes our consolidated net sales and net sales by operating segment for the periods indicated (dollars in thousands).



|                                 |  |                      |         |            |                        |   |                   |   |            |  |       |                   |  |            |         |  |                   |   |            |   |         |  |       |  
|-------------------------------- |  | -------------------- | ------- | ---------- | ---------------------- | - | ----------------- | - | ---------- |  | ----- | ----------------- |  | ---------- | ------- |  | ----------------- | - | ---------- | - | ------- |  | ----- | -
|                                 |  | Thirteen Weeks Ended |         |            | Twenty-six Weeks Ended |  
|                                 |  | December 25, 2004    |         | Percentage |                        |   | December 24, 2005 |   | Percentage |  |       | December 25, 2004 |  | Percentage |         |  | December 24, 2005 |   | Percentage |  
|Harry and David Direct Marketing |  | $                    | 240,171 |            | 71.7                   | % |                   | $ | 257,866    |  | 71.2  | %                 |  | $          | 264,923 |  | 68.1              | % |            | $ | 283,951 |  | 67.6  | %
|Harry and David Stores           |  |                      | 65,051  |            | 19.4                   | % |                   |   | 66,471     |  | 18.3  | %                 |  |            | 87,342  |  | 22.5              | % |            |   | 88,228  |  | 21.0  | %
|Jackson & Perkins                |  |                      | 24,537  |            | 7.3                    | % |                   |   | 26,016     |  | 7.2   | %                 |  |            | 28,676  |  | 7.4               | % |            |   | 31,700  |  | 7.5   | %
|Other                            |  |                      | 5,179   |            | 1.6                    | % |                   |   | 12,039     |  | 3.3   | %                 |  |            | 7,707   |  | 2.0               | % |            |   | 16,236  |  | 3.9   | %
|                                 |  |                      |         |            |                        |   |                   |   |            |  |       |                   |  |            |         |  |                   |   |            |   |         |  |       |  
|Total Net Sales                  |  | $                    | 334,938 |            | 100.0                  | % |                   | $ | 362,392    |  | 100.0 | %                 |  | $          | 388,648 |  | 100.0             | % |            | $ | 420,115 |  | 100.0 | %
|                                 |  |                      |         |            |                        |   |                   |   |            |  |       |                   |  |            |         |  |                   |   |            |   |         |  |       |  



Consolidated net sales of $362.4
million for the thirteen week period ended December 24, 2005 increased $27.5 million, or 8.2%, over the thirteen week period ended December 25, 2004. The net sales increase was the result of increases in catalog circulation, Internet
advertising, comparable store sales, our wholesale customer base, and an extended standard delivery period in our direct marketing businesses during the holiday selling season.



We received approximately 2.2 million telephone, mail, fax and internet orders during the three months ended December 24, 2005, an
increase of 7.6% over the prior year period. During the three months ended December 24, 2005, we shipped over 5.9 million packages, an increase of 8.9% over the prior year period.



Consolidated net sales of $420.1 million for the twenty-six week period ended
December 24, 2005 increased $31.5 million, or 8.1%, over the twenty-six week period ended December 25, 2004. The drivers of the increase in the twenty-six week period results were primarily the same as those for the thirteen week period.



Harry and David Direct Marketing



Harry and David Direct Marketing net sales, which include catalog, Internet,
business-to-business and outbound telemarketing sales, as well as delivery income, increased $17.7 million, or 7.4%, to $257.9 million in the thirteen week period ended December 24, 2005, from $240.2 million in the thirteen week period ended
December 25, 2004. The increase was primarily due to a 6.6% overall increase in catalog circulation and advertising in the direct mail and Internet channels, as well as increased promotional activity, including delivery discounts and product
markdowns.



27



---

Harry and David Direct Marketing net sales increased $19.1 million, or 7.2%, to $284 million in the twenty-six week
period ended December 24, 2005, from $264.9 million in the twenty-six week period ended December 25, 2004. The drivers of the increase in the twenty-six week period results are primarily the same as those for the thirteen week period.



Harry and David Stores



Harry and David Stores net sales increased $1.5 million, or 2.2%, to $66.5 million in the
thirteen week period ended December 24, 2005, from $65.0 million in the thirteen week period ended December 25, 2004. Net sales increased due to higher store traffic and higher average dollar transactions, new product introductions as well
as more effective inventory management, despite having closed fourteen stores since February 2005. Sales for comparable stores were up 9.5% for the thirteen week period ended December 24, 2005. We have experienced increased comparable store
sales for the last twenty-five consecutive months, through December 2005, after adjusting for last years shift of the Easter holiday. A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months,
at which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a
comparable store.



Harry and David Stores net sales increased $0.9 million, or
1.0%, to $88.2 million in the twenty-six week period ended December 24, 2005 from $87.3 million in the twenty-six week period ended December 25, 2004. The drivers of the increase in the twenty-six week period results are primarily the same
as those for the thirteen week period.



Jackson & Perkins



Jackson & Perkins net sales increased $1.5 million, or 6.0%, to
$26.0 million in the thirteen week period ended December 24, 2005 from $24.5 million in the thirteen week period ended December 25, 2004. Jackson & Perkins direct marketing net sales increased $1.0 million, or 5.2% for the
quarter. This increase was primarily driven by higher response rates from the catalog combined with increased Internet advertising and increased promotions and markdowns. The remaining increase was primarily driven by improved returns and
adjustments in the Jackson & Perkins wholesale division compared to the thirteen week period ended December 25, 2004.



Jackson & Perkins net sales increased $3.0 million, or 10.5%, to $31.7 million in the twenty-six week period ended December 24, 2005 from $28.7 million in
the twenty-six week period ended December 25, 2004. The drivers of the increase in the twenty-six week period results are primarily the same as those for the thirteen week period.



Other



Other net sales increased $6.8 million, or 132.5%, to $12.0 million in the thirteen week period ended December 24, 2005 from $5.2 million in the thirteen week period
ended December 25, 2004. Harry and David wholesale net sales of $11.3 million for the thirteen week period ended December 24, 2005 drove $6.7 million of this increase primarily due to the acquisition of new customers and expansion of sales
from existing customers.



Other net sales increased $8.5 million, or 110.7%, to
$16.2 million in the twenty-six week period ended December 24, 2005 from $7.7 million in the twenty-six week period ended December 25, 2004. Harry and David wholesale net sales of $15.2 million for the twenty-six week period ended
December 24, 2005 drove $8.3 million of this increase. The drivers of the twenty-six week period results are primarily the same as those for the thirteen week period.



COST OF GOODS SOLD



The following table summarizes our consolidated cost of goods sold and cost of goods sold by operating segment for the periods indicated.



28



---

(Dollars in thousands)



|                                 |  |                      |         |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------- | -------------- | ---------------------- | - | ---------------- | - | -------------- |  | ---- | ----------------- |  | -------------- | ------- |  | ---------------- | - | -------------- | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |         |                | Twenty-six Weeks Ended |  
|                                 |  | December 25, 2004    |         | % Net Revenues |                        |   | December 24 2005 |   | % Net Revenues |  |      | December 25, 2004 |  | % Net Revenues |         |  | December 24 2005 |   | % Net Revenues |  
|Harry and David Direct Marketing |  | $                    | 110,268 |                | 45.9                   | % |                  | $ | 127,868        |  | 49.6 | %                 |  | $              | 130,378 |  | 49.2             | % |                | $ | 150,098 |  | 52.9 | %
|Harry and David Stores           |  |                      | 30,264  |                | 46.5                   | % |                  |   | 31,395         |  | 47.2 | %                 |  |                | 42,585  |  | 48.8             | % |                |   | 43,295  |  | 49.1 | %
|Jackson & Perkins                |  |                      | 15,725  |                | 64.1                   | % |                  |   | 16,821         |  | 64.7 | %                 |  |                | 19,805  |  | 69.1             | % |                |   | 22,371  |  | 70.6 | %
|Other                            |  |                      | 3,923   |                | 75.7                   | % |                  |   | 9,127          |  | 75.8 | %                 |  |                | 5,601   |  | 72.7             | % |                |   | 12,203  |  | 75.2 | %
|                                 |  |                      |         |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  
|Total                            |  | $                    | 160,180 |                | 47.8                   | % |                  | $ | 185,211        |  | 51.1 | %                 |  | $              | 198,369 |  | 51.1             | % |                | $ | 227,967 |  | 54.3 | %
|                                 |  |                      |         |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  



Cost of goods sold includes cost of
goods, occupancy expenses for manufacturing and distribution facilities, warehouse and fulfillment costs and product delivery costs. Cost of goods consists of manufacturing costs, costs of externally purchased merchandise, inbound freight expenses,
freight to other production/fulfillment locations, freight to stores, and other inventory-related costs such as shrinkage, markdowns and surplus write-offs. Occupancy expenses consist of depreciation, rent, utilities and other general occupancy
costs. Warehouse and fulfillment costs consist of labor, storage and equipment expenses and other costs related to inventory positioning, shipment planning, receiving, picking, packing and shipping product to the end customer, stores and
production/fulfillment locations. Product delivery costs consist of third-party delivery services to customers.



Cost of goods sold increased $25.0 million, or 15.6%, to $185.2 million in the thirteen week period ended December 24, 2005 from $160.2 million in the thirteen week
period ended December 25, 2004. Cost of goods sold as a percentage of consolidated net sales was 51.1% in the thirteen week period ended December 24, 2005 as compared to 47.8% in the thirteen week period ended December 25, 2004.
Increased fuel surcharges drove variable cost increases for our products; in addition, the cost of delivering the products to our customers was higher due to fuel surcharges as well as shifts between surface and expedited shipments, particularly
late in the holiday season. Additional increases included product raw material costs, product design changes, and higher payroll costs associated with a larger than planned pear harvest in fiscal 2006. The combination of higher product markdowns and
delivery discounts impacted net sales, thereby increasing the cost of goods sold as a percentage of net sales compared to prior year.



Cost of goods sold increased $29.6 million, or 14.9%, to $228 million in the twenty-six week period ended December 24, 2005 from $198.4 million in the twenty-six
week period ended December 25, 2004. Cost of goods sold as a percentage of consolidated net sales was 54.3% in the twenty-six week period ended December 24, 2005 as compared to 51.1% in the twenty-six week period ended December 25,
2004. The drivers of the twenty-six week period results are primarily the same as those for the thirteen week period.



SELLING, GENERAL AND ADMINISTRATIVE EXPENSES



The following table summarizes our consolidated selling, general, and administrative expenses and selling, general, and administrative expenses by operating segment for
the periods indicated.



(Dollars in thousands)



|                                 |  |                      |        |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | -------------- | ---------------------- | - | ---------------- | - | -------------- |  | ---- | ----------------- |  | -------------- | ------- |  | ---------------- | - | -------------- | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |                | Twenty-six Weeks Ended |  
|                                 |  | December 25, 2004    |        | % Net Revenues |                        |   | December 24 2005 |   | % Net Revenues |  |      | December 25, 2004 |  | % Net Revenues |         |  | December 24 2005 |   | % Net Revenues |  
|Harry and David Direct Marketing |  | $                    | 53,218 |                | 22.2                   | % |                  | $ | 57,558         |  | 22.3 | %                 |  | $              | 69,864  |  | 26.4             | % |                | $ | 77,086  |  | 27.1 | %
|Harry and David Stores           |  |                      | 18,376 |                | 28.2                   | % |                  |   | 18,362         |  | 27.6 | %                 |  |                | 34,367  |  | 39.3             | % |                |   | 34,280  |  | 38.9 | %
|Jackson & Perkins                |  |                      | 9,021  |                | 36.8                   | % |                  |   | 10,021         |  | 38.5 | %                 |  |                | 12,586  |  | 43.9             | % |                |   | 13,723  |  | 43.3 | %
|Other                            |  |                      | 2,097  |                | 40.5                   | % |                  |   | 838            |  | 7.0  | %                 |  |                | 2,935   |  | 38.1             | % |                |   | 1,476   |  | 9.1  | %
|                                 |  |                      |        |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  
|Total                            |  | $                    | 82,712 |                | 24.7                   | % |                  | $ | 86,779         |  | 24.0 | %                 |  | $              | 119,752 |  | 30.8             | % |                | $ | 126,565 |  | 30.1 | %
|                                 |  |                      |        |                |                        |   |                  |   |                |  |      |                   |  |                |         |  |                  |   |                |   |         |  |      |  



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



Selling, general and administrative expenses increased $4.1 million to $86.8 million in the thirteen week period ended December 24, 2005 compared to $82.7 million in
the thirteen week period ended December 25, 2004. Selling, general and



29



---

administrative expense as a percentage of consolidated net sales was 24.0% in the thirteen week period ended December 24, 2005, as compared to 24.7% in
the thirteen week period ended December 25, 2004. The increased spending over the prior period was primarily related to increased advertising associated with a 5.9% increase in catalog circulation and an increase in marketing expenses in our
Internet and stores channels.



Selling, general and administrative expenses
increased $6.8 million to $126.5 million in the twenty-six week period ended December 24, 2005 compared to $119.7 million in the twenty-six week period ended December 25, 2004. Selling, general and administrative expense as a percentage of
consolidated net sales was 30.1% in the twenty-six week period ended December 24, 2005, as compared to 30.8% in the twenty-six week period ended December 25, 2004. The drivers of the twenty-six week period results are primarily the same as
those for the thirteen week period.



OTHER (INCOME) EXPENSE



The following table summarizes our consolidated other
(income)/expense and other (income)/expense by operating segment for the periods indicated.



(Dollars in thousands)



|                                 |  |                      |       |   |                        |      |   |                  |   |       |                |  |      |                   |  |   |                |   |  |                  |   |  |                |        |   |  |      |  
|-------------------------------- |  | -------------------- | ----- | - | ---------------------- | ---- | - | ---------------- | - | ----- | -------------- |  | ---- | ----------------- |  | - | -------------- | - |  | ---------------- | - |  | -------------- | ------ | - |  | ---- | -
|                                 |  | Thirteen Weeks Ended |       |   | Twenty-six Weeks Ended |     
|                                 |  | December 25, 2004    |       |   | % Net Revenues         |      |   | December 24 2005 |   |       | % Net Revenues |  |      | December 25, 2004 |  |   | % Net Revenues |   |  | December 24 2005 |   |  | % Net Revenues |       
|Harry and David Direct Marketing |  | $                    | (32   | ) |                        |     |   |                  | $ |      |                |  |     |                   |  | $ | (32            | ) |  |                 |   |  | $              |       |   |  |     |  
|Harry and David Stores           |  |                      | 10    |   |                        |     |   |                  |   | (4    | )              |  |     |                   |  |   | 9              |   |  |                 |   |  |                | (6     | ) |  |     |  
|Jackson & Perkins                |  |                      |      |   |                        |     |   |                  |   |      |                |  |     |                   |  |   |               |   |  |                 |   |  |                |       |   |  |     |  
|Other                            |  |                      | 4,700 |   |                        | 90.8 | % |                  |   | 9,132 |                |  | 75.8 | %                 |  |   | 9,659          |   |  | 125.3            | % |  |                | 15,485 |   |  | 95.4 | %
|                                 |  |                      |       |   |                        |      |   |                  |   |       |                |  |      |                   |  |   |                |   |  |                  |   |  |                |        |   |  |      |  
|Total                            |  | $                    | 4,678 |   |                        | 1.4  | % |                  | $ | 9,128 |                |  | 2.5  | %                 |  | $ | 9,636          |   |  | 2.4              | % |  | $              | 15,479 |   |  | 3.7  | %
|                                 |  |                      |       |   |                        |      |   |                  |   |       |                |  |      |                   |  |   |                |   |  |                  |   |  |                |        |   |  |      |  



Other expense increased by $4.4
million to $9.1 million in the thirteen week period ended December 24, 2005 from $4.7 million in the thirteen week period ended December 25, 2004. During the fourth quarter of fiscal 2005 and the first two quarters of fiscal 2006, we
incurred approximately $2.2 million of legal, accounting and other professional fees related to a planned initial public offering of our common stock. However, given current market conditions and other factors, we have postponed the Offering and
have decided to expense these costs in the second fiscal quarter as we anticipate that the planned offering will not take place in fiscal 2006. In addition to the expensed offering costs, the remainder of the increase is primarily due to increased
interest expense as a result of a higher level of debt including $245.0 million in fixed and floating rate bonds and $104.0 million in peak revolver borrowings versus last years debt of a $155.0 million term loan, $13.9 million bridge loan and
$90.0 million in peak revolver borrowings.



Other expense increased by $5.8
million to $15.5 million in the twenty-six week period ended December 24, 2005 from $9.6 million in the twenty-six week period ended December 25, 2004. The drivers of the twenty-six week period results are primarily the same as those for
the thirteen week period.



The provision for income taxes for the thirteen
weeks ended December 24, 2005 was $32.2 million, reflecting an effective tax rate of 39.6%, as compared to $17.7 million in the thirteen weeks ended December 25, 2004, reflecting an effective tax rate of 20.3%. The effective tax rate for
fiscal 2006 is estimated to be 30.5%, and the rate for fiscal 2005 was 27.2%. The rates for the current fiscal year and interim periods differ from the similar periods in fiscal 2005 principally as a result of net operating losses at the state level
for which a tax benefit is recorded and as a result of the seasonality impact on estimated future earnings on which tax is estimated.



EBITDA



For an explanation of why management believes EBITDA is a useful measure for understanding our results of operations and a reconciliation of EBITDA to the most comparable GAAP measure, see note below, Non-GAAP
Financial Measure: EBITDA. The following table reconciles EBITDA to net cash provided by operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net income, which we believe to be the closest GAAP performance
measure to EBITDA:



30



---

|                                                  |  |                      |         |                        |                   |   |                   |  |                   |         |  |   |        
|------------------------------------------------- |  | -------------------- | ------- | ---------------------- | ----------------- | - | ----------------- |  | ----------------- | ------- |  | - | -------
|                                                  |  | Thirteen weeks ended |         | Twenty-six weeks ended
|                                                  |  | December 25, 2004    |         |                        | December 24, 2005 |   | December 25, 2004 |  | December 24, 2005
|Net cash provided by operating activities         |  | $                    | 193,875 |                        |                   | $ | 203,108           |  | $                 | 135,053 |  | $ | 131,945
|Stock option expense                              |  |                      |        |                        |                   |   | 113               |  |                   |        |  |   | 226    
|Changes in operating assets and liabilities       |  |                      | 75,243  |                        |                   |   | 114,197           |  |                   | 24,868  |  |   | 68,068 
|Write-off of deferred IPO costs                   |  |                      |        |                        |                   |   | 2,180             |  |                   |        |  |   | 2,180  
|(Income) loss on impairment or retirement of PP&E |  |                      | (8      | )                      |                   |   | 229               |  |                   | 50      |  |   | 304    
|Deferred income taxes                             |  |                      | 44,776  |                        |                   |   | 32,067            |  |                   | 52,255  |  |   | 18,352 
|Deferred financing costs                          |  |                      | 168     |                        |                   |   | 583               |  |                   | 954     |  |   | 1,166  
|Depreciation and amortization                     |  |                      | 4,060   |                        |                   |   | 4,682             |  |                   | 7,996   |  |   | 9,858  
|                                                  |  |                      |         |                        |                   |   |                   |  |                   |         |  |   |        
|Net income                                        |  | $                    | 69,636  |                        |                   | $ | 49,057            |  | $                 | 48,930  |  | $ | 31,791 
|Interest expense, net                             |  |                      | 4,980   |                        |                   |   | 6,948             |  |                   | 9,938   |  |   | 13,299 
|Provision for income taxes                        |  |                      | 17,732  |                        |                   |   | 32,217            |  |                   | 11,961  |  |   | 18,313 
|Depreciation and amortization                     |  |                      | 4,060   |                        |                   |   | 4,682             |  |                   | 7,996   |  |   | 9,858  
|                                                  |  |                      |         |                        |                   |   |                   |  |                   |         |  |   |        
|EBITDA                                            |  | $                    | 96,408  |                        |                   | $ | 92,904            |  | $                 | 78,825  |  | $ | 73,261 
|                                                  |  |                      |         |                        |                   |   |                   |  |                   |         |  |   |        



In the thirteen week period ended
December 25, 2004, net income and EBITDA included:



| |  |  | $1.5 million of income related to closed stores (income is due to December sales seasonality);
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | $0.2 million of restructuring charges relating to a reduction in force implemented beginning in August 2004 instead of at the beginning of our prior fiscal year in April 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.9 million of one-time consulting fees associated with evaluating the Harry and David®brand strategy and information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.8 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of rental income due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.3 million of other income related to the collection of a note receivable written off during fiscal 2002;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | $0.5 million related to fixed asset impairment charges from a lower rose crop harvest yield associated with a new growing technique; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.3 million of fees paid to Wasserstein and Highfields under the management agreement.
| | - |  | ---------------------------------------------------------------------------------------



In the thirteen week period ended December 24, 2005, net income and EBITDA included:



| |  |  | $0.9 million of income related to closed stores (income is due to December sales seasonality);
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | $0.1 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of charges related to the grant of stock options;
| | - |  | --------------------------------------------------------------



| |  |  | $0.3 million of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | $0.1 million of incremental employee executive recruiting and relocation charges; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | $2.2 million of deferred IPO costs that were written off.
| | - |  | ---------------------------------------------------------



In the twenty-six week period ended December 25, 2004, net income and EBITDA included:



| |  |  | $0.3 million of income related to closed stores (income is due to December sales seasonality);
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | $0.9 million of restructuring charges relating to a reduction in force implemented beginning in August 2004 instead of at the beginning of our prior fiscal year in April 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.2 million of one-time consulting fees associated with evaluating the Harry and David®brand strategy and information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.1 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of rental income due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.3 million of other income related to the collection of a note receivable written off during fiscal 2002;
| | - |  | -----------------------------------------------------------------------------------------------------------



31



---

| |  |  | $0.5 million related to fixed asset impairment charges from a lower rose crop harvest yield associated with a new growing technique; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.6 million of fees paid to Wasserstein and Highfields under the management agreement.
| | - |  | ---------------------------------------------------------------------------------------



In the twenty-six week period ended December 24, 2005, net income and EBITDA included:



| |  |  | $0.3 million of income related to closed stores (income is due to December sales seasonality);
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | $0.1 million of restructuring charges relating to a reduction in force implemented beginning in August 2004 instead of at the beginning of our prior fiscal year in April 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of one-time consulting fees associated with evaluating the Harry and David®brand strategy and information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of rental income due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.2 million of charges related to the grant of stock options;
| | - |  | --------------------------------------------------------------



| |  |  | $0.5 million of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | $0.6 million of incremental employee executive recruiting and relocation charges; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | $2.2 million of deferred IPO costs that were written off.
| | - |  | ---------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES



Our primary liquidity and capital resource needs are to service our debt, finance working capital and make capital expenditures and investments. At December 24, 2005
our primary sources of liquidity were cash and cash equivalents of $147.1 million and our unused revolving credit facility of $121.0 million. We rely heavily on our revolving credit facility to finance operations leading up to the December holiday
selling season. There were $0.0 million of borrowings and $4.0 million in the form of stand-by letters of credit on the revolving credit facility on December 24, 2005. Borrowings on the revolving credit facility peaked at $104.0 million on
November 23, 2005 and were fully paid on December 13, 2005. Borrowings on the revolving credit facility are expected to remain unchanged until the first quarter of fiscal 2007. Generally, cash from operations is the highest in the month of
December because of the holiday season and the seasonality of our business.



Cash Flows from Operating Activities



Cash provided by
operating activities totaled $132.0 million in the first two quarters of fiscal 2006 compared to $135.1 million in the first two quarters of fiscal 2005. The $3.1 million decrease was due to the combined impacts of:



| |  |  | $17.1 million lower net income;
| | - |  | -------------------------------



| |  |  | $33.9 million reduction in deferred income taxes due to reduced income; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | $12.9 million increase in accounts receivable primarily due to increased sales from Harry and David Wholesale, and the sales of pre-paid gift cards.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



These impacts were offset by:



| |  |  | a $28.7 million increase in accounts payable due to a transition to a new primary carrier with deferred payment terms as well as increased purchases of inventory; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $33.7 million decrease in prepaid advertising and other assets resulting primarily from a $34.2 million decrease in income taxes receivable offset in deferred taxes above.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash Flows from Investment Activities



Cash used for investment activities was $6.8 million in the first half of fiscal 2006
compared to $3.5 million in the first half of fiscal 2005. The increase resulted from higher capital spending. Capital expenditures in fiscal 2006 primarily included investment in e-commerce systems ($1.7 million) and refurbishment of existing
stores ($1.0 million).



We currently expect our capital expenditures to be
approximately $18.5 million for fiscal 2006, primarily for e-commerce upgrades, fulfillment and transportation system upgrades, increases in manufacturing capacity and infrastructure improvements in information technology and stores. However, our
capital expenditures may be different than currently anticipated depending upon the size and nature of new business opportunities and actual cash flows generated by our operations.



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Cash Flows from Financing Activities



Cash used in financing activities totaled $2.8 million in the first half of fiscal 2006 compared to $0.0 million in the first half of fiscal
2005. The increase is primarily driven by $2.6 million in dividends paid to our shareholders.



We currently believe that our available cash, cash equivalents, cash flow from operations and borrowings available under the revolving credit facility will be sufficient to service our debt and to finance our
operations and expected capital requirements for at least the next twelve months.



As of December 24, 2005, we were in compliance with all our bank covenants under the revolving credit facility. However, due to weaker than anticipated earnings results in the quarter ended December 24, 2005 and based on current
trends in our business, we believe it is probable that as of March 25, 2006, the next quarterly measurement date, we will be in violation of certain financial covenants under the revolving credit facility, including the debt coverage ratio,
interest coverage ratio and fixed coverage ratio. We will be working diligently with our lenders to renegotiate these covenants and to obtain, where needed, sufficient waivers.



If subsequent to December 24, 2005 we violate any of our quarterly revolving credit facility covenant tests, it is possible that our
lenders may limit the size of our seasonal $125.0 million revolver. If our revolving credit facility was limited in size or not renewed for some reason, we would likely be required to find alternative seasonal funding sources. However, we believe
that we have the necessary cash resources and liquidity to fund our business while pursuing alternative means of bank financing. As of December 24, 2005, we had no debt outstanding under our revolving credit agreement and had $4.0 million in
outstanding letters of credit, which we believe could be funded through other sources, if necessary. While we believe we will be able to renegotiate certain covenants or obtain sufficient waivers on our revolving credit facility, there is no
assurance that alternative funding, if needed, would be available to us on similar or acceptable terms. Absent waivers or a covenant renegotiation, the risk of a probable violation of our revolving credit facility covenants as of the quarter ending
March 25, 2006, would not create a cross default with our senior notes.



Seasonality



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



Accordingly, changing economic conditions or deviations from
projected demand for products during the fourth calendar quarter can have a materially favorable or adverse impact on our financial position and results for the full year. Because we commit to certain fixed costs in anticipation of expected sales
during the holiday selling season in the fourth calendar quarter, if our actual sales during that calendar quarter are lower than anticipated, our results of operations and profitability will be negatively impacted. In addition, our primary growing
season occurs during the second and third calendar quarters. Because we must commit to certain fixed costs before we know the results of a particular harvest, inclement weather conditions and agricultural pests leading to lower harvest yields can
also negatively impact our sales and profitability.



CRITICAL ACCOUNTING
POLICIES



The preparation of financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying condensed consolidated financial statements are prepared using
the same critical accounting policies discussed in our audited condensed consolidated financial statements not included herein. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experiences and various other
factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.



NON-GAAP FINANCIAL MEASURE: EBITDA



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
|------- | --------------------------------------------------------------



We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates and commodity prices, which could impact
our financial condition, results of operations and cash flows. We plan to manage our exposure to these and other market risks through regular operating and financing activities and on a limited basis, the use of derivative financial instruments. We
intend to use such derivative financial instruments as risk management tools and not for speculative investment purposes.



Interest Rate Risk



Interest on our floating rate notes and on our borrowings under the revolving credit facility accrues at variable rates based on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow
the entire amount available under our revolving credit facility, together with the floating rate notes, a 1% change in the interest rate on our variable rate debt would result in a $1.95 million corresponding effect on our interest expense on an
annual basis. The interest rates on our variable rate long-term debt will reflect the market rate of the outstanding floating rate notes sold in the February 2005 offering, and therefore the carrying value of our variable rate long-term debt is
expected to approximate fair value.



Commodity Risk



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



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



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



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control objectives and are subject to certain limitations, including the exercise of judgment by individuals, the inability to identify unlikely future
events and the inability to eliminate misconduct completely.



We have carried
out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
The evaluation examined those disclosure controls and procedures as of December 24, 2005. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of December 24,
2005, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.



We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of
2002, and are therefore not required to make an assessment of the effectiveness of our internal controls over financial reporting. Further, Ernst & Young LLP has not been engaged nor have they expressed an opinion on the effectiveness of
our internal control over financial reporting. However, in connection with our fiscal 2005 financial statement audit, Ernst & Young LLP, our independent registered public accounting firm, informed us that they have identified certain
deficiencies in the design and operation of our internal controls. These deficiencies represent significant deficiencies and may represent material weaknesses as defined in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board (United States), or PCAOB. A material weakness is defined by the PCAOB as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a misstatement of the
financial statements that is more than inconsequential will not be prevented or detected. A control deficiency exists when the design or operations of a control does not allow management or employees, in the normal course of performing their
assigned functions, to prevent or detect misstatements on a timely basis.



The
internal control deficiencies identified at the end of fiscal 2005 related to our financial closing process and our information technology general controls environment. We are taking remedial measures to improve the effectiveness of our internal
controls, and management believes that these efforts will not only address the internal control deficiencies described above, but also improve the effectiveness of our disclosure and internal controls in the future. Specifically, we are and will be:



| |  |  | strengthening our internal staffing and technical expertise in financial, tax and SEC accounting and reporting to accommodate our new status as a stand-alone public company;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enhancing our resources with respect to outsourced tax preparation services; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | engaging an outside compliance consulting firm to advise us on improving our internal controls in selected areas, primarily in the areas of information technology database access
and controls and income tax and sales tax preparation, to take advantage of best practices.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The process and control improvements described above, which are still in the process of being implemented, are the only changes in our internal controls during the thirteen weeks ended December 24, 2005, that
have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures. We plan to continue to assess our internal controls and procedures and will take further action as necessary or appropriate to address
any other matters we identify, including to effect compliance with Section 404 of the Sarbanes-Oxley Act when we are required to make an assessment of our internal controls under Section 404 for fiscal 2007.



36



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PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------



We are involved from time to time in claims and legal actions incidental to our operations, both as plaintiff and defendant. In the opinion of our management, the claims or actions to which we are a party are not
expected to have a material adverse effect, individually or in the aggregate, on our financial condition or results of operations.



|ITEM 2. | UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | ----------------------------------------------------------



None.



|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
|------- | --------



|     |  |                                                                                                                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Harry & David Holdings, Inc. Bylaws (Filed as Exhibit 3.15 to Harry & David Operations Corp.s Registration Statement on Form S-4 (File No. 333-128870) and incorporated herein by
reference)
|     | 
|31.1 |  | Certification of Principal Executive Officer                                                                                                                                                 
|     | 
|31.2 |  | Certification of Principal Financial Officer                                                                                                                                                 
|     | 
|32.1 |  | Section 1350 Certification of Chief Financial Officer and Chief Executive Officer                                                                                                            



37



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SIGNATURES



The Company has duly caused this
Quarterly Report to be signed on its behalf by the undersigned thereto duly authorized.



HARRY & DAVID HOLDINGS, INC.By:

/s/    WILLIAM H.
WILLIAMSWilliam H. WilliamsPresident and Chief Executive OfficerBy:

/s/    STEPHEN V.
OCONNELLStephen V. OConnellChief Financial Officer and Chief Administrative Officer




February 7, 2006



38