##### Table of Contents

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United States Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended December 30, 2006

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



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Harry & David Holdings,
Inc.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                      |  | 20-0884389                            
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|2500 South Pacific Highway, Medford, OR  |  | 97501     
|(Address of Principal Executive Offices) |  | (Zip Code)

(541) 864-2362

(Registrants telephone number including area code)

None

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



---

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

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

Large accelerated ̈Accelerated
filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes ̈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 8, 2007
|Common stock $0.01 par value |  | 1,031,673                         



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##### Table of Contents

HARRY & DAVID H
OLDINGS, INC. AND SUBSIDIARIES

INDEX



| |  |  |  |                               |  |          |  |  |  |                                                                                                                                           |  |     
| |  |  |  | ----------------------------- |  | -------- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | ----
| |  |  |  |                               |  |          |  |  |  |                                                                                                                                           |  | Page
| |  |  |  | Part I. Financial Information |  |         
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 1.  |  |  |  | Condensed Consolidated Financial Statements                                                                                               |  | 3   
| |  |  |  |                               |  |         
| |  |  |  |                               |  |          |  |  |  | Condensed Consolidated Balance Sheets  as of December 30, 2006, June 24, 2006 and December 24, 2005                                      |  | 3   
| |  |  |  |                               |  |         
| |  |  |  |                               |  |          |  |  |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended December 30, 2006 and December 24, 2005                            |  | 4   
| |  |  |  |                               |  |         
| |  |  |  |                               |  |          |  |  |  | Condensed Consolidated Statements of Operations  Twenty-seven Weeks ended December 30, 2006 and Twenty-six Weeks ended December 24, 2005 |  | 5   
| |  |  |  |                               |  |         
| |  |  |  |                               |  |          |  |  |  | Condensed Consolidated Statements of Cash Flows  Twenty-seven Weeks ended December 30, 2006 and Twenty-six Weeks ended December 24, 2005 |  | 6   
| |  |  |  |                               |  |         
| |  |  |  |                               |  |          |  |  |  | Notes to Condensed Consolidated Financial Statements                                                                                      |  | 7   
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 2.  |  |  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                     |  | 22  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 3.  |  |  |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                |  | 36  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 4.  |  |  |  | Controls and Procedures                                                                                                                   |  | 37  
| |  |  | 
| |  |  |  | Part II. Other Information    |  |         
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 1.  |  |  |  | Legal Proceedings                                                                                                                         |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 1A. |  |  |  | Risk Factors                                                                                                                              |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 2.  |  |  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                               |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 3.  |  |  |  | Defaults Upon Senior Securities                                                                                                           |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 4.  |  |  |  | Submission of Matters to a Vote of Security Holders                                                                                       |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 5.  |  |  |  | Other Information                                                                                                                         |  | 38  
| |  |  |  |                               |  |         
| |  |  |  |                               |  | Item 6.  |  |  |  | Exhibits                                                                                                                                  |  | 38  



2



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##### Table of Contents

PART I. FINANCIA
L INFORMATION



|ITEM 1. | FINANCIAL STATEMEN
TS
|------- | ---------------------

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Bala
nce Sheets

(in Thousands, Except Share and per Share Data)



|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | ------------ | - | ------- | ------------------------- |  | - | -------
|                                                                                                                                                                                                     |  | December 30,2006Unaudited |         | June 24,2006 |   |         | December 24,2005Unaudited
|Assets                                                                                                                                                                                               |  |                           |         |              |   |         |                           |  |   |        
|Current assets:                                                                                                                                                                                      |  |                           |         |              |   |         |                           |  |   |        
|Cash and cash equivalents                                                                                                                                                                            |  | $                         | 164,049 |              | $ | 23,802  |                           |  | $ | 147,141
|Trade accounts receivable, net                                                                                                                                                                       |  |                           | 29,100  |              |   | 8,926   |                           |  |   | 27,874 
|Other receivables                                                                                                                                                                                    |  |                           | 2,440   |              |   | 3,059   |                           |  |   | 5,617  
|Inventories, net                                                                                                                                                                                     |  |                           | 64,230  |              |   | 74,117  |                           |  |   | 70,197 
|Prepaid catalog expenses                                                                                                                                                                             |  |                           | 4,501   |              |   | 3,066   |                           |  |   | 5,376  
|Income taxes receivable                                                                                                                                                                              |  |                           | 63      |              |   | 556     |                           |  |   | 381    
|Other current assets                                                                                                                                                                                 |  |                           | 13,179  |              |   | 10,561  |                           |  |   | 25,177 
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total current assets                                                                                                                                                                                 |  |                           | 277,562 |              |   | 124,087 |                           |  |   | 281,763
|Fixed assets, net                                                                                                                                                                                    |  |                           | 175,680 |              |   | 174,010 |                           |  |   | 174,231
|Intangibles, net                                                                                                                                                                                     |  |                           | 31,671  |              |   | 32,657  |                           |  |   | 34,023 
|Deferred financing costs, net                                                                                                                                                                        |  |                           | 13,461  |              |   | 14,813  |                           |  |   | 14,317 
|Deferred income taxes                                                                                                                                                                                |  |                           | 2,608   |              |   | 9,293   |                           |  |   | 8,663  
|Other assets                                                                                                                                                                                         |  |                           | 520     |              |   | 488     |                           |  |   | 573    
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total assets                                                                                                                                                                                         |  | $                         | 501,502 |              | $ | 355,348 |                           |  | $ | 513,570
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Liabilities and stockholders equity (deficit)                                                                                                                                                       |  |                           |         |              |   |         |                           |  |   |        
|Current liabilities:                                                                                                                                                                                 |  |                           |         |              |   |         |                           |  |   |        
|Accounts payable                                                                                                                                                                                     |  | $                         | 65,806  |              | $ | 26,455  |                           |  | $ | 74,249 
|Accrued payroll and benefits                                                                                                                                                                         |  |                           | 19,720  |              |   | 14,895  |                           |  |   | 18,449 
|Deferred revenue                                                                                                                                                                                     |  |                           | 41,055  |              |   | 17,188  |                           |  |   | 41,084 
|Deferred income taxes                                                                                                                                                                                |  |                           | 56,061  |              |   | 26,442  |                           |  |   | 45,272 
|Accrued interest                                                                                                                                                                                     |  |                           | 5,915   |              |   | 5,604   |                           |  |   | 5,769  
|Accrued restructuring costs                                                                                                                                                                          |  |                           |        |              |   |        |                           |  |   | 1,196  
|Other accrued liabilities                                                                                                                                                                            |  |                           | 18,770  |              |   | 11,474  |                           |  |   | 36,016 
|Notes payable                                                                                                                                                                                        |  |                           |        |              |   |        |                           |  |   | 15     
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total current liabilities                                                                                                                                                                            |  |                           | 207,327 |              |   | 102,058 |                           |  |   | 222,050
|Long-term debt                                                                                                                                                                                       |  |                           | 245,000 |              |   | 245,000 |                           |  |   | 245,000
|Accrued pension liability                                                                                                                                                                            |  |                           | 18,368  |              |   | 35,621  |                           |  |   | 33,389 
|Other long-term liabilities                                                                                                                                                                          |  |                           | 3,292   |              |   | 3,119   |                           |  |   | 2,711  
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total liabilities                                                                                                                                                                                    |  |                           | 473,987 |              |   | 385,798 |                           |  |   | 503,150
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Commitments and contingencies                                                                                                                                                                        |  |                           |         |              |   |         |                           |  |   |        
|Stockholders equity (deficit)                                                                                                                                                                       |  |                           |         |              |   |         |                           |  |   |        
|Common stock, $0.01 par value, 1,500,000 shares authorized; 1,031,673, 1,019,929 and 1,014,888 shares issued and outstanding at
December 30, 2006, June 24, 2006 and December 24, 2005, respectively |  |                           | 10      |              |   | 10      |                           |  |   | 10     
|Additional paid-in capital                                                                                                                                                                           |  |                           | 5,233   |              |   | 3,954   |                           |  |   | 3,320  
|Retained earnings (accumulated deficit)                                                                                                                                                              |  |                           | 22,272  |              |   | (34,414 | )                         |  |   | 7,090  
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total stockholders equity (deficit)                                                                                                                                                                 |  |                           | 27,515  |              |   | (30,450 | )                         |  |   | 10,420 
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        
|Total liabilities and stockholders equity (deficit)                                                                                                                                                 |  | $                         | 501,502 |              | $ | 355,348 |                           |  | $ | 513,570
|                                                                                                                                                                                                     |  |                           |         |              |   |         |                           |  |   |        

See accompanying notes.



3



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Except S
hare and per Share Data)

(Unaudited)



|                                                        |  |                      |           |   |                   |   |           |  
|------------------------------------------------------- |  | -------------------- | --------- | - | ----------------- | - | --------- | -
|                                                        |  | Thirteen weeks ended |          
|                                                        |  | December 30, 2006    |           |   | December 24, 2005 |  
|Net sales                                               |  | $                    | 389,152   |   |                   | $ | 362,392   |  
|Cost of good sold                                       |  |                      | 185,883   |   |                   |   | 185,211   |  
|                                                        |  |                      |           |   |                   |   |           |  
|Gross profit                                            |  |                      | 203,269   |   |                   |   | 177,181   |  
|                                                        |  |                      |           |   |                   |   |           |  
|Operating expenses:                                     |  |                      |           |   |                   |   |           |  
|Selling, general and administrative                     |  |                      | 92,788    |   |                   |   | 86,529    |  
|Selling, general and administrative  related party     |  |                      | 250       |   |                   |   | 250       |  
|                                                        |  |                      |           |   |                   |   |           |  
|                                                        |  |                      | 93,038    |   |                   |   | 86,779    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Operating income                                        |  |                      | 110,231   |   |                   |   | 90,402    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Other (income) expense:                                 |  |                      |           |   |                   |   |           |  
|Interest income                                         |  |                      | (319      | ) |                   |   | (156      | )
|Interest expense                                        |  |                      | 7,742     |   |                   |   | 7,104     |  
|Other (income) expense                                  |  |                      | (77       | ) |                   |   | 2,180     |  
|                                                        |  |                      |           |   |                   |   |           |  
|                                                        |  |                      | 7,346     |   |                   |   | 9,128     |  
|                                                        |  |                      |           |   |                   |   |           |  
|Income before income taxes                              |  |                      | 102,885   |   |                   |   | 81,274    |  
|Provision for income taxes                              |  |                      | 40,337    |   |                   |   | 32,217    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Net income                                              |  | $                    | 62,548    |   |                   | $ | 49,057    |  
|                                                        |  |                      |           |   |                   |   |           |  
|Earnings per share:                                     |  |                      |           |   |                   |   |           |  
|Basic and diluted                                       |  | $                    | 61.12     |   |                   | $ | 48.34     |  
|                                                        |  |                      |           |   |                   |   |           |  
|Weighted-average shares used in per share calculations: |  |                      |           |   |                   |   |           |  
|Basic and diluted                                       |  |                      | 1,023,319 |   |                   |   | 1,014,888 |  
|                                                        |  |                      |           |   |                   |   |           |  

See accompanying notes.



4



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Exce
pt Share and per Share Data)

(Unaudited)



|                                                        |  |                                            |           |   |                                          |   |           |  
|------------------------------------------------------- |  | ------------------------------------------ | --------- | - | ---------------------------------------- | - | --------- | -
|                                                        |  | Twenty-seven weeks ended December 30, 2006 |           |   | Twenty-six weeks ended December 24, 2005 |  
|Net sales                                               |  | $                                          | 455,050   |   |                                          | $ | 420,115   |  
|Cost of goods sold                                      |  |                                            | 228,358   |   |                                          |   | 227,967   |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Gross profit                                            |  |                                            | 226,692   |   |                                          |   | 192,148   |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Operating expenses:                                     |  |                                            |           |   |                                          |   |           |  
|Selling, general and administrative                     |  |                                            | 134,239   |   |                                          |   | 126,065   |  
|Selling, general and administrative  related party     |  |                                            | 500       |   |                                          |   | 500       |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|                                                        |  |                                            | 134,739   |   |                                          |   | 126,565   |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Operating income                                        |  |                                            | 91,953    |   |                                          |   | 65,583    |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Other (income) expense:                                 |  |                                            |           |   |                                          |   |           |  
|Interest income                                         |  |                                            | (437      | ) |                                          |   | (258      | )
|Interest expense                                        |  |                                            | 15,130    |   |                                          |   | 13,557    |  
|Pension curtailment gain                                |  |                                            | (15,844   | ) |                                          |   |          |  
|Other (income) expense                                  |  |                                            | (267      | ) |                                          |   | 2,180     |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|                                                        |  |                                            | (1,418    | ) |                                          |   | 15,479    |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Income before income taxes                              |  |                                            | 93,371    |   |                                          |   | 50,104    |  
|Provision for income taxes                              |  |                                            | 36,685    |   |                                          |   | 18,313    |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Net income                                              |  | $                                          | 56,686    |   |                                          | $ | 31,791    |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Earnings per share:                                     |  |                                            |           |   |                                          |   |           |  
|Basic and diluted                                       |  | $                                          | 55.49     |   |                                          | $ | 31.41     |  
|                                                        |  |                                            |           |   |                                          |   |           |  
|Weighted-average shares used in per share calculations: |  |                                            |           |   |                                          |   |           |  
|Basic and diluted                                       |  |                                            | 1,021,561 |   |                                          |   | 1,012,171 |  
|                                                        |  |                                            |           |   |                                          |   |           |  

See accompanying notes.



5



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousan
ds)

(Unaudited)



|                                                                                  |  |                                            |          |   |                                          |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------------------ | -------- | - | ---------------------------------------- | - | -------- | -
|                                                                                  |  | Twenty-seven weeks ended December 30, 2006 |          |   | Twenty-six weeks ended December 24, 2005 |  
|Operating activities                                                              |  |                                            |          |   |                                          |   |          |  
|Net income                                                                        |  | $                                          | 56,686   |   |                                          | $ | 31,791   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                            |          |   |                                          |   |          |  
|Depreciation and amortization of fixed assets                                     |  |                                            | 8,707    |   |                                          |   | 8,904    |  
|Amortization of intangible assets                                                 |  |                                            | 986      |   |                                          |   | 1,154    |  
|Amortization of deferred financing costs                                          |  |                                            | 1,352    |   |                                          |   | 1,166    |  
|Stock option compensation expense                                                 |  |                                            | 309      |   |                                          |   | 226      |  
|Write-off of deferred IPO costs                                                   |  |                                            |         |   |                                          |   | 2,180    |  
|Loss on disposal of fixed assets                                                  |  |                                            | 221      |   |                                          |   | 304      |  
|Deferred income taxes                                                             |  |                                            | 36,304   |   |                                          |   | 18,352   |  
|Pension curtailment gain                                                          |  |                                            | (15,844  | ) |                                          |   |         |  
|Changes in operating assets and liabilities:                                      |  |                                            |          |   |                                          |   |          |  
|Accounts receivable                                                               |  |                                            | (19,555  | ) |                                          |   | (23,032  | )
|Inventories                                                                       |  |                                            | 9,887    |   |                                          |   | (1,537   | )
|Prepaid catalog and other assets                                                  |  |                                            | (3,592   | ) |                                          |   | (22,522  | )
|Accounts payable and accrued liabilities                                          |  |                                            | 50,547   |   |                                          |   | 88,877   |  
|Deferred revenue                                                                  |  |                                            | 23,867   |   |                                          |   | 26,082   |  
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Net cash provided by operating activities                                         |  |                                            | 149,875  |   |                                          |   | 131,945  |  
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Investing activities                                                              |  |                                            |          |   |                                          |   |          |  
|Acquisition of fixed assets                                                       |  |                                            | (10,599  | ) |                                          |   | (6,832   | )
|Proceeds from the sale of fixed assets                                            |  |                                            | 1        |   |                                          |   | 11       |  
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Net cash used in investing activities                                             |  |                                            | (10,598  | ) |                                          |   | (6,821   | )
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Financing activities                                                              |  |                                            |          |   |                                          |   |          |  
|Borrowings of revolving debt                                                      |  |                                            | 108,500  |   |                                          |   | 104,000  |  
|Repayments of revolving debt                                                      |  |                                            | (108,500 | ) |                                          |   | (104,000 | )
|Repayments of notes payable                                                       |  |                                            |         |   |                                          |   | (253     | )
|Payments for deferred financing costs                                             |  |                                            |         |   |                                          |   | (1,214   | )
|Proceeds from exercise of stock options                                           |  |                                            | 970      |   |                                          |   | 1,230    |  
|Dividend                                                                          |  |                                            |         |   |                                          |   | (2,600   | )
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Net cash provided by (used in) financing activities                               |  |                                            | 970      |   |                                          |   | (2,837   | )
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Increase in cash and cash equivalents                                             |  |                                            | 140,247  |   |                                          |   | 122,287  |  
|Cash and cash equivalents, beginning of period                                    |  |                                            | 23,802   |   |                                          |   | 24,854   |  
|                                                                                  |  |                                            |          |   |                                          |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                                          | 164,049  |   |                                          | $ | 147,141  |  
|                                                                                  |  |                                            |          |   |                                          |   |          |  

See accompanying notes.



6



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Con
densed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



1. BUSINESS

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

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 30, 2006 and December 24, 2005, the Condensed Consolidated
Statements of Operations for the thirteen-week periods ended December 30, 2006 and December 24, 2005, the Condensed Consolidated Statements of Operations for the twenty-seven week period ended December 30, 2006 and the twenty-six week
period ended December 24, 2005, and the Condensed Consolidated Statements of Cash Flows for the twenty-seven week period ended December 30, 2006 and the twenty-six week period ended December 24, 2005 have been prepared from the
Companys unaudited Condensed Consolidated Financial Statements. 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 and the twenty-seven and twenty-six week periods then ended. Significant intercompany balances and transactions have been eliminated
in consolidation. The Condensed Consolidated Balance Sheet at June 24, 2006 presented in this report has been derived from the Companys audited balance sheet not included in this report.

The results of operations for the interim periods shown are not necessarily indicative of results to be expected for the full fiscal year. In the second quarter of each
fiscal year, the Company typically realizes its highest sales for the fiscal year as it includes the most significant holidays that drive the largest portion of the gift-giving component of the Companys sales. It is also the period where the
Company incurs significant cost of goods sold in connection with the increased sales. Sales in the third quarter can also be impacted by the timing of Easter each year as either a third or fourth quarter holiday.

The Companys fiscal year ends on the last Saturday in June, based on a fifty-two/fifty-three-week year. Fiscal years ending June 30, 2007 and June 24,
2006 contain fifty-three weeks and fifty-two weeks, respectively. The period ended December 30, 2006 contains twenty-seven weeks while the period ended December 24, 2005 contains twenty-six weeks. Accordingly, results for these two periods
may not be comparable.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the
United States for comparable annual financial statements. Certain notes and other information have been condensed or omitted from the interim condensed consolidated financial statements presented in this Quarterly Report. For further information,
refer to the consolidated financial statements and the notes thereto for the year ended June 24, 2006, not included in this report.

Certain
reclassifications have been made to the December 24, 2005 financial statements to conform to the December 30, 2006, presentation. Such reclassifications had no effect on net income or net cash provided by operating activities, as
originally reported. These reclassifications include the balance sheet presentation of fixed assets and deferred gift card expenses and the related statement of cash flow presentation, as well as the statement of cash flow presentation of the
amortization of favorable lease agreements.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
The Company is required to adopt SFAS No. 157 for its fiscal year ending June 28, 2008. The Company is currently evaluating the potential effects of SFAS No. 157.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements (SAB 108). SAB 108 provides
guidance on how cumulative errors in the balance sheet should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be
considered in evaluating a current year misstatement SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the application of SAB 108 in the fourth quarter of fiscal 2007 to have a material
effect on its consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited
exceptions. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15,
2007. The Company is required to adopt SFAS No. 158 for its fiscal year ending June 30, 2007, and has not yet determined the impact on its consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax
positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria, balance sheet classification, interim period accounting and significantly expands disclosure provisions for uncertain
tax positions taken or that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is required to adopt FIN 48 for its fiscal
year ending June 28, 2008, and has not yet determined the impact on its consolidated financial statements.

In June 2006, the FASBs Emerging
Issues Task Force (EITF) reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).
The scope of EITF 06-3 includes sales, use, value added and certain excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of
accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15,
2006. The adoption of EITF 06-3 did not have a material impact on the Companys consolidated financial position, results of operation or cash flows. The Company presents sales taxes on a net basis.

In June 2006, the EITF ratified the consensus reached on Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to Financial
Accounting Standards Board Statement No. 43, Accounting for Compensated Absences (EITF 06-2). EITF 06-2 concludes that companies should accrue for employee sabbatical leave over the service period in which employees
earn the right to sabbatical leave. EITF 06-2 provisions are effective for the first annual reporting period after the ratification in June 2006, and allow for either retrospective application, or a cumulative effect adjustment approach upon
adoption. The Company is required to adopt EITF 06-2 for the fiscal year ending June 28, 2008, and is currently evaluating the impact that adoption will have on its consolidated financial statements.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



4. BALANCE SHEET INFORMATION

Inventories

Inventories consist of the following:



|                                                   |  |                   |        |               |   |                   |  |   |       
|-------------------------------------------------- |  | ----------------- | ------ | ------------- | - | ----------------- |  | - | ------
|                                                   |  | December 30, 2006 |        | June 24, 2006 |   | December 24, 2005
|Finished goods                                     |  | $                 | 24,935 |               | $ | 20,382            |  | $ | 26,155
|Materials, packaging supplies, and work-in process |  |                   | 25,802 |               |   | 31,915            |  |   | 29,730
|Growing crops                                      |  |                   | 13,493 |               |   | 21,820            |  |   | 14,312
|                                                   |  |                   |        |               |   |                   |  |   |       
|Total                                              |  | $                 | 64,230 |               | $ | 74,117            |  | $ | 70,197
|                                                   |  |                   |        |               |   |                   |  |   |       

Fixed Assets

Fixed assets consist of the following:



|                                                |  |                   |         |   |               |   |         |                   |  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | ----------------- |  | - | ------- | -
|                                                |  | December 30, 2006 |         |   | June 24, 2006 |   |         | December 24, 2005 | 
|Land                                            |  | $                 | 30,547  |   |               | $ | 30,553  |                   |  | $ | 30,663  |  
|Land improvements and orchard development costs |  |                   | 31,534  |   |               |   | 31,377  |                   |  |   | 31,779  |  
|Buildings and improvements                      |  |                   | 57,846  |   |               |   | 56,459  |                   |  |   | 56,874  |  
|Machinery and equipment                         |  |                   | 57,960  |   |               |   | 49,518  |                   |  |   | 48,809  |  
|Leasehold improvements                          |  |                   | 9,010   |   |               |   | 7,610   |                   |  |   | 7,428   |  
|Purchased and internally developed software     |  |                   | 21,346  |   |               |   | 20,353  |                   |  |   | 15,625  |  
|Capital projects-in-progress                    |  |                   | 6,323   |   |               |   | 8,451   |                   |  |   | 5,870   |  
|                                                |  |                   |         |   |               |   |         |                   |  |   |         |  
|                                                |  |                   | 214,566 |   |               |   | 204,321 |                   |  |   | 197,048 |  
|Accumulated depreciation and amortization       |  |                   | (38,886 | ) |               |   | (30,311 | )                 |  |   | (22,817 | )
|                                                |  |                   |         |   |               |   |         |                   |  |   |         |  
|Total                                           |  | $                 | 175,680 |   |               | $ | 174,010 |                   |  | $ | 174,231 |  
|                                                |  |                   |         |   |               |   |         |                   |  |   |         |  

Intangibles

Intangible assets primarily consist of trade names, trademarks, customer mailing and rental lists and favorable lease agreements. The trade names and trademarks have indefinite lives. The customer mailing and rental lists have estimated
useful lives ranging from one to four years. The favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases, ranging from three to ten years. Intangible assets with indefinite lives are tested
for impairment annually using the guidance and criteria described in SFAS No. 142, Goodwill and Other Intangible Assets. The impairment testing compares carrying values to fair values, and generally, if the carrying value of these assets
is in excess of fair value, an impairment loss would be recognized. The Company does not consider there to be any indication of impairment at this time, however, formal annual impairment testing will be performed in the last quarter of the fiscal
year.

The customer mailing and rental lists and favorable lease agreements are being amortized using the straight-line method over their estimated useful
lives. Amortization expense was $486 and $570, for the thirteen-week periods ended December 30, 2006 and December 24, 2005, respectively. For the twenty-seven week period ended December 30, 2006 and the twenty-six week period ended
December 24, 2005, amortization expense was $986 and $1,154, respectively. Amortization expense of intangible assets is included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of
Operations.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



The following is a summary of intangible assets:



|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|----------------------------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- | - | ------ | - |  | - | ------
|                                          |  | December 30, 2006     |        | June 24, 2006           
|                                          |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|Trade names and trademarks                |  | $                     | 28,437 |                          | $ |       |                     |  | $                     | 28,437 |                          | $ | 28,437 |                     | $ |       |   |  | $ | 28,437
|Harry and David customer and rental lists |  |                       | 6,728  |                          |   | (4,494 | )                   |  |                       | 2,234  |                          |   | 6,728  |                     |   | (3,702 | ) |  |   | 3,026 
|Favorable lease agreements                |  |                       | 1,971  |                          |   | (971   | )                   |  |                       | 1,000  |                          |   | 1,971  |                     |   | (777   | ) |  |   | 1,194 
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|                                          |  | $                     | 37,136 |                          | $ | (5,465 | )                   |  | $                     | 31,671 |                          | $ | 37,136 |                     | $ | (4,479 | ) |  | $ | 32,657
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       

The estimated amortization expense for the remainder of 2007 and for each of the next four years and thereafter is
as follows:



|                              |  |                                        |       |                            |   |                           |  |   |      
|----------------------------- |  | -------------------------------------- | ----- | -------------------------- | - | ------------------------- |  | - | -----
|Fiscal Period:                |  | Harryand David Customerand RentalLists |       | Favorable Lease Agreements |   | Total AmortizationExpense
|Remainder of fiscal year 2007 |  | $                                      | 816   |                            | $ | 174                       |  | $ | 990  
|Fiscal
year 2008              |  |                                        | 1,418 |                            |   | 288                       |  |   | 1,706
|Fiscal
year 2009              |  |                                        |      |                            |   | 244                       |  |   | 244  
|Fiscal
year 2010              |  |                                        |      |                            |   | 169                       |  |   | 169  
|Fiscal
year 2011              |  |                                        |      |                            |   | 88                        |  |   | 88   
|Thereafter                    |  |                                        |      |                            |   | 37                        |  |   | 37   
|                              |  |                                        |       |                            |   |                           |  |   |      
|Total                         |  | $                                      | 2,234 |                            | $ | 1,000                     |  | $ | 3,234
|                              |  |                                        |       |                            |   |                           |  |   |      

Accrued Restructuring Costs

On June 17, 2004, the Company purchased all of the outstanding shares of common stock of Harry & David Operations Corp. from Yamanouchi Consumer Inc. (YCI), (the Acquisition). In
accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the Company recorded a liability for restructuring costs associated with the Acquisition. The restructuring liability
consisted of $7,304 in estimated costs to implement managements plan for a reduction in force that began in August 2004. Additionally, the restructuring liability consisted of $3,173 in estimated costs to implement managements plan to
close 19 underperforming Harry and David retail stores. These stores were identified for closure by the new ownership team based on historical and pro forma operating results. As of June 24, 2006, the Company had completed all planned store
closures and restructuring activities.

5. 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 for the second quarters of
fiscal 2007 and fiscal 2006 were 39.2% and 39.6%, respectively.

6. BORROWING ARRANGEMENTS

Revolving Credit Facilities

On June 17, 2004, the Company
entered into a revolving credit agreement with a group of lenders that provided for $150,000 of revolving credit secured by the assets of the Company. In conjunction with a refinancing on February 25, 2005, this agreement was amended to reduce
the revolving credit to $125,000. In connection with the issuance of this facility, the Company incurred debt issuance fees of $7,812, which were recorded as deferred financing costs within long-term assets. As a result of the modification to the
agreement in February 2005, the Company charged $1,098 of financing fees to interest expense, proportional to the decrease in borrowing capacity of the old arrangement and at December 30, 2006, $3,716 remained in deferred financing costs.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



On March 20, 2006, the Company replaced its existing credit facility with a new revolving credit agreement (the
Credit Agreement) with a group of lenders that provides for $125,000 of revolving credit secured by 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. The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events
of default. At December 30, 2006, the Company was in compliance with all of its covenants under the Credit Agreement.

The Company has accounted for
the new Credit Agreement pursuant to EITF Issue No. 98-14, Debtors Accounting for Changes in Lines-of-Credit or Revolving-Debt Agreements, and accordingly has continued to defer $3,716 of unamortized deferred financing costs
associated with the old credit agreement at December 30, 2006. Such deferred costs will be amortized over the term of the Credit Agreement. In connection with this facility, the Company incurred additional debt issuance fees of $1,848, which
are recorded as deferred financing costs. The costs are amortized over the remaining life of the Credit Agreement and as of December 30, 2006 $1,565 of these costs remained as deferred financing costs.

As of December 24, 2005, the Company borrowed and repaid $104,000 under the prior credit facility. Interest on the borrowings was payable at a base rate or a
Eurocurrency, plus an applicable margin and fees. As of December 30, 2006, the Company borrowed and repaid $108,500 under the Credit Agreement. Interest on the borrowings is payable at a base rate or a Eurocurrency rate, plus an applicable
margin and fees.

As of December 30, 2006, unused borrowings under the revolving credit facility were $123,000 excluding $2,000 in letters of credit
outstanding. The maximum available borrowing under the Credit Agreement are determined in accordance with an asset-based debt limitation formula. Total additional available borrowing capacity at December 30, 2006 was approximately $17,905.

Long-Term Debt

In February 2005, the Company issued
$70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%,
calculated and paid quarterly. The interest rate was set at 10.37% and 10.23% at December 30, 2006 and June 24, 2006, respectively. The $175,000 of Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual
interest payments commencing on December 1, 2005. The Company incurred $9,490 in deferred financing fees in connection with this note offering that have been recorded in deferred financing costs within long-term assets.

On December 16, 2005, the Company completed the public exchange offer for the Senior Notes. The Company incurred costs in connection with this exchange offer in the
amount of $1,169 that are recorded as deferred financing costs in addition to the original fees in long-term assets. The costs are amortized over the remaining life of the associated Senior Notes and as of December 30, 2006, $8,180 remained on
the balance sheet for all associated fees.

These Senior Notes represent the senior unsecured obligations of Harry & David Operations Corp., a
wholly-owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the Companys 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. The Company
was in compliance with all of its covenants under the indenture at December 30, 2006.

7. STOCK OPTION PLAN

In February 2005, the Company adopted a Non-Qualified Stock Option Plan (Plan). The Company accounts for stock-based compensation using the fair-value method under
Statement of Financial Accounting Standards (SFAS) No. 123(R) Share Base Payment.The fair value of each option award is estimated on the date of grant using the Black-Scholes option



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



valuation model. Expected volatilities are based on an average historical volatility of the publicly traded stock of a representative set of comparable
companies. The expected term of options granted is derived from the time between initial grant and date of final vesting, as is a customary assumption for stock options in private equity-controlled companies. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. An assumption of a ten percent pre-vesting forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.



|                         |  |                                                       
|------------------------ |  | ------------------------------------------------------
|                         |  | Thirteen and Twenty-sevenweeks ended
December 30, 2006
|Expected volatility      |  | 38.8%                                                 
|Expected dividends       |  | $0                                                    
|Expected term (in years) |  | 4.6 years                                             
|Risk-free rate           |  | 4.57%                                                 

A summary of option activity under the Plan for twenty-seven weeks ended December 30, 2006 is presented
below:



|                                 |  |               |   |  |                                |        |                                           |          
|-------------------------------- |  | ------------- | - |  | ------------------------------ | ------ | ----------------------------------------- | ---------
|Options                          |  | Option Shares |   |  | Weighted-AverageExercise Price |        | Weighted-AverageRemainingContractual Term
|Outstanding at June 24, 2006     |  | 63,377        |   |  | $                              | 82.60  |                                           | 8.6 years
|Granted                          |  | 11,520        |   |  |                                | 190.00 |                                           | 9.9 years
|Exercised                        |  | (11,744       | ) |  |                                | 82.60  |                                           |         
|Forfeited                        |  | (2,601        | ) |  |                                | 82.60  |                                           |         
|                                 |  |               |   |  |                                |        |                                           |          
|Outstanding at December 30, 2006 |  | 60,552        |   |  | $                              | 103.03 |                                           | 8.5 years
|                                 |  |               |   |  |                                |        |                                           |          

As of December 30, 2006, 60,552 options were outstanding, of which 9,604 were fully vested and exercisable.
The weighted average remaining contractual term of vested options was 8.1 years. The total fair value of all options outstanding at December 30, 2006 was $1,608.

A summary of the status of the Companys nonvested option shares as of December 30, 2006, and changes during the twenty-seven weeks ended December 30, 2006 is presented below:



|                                 |  |               |   |  |                                                 |      
|-------------------------------- |  | ------------- | - |  | ----------------------------------------------- | -----
|Nonvested Option Shares          |  | Option Shares |   |  | Weighted-AverageGrant-DateFair Value of Options
|Outstanding at June 24, 2006     |  | 49,874        |   |  | $                                               | 30.04
|Granted options                  |  | 11,520        |   |  | $                                               | 11.74
|Vested                           |  | (8,097        | ) |  | $                                               | 30.04
|Forfeited                        |  | (2,349        | ) |  | $                                               | 30.04
|                                 |  |               |   |  |                                                 |      
|Outstanding at December 30, 2006 |  | 50,948        |   |  | $                                               | 25.90
|                                 |  |               |   |  |                                                 |      

For the thirteen and twenty-seven week periods ended December 30, 2006, the Company recognized stock
compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $188 and $309, respectively. The total tax expense recognized for these periods was $90 and $44, respectively. As of
December 30, 2006 there remained a total of $1,320 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan and will be recognized over the remaining vesting period. The
weighted-average period of the remaining cost is 1.5 years.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



8. BENEFIT PROGRAMS

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



|                                   |  |                                        |       |   |                                        |   |       |                                            |  |   |                                          |   |  |   |        |  
|---------------------------------- |  | -------------------------------------- | ----- | - | -------------------------------------- | - | ----- | ------------------------------------------ |  | - | ---------------------------------------- | - |  | - | ------ | -
|                                   |  | Thirteen weeks ended December 30, 2006 |       |   | Thirteen weeks ended December 24, 2005 |   |       | Twenty-seven weeks ended December 30, 2006 |  |   | Twenty-six weeks ended December 24, 2005 |  
|Service cost                       |  | $                                      | 1,096 |   |                                        | $ | 1,148 |                                            |  | $ | 2,192                                    |   |  | $ | 2,280  |  
|Interest cost                      |  |                                        | 721   |   |                                        |   | 913   |                                            |  |   | 1,443                                    |   |  |   | 1,851  |  
|Expected return on plan assets     |  |                                        | (722  | ) |                                        |   | (614  | )                                          |  |   | (1,445                                   | ) |  |   | (1,376 | )
|Amortization of prior service cost |  |                                        |      |   |                                        |   | 3     |                                            |  |   |                                         |   |  |   | 5      |  
|Settlement gain                    |  |                                        |      |   |                                        |   | 13    |                                            |  |   |                                         |   |  |   |       |  
|                                   |  |                                        |       |   |                                        |   |       |                                            |  |   |                                          |   |  |   |        |  
|Net periodic benefit expense       |  | $                                      | 1,095 |   |                                        | $ | 1,463 |                                            |  | $ | 2,190                                    |   |  | $ | 2,760  |  
|                                   |  |                                        |       |   |                                        |   |       |                                            |  |   |                                          |   |  |   |        |  

During the thirteen and twenty-seven weeks ended December 30, 2006, the Company made a $1,335 and $3,599
contribution to its defined benefit plans, respectively.

On June 22, 2006, the board of directors approved a soft freeze of the Companys
qualified pension plan effective as of June 25, 2006, whereby no new participants will qualify to enter into the plan. A full freeze of the benefit accrual for the plan will be effective June 30, 2007. Under the provisions of SFAS
No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88),these benefit changes resulted in the recognition of a non-cash net curtailment gain
of $13,959. The curtailment gain was recognized in the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007; however, no new participants will enter or qualify for the plan. After
July 1, 2007, the Company has a continuing obligation to fund the plan and will continue to recognize net periodic pension cost under SFAS 87, Employers Accounting for Pensions.

In addition, on August 1, 2006, the board of directors approved the adoption of a non-qualified pension plan, effective as of June 17, 2004, and approved a
hard freeze of this plan effective June 30, 2007. Under the provisions of SFAS No. 88,these benefit changes resulted in the recognition of a non-cash net curtailment gain of $1,885. The curtailment gain was recognized in
the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007. After July 1, 2007, the Company will have a continuing obligation to pay plan participants and will continue to
recognize net periodic pension cost under SFAS 87.

9. EARNINGS PER SHARE

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



|                                           |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          
|------------------------------------------ |  | ------------------------------------- | --------- | -------------------------------------- | - | ---------------------------------------- |  | ---------------------------------------- | --------- |  | - | ---------
|                                           |  | Thirteen weeks ended December 30,2006 |           | Thirteen weeks ended December 24, 2005 |   | Twenty-sevenweeks ended December 30,2006 |  | Twenty-six weeks ended December 24, 2005
|Net income                                 |  | $                                     | 62,548    |                                        | $ | 49,057                                   |  | $                                        | 56,686    |  | $ | 31,791   
|                                           |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          
|Weighted average common shares outstanding |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          
|Basic and diluted                          |  |                                       | 1,023,319 |                                        |   | 1,014,888                                |  |                                          | 1,021,561 |  |   | 1,012,171
|                                           |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          
|Basic and diluted earnings per share       |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          
|Basic and diluted                          |  | $                                     | 61.12     |                                        | $ | 48.34                                    |  | $                                        | 55.49     |  | $ | 31.41    
|                                           |  |                                       |           |                                        |   |                                          |  |                                          |           |  |   |          



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



The number of incremental shares from the assumed exercise of stock options was calculated by applying the treasury
stock method. Common shares relating to the stock options were excluded from the diluted earnings per share calculation where the exercise price was greater than or equal to the average market price of the Companys common shares or where the
assumed exercise would have been anti-dilutive during these periods. The excluded option shares were 60,552 million and 68,437 for the thirteen week-periods ended December 30, 2006 and December 24, 2005, respectively, and 61,855 and 71,275
for the twenty-seven week period ended December 30, 2006 and twenty-six week period December 24, 2005, respectively.

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. Except
for the matter set out below, the Companys management believes that the ultimate liability, if any, resulting from such proceedings would not have a materially adverse effect on the Companys results of operations, financial position or
cash flows.

In January 2007 Harry and David was served with a complaint alleging violations of 15 U.S.C. §1681c(g), a provision of the Fair and
Accurate Credit Transactions Act (FACTA), which relates to credit and debit card data that may be included on the electronically printed receipts provided to retail customers at the point of sale. The Company is in the process of evaluating the
allegations in the complaint and has not yet determined the extent of any potential financial impact.

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. The Company maintains product liability insurance in an amount that it believes is adequate to cover the costs associated with
any potential recalls.

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

Total rental expense for all operating leases was as follows:



|                        |  |                                       |       |                                        |   |                                          |  |                                          |        |  |   |       
|----------------------- |  | ------------------------------------- | ----- | -------------------------------------- | - | ---------------------------------------- |  | ---------------------------------------- | ------ |  | - | ------
|                        |  | Thirteen weeks ended December 30,2006 |       | Thirteen weeks ended December 24, 2005 |   | Twenty-sevenweeks ended December 30,2006 |  | Twenty-six weeks ended December 24, 2005
|Minimum rent expense    |  | $                                     | 8,234 |                                        | $ | 8,285                                    |  | $                                        | 13,542 |  | $ | 13,462
|Contingent rent expense |  |                                       | 221   |                                        |   | 94                                       |  |                                          | 272    |  |   | 138   
|                        |  |                                       |       |                                        |   |                                          |  |                                          |        |  |   |       
|Total rent expense      |  | $                                     | 8,455 |                                        | $ | 8,379                                    |  | $                                        | 13,814 |  | $ | 13,600
|                        |  |                                       |       |                                        |   |                                          |  |                                          |        |  |   |       

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 $6,197, 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% will vest in the next twelve quarters. In each case, vesting occurs so long as the
award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined)
occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable,
non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change
of control either at the time of the change of control or, in some circumstances, at a later specified date. As of December 30, 2006, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the
twenty-seven weeks then ended.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



In connection with the Acquisition, the Company entered into an agreement with its 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 the twenty-seven weeks ended December 30, 2006, and the twenty-six weeks ended December 24, 2005, the Company paid $500 in each period 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.

11. SEGMENT REPORTING

The Company has three reportable segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins. The Harry and David Direct Marketing
segment markets premium gift-quality fruit, gourmet food products and gifts under the Harry and David® brand through the Harry and David catalog, Internet (harryanddavid.com), business-to-business and consumer telemarketing operations. The Harry and David Stores segment sells similar
products through retail locations (outlet stores, specialty stores and a Country Village store). The Jackson & Perkins segment markets horticultural products and gifts through the Jackson & Perkins catalog, Internet
(jacksonandperkins.com), consumer telemarketing and wholesale operations. These reportable segments are strategic business units that offer similar products. They are managed separately because the business units utilize distinct marketing
strategies. Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and capital investment requirements. The accounting policies of the segments, where applicable, are
the same as those described in the summary of significant accounting polices. Transactions between reportable segments are generally recorded at cost. 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, deferred income taxes, third-party and intercompany debt and other corporate long-lived assets, including manufacturing facilities. Also included within
Other is the elimination of intercompany activity. Business units not required to be disclosed separately for segment reporting purposes are grouped in Other and include Harry and David wholesale, commercial sales of
non-gift-quality fruit and business units that support the Companys operations, including orchards, product supply, distribution, customer operations, facilities, information technology services and administrative and marketing support
functions.



|                                           |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|------------------------------------------ |  | ------------------------------ | ------- | --------------------- | - | ------ | ---------------- |  | - | ------ | - |  | ----- | -------- | - |  | - | -------
|Dollars in thousands                       |  | Harry andDavid DirectMarketing |         | Harry andDavid Stores |   |        | Jackson &Perkins |  |   | Other  |   |  | Total
|Thirteen weeks ended December 30, 2006    
|Net external sales                         |  | $                              | 270,466 |                       | $ | 71,552 |                  |  | $ | 26,583 |   |  | $     | 20,551   |   |  | $ | 389,152
|Net intersegment sales                     |  |                                | 77,139  |                       |   | 13,136 |                  |  |   | 3,427  |   |  |       | (93,702  | ) |  |   |       
|Operating income                           |  |                                | 88,091  |                       |   | 18,525 |                  |  |   | 721    |   |  |       | 2,894    |   |  |   | 110,231
|Net interest expense                       |  |                                |        |                       |   |       |                  |  |   | 1      |   |  |       | 7,422    |   |  |   | 7,423  
|Income (loss) before income taxes          |  |                                | 88,150  |                       |   | 18,538 |                  |  |   | 721    |   |  |       | (4,524   | ) |  |   | 102,885
|Net income (loss)                          |  |                                | 88,150  |                       |   | 18,538 |                  |  |   | 721    |   |  |       | (44,861  | ) |  |   | 62,548 
|Total assets                               |  |                                | 60,318  |                       |   | 33,244 |                  |  |   | 50,484 |   |  |       | 357,456  |   |  |   | 501,502
|                                           |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Thirteen weeks ended December 24, 2005     |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Net external sales                         |  | $                              | 257,866 |                       | $ | 66,471 |                  |  | $ | 26,016 |   |  | $     | 12,039   |   |  | $ | 362,392
|Net intersegment sales                     |  |                                | 83,945  |                       |   | 12,392 |                  |  |   | 3,375  |   |  |       | (99,712  | ) |  |   |       
|Operating income (loss)                    |  |                                | 72,441  |                       |   | 16,714 |                  |  |   | (826   | ) |  |       | 2,073    |   |  |   | 90,402 
|Net interest expense (income)              |  |                                |        |                       |   | (4     | )                |  |   |       |   |  |       | 6,952    |   |  |   | 6,948  
|Income (loss) before income taxes          |  |                                | 72,441  |                       |   | 16,718 |                  |  |   | (826   | ) |  |       | (7,059   | ) |  |   | 81,274 
|Net income (loss)                          |  |                                | 46,558  |                       |   | 11,315 |                  |  |   | 155    |   |  |       | (8,971   | ) |  |   | 49,057 
|Total assets                               |  |                                | 93,140  |                       |   | 44,268 |                  |  |   | 61,468 |   |  |       | 314,694  |   |  |   | 513,570
|                                           |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Twenty-seven weeks ended December 30, 2006 |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Net external sales                         |  | $                              | 298,219 |                       | $ | 96,983 |                  |  | $ | 30,267 |   |  | $     | 29,581   |   |  | $ | 455,050
|Net intersegment sales                     |  |                                | 109,478 |                       |   | 20,309 |                  |  |   | 3,874  |   |  |       | (133,661 | ) |  |   |       



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



|                                         |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|---------------------------------------- |  | ------------------------------ | ------- | --------------------- | - | ------ | ---------------- |  | - | ------ | - |  | ----- | -------- | - |  | - | -------
|Dollars in thousands                     |  | Harry andDavid DirectMarketing |         | Harry andDavid Stores |   |        | Jackson &Perkins |  |   | Other  |   |  | Total
|Operating income (loss)                  |  |                                | 76,502  |                       |   | 13,752 |                  |  |   | (3,128 | ) |  |       | 4,827    |   |  |   | 91,953 
|Net interest expense                     |  |                                |        |                       |   |       |                  |  |   | 1      |   |  |       | 14,692   |   |  |   | 14,693 
|Income (loss) before income taxes        |  |                                | 76,561  |                       |   | 13,765 |                  |  |   | (2,938 | ) |  |       | 5,983    |   |  |   | 93,371 
|Net income (loss)                        |  |                                | 76,561  |                       |   | 13,765 |                  |  |   | (2,938 | ) |  |       | (30,702  | ) |  |   | 56,686 
|Total assets                             |  |                                | 60,318  |                       |   | 33,244 |                  |  |   | 50,484 |   |  |       | 357,456  |   |  |   | 501,502
|                                         |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Twenty-six weeks ended December 24, 2005 |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        
|Net external sales                       |  | $                              | 283,951 |                       | $ | 88,228 |                  |  | $ | 31,700 |   |  | $     | 16,236   |   |  | $ | 420,115
|Net intersegment sales                   |  |                                | 106,637 |                       |   | 18,801 |                  |  |   | 3,631  |   |  |       | (129,069 | ) |  |   |       
|Operating income (loss)                  |  |                                | 56,768  |                       |   | 10,652 |                  |  |   | (4,394 | ) |  |       | 2,557    |   |  |   | 65,583 
|Net interest expense (income)            |  |                                |        |                       |   | (7     | )                |  |   |       |   |  |       | 13,306   |   |  |   | 13,299 
|Income (loss) before income taxes        |  |                                | 56,768  |                       |   | 10,659 |                  |  |   | (4,394 | ) |  |       | (12,929  | ) |  |   | 50,104 
|Net income (loss)                        |  |                                | 35,085  |                       |   | 6,763  |                  |  |   | (2,788 | ) |  |       | (7,269   | ) |  |   | 31,791 
|Total assets                             |  |                                | 93,140  |                       |   | 44,268 |                  |  |   | 61,468 |   |  |       | 314,694  |   |  |   | 513,570
|                                         |  |                                |         |                       |   |        |                  |  |   |        |   |  |       |          |   |  |   |        

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Harry & David Operations Corp. issued $70,000 of Senior Floating Rate Notes due 2012 and $175,000 of Senior Fixed Rate Notes due 2013 (collectively, the Senior
Notes) in February 2005 (see Note 7). The following consolidating financial information presents, in separate columns, financial information for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the
equity method, (ii) Harry & David Operations Corp. (the subsidiary issuer) 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 30, 2006, and
June 24, 2006, and for the twenty-seven weeks ended December 30, 2006, and the twenty-six weeks ended December 24, 2005. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of
its existing and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain
restrictions on the payment of dividends, other payments or distributions by the Company and between the guarantors. The Company has not presented separate financial information for each of the subsidiary guarantors because the Companys
management believes that such financial information would not provide investors with any additional information that would be material in evaluating the sufficiency of the guarantees.



16



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12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Balance Sheet

As of December 30, 2006



|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|------------------------------------------ |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | -------------------------------- | ------- |  | ------------ | -------- | - |  | - | -------
|                                           |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  | EliminationsandReclassifications |         |  | Consolidated
|Assets                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Current assets:                            |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Cash and cash equivalents                  |  | $                                          | 1,433   |   |                                | $ | 13,951   |                        |  | $                                | 148,665 |  | $            |         |   |  | $ | 164,049
|Trade accounts receivable, net             |  |                                            |        |   |                                |   | 1        |                        |  |                                  | 29,099  |  |              |         |   |  |   | 29,100 
|Other receivables                          |  |                                            |        |   |                                |   |         |                        |  |                                  | 2,440   |  |              |         |   |  |   | 2,440  
|Inventories, net                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 64,230  |  |              |         |   |  |   | 64,230 
|Prepaid catalog expenses                   |  |                                            |        |   |                                |   |         |                        |  |                                  | 4,501   |  |              |         |   |  |   | 4,501  
|Income taxes receivable                    |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              | 63       |   |  |   | 63     
|Other current assets                       |  |                                            |        |   |                                |   | 2,557    |                        |  |                                  | 10,622  |  |              |         |   |  |   | 13,179 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total current assets                       |  |                                            | 1,433   |   |                                |   | 16,509   |                        |  |                                  | 259,557 |  |              | 63       |   |  |   | 277,562
|Fixed assets, net                          |  |                                            |        |   |                                |   | 25,725   |                        |  |                                  | 149,955 |  |              |         |   |  |   | 175,680
|Intangibles, net                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 31,671  |  |              |         |   |  |   | 31,671 
|Investment in subsidiaries                 |  |                                            | 248,117 |   |                                |   | 232,857  |                        |  |                                  |        |  |              | (480,974 | ) |  |   |       
|Deferred financing costs, net              |  |                                            |        |   |                                |   | 13,461   |                        |  |                                  |        |  |              |         |   |  |   | 13,461 
|Deferred income taxes                      |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              | 2,608    |   |  |   | 2,608  
|Other assets                               |  |                                            |        |   |                                |   | 325      |                        |  |                                  | 195     |  |              |         |   |  |   | 520    
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total assets                               |  | $                                          | 249,550 |   |                                | $ | 288,877  |                        |  | $                                | 441,378 |  | $            | (478,303 | ) |  | $ | 501,502
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Liabilities and stockholders equity       |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Current liabilities:                       |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Accounts payable                           |  | $                                          |        |   |                                | $ | 24,014   |                        |  | $                                | 41,792  |  | $            |         |   |  | $ | 65,806 
|Accrued payroll and benefits               |  |                                            |        |   |                                |   | 7,638    |                        |  |                                  | 12,082  |  |              |         |   |  |   | 19,720 
|Income taxes payable                       |  |                                            | (63     | ) |                                |   |         |                        |  |                                  |        |  |              | 63       |   |  |   |       
|Deferred revenue                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 41,055  |  |              |         |   |  |   | 41,055 
|Deferred income taxes                      |  |                                            | 56,061  |   |                                |   |         |                        |  |                                  |        |  |              |         |   |  |   | 56,061 
|Accrued interest                           |  |                                            |        |   |                                |   | 5,915    |                        |  |                                  |        |  |              |         |   |  |   | 5,915  
|Other accrued liabilities                  |  |                                            |        |   |                                |   | 1,269    |                        |  |                                  | 17,501  |  |              |         |   |  |   | 18,770 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total current liabilities                  |  |                                            | 55,998  |   |                                |   | 38,836   |                        |  |                                  | 112,430 |  |              | 63       |   |  |   | 207,327
|Long-term debt                             |  |                                            |        |   |                                |   | 245,000  |                        |  |                                  |        |  |              |         |   |  |   | 245,000
|Accrued pension liability                  |  |                                            |        |   |                                |   |         |                        |  |                                  | 18,368  |  |              |         |   |  |   | 18,368 
|Deferred income taxes                      |  |                                            | (2,608  | ) |                                |   |         |                        |  |                                  |        |  |              | 2,608    |   |  |   |       
|Intercompany debt                          |  |                                            | 168,645 |   |                                |   | (243,076 | )                      |  |                                  | 74,431  |  |              |         |   |  |   |       
|Other long-term liabilities                |  |                                            |        |   |                                |   |         |                        |  |                                  | 3,292   |  |              |         |   |  |   | 3,292  
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total liabilities                          |  |                                            | 222,035 |   |                                |   | 40,760   |                        |  |                                  | 208,521 |  |              | 2,671    |   |  |   | 473,987
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Stockholders equity:                      |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Common stock                               |  |                                            | 10      |   |                                |   | 1        |                        |  |                                  | 100     |  |              | (101     | ) |  |   | 10     
|Additional paid-in capital                 |  |                                            | 5,233   |   |                                |   | 222,410  |                        |  |                                  | 105,519 |  |              | (327,929 | ) |  |   | 5,233  
|Retained earnings                          |  |                                            | 22,272  |   |                                |   | 25,706   |                        |  |                                  | 127,238 |  |              | (152,944 | ) |  |   | 22,272 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total stockholders equity                 |  |                                            | 27,515  |   |                                |   | 248,117  |                        |  |                                  | 232,857 |  |              | (480,974 | ) |  |   | 27,515 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                                          | 249,550 |   |                                | $ | 288,877  |                        |  | $                                | 441,378 |  | $            | (478,303 | ) |  | $ | 501,502
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        



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12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Balance Sheet

As of June 24, 2006



|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | -------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only)(1) |         |   | Harry & David Operations Corp.(1) |   |          | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(1) |   |  | Consolidated |         
|Assets                                               |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                             | 463     |   |                                   | $ | 7,427    |                        |  | $ | 15,912                               |   |  | $            |         |   |  | $ | 23,802  |  
|Trade accounts receivable, net                       |  |                                               |        |   |                                   |   |         |                        |  |   | 8,926                                |   |  |              |         |   |  |   | 8,926   |  
|Other receivables                                    |  |                                               |        |   |                                   |   | 358      |                        |  |   | 2,701                                |   |  |              |         |   |  |   | 3,059   |  
|Inventories, net                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 74,117                               |   |  |              |         |   |  |   | 74,117  |  
|Prepaid catalog expenses                             |  |                                               |        |   |                                   |   |         |                        |  |   | 3,066                                |   |  |              |         |   |  |   | 3,066   |  
|Income taxes receivable                              |  |                                               | 259     |   |                                   |   |         |                        |  |   | 297                                  |   |  |              |         |   |  |   | 556     |  
|Other current assets                                 |  |                                               |        |   |                                   |   | 2,317    |                        |  |   | 8,244                                |   |  |              |         |   |  |   | 10,561  |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                               | 722     |   |                                   |   | 10,102   |                        |  |   | 113,263                              |   |  |              |         |   |  |   | 124,087 |  
|Fixed assets, net                                    |  |                                               |        |   |                                   |   | 24,522   |                        |  |   | 149,488                              |   |  |              |         |   |  |   | 174,010 |  
|Intangibles, net                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 32,657                               |   |  |              |         |   |  |   | 32,657  |  
|Investment in subsidiaries                           |  |                                               | 153,778 |   |                                   |   | 124,429  |                        |  |   |                                     |   |  |              | (278,207 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                               |        |   |                                   |   | 14,813   |                        |  |   |                                     |   |  |              |         |   |  |   | 14,813  |  
|Deferred income taxes                                |  |                                               |        |   |                                   |   |         |                        |  |   |                                     |   |  |              | 9,293    |   |  |   | 9,293   |  
|Other assets                                         |  |                                               |        |   |                                   |   | 290      |                        |  |   | 198                                  |   |  |              |         |   |  |   | 488     |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                             | 154,500 |   |                                   | $ | 174,156  |                        |  | $ | 295,606                              |   |  | $            | (268,914 | ) |  | $ | 355,348 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                             |        |   |                                   | $ | 7,481    |                        |  | $ | 18,974                               |   |  | $            |         |   |  | $ | 26,455  |  
|Accrued payroll and benefits                         |  |                                               |        |   |                                   |   | 3,524    |                        |  |   | 11,371                               |   |  |              |         |   |  |   | 14,895  |  
|Deferred revenue                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 17,188                               |   |  |              |         |   |  |   | 17,188  |  
|Deferred income taxes                                |  |                                               | 14      |   |                                   |   | (7,519   | )                      |  |   | 33,947                               |   |  |              |         |   |  |   | 26,442  |  
|Accrued interest                                     |  |                                               |        |   |                                   |   | 5,604    |                        |  |   |                                     |   |  |              |         |   |  |   | 5,604   |  
|Other accrued liabilities                            |  |                                               |        |   |                                   |   | 921      |                        |  |   | 10,553                               |   |  |              |         |   |  |   | 11,474  |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                               | 14      |   |                                   |   | 10,011   |                        |  |   | 92,033                               |   |  |              |         |   |  |   | 102,058 |  
|Long-term debt                                       |  |                                               |        |   |                                   |   | 245,000  |                        |  |   |                                     |   |  |              |         |   |  |   | 245,000 |  
|Accrued pension liability                            |  |                                               |        |   |                                   |   |         |                        |  |   | 35,621                               |   |  |              |         |   |  |   | 35,621  |  
|Deferred income taxes                                |  |                                               | (196    | ) |                                   |   | (3,648   | )                      |  |   | (5,449                               | ) |  |              | 9,293    |   |  |   |        |  
|Intercompany debt                                    |  |                                               | 185,132 |   |                                   |   | (230,985 | )                      |  |   | 45,853                               |   |  |              |         |   |  |   |        |  
|Other long-term liabilities                          |  |                                               |        |   |                                   |   |         |                        |  |   | 3,119                                |   |  |              |         |   |  |   | 3,119   |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                               | 184,950 |   |                                   |   | 20,378   |                        |  |   | 171,177                              |   |  |              | 9,293    |   |  |   | 385,798 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                               | 10      |   |                                   |   | 1        |                        |  |   | 100                                  |   |  |              | (101     | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                               | 3,954   |   |                                   |   | 221,440  |                        |  |   | 105,519                              |   |  |              | (326,959 | ) |  |   | 3,954   |  
|Retained earnings (accumulated deficit)              |  |                                               | (34,414 | ) |                                   |   | (67,663  | )                      |  |   | 18,810                               |   |  |              | 48,853   |   |  |   | (34,414 | )
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                               | (30,450 | ) |                                   |   | 153,778  |                        |  |   | 124,429                              |   |  |              | (278,207 | ) |  |   | (30,450 | )
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                             | 154,500 |   |                                   | $ | 174,156  |                        |  | $ | 295,606                              |   |  | $            | (268,914 | ) |  | $ | 355,348 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  

---

|(1) | Certain amounts related to the investment in subsidiaries, additional paid-in capital and retained earnings (accumulated deficit) captions have been revised to properly reflect the
application of the equity method, as required by Securities and Exchange Commission Rule 3-10 of Regulation S-X.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 30, 2006



|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------------------ | -------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only) |          |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                       |  | $                                          |         |   |                                | $ |         |                        |  | $ | 488,625                           |   |  | $            | (99,473  | ) |  | $ | 389,152 |  
|Cost of goods sold                              |  |                                            |         |   |                                |   |         |                        |  |   | 285,356                           |   |  |              | (99,473  | ) |  |   | 185,883 |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                    |  |                                            |         |   |                                |   |         |                        |  |   | 203,269                           |   |  |              |         |   |  |   | 203,269 |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                            |         |   |                                |   |         |                        |  |   | 93,038                            |   |  |              |         |   |  |   | 93,038  |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   | 93,038                            |   |  |              |         |   |  |   | 93,038  |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                            |         |   |                                |   |         |                        |  |   | 110,231                           |   |  |              |         |   |  |   | 110,231 |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                         |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                            |         |   |                                |   |         |                        |  |   | (319                              | ) |  |              |         |   |  |   | (319    | )
|Interest expense                                |  |                                            |         |   |                                |   | 7,709    |                        |  |   | 33                                |   |  |              |         |   |  |   | 7,742   |  
|Other income                                    |  |                                            |         |   |                                |   | (75      | )                      |  |   | (2                                | ) |  |              |         |   |  |   | (77     | )
|Equity in earnings of consolidated subsidiaries |  |                                            | (102,885 | ) |                                |   | (110,519 | )                      |  |   |                                  |   |  |              | 213,404  |   |  |   |        |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            | (102,885 | ) |                                |   | (102,885 | )                      |  |   | (288                              | ) |  |              | 213,404  |   |  |   | 7,346   |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes               |  |                                            | 102,885  |   |                                |   | 102,885  |                        |  |   | 110,519                           |   |  |              | (213,404 | ) |  |   | 102,885 |  
|Provision for income taxes                      |  |                                            | 40,337   |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   | 40,337  |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                          | 62,548   |   |                                | $ | 102,885  |                        |  | $ | 110,519                           |   |  | $            | (213,404 | ) |  | $ | 62,548  |  
|                                                |  |                                            |          |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 24, 2005



|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | ------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only)(2) |         |   | Harry & David Operations Corp.(2) |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(2) |   |  | Consolidated |         
|Net sales                                       |  | $                                             |        |   |                                   | $ |        |                        |  | $ | 465,442                              |   |  | $            | (103,050 | ) |  | $ | 362,392 |  
|Cost of goods sold                              |  |                                               |        |   |                                   |   |        |                        |  |   | 288,261                              |   |  |              | (103,050 | ) |  |   | 185,211 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Gross profit                                    |  |                                               |        |   |                                   |   |        |                        |  |   | 177,181                              |   |  |              |         |   |  |   | 177,181 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                               |        |   |                                   |   |        |                        |  |   | 86,779                               |   |  |              |         |   |  |   | 86,779  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               |        |   |                                   |   |        |                        |  |   | 86,779                               |   |  |              |         |   |  |   | 86,779  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                               |        |   |                                   |   |        |                        |  |   | 90,402                               |   |  |              |         |   |  |   | 90,402  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Other (income) expense:                         |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                               | (6      | ) |                                   |   |        |                        |  |   | (150                                 | ) |  |              |         |   |  |   | (156    | )
|Interest expense                                |  |                                               |        |   |                                   |   | 7,098   |                        |  |   | 6                                    |   |  |              |         |   |  |   | 7,104   |  
|Other expense                                   |  |                                               |        |   |                                   |   | 2,180   |                        |  |   |                                     |   |  |              |         |   |  |   | 2,180   |  
|Equity in earnings of consolidated subsidiaries |  |                                               | (49,058 | ) |                                   |   | (60,351 | )                      |  |   |                                     |   |  |              | 109,409  |   |  |   |        |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               | (49,064 | ) |                                   |   | (51,073 | )                      |  |   | (144                                 | ) |  |              | 109,409  |   |  |   | 9,128   |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes               |  |                                               | 49,064  |   |                                   |   | 51,073  |                        |  |   | 90,546                               |   |  |              | (109,409 | ) |  |   | 81,274  |  
|Provision for income taxes                      |  |                                               | 7       |   |                                   |   | 2,015   |                        |  |   | 30,195                               |   |  |              |         |   |  |   | 32,217  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                             | 49,057  |   |                                   | $ | 49,058  |                        |  | $ | 60,351                               |   |  | $            | (109,409 | ) |  | $ | 49,057  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  

---

|(2) | Amounts related to equity in earnings of consolidated subsidiaries in the Condensed Consolidating Statement of Operations have been included as required by Securities and Exchange
Commission Rule 3-10 of Regulation S-X to properly reflect the application of the equity method.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Statement of Operations

For the Twenty-seven Weeks Ended December 30, 2006



|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                       |  | $                                          |        |   |                                | $ |         |                        |  | $ | 594,804                           |   |  | $            | (139,754 | ) |  | $ | 455,050 |  
|Cost of goods sold                              |  |                                            |        |   |                                |   |         |                        |  |   | 368,112                           |   |  |              | (139,754 | ) |  |   | 228,358 |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross Profit                                    |  |                                            |        |   |                                |   |         |                        |  |   | 226,692                           |   |  |              |         |   |  |   | 226,692 |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                            |        |   |                                |   |         |                        |  |   | 134,739                           |   |  |              |         |   |  |   | 134,739 |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            |        |   |                                |   |         |                        |  |   | 134,739                           |   |  |              |         |   |  |   | 134,739 |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                            |        |   |                                |   |         |                        |  |   | 91,953                            |   |  |              |         |   |  |   | 91,953  |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense                          |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                            |        |   |                                |   |         |                        |  |   | (437                              | ) |  |              |         |   |  |   | (437    | )
|Interest expense                                |  |                                            |        |   |                                |   | 15,057   |                        |  |   | 73                                |   |  |              |         |   |  |   | 15,130  |  
|Pension curtailment gain                        |  |                                            |        |   |                                |   |         |                        |  |   | (15,844                           | ) |  |              |         |   |  |   | (15,844 | )
|Other income                                    |  |                                            |        |   |                                |   | (75      | )                      |  |   | (192                              | ) |  |              |         |   |  |   | (267    | )
|Equity in earnings of consolidated subsidiaries |  |                                            | (93,371 | ) |                                |   | (108,353 | )                      |  |   |                                  |   |  |              | 201,724  |   |  |   |        |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            | (93,371 | ) |                                |   | (93,371  | )                      |  |   | (16,400                           | ) |  |              | 201,724  |   |  |   | (1,418  | )
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes               |  |                                            | 93,371  |   |                                |   | 93,371   |                        |  |   | 108,353                           |   |  |              | (201,724 | ) |  |   | 93,371  |  
|Provision for income taxes                      |  |                                            | 36,685  |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   | 36,685  |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                          | 56,686  |   |                                | $ | 93,371   |                        |  | $ | 108,353                           |   |  | $            | (201,724 | ) |  | $ | 56,686  |  
|                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                   |   |  |              |          |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Twenty-six Weeks Ended December 24, 2005



|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | ------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only)(2) |         |   | Harry & David Operations Corp.(2) |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(2) |   |  | Consolidated |         
|Net sales                                       |  | $                                             |        |   |                                   | $ |        |                        |  | $ | 552,829                              |   |  | $            | (132,714 | ) |  | $ | 420,115 |  
|Cost of goods sold                              |  |                                               |        |   |                                   |   |        |                        |  |   | 360,681                              |   |  |              | (132,714 | ) |  |   | 227,967 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Gross profit                                    |  |                                               |        |   |                                   |   |        |                        |  |   | 192,148                              |   |  |              |         |   |  |   | 192,148 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                               |        |   |                                   |   |        |                        |  |   | 126,565                              |   |  |              |         |   |  |   | 126,565 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               |        |   |                                   |   |        |                        |  |   | 126,565                              |   |  |              |         |   |  |   | 126,565 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                               |        |   |                                   |   |        |                        |  |   | 65,583                               |   |  |              |         |   |  |   | 65,583  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Other (income) expense                          |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                               | (12     | ) |                                   |   |        |                        |  |   | (246                                 | ) |  |              |         |   |  |   | (258    | )
|Interest expense                                |  |                                               |        |   |                                   |   | 13,552  |                        |  |   | 5                                    |   |  |              |         |   |  |   | 13,557  |  
|Other expense                                   |  |                                               |        |   |                                   |   | 2,180   |                        |  |   |                                     |   |  |              |         |   |  |   | 2,180   |  
|Equity in earnings of consolidated subsidiaries |  |                                               | (31,783 | ) |                                   |   | (41,765 | )                      |  |   |                                     |   |  |              | 73,548   |   |  |   |        |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               | (31,795 | ) |                                   |   | (26,033 | )                      |  |   | (241                                 | ) |  |              | 73,548   |   |  |   | 15,479  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Income (loss) before income taxes               |  |                                               | 31,795  |   |                                   |   | 26,033  |                        |  |   | 65,824                               |   |  |              | (73,548  | ) |  |   | 50,104  |  
|Provision (benefit) for income taxes            |  |                                               | 4       |   |                                   |   | (5,750  | )                      |  |   | 24,059                               |   |  |              |         |   |  |   | 18,313  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Net income (loss)                               |  | $                                             | 31,791  |   |                                   | $ | 31,783  |                        |  | $ | 41,765                               |   |  | $            | (73,548  | ) |  | $ | 31,791  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  

---

|(2) | Amounts related to equity in earnings of consolidated subsidiaries in the Condensed Consolidating Statement of Operations have been included as required by Securities and Exchange
Commission Rule 3-10 of Regulation S-X to properly reflect the application of the equity method.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Statement of Cash Flows

For the Twenty-seven Weeks Ended December 30, 2006



|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|--------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                    |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by operating activities           |  |                                            | 17,455  |   |                                |   | 22,205   |                        |  |   | 110,215                          |   |              |   |  |  |   | 149,875  |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                            |        |   |                                |   | (4,483   | )                      |  |   | (6,116                           | ) |              |   |  |  |   | (10,599  | )
|Proceeds from the sale of fixed assets              |  |                                            |        |   |                                |   |         |                        |  |   | 1                                |   |              |   |  |  |   | 1        |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash used in investing activities               |  |                                            |        |   |                                |   | (4,483   | )                      |  |   | (6,115                           | ) |              |   |  |  |   | (10,598  | )
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Financing activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                            |        |   |                                |   | 108,500  |                        |  |   |                                 |   |              |   |  |  |   | 108,500  |  
|Repayments of revolving debt                        |  |                                            |        |   |                                |   | (108,500 | )                      |  |   |                                 |   |              |   |  |  |   | (108,500 | )
|Proceeds for exercise of stock options              |  |                                            | 970     |   |                                |   |         |                        |  |   |                                 |   |              |   |  |  |   | 970      |  
|Net (payments) receipts on intercompany debt        |  |                                            | (17,455 | ) |                                |   | (11,198  | )                      |  |   | 28,653                           |   |              |   |  |  |   |         |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                                            | (16,485 | ) |                                |   | (11,198  | )                      |  |   | 28,653                           |   |              |   |  |  |   | 970      |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Increase in cash and cash equivalents               |  |                                            | 970     |   |                                |   | 6,524    |                        |  |   | 132,753                          |   |              |   |  |  |   | 140,247  |  
|Cash and cash equivalents, beginning of period      |  |                                            | 463     |   |                                |   | 7,427    |                        |  |   | 15,912                           |   |              |   |  |  |   | 23,802   |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                          | 1,433   |   |                                | $ | 13,951   |                        |  | $ | 148,665                          |   |              | $ |  |  | $ | 164,049  |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  

Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 24, 2005



|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|--------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | --- | - |  | - | -------- | -
|                                                    |  | Harry & David Holdings, Inc. (Parent-Only) |        |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |    
|Operating activities                                |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash provided by (used in) operating activities |  |                                            | 5,302  |   |                                |   | 18,940   |                        |  |   | 107,778                          |   |  |              | (75 | ) |  |   | 131,945  |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Investing activities                                |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                            |       |   |                                |   | (2,750   | )                      |  |   | (4,082                           | ) |  |              |    |   |  |   | (6,832   | )
|Proceeds from the sale of fixed assets              |  |                                            |       |   |                                |   |         |                        |  |   | 11                               |   |  |              |    |   |  |   | 11       |  
|Transfer of fixed assets                            |  |                                            |       |   |                                |   | 183      |                        |  |   | (258                             | ) |  |              | 75  |   |  |   |         |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash provided by (used in) investing activities |  |                                            |       |   |                                |   | (2,567   | )                      |  |   | (4,329                           | ) |  |              | 75  |   |  |   | (6,821   | )
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Financing activities                                |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                            |       |   |                                |   | 104,000  |                        |  |   |                                 |   |  |              |    |   |  |   | 104,000  |  
|Repayments of revolving debt                        |  |                                            |       |   |                                |   | (104,000 | )                      |  |   |                                 |   |  |              |    |   |  |   | (104,000 | )
|Repayments of notes payable                         |  |                                            |       |   |                                |   | (253     | )                      |  |   |                                 |   |  |              |    |   |  |   | (253     | )
|Payments for deferred financing costs               |  |                                            | (3,214 | ) |                                |   | 2,000    |                        |  |   |                                 |   |  |              |    |   |  |   | (1,214   | )
|Net (payments) receipts on intercompany debt        |  |                                            | (2,077 | ) |                                |   | (10,646  | )                      |  |   | 12,723                           |   |  |              |    |   |  |   |         |  
|Proceeds from exercise of stock options             |  |                                            | 1,230  |   |                                |   |         |                        |  |   |                                 |   |  |              |    |   |  |   | 1,230    |  
|Dividends to stockholders                           |  |                                            | (2,600 | ) |                                |   |         |                        |  |   |                                 |   |  |              |    |   |  |   | (2,600   | )
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                                            | (6,661 | ) |                                |   | (8,899   | )                      |  |   | 12,723                           |   |  |              |    |   |  |   | (2,837   | )
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents    |  |                                            | (1,359 | ) |                                |   | 7,474    |                        |  |   | 116,172                          |   |  |              |    |   |  |   | 122,287  |  
|Cash and cash equivalents, beginning of period      |  |                                            | 1,405  |   |                                |   | 13,731   |                        |  |   | 9,718                            |   |  |              |    |   |  |   | 24,854   |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                          | 46     |   |                                | $ | 21,205   |                        |  | $ | 125,890                          |   |  | $            |    |   |  | $ | 147,141  |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  



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

FORWARD-LOOKING STATEMENTS

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

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 24, 2006, as updated in Part II, Item 1-A Risk
Factors of this Quarterly Report, 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 Quarterly Report speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible
for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Quarterly Report after the date of this Quarterly Report, except as may be required by law.
In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Quarterly Report or elsewhere might not occur.

Unless otherwise indicated, as used in this report, the terms we, our, and us refer to Harry and David Holdings, Inc. and its consolidated subsidiaries.

OVERVIEW

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

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

MATTERS AFFECTING COMPARABILITY

We report our financial statements
using a 52/53-week year with our quarters ending on the last Saturday of September, December, March and June. Fiscal year 2007, beginning June 25, 2006 and ending June 30, 2007, includes 53 weeks versus 52 weeks in fiscal year 2006, from
June 26, 2005 through June 24, 2006. Therefore, the fiscal 2007 year-to-date period includes 27 weeks versus 26 weeks for fiscal 2006 year-to-date period. Accordingly, results for these two periods may not be comparable.



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RESULTS OF OPERATIONS

The following tables summarize certain information relating to our operating results that has been derived from our unaudited condensed consolidated financial statements for the thirteen weeks ended December 30, 2006 and
December 24, 2005 as well the twenty-seven weeks ended December 30, 2006 and twenty-six weeks ended December 24, 2005. The amounts in the following table are in thousands.



|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|--------------------------------------------------- |  | -------------------------------------- | ------- | - | -------------------------------------- | - | ------- | ------------------------------------------ |  | - | ---------------------------------------- | - |  | - | ------- | -
|                                                    |  | Thirteen weeks ended December 30, 2006 |         |   | Thirteen weeks ended December 24, 2005 |   |         | Twenty-seven weeks ended December 30, 2006 |  |   | Twenty-six weeks ended December 24, 2005 |  
|Net sales                                           |  | $                                      | 389,152 |   |                                        | $ | 362,392 |                                            |  | $ | 455,050                                  |   |  | $ | 420,115 |  
|Cost of goods sold                                  |  |                                        | 185,883 |   |                                        |   | 185,211 |                                            |  |   | 228,358                                  |   |  |   | 227,967 |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Gross profit                                        |  |                                        | 203,269 |   |                                        |   | 177,181 |                                            |  |   | 226,692                                  |   |  |   | 192,148 |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Operating expenses:                                 |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Selling, general and administrative                 |  |                                        | 92,788  |   |                                        |   | 86,529  |                                            |  |   | 134,239                                  |   |  |   | 126,065 |  
|Selling, general and administrative  related party |  |                                        | 250     |   |                                        |   | 250     |                                            |  |   | 500                                      |   |  |   | 500     |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|                                                    |  |                                        | 93,038  |   |                                        |   | 86,779  |                                            |  |   | 134,739                                  |   |  |   | 126,565 |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Operating income                                    |  |                                        | 110,231 |   |                                        |   | 90,402  |                                            |  |   | 91,953                                   |   |  |   | 65,583  |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Other (income) expenses:                            |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Interest income                                     |  |                                        | (319    | ) |                                        |   | (156    | )                                          |  |   | (437                                     | ) |  |   | (258    | )
|Interest expense                                    |  |                                        | 7,742   |   |                                        |   | 7,104   |                                            |  |   | 15,130                                   |   |  |   | 13,557  |  
|Pension curtailment gain                            |  |                                        |        |   |                                        |   |        |                                            |  |   | (15,844                                  | ) |  |   |        |  
|Other (income) expense                              |  |                                        | (77     | ) |                                        |   | 2,180   |                                            |  |   | (267                                     | ) |  |   | 2,180   |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|                                                    |  |                                        | 7,346   |   |                                        |   | 9,128   |                                            |  |   | (1,418                                   | ) |  |   | 15,479  |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Income before income taxes                          |  |                                        | 102,885 |   |                                        |   | 81,274  |                                            |  |   | 93,371                                   |   |  |   | 50,104  |  
|Provision for income taxes                          |  |                                        | 40,337  |   |                                        |   | 32,217  |                                            |  |   | 36,685                                   |   |  |   | 18,313  |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  
|Net income                                          |  | $                                      | 62,548  |   |                                        | $ | 49,057  |                                            |  | $ | 56,686                                   |   |  | $ | 31,791  |  
|                                                    |  |                                        |         |   |                                        |   |         |                                            |  |   |                                          |   |  |   |         |  

NET SALES

The following table summarizes our consolidated net sales and net sales by segment for the periods indicated (dollars in thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in the
narrative may not sum to the amounts presented in the table.



|                                 |  |                      |         |                 |                      |   |                  |                          |                 |  |                        |                  |  |                 |         |  |                  |   |                  |   |         |  |       |  
|-------------------------------- |  | -------------------- | ------- | --------------- | -------------------- | - | ---------------- | ------------------------ | --------------- |  | ---------------------- | ---------------- |  | --------------- | ------- |  | ---------------- | - | ---------------- | - | ------- |  | ----- | -
|                                 |  | Thirteen Weeks Ended |         |                 | Thirteen Weeks Ended |   |                  | Twenty-seven Weeks Ended |                 |  | Twenty-six Weeks Ended |                 
|                                 |  | December 30,2006     |         | Percentof Total |                      |   | December 24,2005 |                          | Percentof Total |  |                        | December 30,2006 |  | Percentof Total |         |  | December 24,2005 |   | Percent of Total |  
|Harry and David Direct Marketing |  | $                    | 270,466 |                 | 69.5                 | % |                  | $                        | 257,866         |  | 71.2                   | %                |  | $               | 298,219 |  | 65.5             | % |                  | $ | 283,951 |  | 67.6  | %
|Harry and David Stores           |  |                      | 71,552  |                 | 18.4                 | % |                  |                          | 66,471          |  | 18.3                   | %                |  |                 | 96,983  |  | 21.3             | % |                  |   | 88,228  |  | 21.0  | %
|Jackson & Perkins                |  |                      | 26,583  |                 | 6.8                  | % |                  |                          | 26,016          |  | 7.2                    | %                |  |                 | 30,267  |  | 6.7              | % |                  |   | 31,700  |  | 7.5   | %
|Other                            |  |                      | 20,551  |                 | 5.3                  | % |                  |                          | 12,039          |  | 3.3                    | %                |  |                 | 29,581  |  | 6.5              | % |                  |   | 16,236  |  | 3.9   | %
|                                 |  |                      |         |                 |                      |   |                  |                          |                 |  |                        |                  |  |                 |         |  |                  |   |                  |   |         |  |       |  
|Total Net Sales                  |  | $                    | 389,152 |                 | 100.0                | % |                  | $                        | 362,392         |  | 100.0                  | %                |  | $               | 455,050 |  | 100.0            | % |                  | $ | 420,115 |  | 100.0 | %
|                                 |  |                      |         |                 |                      |   |                  |                          |                 |  |                        |                  |  |                 |         |  |                  |   |                  |   |         |  |       |  

Consolidated net sales of $389.2 million for the thirteen-week period ended December 30, 2006 increased $26.8
million, or 7.4%, from $362.4 million in the thirteen-week period ended December 24, 2005. This was primarily driven by increases in our Harry and David Direct Marketing segment, the Harry and David wholesale division within our Other segment
and our Harry and David Stores segment. Our Harry and David Direct Marketing segment increase was driven by higher revenue from shipping and handling and higher net sales per shipped package. Our shipping and handling income increase was
attributable to shipping and handling price increases we instituted earlier in the year, reduced delivery promotions as compared to the prior quarter and product price increases, as shipping and handling charges are product price dependent. The
retail pricing improvement was attributable to selected price increases, reduced product markdowns and reduced promotional activity in the current year fiscal quarter compared to the prior year fiscal quarter. The growth in the Harry and David
wholesale division was due to



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##### Table of Contents

continued marketing efforts, which resulted in an increase in order volume from large customers such as Costco and Macys over the prior year. Harry and
David Stores segment growth over the prior fiscal year was attributable to higher revenue per sales transaction due to less price promotional activity in the current year, price increases on selected items and higher customer traffic.

In our Harry and David Direct Marketing segment and the Jackson & Perkins Direct Marketing division, we received approximately 2.0 million telephone, mail,
fax and Internet orders and shipped approximately 5.6 million packages during the thirteen weeks ended December 30, 2006, a decrease of approximately 5.9% in orders and 5.1% in shipped packages over the prior fiscal year period.

Consolidated net sales of $455.1 million for the twenty-seven week period ended December 30, 2006, increased $35.0 million, or 8.3%, from $420.1
million in the twenty-six week period ended December 24, 2005. Net sales increased approximately $21.8 million, or 5.2%, from fiscal 2006 to fiscal 2007, normalized for a twenty-six week period. The drivers of the increase in the twenty-seven
week period results were primarily the same as those for the thirteen-week period.

Harry and David Direct Marketing

Harry and David Direct Marketing segment net sales, which include catalog, Internet, business-to-business and outbound telemarketing sales, as well as revenue from
shipping and handling, increased $12.6 million, or 4.9%, to $270.5 million in the thirteen-week period ended December 30, 2006, from $257.9 million in the thirteen-week period ended December 24, 2005. Despite shipping fewer packages in the
current fiscal quarter, sales increased due to a combination of increased income from shipping and handling per package, increased retail prices, lower markdowns and discounts due to our planned reduction in promotional activity and fewer product
returns.

Harry and David Direct Marketing segment net sales increased $14.2 million, or 5.0%, to $298.2 million in the twenty-seven week period ended
December 30, 2006, from $284.0 million in the twenty-six week period ended December 24, 2005. Net sales increased approximately $6.4 million, or 2.3% from fiscal 2006 to fiscal 2007, normalized for a twenty-six week period. The drivers of
the increase in the twenty-seven week period results were the same as those for the thirteen-week period.

Harry and David Stores

Harry and David Stores segment net sales increased $5.1 million, or 7.7%, to $71.6 million in the thirteen-week period ended December 30, 2006, from $66.5 million in
the thirteen-week period ended December 24, 2005. The increase was due to selected price increases, reduced promotional discounts and fewer product markdowns, the combination of which resulted in higher revenue per sales transaction. We also
experienced higher customer traffic in the current year, which we believe was partially attributable to an overall positive customer response to new Harry and David merchandising, marketing and packaging efforts.

Sales for comparable stores were up 8.5% for the thirteen-week period ended December 30, 2006, compared to the thirteen-week period ended December 24, 2005.
Sales for comparable stores were up 5.7% for the same period after adjusting for the shift in weeks from the thirteen-week period ending December 24, 2005 in the prior year to the thirteen-week period ended December 30, 2006 in the current
year. December 2006 marked the thirty-seventh consecutive month of positive comparable store sales. 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. In both periods we had 135
stores in operation, although in the last twelve months we opened 6 new stores and closed 6 underperforming stores.

Harry and David Stores segment net
sales increased $8.8 million, or 10.0%, to $97.0 million in the twenty-seven week period ended December 30, 2006, from $88.2 million in the twenty-six week period ended December 24, 2005. Harry and David Stores net sales increased
approximately $5.1 million, or 5.8%, from fiscal 2006 to fiscal 2007, normalized for a twenty-six week period. We believe that in addition to the drivers for the thirteen-week period described above, a portion of the increase was due to the economic
impact of hurricanes in the United States that negatively affected sales in first quarter of the prior year.

Jackson & Perkins

Jackson & Perkins segment net sales increased $0.6 million, or 2.3%, to $26.6 million in the thirteen-week period ended December 30, 2006, from $26.0
million in the thirteen-week period ended December 24, 2005. Net sales increased primarily due to improved sales from the Jackson & Perkins wholesale division, partially offset by a sales decrease in the Jackson & Perkins
direct marketing division.



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Jackson & Perkins wholesale division net sales increased $1.5 million, or 26.8%, to $7.1 million in the
thirteen-week period ended December 30, 2006, from $5.6 million in the thirteen-week period ended December 24, 2005. The increase was primarily driven by timing of shipments and product mix improvements.

Jackson & Perkins direct marketing division net sales, which include catalog, Internet, business-to-business and outbound telemarketing sales, as well as
revenue from shipping and handling, decreased approximately $1.0 million, or 4.9%, to $19.3 million in the thirteen-week period ended December 30, 2006, from $20.3 million in the thirteen-week period ended December 24, 2005. The primary
driver of this decrease was a page reduction in our catalogs which reflected an overall strategy to reduce the number of less profitable products offered in our catalogs. The decrease was partially offset by improved revenue from shipping and
handling for the current fiscal quarter as compared to the prior year fiscal quarter.

Jackson & Perkins segment net sales decreased $1.4 million,
or 4.4%, to $30.3 million in the twenty-seven week period ended December 30, 2006, from $31.7 million in the twenty-six week period ended December 24, 2005. Net sales decreased approximately $3.1 million, or 9.8%, from fiscal 2006 to
fiscal 2007, normalized for a twenty-six week period.

Jackson & Perkins wholesale division net sales decreased $0.4 million, or 5.2%, to $7.3
million in the twenty-seven week period ended December 30, 2006, from $7.7 million in the twenty-six week period ended December 24, 2005. The decrease was primarily driven by lower royalty income in the current fiscal period, which was
partially offset by increased product pricing and changes in product mix.

Jackson & Perkins direct marketing division net sales decreased $1.0
million, or 4.4%, to $21.7 million in the twenty-seven week period ended December 30, 2006, from $22.7 million in the twenty-six week period ended December 24, 2005. In addition to the reduced page count in our catalogs discussed above, on
a year-to-date basis, our catalog circulation decreased as part of our strategy to reduce mailings to less profitable segments.

Other

Other category net sales increased $8.6 million, or 71.7%, to $20.6 million in the thirteen-week period ended December 30, 2006, from $12.0 million in the
thirteen-week period ended December 24, 2005. The increase was due to volume gains achieved with national retailers as a result of our continued efforts to market Harry and David ® products. In the Harry and David wholesale division, this resulted in significantly
increased orders in the current fiscal quarter, predominantly driven by sales to Costco and Macys, whose programs expanded to include more retail locations and a broader assortment of Harry and David ® merchandise.

Other category net sales increased $13.4 million, or 82.7%, to $29.6 million in the twenty-seven week period ended December 30, 2006, from $16.2 million in the twenty-six week period ended December 24, 2005.
The twenty-seventh week for Harry and David wholesale did not have a material impact on net sales as most our wholesale customers purchase in advance of the holidays. The drivers of the twenty-seven week period results were primarily the same as
those for the thirteen-week period.

GROSS PROFIT

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

The following table summarizes our consolidated gross profit, gross profit by segment, and gross profit as a percentage of consolidated and segment net sales for the
periods indicated (dollars in thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in the narrative may not sum to the amounts presented in the table.



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|                                 |  |                      |         |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------- | ------------------ | -------------------- | - | ---------------- | ----------------------- | ------------------ |  | --------------------- | ---------------- |  | ------------------ | ------- |  | ---------------- | - | ------------------ | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |         |                    | Thirteen Weeks Ended |   |                  | Twenty-seven WeeksEnded |                    |  | Twenty-six WeeksEnded |                 
|                                 |  | December 30,2006     |         | Percentof NetSales |                      |   | December 24,2005 |                         | Percentof NetSales |  |                       | December 30,2006 |  | Percentof NetSales |         |  | December 24,2005 |   | Percentof NetSales |  
|Harry and David Direct Marketing |  | $                    | 150,759 |                    | 55.7                 | % |                  | $                       | 129,998            |  | 50.4                  | %                |  | $                  | 158,661 |  | 53.2             | % |                    | $ | 133,853 |  | 47.1 | %
|Harry and David Stores           |  |                      | 38,287  |                    | 53.5                 | % |                  |                         | 35,076             |  | 52.8                  | %                |  |                    | 50,456  |  | 52.0             | % |                    |   | 44,933  |  | 50.9 | %
|Jackson & Perkins                |  |                      | 10,023  |                    | 37.7                 | % |                  |                         | 9,195              |  | 35.3                  | %                |  |                    | 10,699  |  | 35.3             | % |                    |   | 9,329   |  | 29.4 | %
|Other                            |  |                      | 4,200   |                    | 20.4                 | % |                  |                         | 2,912              |  | 24.2                  | %                |  |                    | 6,876   |  | 23.2             | % |                    |   | 4,033   |  | 24.8 | %
|                                 |  |                      |         |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  
|Total Gross Profit               |  | $                    | 203,269 |                    | 52.2                 | % |                  | $                       | 177,181            |  | 48.9                  | %                |  | $                  | 226,692 |  | 49.8             | % |                    | $ | 192,148 |  | 45.7 | %
|                                 |  |                      |         |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  

Consolidated gross profit increased $26.1 million, or 14.7%, to $203.3 million in the thirteen-week period ended
December 30, 2006, from $177.2 million in the thirteen-week period ended December 24, 2005. Consolidated gross profit as a percentage of consolidated net sales was 52.2% in the thirteen-week period ended December 30, 2006 and 48.9% in
the thirteen-week period ended December 24, 2005. The rate improvement was driven by higher net sales per package, combined with lower variable manufacturing costs per package and reduced delivery expenses. The reduction in delivery expenses
resulted from a favorable mix of lower cost delivery methods, fewer expedited delivery requests and reduced fuel surcharges. The lower variable products costs were a result of the success of our cost reduction initiatives implemented earlier in the
year. These initiatives focused on reducing material costs while maintaining our product and packaging quality standards. The gross profit rate increases in our Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins
segments were partially offset by a reduction in the gross profit rate in our Other segment due to increased sales volume in lower margin products in the Harry and David wholesale division.

Consolidated gross profit increased $34.6 million, or 18.0%, to $226.7 million in the twenty-seven week period ended December 30, 2006, from $192.1 million in the
twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week, which contributed $5.9 million of gross profit, consolidated gross profit increased approximately $28.7 million, or 14.9%, from fiscal 2006 to fiscal 2007,
normalized for a twenty-six week period. Consolidated gross profit as a percentage of consolidated net sales was 49.8% in the twenty-seven week period ended December 30, 2006, and 45.7% in the twenty-six week period ended December 24,
2005. The drivers of the twenty-seven week period results were primarily the same as those for the thirteen-week period.

Harry and David Direct
Marketing

Harry and David Direct Marketing segment gross profit increased $20.8 million, or 16.0%, to $150.8 million in the thirteen-week period ended
December 30, 2006, from $130.0 million in the thirteen-week period ended December 24, 2005. On a rate basis, gross profit improved to 55.7% in the current fiscal period compared to 50.4% in the prior fiscal period. The rate improvement was
driven by improved revenue from shipping and handling, product price increases, and lower average cost per package, as previously described. Also contributing to the rate increase were lower delivery expenses in the current fiscal quarter.

Harry and David Direct Marketing segment gross profit increased $24.8 million, or 18.5%, to $158.7 million in the twenty-seven week period ended
December 30, 2006, from $133.9 million in the twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week, which accounted for $4.3 million, gross profit increased $20.5 million, or 15.3%. Harry and David Direct
Marketing segment gross profit as a percentage of segment net sales was 53.2% in the twenty-seven week period ended December 30, 2006, and 47.1% in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven week
period results are primarily the same as those for the thirteen-week period.

Harry and David Stores

Harry and David Stores segment gross profit increased $3.2 million, or 9.1%, to $38.3 million in the thirteen-week period ended December 30, 2006, from $35.1 million
in the thirteen-week period ended December 24, 2005. Harry and David Stores segment gross profit as a percentage of segment net sales was 53.5% in the thirteen-week period ended December 30, 2006, compared to 52.8% in the thirteen-week
period ended December 24, 2005. The rate improvement was driven by higher net sales attributable to selected price increases, reduced product markdowns as well as lower variable manufacturing costs as previously described.



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Harry and David Stores segment gross profit increased $5.6 million, or 12.5%, to $50.5 million in the twenty-seven week
period ended December 30, 2006, from $44.9 million in the twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week, which accounted for $1.3 million, gross profit increased $4.3 million, or 9.6%. Harry and David
Stores segment gross profit as a percentage of segment net sales was 52.0% in the twenty-seven week period ended December 30, 2006, compared to 50.9% in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven
week period results were primarily the same as those for the thirteen-week period.

Jackson & Perkins

Jackson & Perkins segment gross profit increased $0.8 million, or 8.7%, to $10.0 million in the thirteen-week period ended December 30, 2006, from $9.2
million in the thirteen-week period ended December 24, 2005. The increase was driven by improved margins in our Jackson & Perkins direct marketing division partially offset by reduced margins in our Jackson & Perkins wholesale
division. Jackson & Perkins segment gross profit as a percentage of segment net sales was 37.7% in the thirteen-week period ended December 30, 2006, and 35.3% in the thirteen-week period ended December 24, 2005.

Jackson & Perkins direct marketing division gross profit increased $1.2 million, or 14.8%, to $9.3 million in the thirteen-week period ended December 30,
2006, from $8.1 million in the thirteen-week period ended December 24, 2005 despite the net sales decrease of $1.0 million. The gross profit improvement was a result of higher revenue from shipping and handling, higher retail prices per
package, lower markdowns and discounts per package and reduced delivery expenses.

Jackson & Perkins wholesale division gross profit decreased
$0.4 million, or 33.3%, to $0.8 million in the thirteen-week period ended December 30, 2006, from $1.2 million in the thirteen-week period ended December 24, 2005. The decrease was attributable to lower net sales, higher inventory reserves
and higher royalty expenses in the current fiscal quarter.

Jackson & Perkins segment gross profit increased $1.4 million, or 15.1%, to $10.7
million in the twenty-seven week period ended December 30, 2006, from $9.3 million in the twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week, which accounted for $0.4 million, gross profit increased $1.0
million, or 10.8%. Jackson & Perkins segment gross profit as a percentage of segment net sales was 35.3% in the twenty-seven week period ended December 30, 2006, and 29.4% in the twenty-six week period ended December 24, 2005.

Jackson & Perkins direct marketing division gross profit increased $1.7 million to $9.9 million in the twenty-seven week period ended
December 30, 2006, from $8.2 million in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven week period results were primarily the same as those for the thirteen-week period.

Jackson & Perkins wholesale division gross profit decreased $0.3 million to $0.8 million in the twenty-seven week period ended December 30, 2006, from $1.1
million in the twenty-six week period ended December 24, 2005. The decrease was attributable to higher inventory reserves and lower royalty income, which was partially offset by lower royalty expense in the twenty-seven week period ended
December 30, 2006.

Other

Other segment gross
profit increased $1.3 million, or 44.8%, to $4.2 million in the thirteen-week period ended December 30, 2006, from $2.9 million in the thirteen-week period ended December 24, 2005. The dollar increase was driven by increased Harry and
David wholesale division sales to Costco and Macys, whose programs expanded to include more retail locations and a broader assortment of Harry and David® merchandise. Other segment gross profit as a percentage of segment net sales was 20.4% in the thirteen-week period
ended December 30, 2006, and 24.2% in the thirteen-week period ended December 24, 2005. This rate decrease was due to unfavorable mix changes reflecting greater sales in lower margin products.

Other segment gross profit increased $2.9 million, or 72.5%, to $6.9 million in the twenty-seven week period ended December 30, 2006, from $4.0 million in the
twenty-six week period ended December 24, 2005. The twenty-seventh week for Harry and David wholesale did not have a material impact on the gross profit as most of our wholesale customers purchase in advance of the holidays. Other segment gross
profit as a percentage of segment net sales was 23.2% in the twenty-seven week period ended December 30, 2006, and 24.8% in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven week period results were
primarily the same as those for the thirteen-week period.



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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses consist of occupancy costs associated with our stores and corporate facility, advertising, credit costs, call center expenses, depreciation and amortization for
store leasehold improvements and fixtures, corporate facilities, Information Technology (IT) equipment and software, and corporate administrative functions. Occupancy costs associated with the stores and corporate facility include rent, common area
maintenance, utilities and other general expenses. Corporate administrative functions include the costs of executive administration, legal, human resources, finance, insurance, information technology services and other general expenses. Corporate
overhead allocations described below consist of various corporate overhead functions that are incurred by our Other segment and allocated to the three other reportable segments. Accordingly, the fluctuation drivers for consolidated SG&A are
generally the same for each reportable segment unless otherwise indicated.

The following table summarizes our consolidated SG&A expenses, SG&A
expenses by segment, and SG&A expenses as a percentage of consolidated and segment net sales for the periods indicated (dollars in thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in
the narrative may not sum to the amounts presented in the table.



|                                 |  |                      |        |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | ------------------ | -------------------- | - | ---------------- | ----------------------- | ------------------ |  | --------------------- | ---------------- |  | ------------------ | ------- |  | ---------------- | - | ------------------ | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |                    | Thirteen Weeks Ended |   |                  | Twenty-seven WeeksEnded |                    |  | Twenty-six WeeksEnded |                 
|                                 |  | December 30,2006     |        | Percentof NetSales |                      |   | December 24,2005 |                         | Percentof NetSales |  |                       | December 30,2006 |  | Percentof NetSales |         |  | December 24,2005 |   | Percentof NetSales |  
|Harry and David Direct Marketing |  | $                    | 62,668 |                    | 23.2                 | % |                  | $                       | 57,558             |  | 22.3                  | %                |  | $                  | 82,159  |  | 27.5             | % |                    | $ | 77,086  |  | 27.1 | %
|Harry and David Stores           |  |                      | 19,762 |                    | 27.6                 | % |                  |                         | 18,362             |  | 27.6                  | %                |  |                    | 36,704  |  | 37.8             | % |                    |   | 34,280  |  | 38.9 | %
|Jackson & Perkins                |  |                      | 9,302  |                    | 35.0                 | % |                  |                         | 10,021             |  | 38.5                  | %                |  |                    | 13,827  |  | 45.7             | % |                    |   | 13,723  |  | 43.3 | %
|Other                            |  |                      | 1,306  |                    | 6.4                  | % |                  |                         | 838                |  | 7.0                   | %                |  |                    | 2,049   |  | 6.9              | % |                    |   | 1,476   |  | 9.1  | %
|                                 |  |                      |        |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  
|Total SG&A                       |  | $                    | 93,038 |                    | 23.9                 | % |                  | $                       | 86,779             |  | 24.0                  | %                |  | $                  | 134,739 |  | 29.6             | % |                    | $ | 126,565 |  | 30.1 | %
|                                 |  |                      |        |                    |                      |   |                  |                         |                    |  |                       |                  |  |                    |         |  |                  |   |                    |   |         |  |      |  

Consolidated SG&A expenses increased $6.2 million, or 7.1%, to $93.0 million in the thirteen-week period ended
December 30, 2006, compared to $86.8 million in the thirteen-week period ended December 24, 2005. The increase was primarily associated with a higher performance-based incentive compensation accrual resulting from the achievement of
certain financial goals as well as an increase in consulting expenses related to the implementation of an Enterprise Resource Planning (ERP) software package. As described below, these increases were partially offset by reduced advertising costs in
the Jackson & Perkins direct marketing division. Consolidated SG&A expenses as a percentage of consolidated net sales were 23.9% in the thirteen-week period ended December 30, 2006, compared to 24.0% in the thirteen-week period
ended December 24, 2005.

Consolidated SG&A expenses increased $8.1 million, or 6.4%, to $134.7 million in the twenty-seven week period ended
December 30, 2006, compared to $126.6 million in the twenty-six week period ended December 24, 2005. In addition to the drivers described above for the thirteen-week period, the additional week also contributed to an increase in SG&A
of approximately $4.1 million in the current fiscal period. Consolidated SG&A expenses as a percentage of consolidated net sales were 29.6% in the twenty-seven week period ended December 30, 2006, compared to 30.1% in the twenty-six week
period ended December 24, 2005.

Harry and David Direct Marketing

Harry and David Direct Marketing segment SG&A expenses increased $5.1 million, or 8.9%, to $62.7 million in the thirteen-week period ended December 30, 2006, compared to $57.6 million in the thirteen-week
period ended December 24, 2005. This increase was primarily a result of higher corporate overhead allocations in the current fiscal quarter. Harry and David Direct Marketing segment SG&A expenses as a percentage of segment net sales were
23.2% in the thirteen-week period ended December 30, 2006, compared to 22.3% in the thirteen-week period ended December 24, 2005.

Harry and
David Direct Marketing segment SG&A expenses increased $5.1 million, or 6.6%, to $82.2 million in the twenty-seven week period ended December 30, 2006, compared to $77.1 million in the twenty-six week period ended December 24, 2005.
The drivers of the twenty-seven week period results were primarily the same as those for the thirteen-week period. Excluding the twenty-seventh week, SG&A expenses increased $2.9 million or 3.8%. Harry and David Direct Marketing segment SG&A
expenses as a percentage of segment net sales were 27.5% in the twenty-seven week period ended December 30, 2006, compared to 27.1% in the twenty-six week period ended December 24, 2005.



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Harry and David Stores

Harry and David Stores segment SG&A expenses increased $1.4 million, or 7.6%, to $19.8 million in the thirteen-week period ended December 30, 2006, compared to $18.4 million in the thirteen-week period ended December 24, 2005.
This increase was primarily due to higher corporate overhead allocations, increased payroll expenses due to merit and headcount increases for salaried employees and higher hourly employee expenses to support the increased sales volume, and higher
depreciation. Harry and David Stores segment SG&A expenses as a percentage of consolidated net sales were 27.6% in both thirteen-week periods ended December 30, 2006 and December 24, 2005.

Harry and David Stores segment SG&A expenses increased $2.4 million, or 7.0%, to $36.7 million in the twenty-seven week period ended December 30, 2006, compared
to $34.3 million in the twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week SG&A increased approximately $1.0 million as compared to the twenty-six week period in the prior fiscal year. Harry and David Stores
segment SG&A expenses as a percentage of segment net sales was 37.8% in the twenty-seven week period ended December 30, 2006, compared to 38.9% in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven week
period results were primarily the same as those for the thirteen-week period.

Jackson & Perkins

Jackson & Perkins segment SG&A expenses decreased $0.7 million, or 7.0%, to $9.3 million in the thirteen-week period ended December 30, 2006, compared
to $10.0 million in the thirteen-week period ended December 24, 2005. The decrease was primarily due to reduced advertising expense of $1.2 million in the Jackson & Perkins direct marketing division driven primarily by savings from
reduced pages in our catalogs. This decrease was partially offset by an increase of $0.3 million in the Jackson & Perkins wholesale division due to increased travel expenses and an increased bad debt reserve. Jackson & Perkins
segment SG&A expenses as a percentage of consolidated net sales were 35.0% in the thirteen-week period ended December 30, 2006, compared to 38.5% in the thirteen-week period ended December 24, 2005.

Jackson & Perkins segment SG&A expenses increased $0.1 million, or 0.7%, to $13.8 million in the twenty-seven week period ended December 30, 2006,
compared to $13.7 million in the twenty-six week period ended December 24, 2005. Excluding the twenty-seventh week, which contributed approximately $0.5 million of expense, SG&A expenses were lower compared to last year. Jackson &
Perkins segment SG&A expenses as a percentage of segment net sales were 45.7% in the twenty-seven week period ended December 30, 2006, compared to 43.3% in the twenty-six week period ended December 24, 2005.

Other

Other segment SG&A expenses increased $0.5 million, or
62.5%, to $1.3 million in the thirteen-week period ended December 30, 2006, compared to $0.8 million in the thirteen-week period ended December 24, 2005. The increase was driven by increased advertising and trade shows in the Harry and
David wholesale division. Other segment SG&A expenses as a percentage of consolidated net sales were 6.4% in the thirteen-week period ended December 30, 2006, compared to 7.0% in the thirteen-week period ended December 24, 2005.

Other segment SG&A expenses increased $0.5 million, or 33.3%, to $2.0 million in the twenty-seven week period ended December 30, 2006, compared
to $1.5 million in the twenty-six week period ended December 24, 2005. The drivers of the twenty-seven week period results were primarily the same as those for the thirteen-week period. The twenty-seventh week in Harry and David wholesale did
not have a material effect on the period. Other category SG&A expenses as a percentage of segment net sales were 6.9% in the twenty-seven week period ended December 30, 2006, compared to 9.1% in the twenty-six week period ended
December 24, 2005.

OTHER (INCOME) EXPENSE

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

Other
(income) expense decreased by $1.8 million, or 19.8%, to $7.3 million in the thirteen-week period ended December 30, 2006, from $9.1 million in the thirteen-week period ended December 24, 2005. The other expense for the thirteen weeks
ended December 30, 2006, was primarily comprised of interest expense in our Other segment. The other expense for the thirteen weeks ended December 24, 2005, was primarily comprised of interest expense of $7.1 million and the $2.2 million
write-off of deferred IPO costs.



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Other (income) expense decreased $16.9 million, or 109.0%, to ($1.4) million in the twenty-seven week period ended
December 30, 2006, compared to $15.5 million in the twenty-six week period ended December 24, 2005. The primary source of other income for the twenty-seven weeks ended December 30, 2006 was the recognition of a one-time curtailment
gain of $15.8 million associated with the freeze of our qualified and non-qualified pension plans effective June 25, 2006, offset by interest expense of $15.1 million. The other expense for the prior fiscal period was primarily comprised of
interest expense of $13.6 million and the $2.2 million write-off of deferred IPO costs, as noted above. For further discussion of the freeze of our pension, see Note 8 to our Condensed Consolidated Financial Statements within Part I of this Form
10-Q.

INCOME TAXES

For interim financial
reporting purposes, tax expense or benefit is calculated based on the estimated annual tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates for the second quarter of fiscal 2007 and fiscal 2006 were 39.2%
and 39.6%, respectively.

EBITDA

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



|                                            |  |                                        |         |                                        |   |                                           |  |   |                                          |   |  |   |        
|------------------------------------------- |  | -------------------------------------- | ------- | -------------------------------------- | - | ----------------------------------------- |  | - | ---------------------------------------- | - |  | - | -------
|                                            |  | Thirteen weeks ended December 30, 2006 |         | Thirteen weeks ended December 24, 2005 |   | Twenty-sevenweeks ended December 30, 2006 |  |   | Twenty-six weeks ended December 24, 2005
|Net cash provided by operating activities   |  | $                                      | 228,340 |                                        | $ | 203,108                                   |  | $ | 149,875                                  |   |  | $ | 131,945
|Stock option compensation expense           |  |                                        | 188     |                                        |   | 113                                       |  |   | 309                                      |   |  |   | 226    
|Changes in operating assets and liabilities |  |                                        | 119,442 |                                        |   | 114,100                                   |  |   | 61,154                                   |   |  |   | 67,868 
|Write-off of deferred IPO costs             |  |                                        |        |                                        |   | 2,180                                     |  |   |                                         |   |  |   | 2,180  
|Loss on disposal of fixed assets            |  |                                        | 134     |                                        |   | 229                                       |  |   | 221                                      |   |  |   | 304    
|Deferred income taxes                       |  |                                        | 40,263  |                                        |   | 32,067                                    |  |   | 36,304                                   |   |  |   | 18,352 
|Pension curtailment gain                    |  |                                        |        |                                        |   |                                          |  |   | (15,844                                  | ) |  |   |       
|Amortization of deferred financing costs    |  |                                        | 658     |                                        |   | 583                                       |  |   | 1,352                                    |   |  |   | 1,166  
|Depreciation and amortization               |  |                                        | 5,107   |                                        |   | 4,779                                     |  |   | 9,693                                    |   |  |   | 10,058 
|                                            |  |                                        |         |                                        |   |                                           |  |   |                                          |   |  |   |        
|Net income                                  |  |                                        | 62,548  |                                        |   | 49,057                                    |  |   | 56,686                                   |   |  |   | 31,791 
|Interest expense, net                       |  |                                        | 7,423   |                                        |   | 6,948                                     |  |   | 14,693                                   |   |  |   | 13,299 
|Provision for income taxes                  |  |                                        | 40,337  |                                        |   | 32,217                                    |  |   | 36,685                                   |   |  |   | 18,313 
|Depreciation and amortization               |  |                                        | 5,107   |                                        |   | 4,779                                     |  |   | 9,693                                    |   |  |   | 10,058 
|                                            |  |                                        |         |                                        |   |                                           |  |   |                                          |   |  |   |        
|EBITDA                                      |  | $                                      | 115,415 |                                        | $ | 93,001                                    |  | $ | 117,757                                  |   |  | $ | 73,461 
|                                            |  |                                        |         |                                        |   |                                           |  |   |                                          |   |  |   |        

In the thirteen-week period ended December 30, 2006, net income and EBITDA included:



| |  |  | $2.3 million of consulting fees associated with the implementation of our ERP software project, other IT strategy projects and, to a lesser extent, employee
executive recruiting charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.6 million severance;
| | - |  | -----------------------



| |  |  | $0.2 million of fees paid to Wasserstein and Highfields under our management agreement;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | $0.1 million loss on disposal of fixed assets; and
| | - |  | --------------------------------------------------



| |  |  | $0.1 million of income recognized from vendor settlements.
| | - |  | ----------------------------------------------------------

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



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



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



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



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



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In the twenty-seven week period ended December 30, 2006, net income and EBITDA included:



| |  |  | $15.8 million non-cash pension curtailment gain;
| | - |  | ------------------------------------------------



| |  |  | $2.9 million of consulting fees associated with the implementation of our ERP software project, other IT strategy projects and, to a lesser extent, employee
executive recruiting charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.8 million severance;
| | - |  | -----------------------



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



| |  |  | $0.2 million loss on disposal of fixed assets; and
| | - |  | --------------------------------------------------



| |  |  | $0.3 million of income recognized from vendor settlements.
| | - |  | ----------------------------------------------------------

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



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



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



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



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



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



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



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

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity and capital resource needs are to service our debt, finance working capital and make
capital expenditures. At December 30, 2006, our primary sources of liquidity were cash and cash equivalents of $164.0 million and unused borrowings under our revolving credit facility of $123.0 million to the extent of our current available
borrowing base. As of December 30, 2006, we had $2.0 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit facility are determined in accordance with our
asset-based debt limitation formula. Total available borrowings at December 30, 2006 were approximately $17.9 million. See further discussion of our revolving credit facility below under Borrowing Arrangements. Due to the highly
seasonal nature of our business, we rely heavily on our revolving credit facility starting in the first quarter of each fiscal year to finance operations leading up to the December holiday selling season. Our available cash and borrowings are used
to fund general operating expenses, inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during the fourth calendar quarter
(our second fiscal quarter) because of the holiday selling season (see Seasonality below).

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

Cash Flows Provided by Operating
Activities

Cash provided by operating activities totaled $149.9 million in the twenty-seven week period ended December 30, 2006, compared to
$131.9 million in the twenty-six week period ended December 24, 2005. The $18.0 million increase in cash provided by operating activities was due to increased cash flow of $24.6 million from operating activities primarily attributable to our
improved results.

Cash Flows Used in Investment Activities

Cash used in investment activities totaled $10.6 million in the twenty-seven week period ended December 30, 2006, compared to $6.8 million in the twenty-six week period ended December 24, 2005. Capital expenditures in the first
twenty-seven weeks of fiscal 2007 included investment in an Enterprise Resource Planning (ERP) system, additional manufacturing capacity, and a new transportation and fulfillment management system to support distribution, and infrastructure for our
seasonal call center, which was relocated within the city of Eugene.



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We currently expect our capital expenditures to be approximately $23.0 million for fiscal 2007, based primarily on
spending for the implementation of the ERP system, manufacturing improvements, new store openings, and systems modernization. However, our capital expenditures may be different than currently anticipated depending upon the size and nature of new
business opportunities and actual cash flows generated by our operations.

Cash Flows Provided by Financing Activities

Cash provided by financing activities totaled $1.0 million for the twenty-seven weeks ended December 30, 2006, compared to a usage of $2.8 million in the twenty-six
weeks ended December 24, 2005. The increase was primarily driven by payments in the prior year related to deferred financing costs and a dividend, neither of which occurred in the current year.

Borrowing Arrangements

Revolving Credit Facility

Our principal sources of liquidity are available cash, cash flows from operations and borrowings under our
$125.0 million revolving credit facility agreement (the Credit Agreement) entered into by our subsidiary Harry & David Operations Corp. The revolving credit facility has a maturity date of March 20, 2011. Harry &
David Operations Corp.s ability to borrow under the revolving credit facility is limited by the borrowing base and is subject to compliance 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 Harry & David Operations Corp.s 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
consistently generated substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 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 30, 2006, we had $2.0 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the Credit Agreement are determined in accordance with our asset-based debt limitation formula.
Total additional available borrowing capacity at December 30, 2006 was approximately $17.9 million.

Harry & David Operations Corp.s
obligations under the revolving credit facility are guaranteed by us and by all of Harry & David Operations Corp.s existing and future direct and indirect domestic subsidiaries and are secured by first-priority pledges of the stock of
Harry & David Operations Corp. 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 & David Operations Corp.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, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. In
addition, the revolving credit facility requires that, on a consolidated basis, we meet and maintain a minimum fixed charge coverage ratio, subject to certain definitions and conditions, and maximum capital expenditures.

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 Risk Factors in Item 1.A.of our Annual Report on Form 10-K. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and
payable which could also trigger a similar right under other agreements, including our indenture.

The revolving credit facility contains customary events
of default, including, but not limited to, failure to pay principal, interest or fees, failure of any representation or warranty to be true in all material respects when made or deemed made, defaults under other debt instruments, including under the
indenture governing the notes, loss of liens on collateral, invalidity of guarantees and commencement of a bankruptcy or similar proceeding by or on behalf of a credit party and judgments against a credit party.



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At December 30, 2006, we were in compliance with all of our covenants under the Credit Agreement.

Long-term Debt

In February 2005, Harry & David
Operations Corp., our wholly-owned subsidiary, issued $70.0 million in Senior Floating Rate Notes due March 1, 2012, and $175.0 million of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior
Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 10.37% and 10.23% at December 30, 2006, and June 24, 2006, respectively. The $175.0 million of
Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments.

On December 16, 2005, Harry &
David Operations Corp. completed an exchange offer for the Senior Notes and issued a like principal amount of unrestricted Senior Notes. The Senior Notes are the senior unsecured obligations of Harry & David Operations Corp. and are
guaranteed on a senior unsecured basis by us and all of Harry & David Operations Corp.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, Harry & David Operations Corp. and its
subsidiaries ability to pay dividends and other restricted payments and their ability to incur liens and transactions with affiliates. See Note 6 to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

Harry & David Operations Corp. and its subsidiaries ability to comply with these covenants may be affected by events beyond their control, such as
those described under Risk Factors in our Annual Report on Form 10-K as updated in Part II, Item 1A, herein. If Harry & David Operations Corp. and its subsidiaries do not remain in compliance with these covenants,
they may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes could accelerate all amounts outstanding to be immediately due and payable.

At December 30, 2006, we were in compliance with all of our covenants under the indenture governing our Senior Notes.

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.

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

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



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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.

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

CRITICAL ACCOUNTING POLICIES

The
preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The accompanying
condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements, which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it
eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are required to adopt SFAS No. 157 for our fiscal year
ending June 28, 2008. We are currently evaluating the potential effects of SFAS No. 157.

In September 2006, the Securities and Exchange
Commission released Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements (SAB 108). SAB 108 provides guidance on how cumulative errors in the balance sheet should be considered from
a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in evaluating a current year misstatement SAB No. 108 is effective
for fiscal years ending after November 15, 2006. We do not expect the application of SAB 108 in the fourth quarter of fiscal 2007 to have a material effect on our consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This Statement also improves
financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer without publicly traded equity securities is required to
recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. We are required to adopt SFAS No. 158 for our fiscal year ending
June 30, 2007, and have not yet determined the impact on our consolidated financial statements.

In June 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The
Interpretation stipulates recognition and measurement criteria, balance sheet classification, interim period accounting and significantly expands disclosure provisions for uncertain tax positions taken or that are expected to be taken in a
companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We arerequired to adopt FIN 48 for our fiscal year ending June 28, 2008, and have not yet determined the
impact on our consolidated financial statements.



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In June 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes sales, use, value added and certain excise taxes
that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that
are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have a material impact on our consolidated
financial position, results of operation or cash flows. We present sales taxes on a net basis.

In June 2006, the EITF ratified the consensus reached on
Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to Financial Accounting Standards Board Statement No. 43, Accounting for Compensated Absences(EITF 06-2). EITF 06-2
concludes that companies should accrue for employee sabbatical leave over the service period in which employees earn the right to sabbatical leave. EITF 06-2 provisions are effective for the first annual reporting period after the ratification in
June 2006, and allow for either retrospective application, or a cumulative effect adjustment approach upon adoption. We are required to adopt EITF 06-2 for the fiscal year ending June 28, 2008, and we are currently evaluating the impact that
adoption will have on our consolidated financial statements.

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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



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depreciation and amortization, changes in net working capital, other non-operating income and losses that affect cash flow and liquidity, interest expense
and taxes. Similarly, you should not consider EBITDA in isolation or as a substitute for these GAAP liquidity measures.

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

Furthermore, we use EBITDA (in conjunction with other GAAP and non-GAAP measures such as operating income, capital expenditures, taxes and changes in working capital) to
measure return on capital employed. EBITDA allows us to determine the cash return 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. | QUANTITATIV
E AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
|------- | ---------------------------------------------------------------

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



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INTEREST RATE RISK

Interest on our floating rate notes and on our borrowings under the revolving credit facility accrues at variable rates based on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow the entire amount
available under our revolving credit facility, together with the floating rate notes, a 1.0% change in the interest rate on our variable rate debt would result in a $1.95 million corresponding effect on our interest expense on an annual basis. The
interest rates on our variable rate long-term debt will reflect the market rate of the outstanding floating rate notes sold in the February 2005 offering, and therefore the carrying value of our variable rate long-term debt is expected to
approximate fair value.

COMMODITY RISK

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



|ITEM 4. | CONTROLS A
ND PROCEDURES
|------- | ------------------------

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

We have carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation examined
those disclosure controls and procedures as of December 30, 2006. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of December 30, 2006, 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.

While we are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make an assessment of the
effectiveness of our internal controls over financial reporting, we plan to continue to assess our internal controls and procedures and will take action as necessary or appropriate to address any matters we identify, including to effect compliance
with Section 404 of the Sarbanes-Oxley Act when we are required to make an assessment of our internal controls under Section 404 for fiscal 2008.



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PART II. OTHER IN
FORMATION



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

Information required by this Item is contained in Note 10 to our Condensed Consolidated
Financial Statements within Part I of this Form 10-Q.



|ITEM 1A. | RISK FACTO
RS
|-------- | -------------

There have been no material changes from the risk factors disclosed under Risk Factors in
Item 1.A. of our Annual Report on Form 10-K for the fiscal year ended June 24, 2006.



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

None.



|ITEM 3. | D
EFAULTS 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



38



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##### Table of Contents

SIGNATURES

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



HARRY & DAVID HOLDINGS, INC.By:

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

/S/ STEPHEN V. OCONNELLStephen V. OConnellChief Financial Officer and ChiefAdministrative Officer


February 13, 2007



39