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United States

Securities and Exchange Commission

Washington, D.C. 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 26, 2009

or



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

For the transition period from              to

Commission File Number
333-127173





Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 20-0884389                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|2500 South Pacific Highway, Medford, OR                        |  | 97501                                  
|(Address of Principal Executive Offices)                       |  | (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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, large accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act (check one):



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

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

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 1,
2010
|Common stock $0.01 par value |  | 1,033,295                         









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##### Table of Contents

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |          |  |                                                                                                                                                                                     |  |     
|----------------------------- |  | -------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |          |  |                                                                                                                                                                                     |  | Page
|Part I. Financial Information |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Condensed Consolidated (unaudited) Financial Statements                                                                                                                             |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Balance Sheets  as of December 26, 2009, June 27, 2009 and December 27, 2008                                                                                |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended December 26, 2009 and December 
27, 2008, and Twenty-six Weeks ended December 26, 2009 and December 27, 2008 |  | 4   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows  Twenty-six Weeks ended December 26, 2009 and December 27, 2008                                                                    |  | 5   
|                              |  |          | 
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                |  | 6   
|                              |  |          | 
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                               |  | 26  
|                              |  |          | 
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                          |  | 35  
|                              |  |          | 
|                              |  | Item 4.  |  | Controls and Procedures                                                                                                                                                             |  | 36  
|                              | 
|Part II. Other Information    |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Legal Proceedings                                                                                                                                                                   |  | 36  
|                              |  |          | 
|                              |  | Item 1A. |  | Risk Factors                                                                                                                                                                        |  | 36  
|                              |  |          | 
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                         |  | 36  
|                              |  |          | 
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                                                                                     |  | 36  
|                              |  |          | 
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                                 |  | 36  
|                              |  |          | 
|                              |  | Item 5.  |  | Other Information                                                                                                                                                                   |  | 36  
|                              |  |          | 
|                              |  | Item 6.  |  | Exhibits                                                                                                                                                                            |  | 36  



2



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PART I. FINANCIAL INFORMATION



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

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share and Per Share Data)



|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -------------------------- |  | - | ------- | -
|                                                                                                                                                                             |  | December 26,2009 |         |   | June 27,2009 |   |         | December 27,2008(Restated) | 
|                                                                                                                                                                             |  | Unaudited        |         |   |              |   |         | Unaudited                  | 
|Assets                                                                                                                                                                       |  |                  |         |   |              |   |         |                            |  |   |         |  
|Current assets                                                                                                                                                               |  |                  |         |   |              |   |         |                            |  |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $                | 108,512 |   |              | $ | 15,395  |                            |  | $ | 95,183  |  
|Trade accounts receivable, net                                                                                                                                               |  |                  | 10,323  |   |              |   | 1,466   |                            |  |   | 21,222  |  
|Other receivables                                                                                                                                                            |  |                  | 1,760   |   |              |   | 2,062   |                            |  |   | 3,204   |  
|Inventories                                                                                                                                                                  |  |                  | 33,850  |   |              |   | 44,738  |                            |  |   | 44,702  |  
|Deferred catalog expenses                                                                                                                                                    |  |                  | 3,781   |   |              |   | 2,657   |                            |  |   | 8,386   |  
|Deferred income taxes                                                                                                                                                        |  |                  |        |   |              |   | 5,230   |                            |  |   |        |  
|Other current assets                                                                                                                                                         |  |                  | 6,387   |   |              |   | 4,862   |                            |  |   | 8,044   |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total current assets                                                                                                                                                         |  |                  | 164,613 |   |              |   | 76,410  |                            |  |   | 180,741 |  
|Fixed assets, net                                                                                                                                                            |  |                  | 136,346 |   |              |   | 145,477 |                            |  |   | 153,669 |  
|Goodwill                                                                                                                                                                     |  |                  | 12,236  |   |              |   | 12,236  |                            |  |   | 12,209  |  
|Intangibles, net                                                                                                                                                             |  |                  | 32,616  |   |              |   | 33,057  |                            |  |   | 33,883  |  
|Deferred financing costs, net                                                                                                                                                |  |                  | 4,789   |   |              |   | 5,975   |                            |  |   | 7,162   |  
|Deferred income taxes                                                                                                                                                        |  |                  |        |   |              |   | 1,423   |                            |  |   |        |  
|Other assets                                                                                                                                                                 |  |                  | 2,126   |   |              |   | 2,114   |                            |  |   | 3,083   |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total assets                                                                                                                                                                 |  | $                | 352,726 |   |              | $ | 276,692 |                            |  | $ | 390,747 |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Liabilities and stockholders equity (deficit)                                                                                                                               |  |                  |         |   |              |   |         |                            |  |   |         |  
|Current liabilities                                                                                                                                                          |  |                  |         |   |              |   |         |                            |  |   |         |  
|Accounts payable                                                                                                                                                             |  | $                | 32,506  |   |              | $ | 11,171  |                            |  | $ | 39,772  |  
|Accrued payroll and benefits                                                                                                                                                 |  |                  | 14,108  |   |              |   | 14,105  |                            |  |   | 14,183  |  
|Deferred revenue                                                                                                                                                             |  |                  | 36,554  |   |              |   | 16,317  |                            |  |   | 41,932  |  
|Deferred income taxes                                                                                                                                                        |  |                  | 3,124   |   |              |   |        |                            |  |   | 2,615   |  
|Income taxes payable                                                                                                                                                         |  |                  | 27,301  |   |              |   | 13,643  |                            |  |   | 29,456  |  
|Accrued interest                                                                                                                                                             |  |                  | 4,420   |   |              |   | 4,485   |                            |  |   | 4,800   |  
|Other accrued liabilities                                                                                                                                                    |  |                  | 9,463   |   |              |   | 2,980   |                            |  |   | 11,089  |  
|Current portion of capital lease obligation                                                                                                                                  |  |                  | 299     |   |              |   | 147     |                            |  |   | 633     |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total current liabilities                                                                                                                                                    |  |                  | 127,775 |   |              |   | 62,848  |                            |  |   | 144,480 |  
|Long-term debt and capital lease obligation                                                                                                                                  |  |                  | 198,519 |   |              |   | 198,671 |                            |  |   | 198,818 |  
|Accrued pension liabilities                                                                                                                                                  |  |                  | 27,179  |   |              |   | 27,364  |                            |  |   | 15,833  |  
|Deferred income taxes                                                                                                                                                        |  |                  | 850     |   |              |   |        |                            |  |   | 1,320   |  
|Other long-term liabilities                                                                                                                                                  |  |                  | 9,626   |   |              |   | 9,591   |                            |  |   | 10,625  |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total liabilities                                                                                                                                                            |  |                  | 363,949 |   |              |   | 298,474 |                            |  |   | 371,076 |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Commitments and contingencies (Note 10)                                                                                                                                      |  |                  |         |   |              |   |         |                            |  |   |         |  
|Stockholders equity (deficit)                                                                                                                                               |  |                  |         |   |              |   |         |                            |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,033,295 shares at December 26,
2009, June 27, 2009 and December 27, 2008, respectively |  |                  | 10      |   |              |   | 10      |                            |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                   |  |                  | 6,844   |   |              |   | 6,673   |                            |  |   | 6,429   |  
|Accumulated other comprehensive loss, net of taxes                                                                                                                           |  |                  | (9,402  | ) |              |   | (9,795  | )                          |  |   | (3,500  | )
|Retained earnings (accumulated deficit)                                                                                                                                      |  |                  | (8,675  | ) |              |   | (18,670 | )                          |  |   | 16,732  |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                         |  |                  | (11,223 | ) |              |   | (21,782 | )                          |  |   | 19,671  |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $                | 352,726 |   |              | $ | 276,692 |                            |  | $ | 390,747 |  
|                                                                                                                                                                             |  |                  |         |   |              |   |         |                            |  |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



3



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Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands)

(Unaudited)



|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|----------------------------------------------------- |  | -------------------- | ------- | - | -------------------------- | - | ------- | ---------------- |  | - | -------------------------- | - |  | - | ------- | -
|                                                      |  | Thirteen Weeks Ended |         |   | Twenty-Six Weeks Ended     |  
|                                                      |  | December 26,2009     |         |   | December 27,2008(Restated) |   |         | December 26,2009 |  |   | December 27,2008(Restated) |  
|Net sales                                             |  | $                    | 267,032 |   |                            | $ | 307,726 |                  |  | $ | 313,296                    |   |  | $ | 360,333 |  
|Cost of goods sold                                    |  |                      | 135,817 |   |                            |   | 161,109 |                  |  |   | 165,858                    |   |  |   | 197,508 |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Gross profit                                          |  |                      | 131,215 |   |                            |   | 146,617 |                  |  |   | 147,438                    |   |  |   | 162,825 |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Operating expenses:                                   |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Selling, general and administrative                   |  |                      | 71,372  |   |                            |   | 103,494 |                  |  |   | 104,716                    |   |  |   | 141,158 |  
|Selling, general and administrative  related party   |  |                      | 250     |   |                            |   | 250     |                  |  |   | 500                        |   |  |   | 500     |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|                                                      |  |                      | 71,622  |   |                            |   | 103,744 |                  |  |   | 105,216                    |   |  |   | 141,658 |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Operating income                                      |  |                      | 59,593  |   |                            |   | 42,873  |                  |  |   | 42,222                     |   |  |   | 21,167  |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Other (income) expense:                               |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Interest income                                       |  |                      | (14     | ) |                            |   | (40     | )                |  |   | (17                        | ) |  |   | (224    | )
|Interest expense                                      |  |                      | 4,905   |   |                            |   | 5,903   |                  |  |   | 9,604                      |   |  |   | 11,824  |  
|Gain on debt repurchases                              |  |                      |        |   |                            |   | (12,573 | )                |  |   |                           |   |  |   | (15,416 | )
|Other (income) expense, net                           |  |                      | (346    | ) |                            |   | (37     | )                |  |   | (369                       | ) |  |   | (23     | )
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|                                                      |  |                      | 4,545   |   |                            |   | (6,747  | )                |  |   | 9,218                      |   |  |   | (3,839  | )
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Income from continuing operations before income taxes |  |                      | 55,048  |   |                            |   | 49,620  |                  |  |   | 33,004                     |   |  |   | 25,006  |  
|Provision for income taxes                            |  |                      | 23,329  |   |                            |   | 19,282  |                  |  |   | 23,009                     |   |  |   | 10,018  |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Net income from continuing operations                 |  |                      | 31,719  |   |                            |   | 30,338  |                  |  |   | 9,995                      |   |  |   | 14,988  |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Discontinued operations:                              |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                      |        |   |                            |   | 21      |                  |  |   |                           |   |  |   | 42      |  
|Operating income from discontinued operations         |  |                      |        |   |                            |   | 159     |                  |  |   |                           |   |  |   | 339     |  
|Provision for income taxes on discontinued operations |  |                      |        |   |                            |   | 70      |                  |  |   |                           |   |  |   | 146     |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Net income from discontinued operations               |  |                      |        |   |                            |   | 110     |                  |  |   |                           |   |  |   | 235     |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  
|Net income                                            |  | $                    | 31,719  |   |                            | $ | 30,448  |                  |  | $ | 9,995                      |   |  | $ | 15,223  |  
|                                                      |  |                      |         |   |                            |   |         |                  |  |   |                            |   |  |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | -------------------------- | - | -------- | -
|                                                                                                                                        |  | Twenty-Six Weeks Ended |        
|                                                                                                                                        |  | December 26,2009       |         |   | December 27,2008(Restated) |  
|Operating activities                                                                                                                    |  |                        |         |   |                            |   |          |  
|Net income                                                                                                                              |  | $                      | 9,995   |   |                            | $ | 15,223   |  
|Less: Net income from discontinued operations                                                                                           |  |                        |        |   |                            |   | 235      |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Net income from continuing operations                                                                                                   |  |                        | 9,995   |   |                            |   | 14,988   |  
|Adjustments to reconcile net income from continuing operations to net cash provided by operating activities from continuing
operations: |  |                        |         |   |                            |   |          |  
|Depreciation and amortization of fixed assets                                                                                           |  |                        | 9,113   |   |                            |   | 9,675    |  
|Amortization of intangible assets                                                                                                       |  |                        | 441     |   |                            |   | 932      |  
|Amortization of deferred financing costs                                                                                                |  |                        | 1,186   |   |                            |   | 1,248    |  
|Stock option compensation expense                                                                                                       |  |                        | 171     |   |                            |   | 238      |  
|Loss on impairment and disposal of fixed assets and other long-lived assets, net                                                        |  |                        | 899     |   |                            |   | 13,848   |  
|Gains on sale of short-term investments                                                                                                 |  |                        |        |   |                            |   | (64      | )
|Deferred income taxes                                                                                                                   |  |                        | 10,375  |   |                            |   | 2,945    |  
|Amortization of deferred pension loss                                                                                                   |  |                        | 645     |   |                            |   | 58       |  
|Gain on debt repayment                                                                                                                  |  |                        |        |   |                            |   | (15,416  | )
|Changes in operating assets and liabilities:                                                                                            |  |                        |         |   |                            |   |          |  
|Trade accounts receivable and other receivables                                                                                         |  |                        | (8,555  | ) |                            |   | (19,802  | )
|Inventories                                                                                                                             |  |                        | 10,888  |   |                            |   | 10,405   |  
|Deferred catalog expenses and other assets                                                                                              |  |                        | (2,661  | ) |                            |   | (2,010   | )
|Accounts payable                                                                                                                        |  |                        | 21,335  |   |                            |   | 20,635   |  
|Accrued liabilities                                                                                                                     |  |                        | 6,981   |   |                            |   | 4,451    |  
|Income taxes                                                                                                                            |  |                        | 13,658  |   |                            |   | 5,846    |  
|Accrued pension liabilities                                                                                                             |  |                        | (185    | ) |                            |   | (1,661   | )
|Deferred revenue                                                                                                                        |  |                        | 20,237  |   |                            |   | 25,676   |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Net cash provided by operating activities from continuing operations                                                                    |  |                        | 94,523  |   |                            |   | 71,992   |  
|Net cash provided by operating activities from discontinued operations                                                                  |  |                        |        |   |                            |   | 735      |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Net cash provided by operating activities                                                                                               |  |                        | 94,523  |   |                            |   | 72,727   |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Investing activities                                                                                                                    |  |                        |         |   |                            |   |          |  
|Acquisition of fixed assets                                                                                                             |  |                        | (1,452  | ) |                            |   | (4,417   | )
|Acquisition of business                                                                                                                 |  |                        |        |   |                            |   | (8,507   | )
|Proceeds from the sale of fixed assets                                                                                                  |  |                        | 46      |   |                            |   | 14       |  
|Proceeds from the sale of held-to-maturity securities                                                                                   |  |                        |        |   |                            |   | 5,000    |  
|Proceeds from the sale of available-for-sale securities                                                                                 |  |                        |        |   |                            |   | 10,097   |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Net cash provided by (used in) investing activities from continuing operations                                                          |  |                        | (1,406  | ) |                            |   | 2,187    |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Financing activities                                                                                                                    |  |                        |         |   |                            |   |          |  
|Borrowings on revolving debt                                                                                                            |  |                        | 85,000  |   |                            |   | 113,000  |  
|Repayments of revolving debt                                                                                                            |  |                        | (85,000 | ) |                            |   | (113,000 | )
|Repayments of capital lease obligation                                                                                                  |  |                        |        |   |                            |   | (157     | )
|Repurchases of long-term debt                                                                                                           |  |                        |        |   |                            |   | (20,366  | )
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Net cash used in financing activities from continuing operations                                                                        |  |                        |        |   |                            |   | (20,523  | )
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Increase in cash and cash equivalents                                                                                                   |  |                        | 93,117  |   |                            |   | 54,391   |  
|Cash and cash equivalents, beginning of period                                                                                          |  |                        | 15,395  |   |                            |   | 40,792   |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  
|Cash and cash equivalents, end of period                                                                                                |  | $                      | 108,512 |   |                            | $ | 95,183   |  
|                                                                                                                                        |  |                        |         |   |                            |   |          |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

NOTE 1BUSINESS

Harry & David Holdings, Inc. and subsidiaries (the Company) 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®, Wolfermans® and Cushmans® brands.
The Company markets and sells its products through catalogs distributed through the mail, the Internet, business-to-business and consumer telemarketing, Company-owned stores and wholesale distribution to other retailers.

NOTE 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 26, 2009 and December 27, 2008, the Condensed Consolidated Statements of
Operations for the thirteen-week and the twenty-six week periods ended December 26, 2009 and December 27, 2008, and the Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended December 26, 2009 and
December 27, 2008 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

For
further information, refer to the consolidated financial statements and the notes thereto for the year ended June 27, 2009, not included in this report. The Company has evaluated subsequent events through February 4, 2010, which is the
filing date of this report on Form 10-Q.

In managements opinion, the Condensed Consolidated Financial Statements include all
adjustments, which include those typically recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen-week periods then ended. Intercompany balances and
transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 27, 2009 presented in this Form 10-Q has been derived from the Companys audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United States of America.

During the fourth quarter of fiscal 2007,
the Company completed the sale of its Jackson & Perkins businesses to J&P Acquisition Inc. In a separate transaction, the Company sold its land and the associated buildings of its Wasco facility, which was primarily utilized to support
rose growing operations of Jackson & Perkins. The financial results of the divested Jackson & Perkins businesses and activities related to the sale are included in discontinued operations in the statement of operations.

The results of operations for the interim periods presented are not necessarily indicative of results to be expected for other interim periods in the
fiscal year. In the second quarter of each fiscal year, the Company realizes its highest sales for the fiscal year as such quarter 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 recognizes significant cost of goods sold and advertising expenses in connection with the increased sales.

The Company has reclassified amounts related to its outstanding gift cards to deferred revenue from accrued liabilities in the condensed consolidated balance sheet with corresponding reclassifications on
its condensed consolidated statement of cash flows to conform to the current year presentation. In addition to the reclassification, certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment.
For further information see Note 3-Restatement.

The Companys total comprehensive income for the thirteen and twenty-six
weeks ended December 26, 2009 of $31,923 and $10,388, respectively, includes an adjustment (net of tax) related to unrealized net losses associated with its pension plans of $204 and $393, respectively. The Companys total comprehensive
income for the thirteen and twenty-six weeks ended December 27, 2008 of $30,477 and $15,281, respectively, includes a $29 and $58 adjustment (net of tax) related to its deferred pension amortization.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



NOTE 3RESTATEMENT

Restatement and correction

During the fourth quarter of fiscal 2009, the Company concluded that the Wolfermans impairment charge recorded in the second fiscal quarter was calculated incorrectly. The correction impacted the financial statements in the previously
filed form 10-Qs for the second and third fiscal quarter of 2009. In this form 10-Q the adjustments are reflected in goodwill as of December 27, 2008 in the condensed consolidated balance sheet, selling, general and administrative expenses and
the provision for income taxes in both the quarter and year-to-date periods ended December 27, 2008 in the condensed consolidated statement of operations. While certain captions comprised in cash provided by operating activities were impacted
by the correction, total net operating cash flows did not change from what was previously reported. The financial statement line items on the balance sheet and statement of operations have been restated as follows:

Balance sheet restatement



|                                        |  |                       |       
|--------------------------------------- |  | --------------------- | ------
|                                        |  | As ofDecember 27,2008
|                                        |  | Unaudited            
|Goodwill                                |  |                       |       
|As previously reported                  |  | $                     | 10,998
|As restated                             |  |                       | 12,209
|Retained earnings (accumulated deficit) |  |                       |       
|As previously reported                  |  | $                     | 16,002
|As restated                             |  |                       | 16,732

Statement of operations restatement



|                                                      |  |                                     |         |                                       |   |        
|----------------------------------------------------- |  | ----------------------------------- | ------- | ------------------------------------- | - | -------
|                                                      |  | Thirteen WeeksEndedDecember 27,2008 |         | Twenty-sixWeeks EndedDecember 27,2008
|                                                      |  | Unaudited                           |         | Unaudited                            
|Selling, general and administrative expense           |  |                                     |         |                                       |   |        
|As previously reported                                |  | $                                   | 104,705 |                                       | $ | 142,369
|As restated                                           |  |                                     | 103,494 |                                       |   | 141,158
|Provision for income taxes from continuing operations |  |                                     |         |                                       |   |        
|As previously reported                                |  | $                                   | 18,801  |                                       | $ | 9,537  
|As restated                                           |  |                                     | 19,282  |                                       |   | 10,018 
|Net income from continuing operations                 |  |                                     |         |                                       |   |        
|As previously reported                                |  | $                                   | 29,608  |                                       | $ | 14,258 
|As restated                                           |  |                                     | 30,338  |                                       |   | 14,988 
|Net income                                            |  |                                     |         |                                       |   |        
|As previously reported                                |  | $                                   | 29,718  |                                       | $ | 14,493 
|As restated                                           |  |                                     | 30,448  |                                       |   | 15,223 



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



NOTE 4NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS

In October 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update 2009-13, Revenue Recognition (Topic
605)Multiple-Deliverable Revenue Arrangements.FASB Accounting Standards Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather
than as a combined unit. Specifically, this guidance amends the criteria in Accounting Standards Codification (ASC) Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable
arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance
also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly
expands required disclosures related to a vendors multiple-deliverable revenue arrangements. FASB Accounting Standards Update 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. The adoption of Accounting Standards Update 2009-13 is not expected to have a material impact on the condensed consolidated financial statements.

In August 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update 2009-05, Fair Value Measurements and
Disclosures (Topic 820)Measuring Liabilities at Fair Valueincludes amendments to Subtopic 820-10, Fair Value Measurements and DisclosuresOverall, for the fair value measurement of liabilities and provides clarification that
in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The adoption of
Accounting Standards Update 2009-05 did not have a material impact on the condensed consolidated financial statements.

During June 2009, the
Financial Accounting Standards Board (FASB) issued FAS No. 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162(SFAS 168) and is incorporated in ASC Topic 105, which establishes the FASB Accounting Standards Codification as the single official source of authoritative US GAAP (other than guidance issued by the SEC), superseding
existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. SFAS 168 became effective as of the beginning of the first annual reporting period that begins after September 15, 2009
and for interim periods within that period. The adoption of SFAS 168 did not have an impact on the Companys results of operations or financial position.

In April 2009, the FASB issued FASB Staff Position (FSP) No. 107-1 (FSP FAS 107-1) and APB 28-1 (APB 28-1) and is incorporated in ASC Topic 825, which amends FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting
periods. FSP FAS 107-1 and APB 28-1 were effective for interim reporting periods ending after June 15, 2009. While the adoption of this staff position impacted our disclosure requirements, it did not have a material impact on the Companys
financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (FSP FAS 115-2),
and FASB Staff Position No. 124-2 (FSP FAS 124-2) and is incorporated in ASC Topic 320, which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 were effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on the condensed consolidated financial statements.

In April 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies, which amends and clarifies SFAS No. 141 (Revised) and is incorporated in ASC Topic 805, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. This FSP shall be effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is during or after fiscal 2010. The Company
will apply the requirements of SFAS No. 141R-1 to any future business combinations.

In December 2008, the FASB issued Staff Position
No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets, and is incorporated in ASC Topic 715, which provides additional guidance on an employers disclosures about plan assets of a defined benefit pension or
other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009. The Company will adopt this interpretation for the fiscal year ended June 26, 2010. The
Company is currently evaluating the impact of adopting FSP 132(R)-1 on its disclosures.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3) and is incorporated in ASC Topics 275 and 350, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company adopted FSP 142-3 in fiscal year 2010. Early
adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset in FSP 142-3 is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements in FSP 142-3 are to
be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. While the adoption of FSP 142-3 impacted our disclosure requirements, it did not have a material impact on the condensed consolidated
financial statements.

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, (FAS 157),
which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years, and is incorporated in ASC Topic 820. FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels which distinguish between assumptions based on market data (observable inputs) and the Companys assumptions (unobservable inputs). The level in the fair value hierarchy within which
the respective fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of inputs used to measure fair value are as follows:

Level 1  Quoted prices in active markets for identical assets or liabilities.

Level 2  Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.

The adoption of FAS 157 did not have a material impact on the condensed consolidated financial statements. The Company
adopted the provisions of FAS 157 on June 29, 2008 for assets and liabilities measured at fair value on a recurring basis, which consist of cash and cash equivalents measured using Level 1 inputs. The Company adopted the provisions of FAS 157-2
on June 28, 2009 for assets and liabilities measured at fair value on a non-recurring basis, which include goodwill, intangible assets and certain other long-lived assets. The fair values for these assets are measured for impairment on a
non-recurring basis using Level 3 inputs. Refer to Note 5-Balance Sheet Information for further discussion of impairment valuation.

NOTE 5BALANCE SHEET INFORMATION

Financial Instruments

The Companys financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, certain accrued
liabilities, capital lease obligations and the Senior Floating Rate Notes due March 1, 2012 and Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The estimated carrying value of these instruments (other than the
Senior Notes) approximates fair value due to their short-term maturities. The fair values below are based on quoted market prices.

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



|                           |  |                   |         |            |   |        
|-------------------------- |  | ----------------- | ------- | ---------- | - | -------
|                           |  | December 26, 2009
|                           |  | Book value        |         | Fair value
|Senior floating rate notes |  | $                 | 58,170  |            | $ | 39,119 
|Senior fixed rate notes    |  |                   | 140,192 |            |   | 96,032 
|                           |  |                   |         |            |   |        
|Total senior notes         |  | $                 | 198,362 |            | $ | 135,151
|                           |  |                   |         |            |   |        



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Inventories

Inventories consist of the following:



|                                                   |  |                  |        |              |   |                  |  |   |       
|-------------------------------------------------- |  | ---------------- | ------ | ------------ | - | ---------------- |  | - | ------
|                                                   |  | December 26,2009 |        | June 27,2009 |   | December 27,2008
|Finished goods                                     |  | $                | 20,674 |              | $ | 18,056           |  | $ | 23,639
|Materials, packaging supplies, and work-in-process |  |                  | 11,949 |              |   | 20,734           |  |   | 20,102
|Growing crops                                      |  |                  | 1,227  |              |   | 5,948            |  |   | 961   
|                                                   |  |                  |        |              |   |                  |  |   |       
|Total                                              |  | $                | 33,850 |              | $ | 44,738           |  | $ | 44,702
|                                                   |  |                  |        |              |   |                  |  |   |       

Fixed assets

Fixed assets consist of the following:



|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|----------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | ---------------- |  | - | ------- | -
|                                                |  | December 26,2009 |         |   | June 27,2009 |   |         | December 27,2008 | 
|Land                                            |  | $                | 19,607  |   |              | $ | 19,607  |                  |  | $ | 19,607  |  
|Land improvements and orchard development costs |  |                  | 30,697  |   |              |   | 30,692  |                  |  |   | 30,548  |  
|Buildings and improvements                      |  |                  | 58,610  |   |              |   | 58,517  |                  |  |   | 57,015  |  
|Machinery and equipment                         |  |                  | 68,149  |   |              |   | 68,176  |                  |  |   | 66,379  |  
|Leasehold improvements                          |  |                  | 10,352  |   |              |   | 10,611  |                  |  |   | 10,693  |  
|Purchased and internally developed software     |  |                  | 37,216  |   |              |   | 36,693  |                  |  |   | 36,081  |  
|Capital projects-in-process                     |  |                  | 853     |   |              |   | 1,521   |                  |  |   | 4,571   |  
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|                                                |  |                  | 225,484 |   |              |   | 225,817 |                  |  |   | 224,894 |  
|Accumulated depreciation and amortization       |  |                  | (89,138 | ) |              |   | (80,340 | )                |  |   | (71,225 | )
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|Total                                           |  | $                | 136,346 |   |              | $ | 145,477 |                  |  | $ | 153,669 |  
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  

As of December 26, 2009, purchased and internally developed software includes software licenses
acquired for $895 financed through an outstanding capital lease agreement. See Note 7  Borrowing Arrangements. Accumulated amortization of purchased and internally developed software costs was $21,479, $18,972 and $16,270 as of
December 26, 2009, June 27, 2009 and December 27, 2008, respectively. Amortization of software costs, which include software assets financed through capital leases, were $1,243 and $1,365 for the thirteen weeks ended
December 26, 2009 and December 27, 2008, respectively, and $2,516 and $2,664 for the twenty-six weeks ended December 26, 2009 and December 27, 2008, respectively.

The Company completed an evaluation of certain underperforming stores and related fixed assets and certain other long-lived assets. As a result of that evaluation the Company recorded a non-cash
impairment charge at December 26, 2009 of $699, all of which was related to fixed assets. A similar evaluation was completed at December 27, 2008, which resulted in an impairment charge of $3,600. The impairment charges were recorded
within selling, general and administrative expenses within the condensed consolidated statement of operations. The impairment amounts were calculated by comparing the applicable stores net assets to fair value, which was based on a discounted cash
flow model.

In the second quarter of fiscal 2010, the Company negotiated lease buy-outs for two of its stores and recognized $200 of
termination costs, of which $100 remained unpaid as of December 26, 2009. In December 2009, the Company exercised its termination option related to its Eugene, Oregon call center lease and accrued the contractual amounts due of $78 which
remained unpaid as of December 26, 2009. As a result of the lease termination, fixed assets were reviewed for impairment and a charge of $231 was recorded in the thirteen weeks ended December 26, 2009.

Intangibles

Goodwill and intangible assets with indefinite lives are tested for impairment annually. The impairment testing compares carrying values to fair values, and generally, if the carrying value of these assets is in excess of fair value,
an impairment loss would be recognized. The Companys goodwill is related to both its Wolfermans reporting unit (included in the Companys Direct Marketing segment,) and its Cushmans reporting unit (included in both the
Companys Direct Marketing and Wholesale segments). The Company tests goodwill and other intangible assets for impairment on an interim basis should factors or indicators become apparent that would require an impairment test. Historically, the
annual impairment testing has occurred during the fourth quarter of each fiscal year for the reporting units and indefinite-lived intangibles.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



In the second fiscal quarter of 2010, due to unfavorable revenue and operating
income results compared to expectations attributable to the Companys Harry and David brand, an interim impairment test was performed specific to the Harry and David trade name. The interim test did not result in an impairment charge related to
the Harry and David trade name. There was no indication of impairment to warrant interim testing for the Companys goodwill and indefinite-lived intangibles related to its Wolfermans® and Cushmans® brands.

In the second quarter of fiscal 2009, the retail industry had declined at a rate that exceeded the Companys forecasted expectations and
negatively impacted the Companys operating results for the second quarter of fiscal 2009 and the future outlook on the industry. Management believed the decline in the overall industry, the resulting decline in the Companys operating
results from plan, and downward revisions to financial forecasts to be factors that required the Company to perform an interim impairment test. As a result, in connection with the preparation of its second quarter of fiscal 2009 financial
statements, the Company performed an interim impairment test on its goodwill, indefinite-lived and other intangible balances.

The estimated
fair value of each of the reporting units included consideration of the impact of the previously noted trends in the business and industry in fiscal 2009, primarily the decline in sales caused by the adverse economic climate. Using a discounted cash
flows model, the Harry and David trade name, Wolfermans customer list and the goodwill and related intangibles associated with the Cushmans acquisition were tested and no impairment was indicated as of December 27, 2008. Based on
the testing the Company concluded that the fair values of the Wolfermans goodwill, recipe and trade name were greater than their related book values, using a discounted cash flows model. As a result, the Company has recorded an impairment
charge of $10,205 ($686 related to goodwill and $9,519 related to the recipe and trade name) in the second quarter within selling, general and administrative expenses within the fiscal 2009 condensed consolidated statement of operations.

Amortization expense was $395 and $638 for the thirteen weeks ended December 26, 2009 and December 27, 2008, respectively, and $441 and $932
for the twenty-six weeks ended December 26, 2009 and December 27, 2008, respectively, and is included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

The following is a summary of intangible assets:



|                                           |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|------------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------- | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------- | - |  | - | ------
|                                           |  | December 26, 2009   |        | June 27, 2009          
|                                           |  | GrossCarryingAmount |        | AccumulatedAmortization |   |         | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names, trademarks and recipe         |  | $                   | 32,139 |                         | $ |        |                   |  | $                   | 32,139 |                         | $ | 32,139 |                   | $ |        |   |  | $ | 32,139
|Goodwill                                   |  |                     | 12,236 |                         |   |        |                   |  |                     | 12,236 |                         |   | 12,236 |                   |   |        |   |  |   | 12,236
|Direct marketing customer and rental lists |  |                     | 9,249  |                         |   | (8,866  | )                 |  |                     | 383    |                         |   | 9,249  |                   |   | (8,467  | ) |  |   | 782   
|Favorable lease agreements                 |  |                     | 1,676  |                         |   | (1,582  | )                 |  |                     | 94     |                         |   | 1,676  |                   |   | (1,540  | ) |  |   | 136   
|                                           |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       
|                                           |  | $                   | 55,300 |                         | $ | (10,448 | )                 |  | $                   | 44,852 |                         | $ | 55,300 |                   | $ | (10,007 | ) |  | $ | 45,293
|                                           |  |                     |        |                         |   |         |                   |  |                     |        |                         |   |        |                   |   |         |   |  |   |       

The estimated amortization expense for each of the next three fiscal years is as follows:



|               |  |                                          |     |                           |   |                          |  |   |    
|-------------- |  | ---------------------------------------- | --- | ------------------------- | - | ------------------------ |  | - | ---
|Fiscal Period: |  | Direct MarketingCustomer andRental Lists |     | Favorable LeaseAgreements |   | TotalAmortizationExpense
|Remaining 2010 |  |                                          | 203 |                           |   | 34                       |  |   | 237
|2011           |  |                                          | 142 |                           |   | 39                       |  |   | 181
|2012           |  |                                          | 38  |                           |   | 21                       |  |   | 59 
|               |  |                                          |     |                           |   |                          |  |   |    
|Total          |  | $                                        | 383 |                           | $ | 94                       |  | $ | 477
|               |  |                                          |     |                           |   |                          |  |   |    

Impairment Testing and Assumptions

The impairment testing results related to our indefinite-lived intangible assets, our goodwill and long-lived assets were calculated using managements
estimates of future forecasted cash flows to be generated from the respective assets and a discount rate inherent



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



within the Companys cost of capital. The nature of these analyses requires significant judgment by management about future operating results, including revenues, margins, operating expenses
and applicable discount rate. If the Company had used different assumptions and estimates regarding the future operating results or discount rate, the impairment charges might have been materially different. However, management believes that the
assumptions and estimates are reasonable and represent the most likely future operating results based upon the current information available. The Company classifies the inputs used in these measurements as Level 3 within the fair value hierarchy
prescribed by ASC Topic 820.

NOTE 6INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax
rates from continuing operations for the second quarter of fiscal 2010 and fiscal 2009 were 42.4% and 38.9%, respectively. For the second quarter of fiscal 2010, the difference in the effective rate and the federal statutory rate is primarily due to
a valuation allowance adjustment of $9,042, relating to certain deferred tax assets, and state tax obligations of $821.

The Company routinely
reviews the future realization of tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. As of December 26, 2009, the Company believes that a
valuation allowance adjustment of $9,042 is required to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these analyses requires significant judgment by management about future operating results,
including revenues, margins and operating expenses.

NOTE 7BORROWING ARRANGEMENTS

Revolving Credit Facilities

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

In connection with this facility and related amendments, the Company has remaining
deferred financing costs of $1,551 and $2,172 as of December 26, 2009 and June 27, 2009, respectively.

As of December 26,
2009, unused borrowings under the revolving credit facility were $123,989, with borrowings amounting to $0 and $1,011 in outstanding letters of credit. The maximum available borrowing under the Credit Agreement is determined in accordance with an
asset-based debt limitation formula. Total available borrowing capacity at December 26, 2009 was $13,876. The Company is required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitment
fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the condensed consolidated statement of operations.

The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. The Credit Agreement requires the Company to comply with
certain covenants, which primarily include a minimum cash balance and limits to capital expenditures.

Long-Term Debt

As of December 26, 2009, the Companys wholly-owned subsidiary, Harry and David, had outstanding $58,170 in Senior Floating
Rate Notes due March 1, 2012 and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes) These amounts reflect amounts repurchased by the Company on the open-market in fiscal 2008 and fiscal 2009.
For further details on the repurchases during the thirteen weeks and twenty-six weeks ended December 27, 2008, see Long-Term Debt Repurchases below.

The floating rate Senior Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 5.26% and 5.67% at December 26, 2009 and
June 27, 2009, respectively. The fixed rate Senior Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December.

The deferred financing fees incurred in connection with the note offering and related exchange have been recorded as deferred financing costs within
long-term assets. The remaining costs are amortized over the remaining life of the associated Senior Notes and as of December 26, 2009 and June 27, 2009, $3,238 and $3,803, respectively, remained on the balance sheet for all associated
fees related to the Senior Notes. As noted below under Long-Term Debt Repurchases, the Senior Notes deferred financing costs are subject to write-off on a pro-rata basis due to early repurchase or repayment of the Senior Notes.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



These Senior Notes represent the senior unsecured obligations of Harry and David, 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 subsidiaries. The indenture governing the Senior Notes contains various
restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates.

Long-Term Debt Repurchases

During the thirteen weeks ended December 27, 2008, the Company purchased $26,438 in aggregate principal amounts of its fixed and floating rate Senior Notes in open-market purchases for $13,259. This debt prepayment resulted in a net
gain of $12,573, comprised of a $13,179 discount on the repayment of outstanding principal, partially offset by the write-off of $606 of unamortized deferred financing costs.

During the thirteen weeks ended September 27, 2008, the Company purchased $10,200 of its fixed rate senior notes in open market purchases for $7,107. This debt prepayment resulted in a net gain of
$2,843, comprised of a $3,093 discount on the repayment of outstanding principal, partially offset by the write-off of $250 of unamortized deferred financing costs.

Amortization of Deferred Financing Costs

Total amortization expense
on deferred financing costs was $593 and $604 for the thirteen weeks ended December 26, 2009 and December 27, 2008, respectively, and $1,186 and $1,248 for the twenty-six weeks ended December 26, 2009 and December 27, 2008,
respectively, and is included within interest expense in the accompanying Condensed Consolidated Statements of Operations.

Capital lease obligation

As of December 26, 2009, the Company had a $456 capital lease obligation representing
amounts outstanding to acquire certain software licenses. The current and non-current portion of the Companys capital lease obligation is $299 and $157, respectively. The interest rate on the obligation is 5.99%, with principal and interest
payments due biannually.

NOTE 8STOCK OPTION PLAN

The Company accounts for stock-based compensation using the fair-value method.The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model
that uses certain assumptions for use in the model. The expected volatility assumption is based on an average historical volatility of the publicly traded stock of a representative set of comparable companies. The expected term assumption is either
the final vesting date or a period derived from the time between the date of final vesting and the expiration of the option, depending on the vesting provisions of the underlying grant. As the Companys shares are not registered, nor publicly
traded on a national securities exchange, the liquidity of the option award is limited. As such, the Company has assumed for purposes of estimating the expected term of the stock option that the vested awards would likely forfeit post-termination.
The risk-free rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. The Company granted 10,000 shares of stock options during the twenty-six weeks ended December 26, 2009. The assumptions used for
the award granted during the thirteen and twenty-six weeks ended December 26, 2009, are as follows:



|                    |  |                      |            |   |                        |   |            |  
|------------------- |  | -------------------- | ---------- | - | ---------------------- | - | ---------- | -
|                    |  | Thirteen Weeks Ended |            |   | Twenty Six Weeks Ended |  
|Expected volatility |  |                      | 59.0       | % |                        |   | 57.0       | %
|Expected dividends  |  | $                    | 0          |   |                        | $ | 0          |  
|Expected term       |  |                      | 2.56 years |   |                        |   | 2.74 years |  
|Risk-free rate      |  |                      | 1.44       | % |                        |   | 1.62       | %



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



A summary of option activity under the Plan for the twenty-six weeks ended December 26, 2009 is
presented below:



|                                 |  |              |   |  |                                |        |                                           |          
|-------------------------------- |  | ------------ | - |  | ------------------------------ | ------ | ----------------------------------------- | ---------
|Options                          |  | OptionShares |   |  | Weighted-AverageExercise
Price |        | Weighted-AverageRemainingContractual Term
|Outstanding at June 27, 2009     |  | 59,568       |   |  | $                              | 113.92 |                                           | 6.2 years
|Granted                          |  | 10,000       |   |  |                                | 150.00 |                                           | 9.8 years
|Exercised                        |  |             |   |  |                                |       |                                           |         
|Forfeited                        |  | (3,122       | ) |  |                                | 209.45 |                                           |         
|                                 |  |              |   |  |                                |        |                                           |          
|Outstanding at December 26, 2009 |  | 66,446       |   |  | $                              | 116.69 |                                           | 6.2 years
|                                 |  |              |   |  |                                |        |                                           |          

Of the 66,446 options outstanding at December 26, 2009, 52,776 were fully vested and
exercisable. The weighted average remaining contractual term of vested options was 5.5 years. The total grant date fair value of all options outstanding at December 26, 2009 was $1,819.

A summary of the status of the Companys nonvested option shares as of December 26, 2009, and activity during the twenty-six weeks ended
December 26, 2009, is presented below:



|                                 |  |              |   |  |                                                |      
|-------------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares          |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at June 27, 2009     |  | 6,239        |   |  | $                                              | 13.42
|Granted options                  |  | 10,000       |   |  | $                                              | 47.41
|Vested                           |  | (1,345       | ) |  | $                                              | 11.45
|Forfeited                        |  | (1,224       | ) |  | $                                              | 21.38
|                                 |  |              |   |  |                                                |      
|Outstanding at December 26, 2009 |  | 13,670       |   |  | $                                              | 37.76
|                                 |  |              |   |  |                                                |      

For the thirteen weeks and twenty-six weeks ended December 26, 2009, the Company recognized
stock compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $112 and $171, respectively. The total tax benefit recognized for these periods was $43 and $66, respectively. As of
December 26, 2009, there remained a total of $459 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan which will be recognized over a remaining weighted-average period
of 2.3 years. Generally, an assumption of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.

NOTE 9BENEFIT PROGRAMS

The components of net periodic pension expense for the
Companys qualified and excess defined benefit pension plans are as follows:



|                                          |  |                      |      |   |                        |   |      |                  |  |   |                  |   |  |   |        |  
|----------------------------------------- |  | -------------------- | ---- | - | ---------------------- | - | ---- | ---------------- |  | - | ---------------- | - |  | - | ------ | -
|                                          |  | Thirteen Weeks Ended |      |   | Twenty-Six Weeks Ended |  
|                                          |  | December 26,2009     |      |   | December 27,2008       |   |      | December 26,2009 |  |   | December 27,2008 |  
|Interest cost                             |  | $                    | 661  |   |                        | $ | 754  |                  |  | $ | 1,322            |   |  | $ | 1,508  |  
|Expected return on plan assets            |  |                      | (234 | ) |                        |   | (590 | )                |  |   | (469             | ) |  |   | (1,180 | )
|Amortization of deferred actuarial losses |  |                      | 333  |   |                        |   | 48   |                  |  |   | 645              |   |  |   | 96     |  
|                                          |  |                      |      |   |                        |   |      |                  |  |   |                  |   |  |   |        |  
|Net periodic pension (benefit) expense    |  | $                    | 760  |   |                        | $ | 212  |                  |  | $ | 1,498            |   |  | $ | 424    |  
|                                          |  |                      |      |   |                        |   |      |                  |  |   |                  |   |  |   |        |  

The Company contributed $825 and $513 during the thirteen weeks ended December 26, 2009 and
December 27, 2008, respectively, and $1,017 and $1,989 during the twenty-six weeks ended December 26, 2009 and December 27, 2008 respectively, to its defined benefit pension plans.

The Companys qualified and unqualified defined benefit plans were frozen effective June 30, 2007. The Company has a continuing obligation to fund
these plans and will continue to recognize net periodic pension expense.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



NOTE 10COMMITMENTS AND CONTINGENCIES

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

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

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

The Company leases certain properties consisting primarily of retail stores, distribution centers, and equipment with original terms ranging
from three to twenty-two 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.

Total rental expense for all operating leases was as follows:



|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       
|----------------------- |  | -------------------- | ----- | ---------------------- | - | ---------------- |  | ---------------- | ------ |  | - | ------
|                        |  | Thirteen weeks ended |       | Twenty-six weeks ended
|                        |  | December 26,2009     |       | December 27,2008       |   | December 26,2009 |  | December 27,2008
|Minimum rent expense    |  | $                    | 7,744 |                        | $ | 8,437            |  | $                | 13,035 |  | $ | 14,016
|Contingent rent expense |  |                      | 58    |                        |   | 62               |  |                  | 85     |  |   | 113   
|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       
|Total rent expense      |  | $                    | 7,802 |                        | $ | 8,499            |  | $                | 13,120 |  | $ | 14,129
|                        |  |                      |       |                        |   |                  |  |                  |        |  |   |       

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

The award is 100% vested, representing $6,034 which also reflects forfeitures. In each case, vesting occurred as long as the award recipient was an employee
of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate
net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable, non-cash consideration equal to the
aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change of control either at the time of the
change of control or, in some circumstances, at a later specified date. As of December 26, 2009, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



NOTE 11RELATED PARTY TRANSACTIONS

The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory
services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During both the thirteen weeks ended
December 26, 2009 and December 27, 2008 the Company paid $250 and during both the twenty-six weeks ended December 26, 2009 and December 27, 2008, the Company paid $500 in such management fees to Wasserstein and Highfields in
connection with this agreement. These amounts were charged to selling, general and administrative expenses  related party.

NOTE
12SEGMENT REPORTING

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

The Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts under the Harry and David®, Wolfermans® and
Cushmans® brands by marketing through catalogs, the Internet, business-to-business and consumer
telemarketing operations. The Companys catalogs reach customers throughout the United States and, to a lesser extent, in Canada. The Stores segment generates net sales of Harry and David®, Wolfermans®, and
Cushmans® brand merchandise at various retail locations (outlet stores, specialty stores, and a Country
Village Store). As of December 26, 2009, the Company operated 136 Harry and David stores and two Cushmans seasonal stores and sold selected store products through our direct-marketing channel. The Wholesale segment generates net sales by
selling Harry and David® brand, Wolfermans® brand and Cushmans®
brand wholesale products to national retailers as well as commercial sales of surplus non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon. 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 are grouped in the Other segment.

In order to conform to current year segment presentation, certain reclassifications and adjustments have been made to the prior year. The Company
reclassified $1,332 of revenue from commercial fruit sales from the Other segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. The
Company also reclassified certain activities related to Cushmans from the Direct Marketing and Stores segments to the Wholesale segment. The revenue reclassification resulted in Wholesale revenue increasing $2,943, and Direct Marketing and
Stores revenue decreasing by $2,471 and $472, respectively. In addition to these reclassifications, certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment in the Direct Marketing segment. The
restatement impacted goodwill as of December 27, 2008 and selling, general and administrative expenses and the provision for income taxes in both the quarter and year-to-date periods ended December 27, 2008 (see Note
3-Restatement for further information).

Net intersegment sales were $19,117 and $22,881 for the thirteen weeks ended December 26,
2009 and December 27, 2008, respectively and $33,457 and $38,946 for the twenty-six weeks ended December 26, 2009 and December 27, 2008, respectively. Total assets in the Other segment include corporate cash and cash equivalents,
short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets, including the Companys manufacturing and distribution facilities.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)





|                                                              |  |                 |         |        |   |        |           |  |       |        |  |                           |         |   |  |   |        
|------------------------------------------------------------- |  | --------------- | ------- | ------ | - | ------ | --------- |  | ----- | ------ |  | ------------------------- | ------- | - |  | - | -------
|Dollars in thousands                                          |  | DirectMarketing |         | Stores |   |        | Wholesale |  | Other |        |  | TotalContinuingOperations
|Thirteen weeks ended December 26, 2009                        |  |                 |         |        |   |        |           |  |       |        |  |                           |         |   |  |   |        
|Net external sales                                            |  | $               | 194,466 |        | $ | 56,780 |           |  | $     | 15,786 |  | $                         |        |   |  | $ | 267,032
|Depreciation and amortization expense                         |  |                 | 386     |        |   | 712    |           |  |       |       |  |                           | 3,800   |   |  |   | 4,898  
|Operating income from continuing operations                   |  |                 | 48,358  |        |   | 10,074 |           |  |       | 1,161  |  |                           |        |   |  |   | 59,593 
|Net interest expense from continuing operations               |  |                 |        |        |   |       |           |  |       |       |  |                           | 4,891   |   |  |   | 4,891  
|Income (loss) from continuing operations, before income taxes |  |                 | 48,638  |        |   | 10,105 |           |  |       | 1,170  |  |                           | (4,865  | ) |  |   | 55,048 
|Capital expenditures                                          |  |                 | 14      |        |   | 74     |           |  |       |       |  |                           | 871     |   |  |   | 959    
|Total assets                                                  |  |                 | 67,928  |        |   | 26,588 |           |  |       | 7,354  |  |                           | 250,856 |   |  |   | 352,726
|Thirteen weeks ended December 27, 2008                        |  |                 |         |        |   |        |           |  |       |        |  |                           |         |   |  |   |        
|Net external sales                                            |  | $               | 224,213 |        | $ | 60,642 |           |  | $     | 22,871 |  | $                         |        |   |  | $ | 307,726
|Depreciation and amortization expense                         |  |                 | 644     |        |   | 897    |           |  |       |       |  |                           | 3,983   |   |  |   | 5,524  
|Operating income from continuing operations                   |  |                 | 34,433  |        |   | 6,024  |           |  |       | 2,416  |  |                           |        |   |  |   | 42,873 
|Net interest expense (income) from continuing operations      |  |                 |        |        |   | (7     | )         |  |       |       |  |                           | 5,870   |   |  |   | 5,863  
|Income (loss) from continuing operations, before income taxes |  |                 | 45,162  |        |   | 7,432  |           |  |       | 2,855  |  |                           | (5,829  | ) |  |   | 49,620 
|Capital expenditures                                          |  |                 | 237     |        |   | 80     |           |  |       |       |  |                           | 2,356   |   |  |   | 2,673  
|Total assets                                                  |  |                 | 79,325  |        |   | 30,589 |           |  |       | 15,269 |  |                           | 265,564 |   |  |   | 390,747
|Twenty-six weeks ended December 26, 2009                      |  |                 |         |        |   |        |           |  |       |        |  |                           |         |   |  |   |        
|Net external sales                                            |  | $               | 214,138 |        | $ | 77,697 |           |  | $     | 21,461 |  | $                         |        |   |  | $ | 313,296
|Depreciation and amortization expense                         |  |                 | 420     |        |   | 1,510  |           |  |       |       |  |                           | 7,624   |   |  |   | 9,554  
|Operating income from continuing operations                   |  |                 | 36,126  |        |   | 4,604  |           |  |       | 1,492  |  |                           |        |   |  |   | 42,222 
|Net interest expense (income) from continuing operations      |  |                 |        |        |   |       |           |  |       |       |  |                           | 9,587   |   |  |   | 9,587  
|Income (loss) from continuing operations, before income taxes |  |                 | 36,407  |        |   | 4,633  |           |  |       | 1,500  |  |                           | (9,536  | ) |  |   | 33,004 
|Capital expenditures                                          |  |                 | 14      |        |   | 296    |           |  |       |       |  |                           | 1,142   |   |  |   | 1,452  
|Total assets                                                  |  |                 | 67,928  |        |   | 26,588 |           |  |       | 7,354  |  |                           | 250,856 |   |  |   | 352,726
|Twenty-six weeks ended December 27, 2008                      |  |                 |         |        |   |        |           |  |       |        |  |                           |         |   |  |   |        
|Net external sales                                            |  | $               | 247,320 |        | $ | 83,692 |           |  | $     | 29,321 |  | $                         |        |   |  | $ | 360,333
|Depreciation and amortization expense                         |  |                 | 910     |        |   | 1,819  |           |  |       |       |  |                           | 7,878   |   |  |   | 10,607 
|Operating income (loss) from continuing operations            |  |                 | 18,346  |        |   | (263   | )         |  |       | 3,084  |  |                           |        |   |  |   | 21,167 
|Net interest expense (income) from continuing operations      |  |                 |        |        |   | (7     | )         |  |       |       |  |                           | 11,607  |   |  |   | 11,600 
|Income (loss) from continuing operations, before income taxes |  |                 | 31,502  |        |   | 1,462  |           |  |       | 3,623  |  |                           | (11,581 | ) |  |   | 25,006 
|Capital expenditures                                          |  |                 | 239     |        |   | 532    |           |  |       |       |  |                           | 3,646   |   |  |   | 4,417  
|Total assets                                                  |  |                 | 79,325  |        |   | 30,589 |           |  |       | 15,269 |  |                           | 265,564 |   |  |   | 390,747

NOTE 13CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Companys wholly-owned subsidiary, Harry and David, has outstanding $58,170 of Senior Floating Rate Notes due 2012 and $140,192 of Senior Fixed
Rate Notes due 2013 (collectively, the Senior Notes). 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 and David under the equity method, (iii) Harry & David Holdings, Inc.s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis,
(iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of December 26, 2009, and June 27,
2009, and for the thirteen and twenty-six weeks ended December 26, 2009 and December 27, 2008, respectively. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of its existing and
future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain restrictions on the
payment of dividends, other payments or distributions by Harry and David and between the guarantors. Certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment. The restatement impacted goodwill
as of December 27, 2008 and selling, general and administrative expenses and the provision for income taxes in both the quarter and year-to-date periods ended December 27, 2008. For further information see Note 3-Restatement.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



NOTE 13CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of December 26, 2009



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 51      |   |                 | $ | 108,461  |                       |  | $ |                                 |   |  | $            |         |   |  | $ | 108,512 |  
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 10,021   |                       |  |   | 302                              |   |  |              |         |   |  |   | 10,323  |  
|Other receivables                                    |  |                                          |        |   |                 |   | 845      |                       |  |   | 915                              |   |  |              |         |   |  |   | 1,760   |  
|Inventories                                          |  |                                          |        |   |                 |   | 19,728   |                       |  |   | 14,122                           |   |  |              |         |   |  |   | 33,850  |  
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 3,781    |                       |  |   |                                 |   |  |              |         |   |  |   | 3,781   |  
|Deferred income taxes                                |  |                                          |        |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   |        |  
|Other current assets                                 |  |                                          | 76      |   |                 |   | 2,618    |                       |  |   | 3,693                            |   |  |              |         |   |  |   | 6,387   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 127     |   |                 |   | 145,454  |                       |  |   | 19,032                           |   |  |              |         |   |  |   | 164,613 |  
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 7,283    |                       |  |   | 129,063                          |   |  |              |         |   |  |   | 136,346 |  
|Goodwill                                             |  |                                          |        |   |                 |   | 12,236   |                       |  |   |                                 |   |  |              |         |   |  |   | 12,236  |  
|Intangibles, net                                     |  |                                          |        |   |                 |   | 32,616   |                       |  |   |                                 |   |  |              |         |   |  |   | 32,616  |  
|Investment in subsidiaries                           |  |                                          | 183,960 |   |                 |   | (83,010  | )                     |  |   |                                 |   |  |              | (100,950 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 4,789    |                       |  |   |                                 |   |  |              |         |   |  |   | 4,789   |  
|Deferred income taxes                                |  |                                          |        |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   |        |  
|Other assets                                         |  |                                          | 1,936   |   |                 |   | 34       |                       |  |   | 156                              |   |  |              |         |   |  |   | 2,126   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 186,023 |   |                 | $ | 119,402  |                       |  | $ | 148,251                          |   |  | $            | (100,950 | ) |  | $ | 352,726 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 26,827   |                       |  | $ | 5,679                            |   |  | $            |         |   |  | $ | 32,506  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 7,438    |                       |  |   | 6,670                            |   |  |              |         |   |  |   | 14,108  |  
|Income taxes payable                                 |  |                                          | 27,404  |   |                 |   | (94      | )                     |  |   | (9                               | ) |  |              |         |   |  |   | 27,301  |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 36,554   |                       |  |   |                                 |   |  |              |         |   |  |   | 36,554  |  
|Deferred income taxes                                |  |                                          | 3,124   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 3,124   |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 4,420    |                       |  |   |                                 |   |  |              |         |   |  |   | 4,420   |  
|Other accrued liabilities                            |  |                                          | 70      |   |                 |   | 8,514    |                       |  |   | 879                              |   |  |              |         |   |  |   | 9,463   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                 |   | 299      |                       |  |   |                                 |   |  |              |         |   |  |   | 299     |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 30,598  |   |                 |   | 83,958   |                       |  |   | 13,219                           |   |  |              |         |   |  |   | 127,775 |  
|Long-term debt and capital lease obligations         |  |                                          |        |   |                 |   | 198,519  |                       |  |   |                                 |   |  |              |         |   |  |   | 198,519 |  
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 27,179                           |   |  |              |         |   |  |   | 27,179  |  
|Deferred income taxes                                |  |                                          | 850     |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 850     |  
|Other long-term liabilities                          |  |                                          | 3,851   |   |                 |   | 3,896    |                       |  |   | 1,879                            |   |  |              |         |   |  |   | 9,626   |  
|Intercompany debt                                    |  |                                          | 161,947 |   |                 |   | (350,931 | )                     |  |   | 188,984                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 197,246 |   |                 |   | (64,558  | )                     |  |   | 231,261                          |   |  |              |         |   |  |   | 363,949 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 6,844   |   |                 |   | 232,518  |                       |  |   | 53,785                           |   |  |              | (286,303 | ) |  |   | 6,844   |  
|Accumulated other comprehensive loss, net of tax     |  |                                          | (9,402  | ) |                 |   |         |                       |  |   | (12,876                          | ) |  |              | 12,876   |   |  |   | (9,402  | )
|Accumulated deficit                                  |  |                                          | (8,675  | ) |                 |   | (48,559  | )                     |  |   | (123,919                         | ) |  |              | 172,478  |   |  |   | (8,675  | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | (11,223 | ) |                 |   | 183,960  |                       |  |   | (83,010                          | ) |  |              | (100,950 | ) |  |   | (11,223 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 186,023 |   |                 | $ | 119,402  |                       |  | $ | 148,251                          |   |  | $            | (100,950 | ) |  | $ | 352,726 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



18



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Balance Sheet

As of June 27, 2009



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 51      |   |                 | $ | 15,344   |                       |  | $ |                                 |   |  | $            |         |   |  | $ | 15,395  |  
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 1,350    |                       |  |   | 116                              |   |  |              |         |   |  |   | 1,466   |  
|Other receivables                                    |  |                                          |        |   |                 |   | 398      |                       |  |   | 1,664                            |   |  |              |         |   |  |   | 2,062   |  
|Inventories                                          |  |                                          |        |   |                 |   | 17,936   |                       |  |   | 26,802                           |   |  |              |         |   |  |   | 44,738  |  
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 2,657    |                       |  |   |                                 |   |  |              |         |   |  |   | 2,657   |  
|Deferred income taxes                                |  |                                          | 5,230   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 5,230   |  
|Other current assets                                 |  |                                          | 262     |   |                 |   | 1,572    |                       |  |   | 3,028                            |   |  |              |         |   |  |   | 4,862   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 5,543   |   |                 |   | 39,257   |                       |  |   | 31,610                           |   |  |              |         |   |  |   | 76,410  |  
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 9,208    |                       |  |   | 136,269                          |   |  |              |         |   |  |   | 145,477 |  
|Goodwill                                             |  |                                          |        |   |                 |   | 12,236   |                       |  |   |                                 |   |  |              |         |   |  |   | 12,236  |  
|Intangibles, net                                     |  |                                          |        |   |                 |   | 33,057   |                       |  |   |                                 |   |  |              |         |   |  |   | 33,057  |  
|Investment in subsidiaries                           |  |                                          | 150,370 |   |                 |   | (83,606  | )                     |  |   |                                 |   |  |              | (66,764  | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 5,975    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,975   |  
|Deferred income taxes                                |  |                                          | 1,423   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 1,423   |  
|Other assets                                         |  |                                          | 1,886   |   |                 |   | 32       |                       |  |   | 196                              |   |  |              |         |   |  |   | 2,114   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 159,222 |   |                 | $ | 16,159   |                       |  | $ | 168,075                          |   |  | $            | (66,764  | ) |  | $ | 276,692 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 4,322    |                       |  | $ | 6,849                            |   |  | $            |         |   |  | $ | 11,171  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 7,694    |                       |  |   | 6,411                            |   |  |              |         |   |  |   | 14,105  |  
|Income taxes payable                                 |  |                                          | 13,717  |   |                 |   | (78      | )                     |  |   | 4                                |   |  |              |         |   |  |   | 13,643  |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 16,317   |                       |  |   |                                 |   |  |              |         |   |  |   | 16,317  |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 4,485    |                       |  |   |                                 |   |  |              |         |   |  |   | 4,485   |  
|Other accrued liabilities                            |  |                                          | 176     |   |                 |   | 1,813    |                       |  |   | 991                              |   |  |              |         |   |  |   | 2,980   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                 |   | 147      |                       |  |   |                                 |   |  |              |         |   |  |   | 147     |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 13,893  |   |                 |   | 34,700   |                       |  |   | 14,255                           |   |  |              |         |   |  |   | 62,848  |  
|Long-term debt and capital lease obligations         |  |                                          |        |   |                 |   | 198,671  |                       |  |   |                                 |   |  |              |         |   |  |   | 198,671 |  
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 27,364                           |   |  |              |         |   |  |   | 27,364  |  
|Other long-term liabilities                          |  |                                          | 3,861   |   |                 |   | 4,121    |                       |  |   | 1,609                            |   |  |              |         |   |  |   | 9,591   |  
|Intercompany debt                                    |  |                                          | 163,250 |   |                 |   | (371,703 | )                     |  |   | 208,453                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 181,004 |   |                 |   | (134,211 | )                     |  |   | 251,681                          |   |  |              |         |   |  |   | 298,474 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 6,673   |   |                 |   | 232,518  |                       |  |   | 53,784                           |   |  |              | (286,302 | ) |  |   | 6,673   |  
|Accumulated other comprehensive loss, net of tax     |  |                                          | (9,795  | ) |                 |   |         |                       |  |   | (13,521                          | ) |  |              | 13,521   |   |  |   | (9,795  | )
|Accumulated deficit                                  |  |                                          | (18,670 | ) |                 |   | (82,149  | )                     |  |   | (123,869                         | ) |  |              | 206,018  |   |  |   | (18,670 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | (21,782 | ) |                 |   | 150,370  |                       |  |   | (83,606                          | ) |  |              | (66,764  | ) |  |   | (21,782 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 159,222 |   |                 | $ | 16,159   |                       |  | $ | 168,075                          |   |  | $            | (66,764  | ) |  | $ | 276,692 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



19



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 26, 2009



|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                | $ | 267,427 |                       |  | $ | 18,722                           |   |  | $            | (19,117 | ) |  | $ | 267,032 |  
|Cost of goods sold                                           |  |                                          |        |   |                |   | 136,216 |                       |  |   | 18,718                           |   |  |              | (19,117 | ) |  |   | 135,817 |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                |   | 131,211 |                       |  |   | 4                                |   |  |              |        |   |  |   | 131,215 |  
|Selling, general and administrative                          |  |                                          |        |   |                |   | 71,618  |                       |  |   | 4                                |   |  |              |        |   |  |   | 71,622  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income                                             |  |                                          |        |   |                |   | 59,593  |                       |  |   |                                 |   |  |              |        |   |  |   | 59,593  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          | (11     | ) |                |   |        |                       |  |   | (3                               | ) |  |              |        |   |  |   | (14     | )
|Interest expense                                             |  |                                          |        |   |                |   | 4,892   |                       |  |   | 13                               |   |  |              |        |   |  |   | 4,905   |  
|Other (income) expense, net                                  |  |                                          | (25     | ) |                |   | (321    | )                     |  |   |                                 |   |  |              |        |   |  |   | (346    | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | (55,012 | ) |                |   | 10      |                       |  |   |                                 |   |  |              | 55,002  |   |  |   |        |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | (55,048 | ) |                |   | 4,581   |                       |  |   | 10                               |   |  |              | 55,002  |   |  |   | 4,545   |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | 55,048  |   |                |   | 55,012  |                       |  |   | (10                              | ) |  |              | (55,002 | ) |  |   | 55,048  |  
|Provision for income taxes                                   |  |                                          | 23,329  |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 23,329  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  |                                          | 31,719  |   |                |   | 55,012  |                       |  |   | (10                              | ) |  |              | (55,002 | ) |  |   | 31,719  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



20



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 27, 2008 (Restated)



|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                             |  | $                                        |        |   |                | $ | 307,372 |                       |  | $ | 23,235                           |   |  | $            | (22,881 | ) |  | $ | 307,726 |  
|Cost of goods sold                                    |  |                                          |        |   |                |   | 160,752 |                       |  |   | 23,238                           |   |  |              | (22,881 | ) |  |   | 161,109 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                          |  |                                          |        |   |                |   | 146,620 |                       |  |   | (3                               | ) |  |              |        |   |  |   | 146,617 |  
|Selling, general and administrative                   |  |                                          |        |   |                |   | 103,747 |                       |  |   | (3                               | ) |  |              |        |   |  |   | 103,744 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income                                      |  |                                          |        |   |                |   | 42,873  |                       |  |   |                                 |   |  |              |        |   |  |   | 42,873  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                               |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                       |  |                                          |        |   |                |   |        |                       |  |   | (40                              | ) |  |              |        |   |  |   | (40     | )
|Interest expense                                      |  |                                          |        |   |                |   | 5,877   |                       |  |   | 26                               |   |  |              |        |   |  |   | 5,903   |  
|Other (income) expense, net                           |  |                                          | (37     | ) |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | (37     | )
|Gain on debt repurchases                              |  |                                          |        |   |                |   | (12,573 | )                     |  |   |                                 |   |  |              |        |   |  |   | (12,573 | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (49,763 | ) |                |   | (138    | )                     |  |   |                                 |   |  |              | 49,901  |   |  |   |        |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (49,800 | ) |                |   | (6,834  | )                     |  |   | (14                              | ) |  |              | 49,901  |   |  |   | (6,747  | )
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 49,800  |   |                |   | 49,707  |                       |  |   | 14                               |   |  |              | (49,901 | ) |  |   | 49,620  |  
|Provision for income taxes                            |  |                                          | 19,282  |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 19,282  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 30,518  |   |                |   | 49,707  |                       |  |   | 14                               |   |  |              | (49,901 | ) |  |   | 30,338  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Discontinued operations:                              |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                                          |        |   |                |   |        |                       |  |   | 21                               |   |  |              |        |   |  |   | 21      |  
|Operating income from discontinued operations         |  |                                          |        |   |                |   | 56      |                       |  |   | 103                              |   |  |              |        |   |  |   | 159     |  
|Provision for income taxes on discontinued operations |  |                                          | 70      |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 70      |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (70     | ) |                |   | 56      |                       |  |   | 124                              |   |  |              |        |   |  |   | 110     |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income                                            |  | $                                        | 30,448  |   |                | $ | 49,763  |                       |  | $ | 138                              |   |  | $            | (49,901 | ) |  | $ | 30,448  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Twenty-six Weeks Ended December 26, 2009



|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                | $ | 313,959 |                       |  | $ | 32,794                           |   |  | $            | (33,457 | ) |  | $ | 313,296 |  
|Cost of goods sold                                           |  |                                          |        |   |                |   | 166,511 |                       |  |   | 32,804                           |   |  |              | (33,457 | ) |  |   | 165,858 |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                |   | 147,448 |                       |  |   | (10                              | ) |  |              |        |   |  |   | 147,438 |  
|Selling, general and administrative                          |  |                                          |        |   |                |   | 105,226 |                       |  |   | (10                              | ) |  |              |        |   |  |   | 105,216 |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income                                             |  |                                          |        |   |                |   | 42,222  |                       |  |   |                                 |   |  |              |        |   |  |   | 42,222  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          | (11     | ) |                |   |        |                       |  |   | (6                               | ) |  |              |        |   |  |   | (17     | )
|Interest expense                                             |  |                                          |        |   |                |   | 9,596   |                       |  |   | 8                                |   |  |              |        |   |  |   | 9,604   |  
|Other (income) expense, net                                  |  |                                          | (50     | ) |                |   | (319    | )                     |  |   |                                 |   |  |              |        |   |  |   | (369    | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | (32,943 | ) |                |   | 2       |                       |  |   |                                 |   |  |              | 32,941  |   |  |   |        |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | (33,004 | ) |                |   | 9,279   |                       |  |   | 2                                |   |  |              | 32,941  |   |  |   | 9,218   |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | 33,004  |   |                |   | 32,943  |                       |  |   | (2                               | ) |  |              | (32,941 | ) |  |   | 33,004  |  
|Provision for income taxes                                   |  |                                          | 23,009  |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 23,009  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  |                                          | 9,995   |   |                |   | 32,943  |                       |  |   | (2                               | ) |  |              | (32,941 | ) |  |   | 9,995   |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Twenty-six Weeks Ended December 27, 2008 (Restated)



|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                             |  | $                                        |        |   |                | $ | 359,698 |                       |  | $ | 39,581                           |   |  | $            | (38,946 | ) |  | $ | 360,333 |  
|Cost of goods sold                                    |  |                                          |        |   |                |   | 196,865 |                       |  |   | 39,589                           |   |  |              | (38,946 | ) |  |   | 197,508 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                          |  |                                          |        |   |                |   | 162,833 |                       |  |   | (8                               | ) |  |              |        |   |  |   | 162,825 |  
|Selling, general and administrative                   |  |                                          |        |   |                |   | 141,666 |                       |  |   | (8                               | ) |  |              |        |   |  |   | 141,658 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income                                      |  |                                          |        |   |                |   | 21,167  |                       |  |   |                                 |   |  |              |        |   |  |   | 21,167  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                               |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                       |  |                                          |        |   |                |   |        |                       |  |   | (224                             | ) |  |              |        |   |  |   | (224    | )
|Interest expense                                      |  |                                          |        |   |                |   | 11,738  |                       |  |   | 86                               |   |  |              |        |   |  |   | 11,824  |  
|Other (income) expense, net                           |  |                                          | (22     | ) |                |   | (1      | )                     |  |   |                                 |   |  |              |        |   |  |   | (23     | )
|Gain on debt repurchases                              |  |                                          |        |   |                |   | (15,416 | )                     |  |   |                                 |   |  |              |        |   |  |   | (15,416 | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (25,365 | ) |                |   | (409    | )                     |  |   |                                 |   |  |              | 25,774  |   |  |   |        |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (25,387 | ) |                |   | (4,088  | )                     |  |   | (138                             | ) |  |              | 25,774  |   |  |   | (3,839  | )
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 25,387  |   |                |   | 25,255  |                       |  |   | 138                              |   |  |              | (25,774 | ) |  |   | 25,006  |  
|Provision for income taxes                            |  |                                          | 10,018  |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 10,018  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 15,369  |   |                |   | 25,255  |                       |  |   | 138                              |   |  |              | (25,774 | ) |  |   | 14,988  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Discontinued operations:                              |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                                          |        |   |                |   |        |                       |  |   | 42                               |   |  |              |        |   |  |   | 42      |  
|Operating income from discontinued operations         |  |                                          |        |   |                |   | 110     |                       |  |   | 229                              |   |  |              |        |   |  |   | 339     |  
|Provision for income taxes on discontinued operations |  |                                          | 146     |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 146     |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (146    | ) |                |   | 110     |                       |  |   | 271                              |   |  |              |        |   |  |   | 235     |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income                                            |  | $                                        | 15,223  |   |                | $ | 25,365  |                       |  | $ | 409                              |   |  | $            | (25,774 | ) |  | $ | 15,223  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



23



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 26, 2009



|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                    |  | Harry & DavidHoldings,
Inc.(Parent-Only) |        |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by operating activities           |  | $                                        | 1,305  |   |                | $ | 72,605  |                       |  | $ | 20,613                           |   |              | $ |  |  | $ | 94,523  |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Investing activities                                |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                         |  |                                          |       |   |                |   | (309    | )                     |  |   | (1,143                           | ) |              |   |  |  |   | (1,452  | )
|Proceeds from the sale of fixed assets              |  |                                          |       |   |                |   |        |                       |  |   | 46                               |   |              |   |  |  |   | 46      |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash used in investing activities               |  |                                          |       |   |                |   | (309    | )                     |  |   | (1,097                           | ) |              |   |  |  |   | (1,406  | )
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Financing activities                                |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                        |  |                                          |       |   |                |   | 85,000  |                       |  |   |                                 |   |              |   |  |  |   | 85,000  |  
|Repayments of revolving debt                        |  |                                          |       |   |                |   | (85,000 | )                     |  |   |                                 |   |              |   |  |  |   | (85,000 | )
|Net (payments) receipts on intercompany debt        |  |                                          | (1,305 | ) |                |   | 20,821  |                       |  |   | (19,516                          | ) |              |   |  |  |   |        |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |                                          | (1,305 | ) |                |   | 20,821  |                       |  |   | (19,516                          | ) |              |   |  |  |   |        |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Increase in cash and cash equivalents               |  |                                          |       |   |                |   | 93,117  |                       |  |   |                                 |   |              |   |  |  |   | 93,117  |  
|Cash and cash equivalents, beginning of period      |  |                                          | 51     |   |                |   | 15,344  |                       |  |   |                                 |   |              |   |  |  |   | 15,395  |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period            |  | $                                        | 51     |   |                | $ | 108,461 |                       |  | $ |                                 |   |              | $ |  |  | $ | 108,512 |  
|                                                    |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  



24



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 27, 2008



|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|------------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------------- | - | -------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                        |  | Harry & DavidHoldings,
Inc.(Parent-Only) |        |   | Harry andDavid |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) operating activities     |  | $                                        | (841   | ) |                | $ | 53,004   |                       |  | $ | 20,564                           |   |              | $ |  |  | $ | 72,727   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                             |  |                                          |       |   |                |   | (529     | )                     |  |   | (3,888                           | ) |              |   |  |  |   | (4,417   | )
|Acquisition of business                                 |  |                                          |       |   |                |   | (8,507   | )                     |  |   |                                 |   |              |   |  |  |   | (8,507   | )
|Proceeds from the sale of fixed assets                  |  |                                          |       |   |                |   |         |                       |  |   | 14                               |   |              |   |  |  |   | 14       |  
|Proceeds from the sale of held-to-maturity securities   |  |                                          |       |   |                |   |         |                       |  |   | 5,000                            |   |              |   |  |  |   | 5,000    |  
|Proceeds from the sale of available-for-sale securities |  |                                          |       |   |                |   |         |                       |  |   | 10,097                           |   |              |   |  |  |   | 10,097   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities     |  |                                          |       |   |                |   | (9,036   | )                     |  |   | 11,223                           |   |              |   |  |  |   | 2,187    |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Financing activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                            |  |                                          |       |   |                |   | 113,000  |                       |  |   |                                 |   |              |   |  |  |   | 113,000  |  
|Repayments of revolving debt                            |  |                                          |       |   |                |   | (113,000 | )                     |  |   |                                 |   |              |   |  |  |   | (113,000 | )
|Repayments of capital lease obligations                 |  |                                          |       |   |                |   | (157     | )                     |  |   |                                 |   |              |   |  |  |   | (157     | )
|Repurchases of long-term debt                           |  |                                          |       |   |                |   | (20,366  | )                     |  |   |                                 |   |              |   |  |  |   | (20,366  | )
|Proceeds from exercise of stock options                 |  |                                          |       |   |                |   |         |                       |  |   |                                 |   |              |   |  |  |   |         |  
|Net (payments) receipts on intercompany debt            |  |                                          | (678   | ) |                |   | 1,162    |                       |  |   | (484                             | ) |              |   |  |  |   |         |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities     |  |                                          | (678   | ) |                |   | (19,361  | )                     |  |   | (484                             | ) |              |   |  |  |   | (20,523  | )
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents        |  |                                          | (1,519 | ) |                |   | 24,607   |                       |  |   | 31,303                           |   |              |   |  |  |   | 54,391   |  
|Cash and cash equivalents, beginning of period          |  |                                          | 1,570  |   |                |   | 9,723    |                       |  |   | 29,499                           |   |              |   |  |  |   | 40,792   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period                |  | $                                        | 51     |   |                | $ | 34,330   |                       |  | $ | 60,802                           |   |              | $ |  |  | $ | 95,183   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  



25



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##### Table of Contents

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

FORWARD-LOOKING STATEMENTS

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

Risk factors that may affect our results include the Risk Factors set forth in Harry and Davids Annual Report on Form 10-K
for the fiscal year ended June 27, 2009, and those risks which may be described from time to time in Harry and Davids other filings with the Securities and Exchange Commission.

You should keep in mind that any forward-looking statement made by us in this Form 10-Q 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 Form 10-Q or elsewhere might not occur.

As used in this Item 2 and all of Part II, except as the context requires otherwise, reference to us, we, our and
our company refer to Harry & David Holdings, Inc. and its subsidiaries on a consolidated basis. Dollars presented in this Item 2. are in thousands.

OVERVIEW

General

We are a leading multi-channel specialty retailer and producer of branded premium gift-quality
fruit and gourmet food products and other gifts, which are marketed under the Harry and David®,
Wolfermans® and Cushmans® brands. We market our products through multiple channels, including direct marketing (primarily catalogs and Internet), business-to-business, our stores, and
wholesale distribution through select retailers.

MATTERS AFFECTING COMPARABILITY

A portion of our Direct Marketing sales are derived from Fruit-of-the-Month Club® product shipments. As such, results in this segment may vary between periods due to variations in fruit availability year-to-year, as well as other factors.

In order to conform to the current year presentation, we have reclassified revenue from commercial fruit sales from the Other
segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. We also reclassified certain activities related to Cushmans
from the Direct Marketing and Stores segments to the Wholesale segment. In addition, certain adjustments have been made to the prior year for the restatement of Wolfermans goodwill impairment in the
Direct Marketing segment. The restatement impacted goodwill as of December 27, 2008 and selling, general and administrative expenses and the provision for income taxes in both the quarter and year-to-date periods ended
December 27, 2008 (see Note 3-Restatement within Item 1 of Part I of this Form 10-Q for further information).



26



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##### Table of Contents

RESULTS OF OPERATIONS

NET SALES

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



|                 |  |                      |         |                 |                        |   |                  |   |                 |  |       |                  |  |                 |         |  |                  |   |                 |   |         |  |       |  
|---------------- |  | -------------------- | ------- | --------------- | ---------------------- | - | ---------------- | - | --------------- |  | ----- | ---------------- |  | --------------- | ------- |  | ---------------- | - | --------------- | - | ------- |  | ----- | -
|                 |  | Thirteen Weeks Ended |         |                 | Twenty-Six Weeks Ended |  
|                 |  | December 26,2009     |         | Percent ofTotal |                        |   | December 27,2008 |   | Percent ofTotal |  |       | December 26,2009 |  | Percent ofTotal |         |  | December 27,2008 |   | Percent ofTotal |  
|Direct Marketing |  | $                    | 194,466 |                 | 72.8                   | % |                  | $ | 224,213         |  | 72.9  | %                |  | $               | 214,138 |  | 68.4             | % |                 | $ | 247,320 |  | 68.6  | %
|Stores           |  |                      | 56,780  |                 | 21.3                   | % |                  |   | 60,642          |  | 19.7  | %                |  |                 | 77,697  |  | 24.8             | % |                 |   | 83,692  |  | 23.2  | %
|Wholesale        |  |                      | 15,786  |                 | 5.9                    | % |                  |   | 22,871          |  | 7.4   | %                |  |                 | 21,461  |  | 6.9              | % |                 |   | 29,321  |  | 8.1   | %
|                 |  |                      |         |                 |                        |   |                  |   |                 |  |       |                  |  |                 |         |  |                  |   |                 |   |         |  |       |  
|Total net sales  |  | $                    | 267,032 |                 | 100.0                  | % |                  | $ | 307,726         |  | 100.0 | %                |  | $               | 313,296 |  | 100.0            | % |                 | $ | 360,333 |  | 100.0 | %
|                 |  |                      |         |                 |                        |   |                  |   |                 |  |       |                  |  |                 |         |  |                  |   |                 |   |         |  |       |  

Net sales from continuing operations of $267,032 for the thirteen weeks ended December 26, 2009,
decreased $40,694, or 13.2%, from the thirteen weeks ended December 27, 2008. The decline in net sales was driven by lower volumes and higher markdowns and discounts in the Harry & David and Cushmans Direct Marketing brand sales,
Stores and the Wholesale segments, partially offset by an increase in Wolfermans Direct Marketing brand sales.

Net sales from
continuing operations of $313,296 for the twenty-six weeks ended December 26, 2009, decreased $47,037, or 13.1%, from the twenty-six weeks ended December 27, 2008. The decline was attributable to the same factors mentioned above for the
thirteen-week period.

Direct Marketing

Net sales in our Direct Marketing segment decreased $29,747, or 13.3%, from the thirteen weeks ended December 27, 2008 to the thirteen weeks ended December 26, 2009. The decline was driven by
lower average order size resulting from lower advertised retails and increased delivery discounts on higher unit volume.

Net sales in our
Direct Marketing segment decreased $33,182, or 13.4%, from the twenty-six weeks ended December 27, 2008 to the twenty-six weeks ended December 26, 2009. The decline was attributable to the same factors mentioned above for the thirteen-week
period.

Stores

Our Stores segment net sales decreased $3,862, representing a 6.4% decline in total sales and a comparable stores sales decline of 3.6% or approximately $2,090, from the thirteen weeks ended
December 27, 2008 to the thirteen weeks ended December 26, 2009. The decrease was driven by lower traffic and fewer stores, partially offset by higher conversion and average transaction size.

Our Stores segment net sales decreased $5,995, representing a 7.2% decline in total sales and a decline of 4.6% or approximately $3,689, on a comparable
store basis, from the twenty-six weeks ended December 27, 2008 to the twenty-six weeks ended December 26, 2009. The decrease was attributable to the same factors mentioned above for the thirteen-week period.

As of December 26, 2009, we had 136 stores in operation compared to 144 stores in operation during the same quarter last fiscal year. Not included in
the store counts above are two seasonal Cushmans stores, and three temporary stores that were tested in the same period last season.

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. However, when a store is closed for an extended period of time, it is no longer treated as a comparable store and is excluded
from comparable sales comparisons for that period.

Wholesale

Our Wholesale segment net sales declined $7,085, or 31.0%, from the thirteen weeks ended December 27, 2008 to the thirteen weeks ended December 26,
2009. The decline was primarily due to a decision not to renew holiday sales to a major customer.

Our Wholesale segment net sales declined
$7,860, or 26.8%, from the twenty-six weeks ended December 27, 2008 to the twenty-six weeks ended December 26, 2009. The decline was primarily due to the same factors mentioned above.



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##### Table of Contents

GROSS PROFIT

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



|                   |  |                      |         |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  
|------------------ |  | -------------------- | ------- | ------------------- | ---------------------- | - | ---------------- | - | ------------------- |  | ---- | ---------------- |  | ------------------- | ------- |  | ---------------- | - | ------------------- | - | ------- |  | ---- | -
|                   |  | Thirteen Weeks Ended |         |                     | Twenty-six Weeks Ended |  
|                   |  | December 26,2009     |         | Percent ofNet Sales |                        |   | December 27,2008 |   | Percent ofNet Sales |  |      | December 26,2009 |  | Percent ofNet Sales |         |  | December 27,2008 |   | Percent ofNet Sales |  
|Direct Marketing   |  | $                    | 99,470  |                     | 51.2                   | % |                  | $ | 113,328             |  | 50.5 | %                |  | $                   | 104,292 |  | 48.7             | % |                     | $ | 117,104 |  | 47.3 | %
|Stores             |  |                      | 28,912  |                     | 50.9                   | % |                  |   | 28,898              |  | 47.7 | %                |  |                     | 38,952  |  | 50.1             | % |                     |   | 39,652  |  | 47.4 | %
|Wholesale          |  |                      | 2,833   |                     | 17.9                   | % |                  |   | 4,391               |  | 19.2 | %                |  |                     | 4,194   |  | 19.5             | % |                     |   | 6,069   |  | 20.7 | %
|                   |  |                      |         |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  
|Total gross profit |  | $                    | 131,215 |                     | 49.1                   | % |                  | $ | 146,617             |  | 47.6 | %                |  | $                   | 147,438 |  | 47.1             | % |                     | $ | 162,825 |  | 45.2 | %
|                   |  |                      |         |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  

Gross profit from continuing operations decreased $15,402, or 10.5%, to $131,215 in the thirteen
weeks ended December 26, 2009, from $146,617 in the thirteen weeks ended December 27, 2008. Consolidated gross profit as a percentage of consolidated net sales was 49.1% in the thirteen-week period ended December 26, 2009, and 47.6%
in the thirteen-week period ended December 27, 2008.

Gross profit from continuing operations decreased $15,387, or 9.5%, to $147,438 in
the twenty-six weeks ended December 26, 2009, from $162,825 in the twenty-six weeks ended December 27, 2008. Consolidated gross profit as a percentage of consolidated net sales was 47.1% in the twenty-six week period ended
December 26, 2009, and 45.2% in the twenty-six week period ended December 27, 2008.

Direct Marketing

Our Direct Marketing segment gross profit decreased $13,858, or 12.2%, with gross margin improving to 51.2% in the thirteen weeks ended
December 26, 2009 from 50.5% in the thirteen weeks ended December 27, 2008. The gross profit decline was primarily due to lower sales volume and higher delivery discounts. The gross margin improvement was primarily due to lower inventory
reserves versus last year and the effect of lower overhead costs.

Our Direct Marketing segment gross profit decreased $12,812, or 10.9%, with
gross margin improving to 48.7% in the twenty-six weeks ended December 26, 2009 from 47.3% in the twenty-six weeks ended December 27, 2008. The gross profit decline and gross margin improvement were primarily due to the same factors
discussed above for the thirteen-week period.

Stores

Our Stores segment gross profit increased $14, or 0.0%, with gross margin improving to 50.9% in the thirteen weeks ended December 26, 2009 from 47.7% in
the thirteen weeks ended December 27, 2008. The gross profit and gross margin increases were primarily due to increases in retail pricing, lower overhead costs and lower product costs, with gross profit partially offset by lower traffic and the
impact of fewer stores.

Our Stores segment gross profit decreased $700, or 1.8%, with gross margin improving to 50.1% in the twenty-six weeks
ended December 26, 2009 from 47.4% in the twenty-six weeks ended December 27, 2008. The gross profit decline was primarily due to lower sales volumes and the impact of having fewer stores. The improvement in gross margin was attributable
to the same factors as described above.

Wholesale

Our Wholesale segment gross profit decreased $1,558 or 35.5%, while gross margin declined to 17.9% in the thirteen weeks ended December 26, 2009 from 19.2% in the thirteen weeks ended
December 27, 2008. The gross profit decrease was primarily attributable to lower sales volume. The decline in gross margin was primarily due to product mix in the lower sales volume, partially offset by lower overhead costs.

Our Wholesale segment gross profit decreased $1,875 or 30.9%, and gross margin decreased to 19.5% in the twenty-six weeks ended December 26, 2009 from
20.7% in the twenty-six weeks ended December 27, 2008. The decline in gross margin was attributable to the same factors as described above.



28



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##### Table of Contents

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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



|                                           |  |                      |        |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  
|------------------------------------------ |  | -------------------- | ------ | ------------------- | ---------------------- | - | ---------------- | - | ------------------- |  | ---- | ---------------- |  | ------------------- | ------- |  | ---------------- | - | ------------------- | - | ------- |  | ---- | -
|                                           |  | Thirteen Weeks Ended |        |                     | Twenty-six Weeks Ended |  
|                                           |  | December 26,2009     |        | Percent ofNet Sales |                        |   | December 27,2008 |   | Percent ofNet Sales |  |      | December 26,2009 |  | Percent ofNet Sales |         |  | December 27,2008 |   | Percent ofNet Sales |  
|                                           |  |                      |        |                     |                        |   |                  |  
|Direct Marketing                           |  | $                    | 51,112 |                     | 26.3                   | % |                  | $ | 78,896              |  | 35.2 | %                |  | $                   | 68,166  |  | 31.8             | % |                     | $ | 98,758  |  | 39.9 | %
|Stores                                     |  |                      | 18,838 |                     | 33.2                   | % |                  |   | 22,873              |  | 37.7 | %                |  |                     | 34,348  |  | 44.2             | % |                     |   | 39,915  |  | 47.7 | %
|Wholesale                                  |  |                      | 1,672  |                     | 10.6                   | % |                  |   | 1,975               |  | 8.6  | %                |  |                     | 2,702   |  | 12.6             | % |                     |   | 2,985   |  | 10.2 | %
|                                           |  |                      |        |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  
|Total selling, general, and administrative |  | $                    | 71,622 |                     | 26.8                   | % |                  | $ | 103,744             |  | 33.7 | %                |  | $                   | 105,216 |  | 33.6             | % |                     | $ | 141,658 |  | 39.3 | %
|                                           |  |                      |        |                     |                        |   |                  |   |                     |  |      |                  |  |                     |         |  |                  |   |                     |   |         |  |      |  

Selling, general and administrative expenses from continuing operations decreased $32,122, or 31.0%
in the thirteen weeks ended December 26, 2009 from the thirteen weeks ended December 27, 2008. The improvement in selling, general and administrative expenses was primarily due to lower advertising expenses, $13,848 of non-cash impairment
charges in the same period last year, lower outside service expenditures and lower payroll costs, partially offset by non-cash impairment charges for stores and the Eugene, Oregon call center closure this year.

Selling, general and administrative expenses from continuing operations decreased $36,442, or 25.7% in the twenty-six weeks ended December 26, 2009
from the twenty-six weeks ended December 27, 2008. The decrease in selling, general and administrative expenses was driven primarily by the factors discussed above.

Consolidated selling, general and administrative expenses as a percentage of consolidated net sales were 26.8% in the thirteen-week period ended December 26, 2009, compared to 33.7% in the
thirteen-week period ended December 27, 2008, and 33.6% in the twenty-six-week period ended December 26, 2009, compared to 39.3% in the twenty-six week period ended December 27, 2008.

OTHER (INCOME) EXPENSE

Other (income) expense consists of interest and other non-operating expense (income). The following table summarizes other (income) expense for the periods indicated (dollars in thousands).



|                             |  |                      |       |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|---------------------------- |  | -------------------- | ----- | - | ---------------------- | - | ------- | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                             |  | Thirteen weeks ended |       |   | Twenty-six weeks ended |  
|                             |  | December 26,2009     |       |   | December 27,2008       |   |         | December 26,2009 |  |   | December 27,2008 |  
|Net interest expense         |  | $                    | 4,891 |   |                        | $ | 5,863   |                  |  | $ | 9,587            |   |  | $ | 11,600  |  
|Gain on debt prepayment      |  |                      |      |   |                        |   | (12,573 | )                |  |   |                 |   |  |   | (15,416 | )
|Other (income) expense, net  |  |                      | (346  | ) |                        |   | (37     | )                |  |   | (369             | ) |  |   | (23     | )
|                             |  |                      |       |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|Total other (income) expense |  | $                    | 4,545 |   |                        | $ | (6,747  | )                |  | $ | 9,218            |   |  | $ | (3,839  | )
|                             |  |                      |       |   |                        |   |         |                  |  |   |                  |   |  |   |         |  

During the thirteen weeks ended December 27, 2008, the Company purchased $26,438 in
aggregate principal amounts of fixed and floating rate Senior Notes in open-market purchases for $13,259. This debt prepayment resulted in a net gain of $12,573, comprised of a $13,179 discount on the repayment of outstanding principal, partially
offset by the write-off of $606 of unamortized deferred financing costs.

During the thirteen weeks ended September 27, 2008,
the Company purchased $10,200 of fixed rate senior notes in open market purchases for $7,107. This debt prepayment resulted in a net gain of $2,843, comprised of a $3,093 discount on the repayment of outstanding principal, partially offset by the
write-off of $250 of unamortized deferred financing costs.

INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to
anticipated permanent differences. The effective tax rates from continuing operations for the second quarter of fiscal 2010 and fiscal 2009 were 42.4% and 38.9%, respectively. For the second quarter of fiscal 2010, the difference in the effective
rate and the federal statutory rate is primarily due to a valuation allowance adjustment of $9,042, relating to certain deferred tax assets, and state tax obligations of $821.

We routinely review the future realization of tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies and projected future taxable income. As of
December 26, 2009, we believe that a valuation allowance adjustment of $9,042 is required to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these analyses requires significant judgment by
management about future operating results, including revenues, margins and operating expenses.

EBITDA

EBITDA is defined as earnings before net interest expense, income taxes, depreciation, and amortization. Our EBITDA from continuing operations for the
thirteen-week period ended December 26, 2009 increased $3,830 to $64,837 from $61,007 primarily due to our operating performance.



29



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##### Table of Contents

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



|                                                                                 |  |                      |         |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | -------------------- | ------- | - | ---------------------- | - | ------- | ---------------- |  | - | ---------------- | - |  | - | ------- | -
|                                                                                 |  | Thirteen Weeks Ended |         |   | Twenty-Six Weeks Ended |  
|                                                                                 |  | December 26,2009     |         |   | December 27,2008       |   |         | December 26,2009 |  |   | December 27,2008 |  
|Net income from continuing operations                                            |  | $                    | 31,719  |   |                        | $ | 30,338  |                  |  | $ | 9,995            |   |  | $ | 14,988  |  
|Interest expense, net from continuing operations                                 |  |                      | 4,891   |   |                        |   | 5,863   |                  |  |   | 9,587            |   |  |   | 11,600  |  
|Provision for income taxes from continuing operations                            |  |                      | 23,329  |   |                        |   | 19,282  |                  |  |   | 23,009           |   |  |   | 10,018  |  
|Depreciation and amortization from continuing operations                         |  |                      | 4,898   |   |                        |   | 5,524   |                  |  |   | 9,554            |   |  |   | 10,607  |  
|                                                                                 |  |                      |         |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|EBITDA from continuing operations                                                |  | $                    | 64,837  |   |                        | $ | 61,007  |                  |  | $ | 52,145           |   |  | $ | 47,213  |  
|Interest expense, net from continuing operations                                 |  |                      | (4,891  | ) |                        |   | (5,863  | )                |  |   | (9,587           | ) |  |   | (11,600 | )
|Provision for income taxes from continuing operations                            |  |                      | (23,329 | ) |                        |   | (19,282 | )                |  |   | (23,009          | ) |  |   | (10,018 | )
|Amortization of deferred financing costs                                         |  |                      | 593     |   |                        |   | 604     |                  |  |   | 1,186            |   |  |   | 1,248   |  
|Stock option compensation expense                                                |  |                      | 112     |   |                        |   | 119     |                  |  |   | 171              |   |  |   | 238     |  
|Loss on impairment and disposal of fixed assets and other long-lived assets, net |  |                      | 883     |   |                        |   | 13,853  |                  |  |   | 899              |   |  |   | 13,848  |  
|Gain on sale of short-term investments                                           |  |                      |        |   |                        |   |        |                  |  |   |                 |   |  |   | (64     | )
|Deferred income taxes                                                            |  |                      | 3,060   |   |                        |   | (2,759  | )                |  |   | 10,375           |   |  |   | 2,945   |  
|Amortization of deferred pension loss                                            |  |                      | 333     |   |                        |   | 29      |                  |  |   | 645              |   |  |   | 58      |  
|Gain on debt repayment                                                           |  |                      |        |   |                        |   | (12,573 | )                |  |   |                 |   |  |   | (15,416 | )
|Changes in operating assets and liabilities from continuing operations           |  |                      | 112,885 |   |                        |   | 120,285 |                  |  |   | 61,698           |   |  |   | 43,540  |  
|                                                                                 |  |                      |         |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|Net cash provided by operating activities from continuing operations             |  |                      | 154,483 |   |                        |   | 155,420 |                  |  |   | 94,523           |   |  |   | 71,992  |  
|Net cash provided by discontinued operations                                     |  |                      |        |   |                        |   | 245     |                  |  |   |                 |   |  |   | 735     |  
|                                                                                 |  |                      |         |   |                        |   |         |                  |  |   |                  |   |  |   |         |  
|Net cash provided by operating activities                                        |  | $                    | 154,483 |   |                        | $ | 155,665 |                  |  | $ | 94,523           |   |  | $ | 72,727  |  
|                                                                                 |  |                      |         |   |                        |   |         |                  |  |   |                  |   |  |   |         |  

In the thirteen-week period ended December 26, 2009, net income and EBITDA from continuing
operations included:



| |  |  | $225 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $250 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $999 in severance and re-organization payroll and benefits;
| | - |  | -----------------------------------------------------------



| |  |  | $883 loss on impairment and disposal of fixed assets and other long-lived assets, net;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | $278 related to store closure expenses and lease termination costs for our Eugene, Oregon call center;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | $285 gain on legal settlement;
| | - |  | ------------------------------



| |  |  | $25 gain related to certain income tax reserves; and
| | - |  | ----------------------------------------------------



| |  |  | $110 of state net worth tax adjustments.
| | - |  | ----------------------------------------

In the thirteen-week period ended December 27, 2008, net income and EBITDA from continuing operations included:



| |  |  | $617 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $250 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $393 of integration expenses related to our acquisitions;
| | - |  | ---------------------------------------------------------



| |  |  | $48 loss on disposal of fixed assets;
| | - |  | -------------------------------------



| |  |  | $12,573 net gain on repurchases of long-term debt;
| | - |  | --------------------------------------------------



| |  |  | $100 of severance and re-organization payroll and benefits;
| | - |  | -----------------------------------------------------------



| |  |  | $13,805 of expenses recognized for impaired assets;
| | - |  | ---------------------------------------------------



30



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##### Table of Contents

| |  |  | $5,428 of inventory reserve expenses;
| | - |  | -------------------------------------



| |  |  | $22 gain on certain income tax reserves;
| | - |  | ----------------------------------------



| |  |  | $89 of expenses related to land rezoning; and
| | - |  | ---------------------------------------------



| |  |  | $82 gain on reversal of expense associated with a leased facility identified for closure.
| | - |  | -----------------------------------------------------------------------------------------

In the twenty-six week period ended December 26, 2009, net income and EBITDA from continuing operations included:



| |  |  | $421 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $500 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $886 in severance and re-organization payroll and benefit expenses;
| | - |  | -------------------------------------------------------------------



| |  |  | $89 in approved recruiting and relocation expenses;
| | - |  | ---------------------------------------------------



| |  |  | $899 loss on impairment and disposal of fixed assets and other long-lived assets, net
| | - |  | -------------------------------------------------------------------------------------



| |  |  | $278 related to store closure expenses and lease termination costs for our Eugene, Oregon call center;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | $285 gain on legal settlement;
| | - |  | ------------------------------



| |  |  | $50 gain related certain income tax reserves; and
| | - |  | -------------------------------------------------



| |  |  | $110 of state net worth tax adjustments.
| | - |  | ----------------------------------------

In the twenty-six week period ended December 27, 2008, net income and EBITDA from continuing operations included:



| |  |  | $1,049 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | $500 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $300 of income associated with a vendor settlement;
| | - |  | ---------------------------------------------------



| |  |  | $487 of integration expenses related to our acquisitions;
| | - |  | ---------------------------------------------------------



| |  |  | $87 of expense related to inventory step-up amortization related to our acquisition;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | $43 loss on disposal of fixed assets;
| | - |  | -------------------------------------



| |  |  | $15,416 net gain on repurchases of long-term debt;
| | - |  | --------------------------------------------------



| |  |  | $416 of severance and re-organization payroll and benefits;
| | - |  | -----------------------------------------------------------



| |  |  | $13,805 of expenses recognized for impaired assets;
| | - |  | ---------------------------------------------------



| |  |  | $5,428 of inventory reserve expenses;
| | - |  | -------------------------------------



| |  |  | $22 gain on certain income tax reserves; and
| | - |  | --------------------------------------------



| |  |  | $89 of expenses related to land rezoning.
| | - |  | -----------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity and capital resource needs
are to service our debt, finance working capital and make capital expenditures. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit facility to finance operations leading up to the December holiday selling
season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during our
second fiscal quarter because of the holiday selling season (see Seasonality below).

Based upon our current operations and
historical results, we believe that our cash flow from operations, together with available cash and borrowings under our revolving credit facility, will be adequate to meet our anticipated requirements for working capital, capital expenditures,
lease payments and scheduled interest payments and to fund our future growth for the next twelve months. Certain loan covenants in the revolving credit facility and in the indenture governing the Senior Notes restrict the transfer of funds from the
direct and indirect subsidiaries to the parent in the form of cash dividends, loans or advances. To the extent additional funding is required beyond the twelve-month horizon, we expect to seek additional financing in the public or private debt or
equity capital markets; however, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or
at all. Our equity sponsors, Wasserstein & Co. and Highfields Capital Management, are not obligated to provide financing to us. If we are unable to obtain the capital we require to implement our business strategy on acceptable terms or in a
timely manner, we would attempt to take appropriate actions to tailor our activities to match our available financing, including revising our business strategy and future growth plans to accommodate the amount of available financing.



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Cash Flows Provided by Operating Activities from Continuing Operations

Cash provided by operating activities from continuing operations totaled $94,523 in the twenty-six week period ended December 26, 2009, compared to
$71,992 in the twenty-six week period ended December 27, 2008. The increase in cash provided by continuing operations was primarily attributable to improved working capital utilization coupled with higher operating income driven by the factors
previously described in Results of Operations.

Cash Flows Provided by (Used in) Investing Activities from
Continuing Operations

Cash used in investing activities from continuing operations totaled $1,406 for the twenty-six weeks ended
December 26, 2009 compared to cash flows provided by investing activities from continuing operations totaled $2,187 in the twenty-six weeks ended December 27, 2008. Investing activities in the first half of fiscal 2010 consisted primarily
of capital expenditures. Investing activities in the first half of fiscal 2009 consisted primarily of proceeds on short-term investments, partially offset by cash used for the Cushmans acquisition and other capital expenditures.

Cash Flows Used in Financing Activities from Continuing Operations

Cash used in financing activities from continuing operations totaled $20,523 for the twenty-six weeks ended December 27, 2008 and were primarily comprised of the repurchases of our Senior Notes.

Cash Flows from Discontinued Operations

Cash flows provided by operating activities from discontinued operations totaled $735 for the twenty-six weeks ended December 27, 2008 and was primarily comprised of cash payments made to us for
transitional services we provided to the buyers of Jackson & Perkins.

The divested Jackson & Perkins business did not
impact our cash flows during the twenty-six weeks ended December 26, 2009.

Borrowing Arrangements

Revolving Credit Facility

Our principal sources of liquidity are available cash, cash flows from operations and borrowings under our revolving credit facility entered into by our subsidiary, Harry and David. The revolving
credit facility has a maturity date of March 20, 2011. Our ability to borrow under the revolving credit facility is subject to compliance with the borrowing base and with financial covenants and other customary conditions, including that no
default under the facility shall have occurred and be continuing. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate, based on the higher of the federal funds rate plus 0.5% or the corporate base
lending rate of UBS AG, or a Eurodollar rate, based on the rate offered in the London interbank market (LIBOR), plus in each case a borrowing margin determined based on our consolidated leverage ratio. Due to the seasonal nature of our
business, we draw on our revolving credit facility to provide seasonal working capital to support inventory buildup and catalog production in advance of the holiday selling season and for other general corporate purposes. We have typically generated
substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 25thof each year. Cash generated during the holiday selling season is also typically used to fund our operations for
several months during the post-holiday selling season, until we begin to build inventories and other working capital components to support our next holiday selling season.

As of December 26, 2009, unused borrowings under the revolving credit facility were $123,989, with borrowings amounting to $0 and $1,011 in outstanding letters of credit. The maximum available borrowing
under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at December 26, 2009 was $13,876. We are required to pay a commitment fee equal to 0.375% per annum on the daily
average unused line of credit. The commitment fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the condensed consolidated statement of operations.

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

The revolving credit facility requires mandatory prepayments upon the receipt of proceeds from certain assets sales, casualty events and debt offerings. The
revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities of this type, including, but not limited to, limitations on the incurrence of indebtedness, capital expenditures, asset
dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates.



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In addition, the revolving credit facility requires that, on a consolidated basis, we
maintain as of December 31stan available cash
balance (defined as all cash, cash equivalents and short-term investments, minus all accounts payable) of $50,000, failing which we are required to meet and maintain a minimum fixed charge coverage ratio, subject to certain definitions and
conditions. As of December 31, 2009, we were in compliance with this covenant. We also are limited to the amount of capital expenditures in each fiscal year, subject to certain adjustments, through the term of the revolving credit facility.

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

At December 31, 2009, we were in compliance with all of our covenants under the Credit Agreement.

Long-term Debt

As
of December 26, 2009, Harry and David, our wholly owned subsidiary, has outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012, and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the
Senior Notes). The $58,170 in Senior Floating Rate Notes accrues interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 5.26% at December 26, 2009. The $140,192 in Senior
Fixed Rate Notes accrues interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first of March and December.

The Senior Notes are the senior unsecured obligations of Harry and David and are guaranteed on a senior unsecured basis by us and all of Harry and Davids subsidiaries.

The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of
indebtedness, engaging in asset dispositions or acquisitions, making investments, and our and our subsidiaries ability to pay dividends and other restricted payments as well as our ability to incur liens and transactions with affiliates. Our
ability to comply with these covenants may be affected by events beyond our control, such as those described under Item 1A. -Risk Factors in our Annual Report on Form 10-K. If we do not remain in compliance with these covenants, we may
not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could accelerate all amounts outstanding to be immediately due and payable.

At December 26, 2009, we were in compliance with all of our covenants under the indenture. Our debt service requirements consist primarily of interest
expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under
various operating leases and repayment of any borrowings under our revolving credit facility.

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

Certain funds sponsored by Wasserstein Partners, LP, and its affiliates (Wasserstein) and certain funds sponsored by Highfields Capital
Management LP (Highfields) currently own approximately 63% and 34%, respectively, of our common stock. Wasserstein and/or Highfields have purchased, and may continue to purchase, our outstanding Senior Notes in open market purchases,
privately negotiated transactions or otherwise. Such purchases will depend on prevailing market conditions and other factors, and there can be no assurance as to when or whether any such purchases may occur. The amounts involved may be material.

Seasonality

Historically, our business has been subject to substantial seasonal variations in demand. 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.



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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, lower than expected 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 Annual Report on Form 10-K. The estimates and assumptions are evaluated on an ongoing basis and are based on
historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

For details regarding recent accounting pronouncements, see Note 4  New Accounting Pronouncements and Adoptions within Part I of this Form 10-Q.

NON-GAAP FINANCIAL MEASURE: EBITDA

Our measure of EBITDA meets the definition of a non-GAAP financial measure.

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

We use EBITDA, in conjunction with 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 a comparative measure.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

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.



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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 before taxes, capital spending and changes in working capital generated by the total equity employed in our company. We believe return on capital employed is a useful measure because it indicates the total returns generated by our
business, which, when viewed together with profit margin information, allows us to better evaluate profitability and profit margin trends.

As
a performance measure, we also use return on capital employed to assist us in making budgeting decisions related to how debt and equity capital is being employed and how it will be employed in the future. Historical measures of return on capital
employed, which include 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. 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 normal 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 principal amount due for our floating rate notes as of December 26, 2009, a 1.0% change
in the interest rate on our variable rate debt would result in a $1,832 corresponding effect on our interest expense on an annual basis.

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 manage our commodity risk, we typically have multiple sources for these commodities.



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

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 26, 2009. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of December 26,
2009, 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.

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



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

None.



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

There have been no material
changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 27, 2009.



|ITEM 2. | UNREGISTERED SALES 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
|------- | --------



|     |  |                                                                                  
|---- |  | ---------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer                                     
|     | 
|31.2 |  | Certification of Principal Financial Officer                                     
|     | 
|32.1 |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer



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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/    EDWARD F.
DUNLAPEdward F. DunlapChief Financial Officer


February 4, 2010



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