##### Table of Contents





United States

Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 25, 2010

or



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

For the transition period from             to

Commission File Number 333-127173





Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)







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

(541)
864-2362

(Registrants telephone number including area code)

None

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





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

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

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



|                             |  |                                   
|---------------------------- |  | ----------------------------------
|Class                        |  | Outstanding as of November 1,
2010
|Common stock $0.01 par value |  | 1,034,169                         









|* | The registrant is not currently required to file reports, including this report, pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934, but is
voluntarily filing this report with the Security and Exchange Commission.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents



HARRY &
DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |  |  |          |  |                                                                                                                  |  |      |    | 
|----------------------------- |  |  |  | -------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                              |  |  |  |          |  |                                                                                                                  |  | Page |   
|                              | 
|Part I. Financial Information |  |  |  |         
|                              |  |  |  |         
|                              |  |  |  | Item 1.  |  | Condensed Consolidated (unaudited) Financial Statements                                                          |  |      | 3  | 
|                              |  |  |  |         
|                              |  |  |  |          |  | Condensed Consolidated Balance Sheets  as of September 25, 2010, June 26, 2010 and September 26, 2009           |  |      | 3  | 
|                              |  |  |  |         
|                              |  |  |  |          |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended September 25, 2010 and September 26, 2009 |  |      | 4  | 
|                              |  |  |  |         
|                              |  |  |  |          |  | Condensed Consolidated Statements of Cash Flows  Thirteen Weeks ended September 25, 2010 and September 26, 2009 |  |      | 5  | 
|                              |  |  |  |         
|                              |  |  |  |          |  | Notes to Condensed Consolidated Financial Statements                                                             |  |      | 6  | 
|                              |  |  |  |         
|                              |  |  |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  |      | 22 | 
|                              |  |  |  |         
|                              |  |  |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  |      | 31 | 
|                              |  |  |  |         
|                              |  |  |  | Item 4.  |  | Controls and Procedures                                                                                          |  |      | 31 | 
|                              | 
|Part II. Other Information    |  |  |  |         
|                              |  |  |  |         
|                              |  |  |  | Item 1.  |  | Legal Proceedings                                                                                                |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 1A. |  | Risk Factors                                                                                                     |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                  |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 4.  |  | [Removed and Reserved]                                                                                           |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 5.  |  | Other Information                                                                                                |  |      | 32 | 
|                              |  |  |  |         
|                              |  |  |  | Item 6.  |  | Exhibits                                                                                                         |  |      | 32 | 



2



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##### Table of Contents



PART I. FINANCIAL
INFORMATION



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

Harry 
& David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | ----------------- |  | - | ------- | -
|                                                                                                                                                                                        |  | September 25,2010 |         |   | June 26,2010 |   |         | September 26,2009 | 
|                                                                                                                                                                                        |  | Unaudited         |         |   |              |   |         | Unaudited         | 
|Assets                                                                                                                                                                                  |  |                   |         |   |              |   |         |                   |  |   |         |  
|Current assets                                                                                                                                                                          |  |                   |         |   |              |   |         |                   |  |   |         |  
|Cash and cash equivalents                                                                                                                                                               |  | $                 | 5,253   |   |              | $ | 13,730  |                   |  | $ | 1,986   |  
|Short-term investments                                                                                                                                                                  |  |                   |        |   |              |   | 4,999   |                   |  |   |        |  
|Trade accounts receivable, net                                                                                                                                                          |  |                   | 2,989   |   |              |   | 936     |                   |  |   | 4,659   |  
|Other receivables                                                                                                                                                                       |  |                   | 576     |   |              |   | 834     |                   |  |   | 1,460   |  
|Inventories                                                                                                                                                                             |  |                   | 82,577  |   |              |   | 35,527  |                   |  |   | 82,859  |  
|Deferred catalog expenses                                                                                                                                                               |  |                   | 5,103   |   |              |   | 2,286   |                   |  |   | 4,087   |  
|Deferred income taxes                                                                                                                                                                   |  |                   | 9,331   |   |              |   | 2,173   |                   |  |   |        |  
|Other current assets                                                                                                                                                                    |  |                   | 4,011   |   |              |   | 3,754   |                   |  |   | 4,462   |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total current assets                                                                                                                                                                    |  |                   | 109,840 |   |              |   | 64,239  |                   |  |   | 99,513  |  
|Fixed assets, net                                                                                                                                                                       |  |                   | 125,515 |   |              |   | 128,391 |                   |  |   | 141,300 |  
|Goodwill                                                                                                                                                                                |  |                   | 12,236  |   |              |   | 12,236  |                   |  |   | 12,236  |  
|Intangibles, net                                                                                                                                                                        |  |                   | 32,360  |   |              |   | 32,376  |                   |  |   | 33,011  |  
|Deferred financing costs, net                                                                                                                                                           |  |                   | 5,096   |   |              |   | 3,603   |                   |  |   | 5,382   |  
|Other assets                                                                                                                                                                            |  |                   | 2,086   |   |              |   | 2,369   |                   |  |   | 2,133   |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total assets                                                                                                                                                                            |  | $                 | 287,133 |   |              | $ | 243,214 |                   |  | $ | 293,575 |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Liabilities and stockholders deficit                                                                                                                                                   |  |                   |         |   |              |   |         |                   |  |   |         |  
|Current liabilities                                                                                                                                                                     |  |                   |         |   |              |   |         |                   |  |   |         |  
|Accounts payable                                                                                                                                                                        |  | $                 | 29,148  |   |              | $ | 15,083  |                   |  | $ | 19,065  |  
|Accrued payroll and benefits                                                                                                                                                            |  |                   | 14,645  |   |              |   | 14,673  |                   |  |   | 13,672  |  
|Deferred revenue                                                                                                                                                                        |  |                   | 8,349   |   |              |   | 14,014  |                   |  |   | 9,651   |  
|Deferred income taxes                                                                                                                                                                   |  |                   |        |   |              |   |        |                   |  |   | 617     |  
|Income taxes payable                                                                                                                                                                    |  |                   | 2,884   |   |              |   | 1,860   |                   |  |   | 6,076   |  
|Accrued interest                                                                                                                                                                        |  |                   | 1,400   |   |              |   | 4,426   |                   |  |   | 1,324   |  
|Other accrued liabilities                                                                                                                                                               |  |                   | 3,017   |   |              |   | 3,194   |                   |  |   | 3,253   |  
|Current portion of capital lease obligation                                                                                                                                             |  |                   | 156     |   |              |   | 309     |                   |  |   | 299     |  
|Revolving credit facility                                                                                                                                                               |  |                   | 58,000  |   |              |   |        |                   |  |   | 47,000  |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total current liabilities                                                                                                                                                               |  |                   | 117,599 |   |              |   | 53,559  |                   |  |   | 100,957 |  
|Long-term debt and capital lease obligation                                                                                                                                             |  |                   | 198,362 |   |              |   | 198,362 |                   |  |   | 198,519 |  
|Accrued pension liabilities                                                                                                                                                             |  |                   | 27,886  |   |              |   | 29,851  |                   |  |   | 27,598  |  
|Deferred income taxes                                                                                                                                                                   |  |                   | 5,291   |   |              |   | 5,116   |                   |  |   | 168     |  
|Other long-term liabilities                                                                                                                                                             |  |                   | 9,237   |   |              |   | 9,871   |                   |  |   | 9,591   |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total liabilities                                                                                                                                                                       |  |                   | 358,375 |   |              |   | 296,759 |                   |  |   | 336,833 |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Commitments and contingencies (Note 9)                                                                                                                                                  |  |                   |         |   |              |   |         |                   |  |   |         |  
|Stockholders deficit                                                                                                                                                                   |  |                   |         |   |              |   |         |                   |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,034,169 shares at September 25, 2010
and June 26, 2010 and 1,033,295 shares at September 26, 2009 |  |                   | 10      |   |              |   | 10      |                   |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                              |  |                   | 17,272  |   |              |   | 17,062  |                   |  |   | 6,732   |  
|Accumulated other comprehensive loss, net of tax                                                                                                                                        |  |                   | (12,449 | ) |              |   | (12,719 | )                 |  |   | (9,606  | )
|Accumulated deficit                                                                                                                                                                     |  |                   | (76,075 | ) |              |   | (57,898 | )                 |  |   | (40,394 | )
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total stockholders deficit                                                                                                                                                             |  |                   | (71,242 | ) |              |   | (53,545 | )                 |  |   | (43,258 | )
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total liabilities and stockholders deficit                                                                                                                                             |  | $                 | 287,133 |   |              | $ | 243,214 |                   |  | $ | 293,575 |  
|                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



3



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Harry &
David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands)

(unaudited)



|                                                    |  |                                      |         |   |                                      |   |         |  
|--------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                    |  | Thirteenweeks endedSeptember 25,2010 |         |   | Thirteenweeks endedSeptember 26,2009 |  
|Net sales                                           |  | $                                    | 40,440  |   |                                      | $ | 46,264  |  
|Cost of goods sold                                  |  |                                      | 28,238  |   |                                      |   | 30,041  |  
|                                                    |  |                                      |         |   |                                      |   |         |  
|Gross profit                                        |  |                                      | 12,202  |   |                                      |   | 16,223  |  
|                                                    |  |                                      |         |   |                                      |   |         |  
|Operating expenses:                                 |  |                                      |         |   |                                      |   |         |  
|Selling, general and administrative                 |  |                                      | 31,861  |   |                                      |   | 33,344  |  
|Selling, general and administrative  related party |  |                                      | 250     |   |                                      |   | 250     |  
|                                                    |  |                                      |         |   |                                      |   |         |  
|                                                    |  |                                      | 32,111  |   |                                      |   | 33,594  |  
|                                                    |  |                                      |         |   |                                      |   |         |  
|Operating loss                                      |  |                                      | (19,909 | ) |                                      |   | (17,371 | )
|                                                    |  |                                      |         |   |                                      |   |         |  
|Other (income) expense:                             |  |                                      |         |   |                                      |   |         |  
|Interest income                                     |  |                                      | (1      | ) |                                      |   | (3      | )
|Interest expense                                    |  |                                      | 5,324   |   |                                      |   | 4,699   |  
|Other (income) expense, net                         |  |                                      | (26     | ) |                                      |   | (23     | )
|                                                    |  |                                      |         |   |                                      |   |         |  
|                                                    |  |                                      | 5,297   |   |                                      |   | 4,673   |  
|                                                    |  |                                      |         |   |                                      |   |         |  
|Loss before income taxes                            |  |                                      | (25,206 | ) |                                      |   | (22,044 | )
|Benefit for income taxes                            |  |                                      | (7,029  | ) |                                      |   | (320    | )
|                                                    |  |                                      |         |   |                                      |   |         |  
|Net loss                                            |  |                                      | (18,177 | ) |                                      |   | (21,724 | )
|                                                    |  |                                      |         |   |                                      |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry &
David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                 |  |                                      |         |   |                                      |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                 |  | Thirteenweeks endedSeptember 25,2010 |         |   | Thirteenweeks endedSeptember 26,2009 |  
|Operating activities                                                             |  |                                      |         |   |                                      |   |         |  
|Net loss                                                                         |  | $                                    | (18,177 | ) |                                      | $ | (21,724 | )
|Adjustments to reconcile net loss to net cash used in operating activities:      |  |                                      |         |   |                                      |   |         |  
|Depreciation and amortization of fixed assets                                    |  |                                      | 3,887   |   |                                      |   | 4,610   |  
|Amortization of intangible assets                                                |  |                                      | 16      |   |                                      |   | 46      |  
|Amortization of deferred financing costs                                         |  |                                      | 1,023   |   |                                      |   | 593     |  
|Stock option compensation expense                                                |  |                                      | 210     |   |                                      |   | 59      |  
|Loss on disposal and impairment of fixed assets and other long-lived assets, net |  |                                      | 101     |   |                                      |   | 16      |  
|Gain on sale of short-term investments                                           |  |                                      | (1      | ) |                                      |   |        |  
|Deferred income taxes                                                            |  |                                      | (7,158  | ) |                                      |   | 7,315   |  
|Amortization of deferred pension loss                                            |  |                                      | 425     |   |                                      |   | 312     |  
|Changes in operating assets and liabilities:                                     |  |                                      |         |   |                                      |   |         |  
|Trade accounts receivable and other receivables                                  |  |                                      | (1,795  | ) |                                      |   | (2,591  | )
|Inventories                                                                      |  |                                      | (47,050 | ) |                                      |   | (38,121 | )
|Deferred catalog expenses and other assets                                       |  |                                      | (2,791  | ) |                                      |   | (1,049  | )
|Accounts payable                                                                 |  |                                      | 14,065  |   |                                      |   | 7,894   |  
|Accrued liabilities                                                              |  |                                      | (3,865  | ) |                                      |   | (3,321  | )
|Income taxes                                                                     |  |                                      | 1,024   |   |                                      |   | (7,567  | )
|Accrued pension liabilities                                                      |  |                                      | (1,945  | ) |                                      |   | 234     |  
|Deferred revenue                                                                 |  |                                      | (5,665  | ) |                                      |   | (6,666  | )
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Net cash used in operating activities                                            |  |                                      | (67,696 | ) |                                      |   | (59,960 | )
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Investing activities                                                             |  |                                      |         |   |                                      |   |         |  
|Acquisition of fixed assets                                                      |  |                                      | (1,112  | ) |                                      |   | (493    | )
|Proceeds from the sale of fixed assets                                           |  |                                      |        |   |                                      |   | 44      |  
|Proceeds from maturities of held-to-maturity securities                          |  |                                      | 5,000   |   |                                      |   |        |  
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Net cash provided by (used in) investing activities                              |  |                                      | 3,888   |   |                                      |   | (449    | )
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Financing activities                                                             |  |                                      |         |   |                                      |   |         |  
|Borrowings on revolving debt                                                     |  |                                      | 58,000  |   |                                      |   | 47,000  |  
|Repayments of capital lease obligation                                           |  |                                      | (153    | ) |                                      |   |        |  
|Payments for deferred financing costs                                            |  |                                      | (2,516  | ) |                                      |   |        |  
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Net cash provided by financing activities                                        |  |                                      | 55,331  |   |                                      |   | 47,000  |  
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Decrease in cash and cash equivalents                                            |  |                                      | (8,477  | ) |                                      |   | (13,409 | )
|Cash and cash equivalents, beginning of period                                   |  |                                      | 13,730  |   |                                      |   | 15,395  |  
|                                                                                 |  |                                      |         |   |                                      |   |         |  
|Cash and cash equivalents, end of period                                         |  | $                                    | 5,253   |   |                                      | $ | 1,986   |  
|                                                                                 |  |                                      |         |   |                                      |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry &
David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollars in thousands)

(unaudited)

NOTE 1BUSINESS

Harry & David Holdings, Inc. and subsidiaries (the Company) is a vertically integrated multi-channel specialty
retailer and producer of branded premium gift-quality fruit, food products and gifts marketed under the Harry and
David®, Wolfermans®, and Cushmans® brands.
The Company markets its products through catalogs distributed through the mail, the Internet, business-to-business, consumer telemarketing, Harry and David Stores, Cushmans seasonal stores and wholesale distribution to other retailers.

Sales of the Companys products are subject to a variety of agricultural risks, fuel and energy price fluctuations, delivery rate
increases, and extreme weather conditions, and are subject to regulation and inspection by various governmental agencies. Historically, the Companys business has been subject to substantial seasonal variations in demand. A significant portion
of the Companys net sales and net earnings are realized during the holiday selling season from October through December, and levels of net sales and net earnings are significantly lower during the period from January to September. Accordingly,
operating results will vary based on the timing of holidays and the ripening of seasonal fruits, which, if delayed, can cause delays in product shipments.

NOTE 2BASIS OF PRESENTATION

These financial statements include the consolidated
results of the Company and its subsidiaries. The Condensed Consolidated Balance Sheets as of September 25, 2010 and September 26, 2009, the Condensed Consolidated Statements of Operations for the thirteen-week periods ended
September 25, 2010 and September 26, 2009, and the Condensed Consolidated Statements of Cash Flows for the thirteen-week periods ended September 25, 2010 and September 26, 2009 have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles
accepted in the United States for comparable annual financial statements.

For further information, refer to the consolidated financial
statements and the notes thereto for the year ended June 26, 2010, which are not included in this report.

In managements opinion,
the Condensed Consolidated Financial Statements include all adjustments, which include typically recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen-week
periods then ended. Intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet as of June 26, 2010 presented in this Form 10-Q has been derived from the Companys audited
financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In fiscal 2007, the Company sold its Jackson & Perkins businesses, and in a separate transaction, the Company sold its land and the associated buildings and equipment of its Wasco facility, which
was primarily utilized to support rose growing operations of Jackson & Perkins. The Company provided transitional services to the buyer through June 2009 and in the fourth quarter of fiscal 2010, the Company sold certain land use rights
related to the Wasco property. These activities were included as discontinued operations in the consolidated financial statements during the applicable reporting periods. There were no activities related to the sale of the Jackson & Perkins
businesses and other related assets during the first quarter of fiscal 2011 and fiscal 2010 and therefore, there are no discontinued operations included in the Companys condensed consolidated financial statements in this Form 10-Q.

The results of operations for the interim periods presented are not necessarily indicative of results to be expected for other interim periods in the
fiscal year. In the second quarter of each fiscal year, the Company realizes its highest sales for the fiscal year as such quarter includes the most significant holidays that drive the largest portion of the gift-giving component of the
Companys sales. It is also the period where the Company recognizes significant cost of goods sold and advertising expenses in connection with the increased sales.

The Companys total comprehensive loss for the thirteen weeks ended September 25, 2010 of $17,907 includes a $270 adjustment (net of tax) related to unrealized net losses associated with its
pension plans. The Companys total comprehensive loss for the thirteen weeks ended September 26, 2009 of $21,535 includes a $189 adjustment (net of tax) related to unrealized net losses associated with its pension plans.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





NOTE 3RECENT ACCOUNTING
PRONOUNCEMENTS AND DEVELOPMENTS

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (ASU 2010-06), which amends the disclosure guidance with respect to fair value measurements.
Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements,
greater disaggregation of the assets and liabilities for which fair value measurements are presented and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new guidance around the Level 3 activity reconciliations, which is effective for fiscal years beginning after December 15, 2010. The
adoption of the guidance required for interim and annual reporting periods after December 15, 2010 is not expected to have an impact on the Companys consolidated financial statements.

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

NOTE 4BALANCE SHEET INFORMATION

Financial Instruments

The Companys financial instruments consist principally of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable, certain accrued liabilities, capital lease obligations and the Senior Floating Rate Notes due March 1, 2012 and Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The estimated
carrying value of these instruments (except for the Senior Notes as shown in the table below) approximates fair value due to their short-term maturities.

The fair values for cash and cash equivalents, short-term investments and the Senior Notes are measured using observable inputs such as quoted prices in active markets (Level 1) as defined within the fair
value hierarchy prescribed by Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures(ASC Topic 820).

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



|                           |  |                    |         |  |            |   |         | 
|-------------------------- |  | ------------------ | ------- |  | ---------- | - | ------- | 
|                           |  | September 25, 2010 |        
|                           |  | Book value         |         |  | Fair value |  
|Senior Floating Rate Notes |  | $                  | 58,170  |  |            | $ | 36,938  | 
|Senior Fixed Rate Notes    |  |                    | 140,192 |  |            |   | 94,980  | 
|                           |  |                    |         |  |            |   |         | 
|Total Senior Notes         |  | $                  | 198,362 |  |            | $ | 131,918 | 
|                           |  |                    |         |  |            |   |         | 

Inventories

Inventories consist of the following:



|                                                  |  |                   |        |  |              |   |        |                   |  |   |        | 
|------------------------------------------------- |  | ----------------- | ------ |  | ------------ | - | ------ | ----------------- |  | - | ------ | 
|                                                  |  | September 25,2010 |        |  | June 26,2010 |   |        | September 26,2009 | 
|Finished goods                                    |  | $                 | 34,736 |  |              | $ | 15,611 |                   |  | $ | 42,634 | 
|Materials, packaging supplies and work-in-process |  |                   | 44,830 |  |              |   | 13,782 |                   |  |   | 40,225 | 
|Growing crops                                     |  |                   | 3,011  |  |              |   | 6,134  |                   |  |   |       | 
|                                                  |  |                   |        |  |              |   |        |                   |  |   |        | 
|Total                                             |  | $                 | 82,577 |  |              | $ | 35,527 |                   |  | $ | 82,859 | 
|                                                  |  |                   |        |  |              |   |        |                   |  |   |        | 



7



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Fixed assets

Fixed assets consist of the following:



|                                                |  |                   |          |   |              |   |         |                   |  |   |         |  
|----------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | ------- | ----------------- |  | - | ------- | -
|                                                |  | September 25,2010 |          |   | June 26,2010 |   |         | September 26,2009 | 
|Land                                            |  | $                 | 19,607   |   |              | $ | 19,607  |                   |  | $ | 19,607  |  
|Land improvements and orchard development costs |  |                   | 30,726   |   |              |   | 30,698  |                   |  |   | 30,701  |  
|Buildings and improvements                      |  |                   | 58,682   |   |              |   | 58,674  |                   |  |   | 58,457  |  
|Machinery and equipment                         |  |                   | 68,384   |   |              |   | 68,352  |                   |  |   | 68,511  |  
|Leasehold improvements                          |  |                   | 9,766    |   |              |   | 9,908   |                   |  |   | 10,681  |  
|Purchased and internally developed software     |  |                   | 37,156   |   |              |   | 37,223  |                   |  |   | 36,853  |  
|Capital projects-in-process                     |  |                   | 1,799    |   |              |   | 882     |                   |  |   | 1,417   |  
|                                                |  |                   |          |   |              |   |         |                   |  |   |         |  
|                                                |  |                   | 226,120  |   |              |   | 225,344 |                   |  |   | 226,227 |  
|Accumulated depreciation and amortization       |  |                   | (100,605 | ) |              |   | (96,953 | )                 |  |   | (84,927 | )
|                                                |  |                   |          |   |              |   |         |                   |  |   |         |  
|Total                                           |  | $                 | 125,515  |   |              | $ | 128,391 |                   |  | $ | 141,300 |  
|                                                |  |                   |          |   |              |   |         |                   |  |   |         |  

As of September 25, 2010, purchased and internally developed software includes software licenses acquired for $895 and
financed through an outstanding capital lease agreement. See Note 6  Borrowing Arrangements. Accumulated amortization of purchased and internally developed software costs was $24,809, $23,844 and $20,245 as of September 25,
2010, June 26, 2010 and September 26, 2009, respectively. Amortization of software costs, which include software assets financed through capital leases, was $1,023 and $1,273 for the thirteen weeks ended September 25, 2010 and
September 26, 2009, respectively.

Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives are tested for impairment annually. The impairment testing compares carrying values to fair
values, and generally, if the carrying value of these assets is in excess of fair value, an impairment loss would be recognized. The Company does not consider there to be any indication of impairment of its goodwill, trade names, trademarks, recipe
and customer lists as of September 25, 2010.

Amortization expense was $16 and $46 for the thirteen weeks ended September 25, 2010
and September 26, 2009, respectively, and is included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The following is a summary of intangible assets:



|                                           |  |                     |        |  |                         |   |         |                             |  |   |                   |   |  |                     |        |  |                         |   |        |                             |  |   |                   |   |  |   |         |   |  |   |        | 
|------------------------------------------ |  | ------------------- | ------ |  | ----------------------- | - | ------- | --------------------------- |  | - | ----------------- | - |  | ------------------- | ------ |  | ----------------------- | - | ------ | --------------------------- |  | - | ----------------- | - |  | - | ------- | - |  | - | ------ | 
|                                           |  | September 25, 2010  |        |  | June 26, 2010           |  
|                                           |  | GrossCarryingAmount |        |  | AccumulatedAmortization |   |         | AccumulatedImpairmentLosses |  |   | NetCarryingAmount |   |  | GrossCarryingAmount |        |  | AccumulatedAmortization |   |        | AccumulatedImpairmentLosses |  |   | NetCarryingAmount |  
|Trade names, trademarks and recipe         |  | $                   | 41,658 |  |                         | $ |        |                             |  | $ | (9,519            | ) |  | $                   | 32,139 |  |                         | $ | 41,658 |                             |  | $ |                  |   |  | $ | (9,519  | ) |  | $ | 32,139 | 
|Goodwill                                   |  |                     | 12,922 |  |                         |   |        |                             |  |   | (686              | ) |  |                     | 12,236 |  |                         |   | 12,922 |                             |  |   |                  |   |  |   | (686    | ) |  |   | 12,236 | 
|Direct marketing customer and rental lists |  |                     | 9,249  |  |                         |   | (9,071  | )                           |  |   |                  |   |  |                     | 178    |  |                         |   | 9,249  |                             |  |   | (9,068            | ) |  |   |        |   |  |   | 181    | 
|Favorable lease agreements                 |  |                     | 1,676  |  |                         |   | (1,633  | )                           |  |   |                  |   |  |                     | 43     |  |                         |   | 1,676  |                             |  |   | (1,620            | ) |  |   |        |   |  |   | 56     | 
|                                           |  |                     |        |  |                         |   |         |                             |  |   |                   |   |  |                     |        |  |                         |   |        |                             |  |   |                   |   |  |   |         |   |  |   |        | 
|                                           |  | $                   | 65,505 |  |                         | $ | (10,704 | )                           |  | $ | (10,205           | ) |  | $                   | 44,596 |  |                         | $ | 65,505 |                             |  | $ | (10,688           | ) |  | $ | (10,205 | ) |  | $ | 44,612 | 
|                                           |  |                     |        |  |                         |   |         |                             |  |   |                   |   |  |                     |        |  |                         |   |        |                             |  |   |                   |   |  |   |         |   |  |   |        | 

The estimated remaining amortization expense is as follows:



|               |  |                                          |     |  |                            |   |    |                          |  |   |     | 
|-------------- |  | ---------------------------------------- | --- |  | -------------------------- | - | -- | ------------------------ |  | - | --- | 
|Fiscal Period: |  | Direct MarketingCustomer
andRental Lists |     |  | Favorable 
LeaseAgreements |   |    | TotalAmortizationExpense | 
|Remaining 2011 |  |                                          | 139 |  |                            |   | 22 |                          |  |   | 161 | 
|2012           |  |                                          | 39  |  |                            |   | 21 |                          |  |   | 60  | 
|               |  |                                          |     |  |                            |   |    |                          |  |   |     | 
|Total          |  | $                                        | 178 |  |                            | $ | 43 |                          |  | $ | 221 | 
|               |  |                                          |     |  |                            |   |    |                          |  |   |     | 



8



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





NOTE 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 first quarter of fiscal 2011 and fiscal 2010 were 27.9% and 1.5%, respectively. For the first quarter of fiscal 2011, the difference in the effective rate and the federal
statutory rate is primarily due to a valuation allowance adjustment benefit of $298, relating to certain deferred tax assets, and state tax expense of $138. For the first quarter of fiscal 2010, the difference in the effective rate and the federal
statutory rate is primarily due to charitable contributions benefit of $269, tax credits benefit of $226, and state tax benefit of $349.

The
Company routinely reviews the future realization of deferred tax assets based on projected future reversals of taxable temporary differences, available tax planning strategies and projected future taxable income. As of September 25, 2010, the
Company has recorded a valuation allowance of $14,966 to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these analyses requires significant judgment by management about future operating results,
including revenues, margins and operating expenses.

NOTE 6BORROWING ARRANGEMENTS

Revolving Credit Facilities

On July 7, 2010, Harry and David entered into a third amendment to its revolving credit agreement. The amendment, among other things, (A) extended the maturity date of the revolving credit
agreement from March 20, 2011 to the earliest to occur of (i) July 7, 2014, (ii) 45 days prior to the final maturity date of Harry and Davids Floating Rate Senior Notes due 2012 (unless such notes are paid in full prior to
such date) and (iii) 45 days prior to the final maturity date of Harry and Davids 9.0% Senior Notes due 2013 (unless such notes are paid in full prior to such date) and (B) reduced the size of the facility from $125,000 to $105,000
(subject to an accordion feature providing Harry and David with an option to increase the aggregate commitments under the revolving credit agreement by up to $20,000, upon satisfaction of certain conditions and at the sole discretion of any existing
lenders requested to provide any increased commitment), (C) increased certain fees payable under the revolving credit agreement and (D) increased the margins on borrowings under the revolving credit agreement, (i) in the case of
Eurodollar borrowings, from a range of 1.50% to 2.00% to a range of 3.25% to 3.50% and (ii) in the case of Alternate Base Rate borrowings, from a range of .50% to 1.00% to a range of 2.25% to 2.50% and changed the basis for determining the
applicable margin from the method based on Holdings consolidated leverage ratio to a usage-based method tied to the level of borrowings and letters of credit under the revolving credit facility. In connection with entering into the third
amendment, the Company incurred deferred financing costs of $2,516. In accordance with ASC Topic 470-50-55-2-Debt Modifications and Extinguishments, $250 of unamortized deferred costs associated with creditors not participating in the new
amendment were written off during the first quarter of fiscal 2011 and was recorded in interest expense in the consolidated statement of operations. The remaining portion of unamortized expenses have been combined with the new financing costs and
will be amortized through January 15, 2012, the date of the first possible maturity of the revolving credit agreement. The Company had total unamortized deferred financing costs related to its revolving credit facility of $2,704, $929 and
$1,861as of September 25, 2010, June 26, 2010 and September 26, 2009, respectively.

As of September 25, 2010, unused
borrowings under the revolving credit facility were $45,977, reflecting borrowings of $58,000 and $1,023 in outstanding letters of credit. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based
debt limitation formula. The formula generally allows the Company to borrow a substantial portion of the facility from August to December, but significantly restricts its borrowing capacity from January to July. As a result, total available
borrowing capacity at September 25, 2010 was $24,882. The Company is required to pay a commitment fee equal to (i) 0.75% per annum on the average daily unused amount of the Revolving Commitment of such Lender for each day on which
usage is greater than 60% or (ii) 1.00% per annum on the average daily unused amount of each Commitment of such Lender for each day on which usage is less than or equal to 60%. The commitment fees are payable on the last day of each
calendar year quarter and the associated expense is included within interest expense in the consolidated statement of operations.

The
revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities of this type, including, but not limited to, limitations on the incurrence of indebtedness, capital expenditures, asset
dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. These covenants significantly limit the Companys ability to obtain funds from its subsidiaries in the form of loans,
dividends or other advances other than dividends paid to the Company by Harry and David for the purpose of paying (i) income taxes when and as due, (ii) management fees payable to Wasserstein under the management agreement or
(iii) operating expenses incurred in the ordinary course of business and other corporate overhead costs and expenses (including legal and accounting expenses and similar expenses and customary fees to non-officer directors in an amount not to
exceed $350 in any fiscal year). At September 25, 2010, the Company was in compliance with all of the covenants under the revolving credit facility.

Long-Term Debt

As of September 25, 2010, the Companys wholly-owned
subsidiary, Harry and David, had outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012 and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes).



9



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





The floating rate Senior Notes
accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 5.30% and 5.54% at September 25, 2010 and June 26, 2010, respectively. The fixed rate Senior Notes accrue interest at
an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December.

The deferred financing fees
incurred in connection with the Senior Notes offerings and related exchanges have been recorded as deferred financing costs within long-term assets. The remaining costs are amortized over the remaining life of the associated Senior Notes and as of
September 25, 2010 and June 26, 2010, $2,392 and $2,674, respectively, remained on the balance sheet for all fees associated with the Senior Notes.

The Senior Notes represent the senior unsecured obligations of Harry and David, a wholly-owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by
Harry & David Holdings, Inc. and all of the Companys subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset
dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. The Company was in compliance with all of the covenants contained in the indenture governing the Senior Notes at
September 25, 2010.

Amortization of Deferred Financing Costs

Amortization expense of deferred financing costs was $1,023 and $593 for the thirteen weeks ended September 25, 2010 and September 26, 2009,
respectively, and is included within interest expense in the accompanying condensed consolidated statements of operations. Amortization expense recorded in the period ended September 25, 2010 included $250 of unamortized deferred costs, that
were written off in association with entering into the third amendment to the revolving credit facility.

Capital lease
obligation

In the fourth quarter of fiscal 2008, the Company acquired a software license for $895, financed by a capital lease
agreement. The interest rate on the agreement is 5.99% due in three annual installments of principal and interest. The current portion of the remaining obligation in the condensed consolidated balance sheet as of September 25, 2010, was $156.

NOTE 7STOCK OPTION PLAN

The Company accounts for stock-based compensation using the fair-value method. The fair value of each option award is estimated on the date of grant using
the Black-Scholes option valuation model that uses certain assumptions for use in the model. The expected volatility assumption is based on an average historical volatility of the publicly traded stock of a representative set of comparable
companies. The expected term assumption is either the final vesting date or a period derived from the time between the date of final vesting and the expiration of the option, depending on the vesting provisions of the underlying grant. The risk-free
rate for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used for the options granted during the thirteen weeks ended September 25, 2010 and September 26, 2009 are as follows:



|                    |  |                                         |           |   |                                         |   |           |  
|------------------- |  | --------------------------------------- | --------- | - | --------------------------------------- | - | --------- | -
|                    |  | Thirteen Weeks 
EndedSeptember 25, 2010 |           |   | Thirteen Weeks 
EndedSeptember 26, 2009 |  
|Expected volatility |  |                                         | 75.3      | % |                                         |   | 54.0      | %
|Expected dividends  |  | $                                       | 0         |   |                                         | $ | 0         |  
|Expected term       |  |                                         | 3.0 years |   |                                         |   | 2.9 years |  
|Risk-free rate      |  |                                         | 0.88      | % |                                         |   | 1.79      | %

A summary of option activity for the
thirteen weeks ended September 25, 2010 is presented below:



|                                  |  |              |         |   |                                |   |        |                                            |  |  |            | 
|--------------------------------- |  | ------------ | ------- | - | ------------------------------ | - | ------ | ------------------------------------------ |  |  | ---------- | 
|Options                           |  | OptionShares |         |   | Weighted-AverageExercise
Price |   |        | Weighted-AverageRemaining
Contractual Term | 
|Outstanding at June 26, 2010      |  |              | 242,010 |   |                                | $ | 223.46 |                                            |  |  | 9.3 years  | 
|Granted                           |  |              | 6,000   |   |                                |   | 150.00 |                                            |  |  | 10.0 years | 
|Exercised                         |  |              |        |   |                                |   |       |                                            |  |  |           | 
|Forfeited                         |  |              | (8,243  | ) |                                |   | 147.85 |                                            |  |  |           | 
|                                  |  |              |         |   |                                |   |        |                                            |  |  |            | 
|Outstanding at September 25, 2010 |  |              | 239,767 |   |                                | $ | 222.74 |                                            |  |  | 9.1 years  | 
|                                  |  |              |         |   |                                |   |        |                                            |  |  |            | 
|Exercisable at September 25, 2010 |  |              | 210,378 |   |                                | $ | 234.46 |                                            |  |  | 9.4 years  | 
|                                  |  |              |         |   |                                |   |        |                                            |  |  |            | 



10



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





The total grant date fair value of
all options outstanding at September 25, 2010 was $11,857.

A summary of the status of the Companys nonvested option shares as of
September 25, 2010, is presented below:



|                                  |  |              |        |   |                                                 |   |       | 
|--------------------------------- |  | ------------ | ------ | - | ----------------------------------------------- | - | ----- | 
|Nonvested Option Shares           |  | OptionShares |        |   | Weighted-AverageGrant-Date
Fair Valueof Options |  
|Nonvested at June 26, 2010        |  |              | 27,464 |   |                                                 | $ | 60.00 | 
|Granted options                   |  |              | 6,000  |   |                                                 | $ | 63.55 | 
|Vested                            |  |              | (241   | ) |                                                 | $ | 11.50 | 
|Forfeited                         |  |              | (3,834 | ) |                                                 | $ | 56.94 | 
|                                  |  |              |        |   |                                                 |   |       | 
|Outstanding at September 25, 2010 |  |              | 29,389 |   |                                                 | $ | 58.80 | 
|                                  |  |              |        |   |                                                 |   |       | 

The Company recognized stock compensation expense of $210 and $59 for the first quarter of fiscal 2010 and fiscal 2009,
respectively, and the total tax benefit recognized for these periods was $82 and $23, respectively. As of September 25, 2010, there was $1,523 of total unrecognized pre-tax compensation cost related to nonvested share-based compensation
arrangements granted under the Plan that will be recognized over the remaining vesting period. The weighted-average period of the remaining cost is 1.9 years.

The Company utilized a forfeiture rate of 0% when arriving at the amount of stock compensation expense recognized, as the options were granted to few individuals with relatively short or immediate
vesting.



11



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





NOTE 8BENEFIT PROGRAMS

Pension Plans

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



|                                          |  |                                      |      |   |                                      |   |      |  
|----------------------------------------- |  | ------------------------------------ | ---- | - | ------------------------------------ | - | ---- | -
|                                          |  | Thirteenweeks endedSeptember 25,2010 |      |   | Thirteenweeks endedSeptember 26,2009 |  
|Interest cost                             |  | $                                    | 625  |   |                                      | $ | 661  |  
|Expected return on plan assets            |  |                                      | (285 | ) |                                      |   | (235 | )
|Amortization of deferred actuarial losses |  |                                      | 425  |   |                                      |   | 312  |  
|                                          |  |                                      |      |   |                                      |   |      |  
|Net periodic pension expense              |  | $                                    | 765  |   |                                      | $ | 738  |  
|                                          |  |                                      |      |   |                                      |   |      |  

The Company contributed $2,485 and $192 during the thirteen weeks ended September 25, 2010 and September 26, 2009,
respectively, to its defined benefit pension plans.

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

Severances

During fiscal 2010, the Company accrued $7,425 for estimated severance
and related benefits, of which $114 was recorded in the first quarter of fiscal 2010. The severance and related benefits were associated with elimination of certain full-time positions across the Company as well as the termination of certain other
employees and executives. In the first quarter of fiscal 2011, the Company recorded additional charges of $447, as well as reversed previously accrued amounts of $576.

The following table summarizes the Companys severance related activities for the thirteen weeks ended September 25, 2010:



|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|Beginning balance as of June 26, 2010       |  | $ | 4,802  |  
|Accruals for severance and related benefits |  |   | 447    |  
|Payments of benefits                        |  |   | (2,120 | )
|Adjustments/reversals                       |  |   | (576   | )
|                                            |  |   |        |  
|Ending balance as of September 25, 2010     |  | $ | 2,553  |  
|                                            |  |   |        |  

NOTE 9COMMITMENTS AND CONTINGENCIES

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

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

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



12



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





The Company leases certain
properties consisting primarily of retail stores, distribution centers, and equipment with original terms ranging primarily from 3 to 10 years and up to 22 years. Certain leases contain renewal options; generally for five year periods, with rent
payments during the lease term dependant on the defined percent increase or increases based on certain indexes, in each case as defined within the individual lease agreements. In accordance with ASC Topic 840 Leases, for leases that
contain fixed escalations of the minimum annual lease payment during the original term of the lease and other lease incentives, the Company recognizes rental expense on a straight-line basis over the lease term and records the difference between
rent expense and the amount that is payable as deferred rent. In addition to minimum rental payments, certain of the Companys retail store leases require the Company to make contingent rental payments, which are typically structured as either
minimum rent plus additional rent based on a percentage of store sales if a specified store sales threshold is exceeded, or rent based on a negotiated threshold of sales after which a percent of sales is paid to the landlord. Such contingent rental
expense is accrued in each reporting period if achievement of any factor is considered probable. Extra payments such as common area maintenance and property taxes are also required on certain leases.

Total rental expense for all operating leases was as follows:



|                        |  |                                      |       |  |                                      |   |       | 
|----------------------- |  | ------------------------------------ | ----- |  | ------------------------------------ | - | ----- | 
|                        |  | Thirteenweeks endedSeptember 25,2010 |       |  | Thirteenweeks endedSeptember 26,2009 |  
|Minimum rent expense    |  | $                                    | 4,807 |  |                                      | $ | 5,291 | 
|Contingent rent expense |  |                                      | 7     |  |                                      |   | 27    | 
|                        |  |                                      |       |  |                                      |   |       | 
|Total rent expense      |  | $                                    | 4,814 |  |                                      | $ | 5,318 | 
|                        |  |                                      |       |  |                                      |   |       | 

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

The award is 100% vested, representing $6,034, which also reflects forfeitures. In each case, vesting occurred as long as the award recipient was an
employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless by June 17, 2011: (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 September 25, 2010, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the
Liquidity Event Award Program.

NOTE 10RELATED PARTY TRANSACTIONS

The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of
$1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During the thirteen weeks ended September 25, 2010 and September 26, 2009, the
Company paid $250 in connection with this agreement. These amounts were charged to selling, general and administrative expenses  related party.

NOTE 11SEGMENT REPORTING

Performance of business units is evaluated considering
revenue growth achieved and potential profitability, contribution to other units and capital investment requirements. Reportable segments are strategic business units that offer similar products and are managed separately because the business units
utilize distinct marketing strategies. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting polices in the Companys Annual Report on Form 10-K.

The Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts under the
Harry & David®, Wolfermans® and Cushmans® brands by
marketing through catalogs, the Internet, business-to-business and consumer telemarketing operations. The Companys catalogs reach customers throughout the United States and, to a lesser extent, in Canada. The Stores segment generates net sales
of Harry & David®, Wolfermans® and Cushmans®
merchandise at various retail locations (outlet stores, specialty stores, and a Country Village Store). As of September 25, 2010, the Company operated 124 Harry and David stores in 38 states. The Wholesale segment generates net sales by selling
Harry & David® brand, Wolfermans® brand and Cushmans®
brand wholesale products to national retailers as well as commercial sales of surplus, non-gift quality fruit grown in the



13



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)



Companys orchards surrounding Medford, Oregon. Business units not disclosed separately for segment reporting purposes are grouped in the Other segment and include 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.

Net intersegment sales were $5,912 and $14,340 for the thirteen weeks ended September 25, 2010 and September 26, 2009, respectively. Total
assets in the Other segment include corporate cash and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets,
including the Companys manufacturing and distribution facilities. Of the Companys $12,236 of goodwill, $10,827 is included within the Direct Marketing segment and $1,409 is included within the Wholesale segment.



|                                        |  |                 |         |   |        |   |        |           |  |   |        |  |  |              |         |   |  |   |         |  
|--------------------------------------- |  | --------------- | ------- | - | ------ | - | ------ | --------- |  | - | ------ |  |  | ------------ | ------- | - |  | - | ------- | -
|Dollars in thousands                    |  | DirectMarketing |         |   | Stores |   |        | Wholesale |  |   | Other  |  |  | Consolidated |        
|Thirteen weeks ended September 25, 2010 |  |                 |         |   |        |   |        |           |  |   |        |  |  |              |         |   |  |   |         |  
|Net external sales                      |  | $               | 18,073  |   |        | $ | 19,477 |           |  | $ | 2,890  |  |  | $            |        |   |  | $ | 40,440  |  
|Depreciation and amortization expense   |  |                 | 11      |   |        |   | 581    |           |  |   | 3      |  |  |              | 3,308   |   |  |   | 3,903   |  
|Operating income (loss)                 |  |                 | (15,317 | ) |        |   | (5,101 | )         |  |   | 512    |  |  |              | (3      | ) |  |   | (19,909 | )
|Net interest expense                    |  |                 |        |   |        |   |       |           |  |   |       |  |  |              | 5,323   |   |  |   | 5,323   |  
|Income (loss) before income taxes       |  |                 | (15,317 | ) |        |   | (5,101 | )         |  |   | 512    |  |  |              | (5,300  | ) |  |   | (25,206 | )
|Capital expenditures                    |  |                 |        |   |        |   | 277    |           |  |   |       |  |  |              | 835     |   |  |   | 1,112   |  
|Total assets                            |  |                 | 53,167  |   |        |   | 25,301 |           |  |   | 10,110 |  |  |              | 198,555 |   |  |   | 287,133 |  
|Thirteen weeks ended September 26, 2009 |  |                 |         |   |        |   |        |           |  |   |        |  |  |              |         |   |  |   |         |  
|Net external sales                      |  | $               | 19,672  |   |        | $ | 20,917 |           |  | $ | 5,675  |  |  | $            |        |   |  | $ | 46,264  |  
|Depreciation and amortization expense   |  |                 | 34      |   |        |   | 798    |           |  |   |       |  |  |              | 3,824   |   |  |   | 4,656   |  
|Operating income (loss)                 |  |                 | (12,232 | ) |        |   | (5,470 | )         |  |   | 331    |  |  |              |        |   |  |   | (17,371 | )
|Net interest expense                    |  |                 |        |   |        |   |       |           |  |   |       |  |  |              | 4,696   |   |  |   | 4,696   |  
|Income (loss) before income taxes       |  |                 | (12,231 | ) |        |   | (5,472 | )         |  |   | 330    |  |  |              | (4,671  | ) |  |   | (22,044 | )
|Capital expenditures                    |  |                 |        |   |        |   | 222    |           |  |   |       |  |  |              | 271     |   |  |   | 493     |  
|Total assets                            |  |                 | 58,101  |   |        |   | 30,083 |           |  |   | 10,115 |  |  |              | 195,276 |   |  |   | 293,575 |  

NOTE 12CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS

The Companys wholly-owned subsidiary, Harry and David, has outstanding $58,170 of Senior
Floating Rate Notes due 2012 and $140,192 of Senior Fixed Rate Notes due 2013 as of September 25, 2010. The following consolidated financial information presents, in separate columns, financial information for (i) the Company (on a
parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) Harry & David Holdings, Inc.s (guarantor) subsidiaries of the Company that
guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis,
as of September 25, 2010, and June 26, 2010, and for the thirteen weeks ended September 25, 2010 and September 26, 2009, respectively. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the
Company and each of its existing and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes
place certain restrictions on the payment of dividends, other payments or distributions by Harry and David and between the guarantors.



14



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)



NOTE 12CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)



Condensed Consolidating Balance Sheet

As of September 25, 2010



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 123     |   |                 | $ | 5,130    |                       |  | $ |                                 |   |  | $            |         |   |  | $ | 5,253   |  
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 2,958    |                       |  |   | 31                               |   |  |              |         |   |  |   | 2,989   |  
|Other receivables                                    |  |                                          |        |   |                 |   | 142      |                       |  |   | 434                              |   |  |              |         |   |  |   | 576     |  
|Inventories                                          |  |                                          |        |   |                 |   | 27,104   |                       |  |   | 55,473                           |   |  |              |         |   |  |   | 82,577  |  
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 5,103    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,103   |  
|Deferred income taxes                                |  |                                          | 9,331   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 9,331   |  
|Other current assets                                 |  |                                          | 5       |   |                 |   | 1,795    |                       |  |   | 2,211                            |   |  |              |         |   |  |   | 4,011   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 9,459   |   |                 |   | 42,232   |                       |  |   | 58,149                           |   |  |              |         |   |  |   | 109,840 |  
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 5,782    |                       |  |   | 119,733                          |   |  |              |         |   |  |   | 125,515 |  
|Goodwill                                             |  |                                          |        |   |                 |   | 12,236   |                       |  |   |                                 |   |  |              |         |   |  |   | 12,236  |  
|Intangibles, net                                     |  |                                          |        |   |                 |   | 32,360   |                       |  |   |                                 |   |  |              |         |   |  |   | 32,360  |  
|Investment in subsidiaries                           |  |                                          | 80,397  |   |                 |   | (87,826  | )                     |  |   |                                 |   |  |              | 7,429    |   |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 5,096    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,096   |  
|Other assets                                         |  |                                          | 2,009   |   |                 |   | 50       |                       |  |   | 27                               |   |  |              |         |   |  |   | 2,086   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 91,865  |   |                 | $ | 9,930    |                       |  | $ | 177,909                          |   |  | $            | 7,429    |   |  | $ | 287,133 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 10,035   |                       |  | $ | 19,113                           |   |  | $            |         |   |  | $ | 29,148  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 6,662    |                       |  |   | 7,983                            |   |  |              |         |   |  |   | 14,645  |  
|Income taxes payable                                 |  |                                          | 2,987   |   |                 |   | (94      | )                     |  |   | (9                               | ) |  |              |         |   |  |   | 2,884   |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 8,349    |                       |  |   |                                 |   |  |              |         |   |  |   | 8,349   |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 1,397    |                       |  |   | 3                                |   |  |              |         |   |  |   | 1,400   |  
|Other accrued liabilities                            |  |                                          | 9       |   |                 |   | 1,619    |                       |  |   | 1,389                            |   |  |              |         |   |  |   | 3,017   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                 |   | 156      |                       |  |   |                                 |   |  |              |         |   |  |   | 156     |  
|Revolving credit facility                            |  |                                          |        |   |                 |   | 58,000   |                       |  |   |                                 |   |  |              |         |   |  |   | 58,000  |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 2,996   |   |                 |   | 86,124   |                       |  |   | 28,479                           |   |  |              |         |   |  |   | 117,599 |  
|Long-term debt                                       |  |                                          |        |   |                 |   | 198,362  |                       |  |   |                                 |   |  |              |         |   |  |   | 198,362 |  
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 27,886                           |   |  |              |         |   |  |   | 27,886  |  
|Deferred income taxes                                |  |                                          | 5,291   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 5,291   |  
|Other long-term liabilities                          |  |                                          | 3,827   |   |                 |   | 3,292    |                       |  |   | 2,118                            |   |  |              |         |   |  |   | 9,237   |  
|Intercompany debt                                    |  |                                          | 150,993 |   |                 |   | (358,245 | )                     |  |   | 207,252                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 163,107 |   |                 |   | (70,467  | )                     |  |   | 265,735                          |   |  |              |         |   |  |   | 358,375 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 17,272  |   |                 |   | 232,591  |                       |  |   | 53,784                           |   |  |              | (286,375 | ) |  |   | 17,272  |  
|Accumulated other comprehensive loss, net of tax     |  |                                          | (12,449 | ) |                 |   |         |                       |  |   | (17,711                          | ) |  |              | 17,711   |   |  |   | (12,449 | )
|Accumulated deficit                                  |  |                                          | (76,075 | ) |                 |   | (152,195 | )                     |  |   | (123,899                         | ) |  |              | 276,094  |   |  |   | (76,075 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | (71,242 | ) |                 |   | 80,397   |                       |  |   | (87,826                          | ) |  |              | 7,429    |   |  |   | (71,242 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 91,865  |   |                 | $ | 9,930    |                       |  | $ | 177,909                          |   |  | $            | 7,429    |   |  | $ | 287,133 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



15



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Condensed
Consolidating Balance Sheet

As of June 26, 2010



|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ----------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & 
DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                         | 123     |   |                 | $ | 13,607   |                       |  | $ |                                 |   |  | $            |         |   |  | $ | 13,730  |  
|Short-term investments                               |  |                                           |        |   |                 |   |         |                       |  |   | 4,999                            |   |  |              |         |   |  |   | 4,999   |  
|Trade accounts receivable, net                       |  |                                           |        |   |                 |   | 832      |                       |  |   | 104                              |   |  |              |         |   |  |   | 936     |  
|Other receivables                                    |  |                                           |        |   |                 |   | 296      |                       |  |   | 538                              |   |  |              |         |   |  |   | 834     |  
|Inventories                                          |  |                                           |        |   |                 |   | 15,368   |                       |  |   | 20,159                           |   |  |              |         |   |  |   | 35,527  |  
|Deferred catalog expenses                            |  |                                           |        |   |                 |   | 2,286    |                       |  |   |                                 |   |  |              |         |   |  |   | 2,286   |  
|Deferred income taxes                                |  |                                           | 2,173   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 2,173   |  
|Other current assets                                 |  |                                           |        |   |                 |   | 1,322    |                       |  |   | 2,432                            |   |  |              |         |   |  |   | 3,754   |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                           | 2,296   |   |                 |   | 33,711   |                       |  |   | 28,232                           |   |  |              |         |   |  |   | 64,239  |  
|Fixed assets, net                                    |  |                                           |        |   |                 |   | 5,985    |                       |  |   | 122,406                          |   |  |              |         |   |  |   | 128,391 |  
|Goodwill                                             |  |                                           |        |   |                 |   | 12,236   |                       |  |   |                                 |   |  |              |         |   |  |   | 12,236  |  
|Intangibles, net                                     |  |                                           |        |   |                 |   | 32,376   |                       |  |   |                                 |   |  |              |         |   |  |   | 32,376  |  
|Investment in subsidiaries                           |  |                                           | 105,183 |   |                 |   | (88,263  | )                     |  |   |                                 |   |  |              | (16,920  | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                           |        |   |                 |   | 3,603    |                       |  |   |                                 |   |  |              |         |   |  |   | 3,603   |  
|Deferred income taxes                                |  |                                           |        |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   |        |  
|Other assets                                         |  |                                           | 1,985   |   |                 |   | 55       |                       |  |   | 329                              |   |  |              |         |   |  |   | 2,369   |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                         | 109,464 |   |                 | $ | (297     | )                     |  | $ | 150,967                          |   |  | $            | (16,920  | ) |  | $ | 243,214 |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                         |        |   |                 | $ | 7,127    |                       |  | $ | 7,956                            |   |  | $            |         |   |  | $ | 15,083  |  
|Accrued payroll and benefits                         |  |                                           |        |   |                 |   | 6,869    |                       |  |   | 7,804                            |   |  |              |         |   |  |   | 14,673  |  
|Income taxes payable                                 |  |                                           | 1,963   |   |                 |   | (94      | )                     |  |   | (9                               | ) |  |              |         |   |  |   | 1,860   |  
|Deferred revenue                                     |  |                                           |        |   |                 |   | 14,014   |                       |  |   |                                 |   |  |              |         |   |  |   | 14,014  |  
|Accrued interest                                     |  |                                           |        |   |                 |   | 4,426    |                       |  |   |                                 |   |  |              |         |   |  |   | 4,426   |  
|Other accrued liabilities                            |  |                                           |        |   |                 |   | 1,352    |                       |  |   | 1,842                            |   |  |              |         |   |  |   | 3,194   |  
|Current portion of capital lease obligations         |  |                                           |        |   |                 |   | 309      |                       |  |   |                                 |   |  |              |         |   |  |   | 309     |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                           | 1,963   |   |                 |   | 34,003   |                       |  |   | 17,593                           |   |  |              |         |   |  |   | 53,559  |  
|Long-term debt                                       |  |                                           |        |   |                 |   | 198,362  |                       |  |   |                                 |   |  |              |         |   |  |   | 198,362 |  
|Accrued pension liability                            |  |                                           |        |   |                 |   |         |                       |  |   | 29,851                           |   |  |              |         |   |  |   | 29,851  |  
|Deferred income taxes                                |  |                                           | 5,116   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 5,116   |  
|Other long-term liabilities                          |  |                                           | 3,911   |   |                 |   | 3,866    |                       |  |   | 2,094                            |   |  |              |         |   |  |   | 9,871   |  
|Intercompany debt                                    |  |                                           | 152,019 |   |                 |   | (341,711 | )                     |  |   | 189,692                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                           | 163,009 |   |                 |   | (105,480 | )                     |  |   | 239,230                          |   |  |              |         |   |  |   | 296,759 |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                           | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                           | 17,062  |   |                 |   | 232,591  |                       |  |   | 53,783                           |   |  |              | (286,374 | ) |  |   | 17,062  |  
|Accumulated other comprehensive loss, net of tax     |  |                                           | (12,719 | ) |                 |   |         |                       |  |   | (18,156                          | ) |  |              | 18,156   |   |  |   | (12,719 | )
|Accumulated deficit                                  |  |                                           | (57,898 | ) |                 |   | (127,409 | )                     |  |   | (123,890                         | ) |  |              | 251,299  |   |  |   | (57,898 | )
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                           | (53,545 | ) |                 |   | 105,183  |                       |  |   | (88,263                          | ) |  |              | (16,920  | ) |  |   | (53,545 | )
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                         | 109,464 |   |                 | $ | (297     | )                     |  | $ | 150,967                          |   |  | $            | (16,920  | ) |  | $ | 243,214 |  
|                                                     |  |                                           |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



16



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Condensed
Consolidating Statement of Operations

For the Thirteen Weeks Ended September 25, 2010



|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                       |  | $                                        |        |   |                | $ | 40,521  |                       |  | $ | 5,831                            |   |  | $            | (5,912  | ) |  | $ | 40,440  |  
|Cost of goods sold                              |  |                                          |        |   |                |   | 28,312  |                       |  |   | 5,838                            |   |  |              | (5,912  | ) |  |   | 28,238  |  
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                    |  |                                          |        |   |                |   | 12,209  |                       |  |   | (7                               | ) |  |              |        |   |  |   | 12,202  |  
|Selling, general and administrative             |  |                                          |        |   |                |   | 32,115  |                       |  |   | (4                               | ) |  |              |        |   |  |   | 32,111  |  
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating loss                                  |  |                                          |        |   |                |   | (19,906 | )                     |  |   | (3                               | ) |  |              |        |   |  |   | (19,909 | )
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                         |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                 |  |                                          |        |   |                |   |        |                       |  |   | (1                               | ) |  |              |        |   |  |   | (1      | )
|Interest expense                                |  |                                          |        |   |                |   | 5,317   |                       |  |   | 7                                |   |  |              |        |   |  |   | 5,324   |  
|Other (income) expense, net                     |  |                                          | (25     | ) |                |   | (1      | )                     |  |   |                                 |   |  |              |        |   |  |   | (26     | )
|Equity in earnings of consolidated subsidiaries |  |                                          | 25,231  |   |                |   | 9       |                       |  |   |                                 |   |  |              | (25,240 | ) |  |   |        |  
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                    |  |                                          | 25,206  |   |                |   | 5,325   |                       |  |   | 6                                |   |  |              | (25,240 | ) |  |   | 5,297   |  
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes               |  |                                          | (25,206 | ) |                |   | (25,231 | )                     |  |   | (9                               | ) |  |              | 25,240  |   |  |   | (25,206 | )
|Benefit for income taxes                        |  |                                          | (7,029  | ) |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | (7,029  | )
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                               |  | $                                        | (18,177 | ) |                | $ | (25,231 | )                     |  | $ | (9                               | ) |  | $            | 25,240  |   |  | $ | (18,177 | )
|                                                |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Condensed
Consolidating Statement of Operations

For the Thirteen Weeks Ended September 26, 2009



|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|----------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | ---------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                |  | Harry & DavidHoldings,
Inc.(Parent-Only) |         |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations 
andReclassifications |   |  | Consolidated |        
|Net sales                                       |  | $                                        |        |   |                 | $ | 46,532  |                       |  | $ | 14,072                             |   |  | $            | (14,340 | ) |  | $ | 46,264  |  
|Cost of goods sold                              |  |                                          |        |   |                 |   | 30,295  |                       |  |   | 14,086                             |   |  |              | (14,340 | ) |  |   | 30,041  |  
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Gross profit                                    |  |                                          |        |   |                 |   | 16,237  |                       |  |   | (14                                | ) |  |              |        |   |  |   | 16,223  |  
|Selling, general and administrative             |  |                                          |        |   |                 |   | 33,608  |                       |  |   | (14                                | ) |  |              |        |   |  |   | 33,594  |  
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Operating loss                                  |  |                                          |        |   |                 |   | (17,371 | )                     |  |   |                                   |   |  |              |        |   |  |   | (17,371 | )
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Other (income) expense:                         |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Interest income                                 |  |                                          |        |   |                 |   |        |                       |  |   | (3                                 | ) |  |              |        |   |  |   | (3      | )
|Interest expense                                |  |                                          |        |   |                 |   | 4,704   |                       |  |   | (5                                 | ) |  |              |        |   |  |   | 4,699   |  
|Other (income) expense, net                     |  |                                          | (25     | ) |                 |   | 2       |                       |  |   |                                   |   |  |              |        |   |  |   | (23     | )
|Equity in earnings of consolidated subsidiaries |  |                                          | 22,069  |   |                 |   | (8      | )                     |  |   |                                   |   |  |              | (22,061 | ) |  |   |        |  
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Total other (income) expense                    |  |                                          | 22,044  |   |                 |   | 4,698   |                       |  |   | (8                                 | ) |  |              | (22,061 | ) |  |   | 4,673   |  
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes               |  |                                          | (22,044 | ) |                 |   | (22,069 | )                     |  |   | 8                                  |   |  |              | 22,061  |   |  |   | (22,044 | )
|Benefit for income taxes                        |  |                                          | (320    | ) |                 |   |        |                       |  |   |                                   |   |  |              |        |   |  |   | (320    | )
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  
|Net income (loss)                               |  | $                                        | (21,724 | ) |                 | $ | (22,069 | )                     |  | $ | 8                                  |   |  | $            | 22,061  |   |  | $ | (21,724 | )
|                                                |  |                                          |         |   |                 |   |         |                       |  |   |                                    |   |  |              |         |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Condensed
Consolidating Statement of Cash Flows

For the Thirteen Weeks Ended September 25, 2010



|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|------------------------------------------------------- |  | ---------------------------------------- | ------ | - | --------------- | - | ------- | --------------------- |  | - | ---------------------------------- | - |  | ------------ | - |  |  | - | ------- | -
|                                                        |  | Harry & DavidHoldings,
Inc.(Parent-Only) |        |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations 
andReclassifications |   |  | Consolidated |  
|Operating activities                                    |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) operating activities     |  | $                                        | 1,026  |   |                 | $ | (46,781 | )                     |  | $ | (21,941                            | ) |  | $            |  |  |  | $ | (67,696 | )
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Investing activities                                    |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Acquisition of fixed assets                             |  |                                          |       |   |                 |   | (492    | )                     |  |   | (620                               | ) |  |              |  |  |  |   | (1,112  | )
|Proceeds from maturities of held-to-maturity securities |  |                                          |       |   |                 |   |        |                       |  |   | 5,000                              |   |  |              |  |  |  |   | 5,000   |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) investing activities     |  | $                                        |       |   |                 | $ | (492    | )                     |  | $ | 4,380                              |   |  | $            |  |  |  | $ | 3,888   |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Financing activities                                    |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Borrowings of revolving debt                            |  |                                          |       |   |                 |   | 58,000  |                       |  |   |                                   |   |  |              |  |  |  |   | 58,000  |  
|Repayments of capital lease obligation                  |  |                                          |       |   |                 |   | (153    | )                     |  |   |                                   |   |  |              |  |  |  |   | (153    | )
|Payments for deferred financing costs                   |  |                                          |       |   |                 |   | (2,516  | )                     |  |   |                                   |   |  |              |  |  |  |   | (2,516  | )
|Net (payments) receipts on intercompany debt            |  |                                          | (1,026 | ) |                 |   | (16,535 | )                     |  |   | 17,561                             |   |  |              |  |  |  |   |        |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) financing activities     |  | $                                        | (1,026 | ) |                 | $ | 38,796  |                       |  | $ | 17,561                             |   |  | $            |  |  |  | $ | 55,331  |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Decrease in cash and cash equivalents                   |  |                                          |       |   |                 |   | (8,477  | )                     |  |   |                                   |   |  |              |  |  |  |   | (8,477  | )
|Cash and cash equivalents, beginning of period          |  |                                          | 123    |   |                 |   | 13,607  |                       |  |   |                                   |   |  |              |  |  |  |   | 13,730  |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Cash and cash equivalents, end of period                |  | $                                        | 123    |   |                 | $ | 5,130   |                       |  | $ |                                   |   |  | $            |  |  |  | $ | 5,253   |  
|                                                        |  |                                          |        |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements(Continued)

(dollars in thousands)

(unaudited)





Condensed
Consolidating Statement of Cash Flows

For the Thirteen Weeks Ended September 26, 2009



|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------- | ---- | - | --------------- | - | ------- | --------------------- |  | - | ---------------------------------- | - |  | ------------ | - |  |  | - | ------- | -
|                                                    |  | Harry & DavidHoldings,
Inc.(Parent-Only) |      |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations 
andReclassifications |   |  | Consolidated |  
|Operating activities                                |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) operating activities |  | $                                        | 152  |   |                 | $ | (45,926 | )                     |  | $ | (14,186                            | ) |  | $            |  |  |  | $ | (59,960 | )
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Investing activities                                |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Acquisition of fixed assets                         |  |                                          |     |   |                 |   | (222    | )                     |  |   | (271                               | ) |  |              |  |  |  |   | (493    | )
|Proceeds from the sale of fixed assets              |  |                                          |     |   |                 |   |        |                       |  |   | 44                                 |   |  |              |  |  |  |   | 44      |  
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash used in investing activities               |  | $                                        |     |   |                 | $ | (222    | )                     |  | $ | (227                               | ) |  | $            |  |  |  | $ | (449    | )
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Financing activities                                |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Borrowings of revolving debt                        |  |                                          |     |   |                 |   | 47,000  |                       |  |   |                                   |   |  |              |  |  |  |   | 47,000  |  
|Net (payments) receipts on intercompany debt        |  |                                          | (152 | ) |                 |   | (14,261 | )                     |  |   | 14,413                             |   |  |              |  |  |  |   |        |  
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Net cash provided by (used in) financing activities |  | $                                        | (152 | ) |                 | $ | 32,739  |                       |  | $ | 14,413                             |   |  | $            |  |  |  | $ | 47,000  |  
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Decrease in cash and cash equivalents               |  |                                          |     |   |                 |   | (13,409 | )                     |  |   |                                   |   |  |              |  |  |  |   | (13,409 | )
|Cash and cash equivalents, beginning of period      |  |                                          | 51   |   |                 |   | 15,344  |                       |  |   |                                   |   |  |              |  |  |  |   | 15,395  |  
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  
|Cash and cash equivalents, end of period            |  | $                                        | 51   |   |                 | $ | 1,935   |                       |  | $ |                                   |   |  | $            |  |  |  | $ | 1,986   |  
|                                                    |  |                                          |      |   |                 |   |         |                       |  |   |                                    |   |  |              |   |  |  |   |         |  



20



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##### Table of Contents



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

FORWARD-LOOKING STATEMENTS

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

Risk factors that may affect our results include risks
relating to market demand for our products, the seasonality of our business, production capabilities, relationships with customers and suppliers, implementation of our business and marketing strategies, competition, fluctuations in energy and other
commodity costs, financial leverage, postal rate increases, loss of key management, disruptions in IT, increase in labor costs and the availability of a seasonal workforce and changes in federal and state tax laws, potential effect of extreme
weather and pests on crops, government regulation by the Food and Drug Administration (FDA) and the United States Department of Agriculture (USDA), protection of intellectual property, compliance with environmental
regulations and natural disasters, terrorism and acts of war, as well as the other risks included in the Risk Factors set forth in Item 1A of Harry and Davids Annual Report on Form 10-K for the fiscal year ended June 26, 2010, and
those risks which may be described from time to time in Harry and Davids other filings with the Securities and Exchange Commission.

You
should keep in mind that any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they
may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, you
should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.

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

OVERVIEW

General

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

MATTERS AFFECTING COMPARABILITY

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



21



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##### Table of Contents



RESULTS OF
OPERATIONS

NET SALES

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



|                 |  |                      |        |  |                      |  |       |                   |  |   |                 |  |  |  |       |  
|---------------- |  | -------------------- | ------ |  | -------------------- |  | ----- | ----------------- |  | - | --------------- |  |  |  | ----- | -
|                 |  | Thirteen 
weeksended |        |  | Thirteen 
weeksended | 
|                 |  | September 25,2010    |        |  | Percentof Total      |  |       | September 26,2009 |  |   | Percentof Total | 
|Direct Marketing |  | $                    | 18,073 |  |                      |  | 44.7  | %                 |  | $ | 19,672          |  |  |  | 42.5  | %
|Stores           |  |                      | 19,477 |  |                      |  | 48.2  | %                 |  |   | 20,917          |  |  |  | 45.2  | %
|Wholesale        |  |                      | 2,890  |  |                      |  | 7.1   | %                 |  |   | 5,675           |  |  |  | 12.3  | %
|                 |  |                      |        |  |                      |  |       |                   |  |   |                 |  |  |  |       |  
|Total net sales  |  | $                    | 40,440 |  |                      |  | 100.0 | %                 |  | $ | 46,264          |  |  |  | 100.0 | %
|                 |  |                      |        |  |                      |  |       |                   |  |   |                 |  |  |  |       |  

Net sales of $40,440 for the thirteen weeks ended September 25, 2010, decreased $5,824, or 12.6%, from the thirteen
weeks ended September 26, 2009. The decline was attributable to a combination of lower sales volume in our Wholesale segment and the impact of having fewer stores in operation, combined with lower volumes and higher delivery discounts in our
Direct Marketing segment.

Direct Marketing

Net sales in our Direct Marketing segment decreased $1,599, or 8.1%, from the thirteen weeks ended September 26, 2009 to the thirteen weeks ended September 25, 2010. The decline was primarily
driven by lower sales volumes combined with increased delivery discounts.

Stores

Our Stores segment net sales decreased $1,440, representing a 6.9% decline in total sales and a comparable stores sales decline of 0.4%, or approximately
$86, from the thirteen weeks ended September 26, 2009 to the thirteen weeks ended September 25, 2010. The total sales decrease was primarily driven by fewer stores in operation in the current fiscal period as compared to the prior
comparable fiscal period.

As of September 25, 2010, we had 124 stores in operation compared to 136 stores in operation during the same
quarter last fiscal year.

A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months, at
which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a
comparable store. However, when a store is closed for an extended period of time, it is no longer treated as a comparable store and is excluded from comparable sales comparisons for that period.

Wholesale

Our
Wholesale segment net sales declined $2,785, or 49.1%, from the thirteen weeks ended September 26, 2009 to the thirteen weeks ended September 25, 2010. The decline was primarily due to lower sales to certain wholesale customers.

GROSS PROFIT

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



|                   |  |                      |        |  |                      |  |      |                   |  |   |                      |  |  |  |      |  
|------------------ |  | -------------------- | ------ |  | -------------------- |  | ---- | ----------------- |  | - | -------------------- |  |  |  | ---- | -
|                   |  | Thirteen 
weeksended |        |  | Thirteen 
weeksended | 
|                   |  | September 25,2010    |        |  | Percentof Net 
Sales |  |      | September 26,2009 |  |   | Percentof Net 
Sales | 
|Direct Marketing   |  | $                    | 1,429  |  |                      |  | 7.9  | %                 |  | $ | 4,822                |  |  |  | 24.5 | %
|Stores             |  |                      | 9,412  |  |                      |  | 48.3 | %                 |  |   | 10,040               |  |  |  | 48.0 | %
|Wholesale          |  |                      | 1,361  |  |                      |  | 47.1 | %                 |  |   | 1,361                |  |  |  | 24.0 | %
|                   |  |                      |        |  |                      |  |      |                   |  |   |                      |  |  |  |      |  
|Total gross profit |  | $                    | 12,202 |  |                      |  | 30.2 | %                 |  | $ | 16,223               |  |  |  | 35.1 | %
|                   |  |                      |        |  |                      |  |      |                   |  |   |                      |  |  |  |      |  



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Gross profit decreased $4,021, or
24.8%, to $12,202 in the thirteen weeks ended September 25, 2010, from $16,223 in the thirteen weeks ended September 26, 2009. Consolidated gross profit as a percentage of consolidated net sales was 30.2% in the thirteen-week period ended
September 25, 2010, and 35.1% in the thirteen-week period ended September 26, 2009. The decrease in gross profit margin was primarily due to a higher portion of manufacturing and overhead costs expensed in the first quarter of fiscal 2011
as a result of shifting a significant portion of our production into the second fiscal quarter and the impact of our fixed costs on a lower sales base.

Direct Marketing

Our Direct Marketing segment gross profit decreased $3,393, or
70.4%, with gross margin declining to 7.9% in the thirteen weeks ended September 25, 2010 from 24.5% in the thirteen weeks ended September 26, 2009. The gross profit and gross margin decreases were primarily due to higher product costs,
unfavorable impact of overhead expenses in the first quarter of fiscal 2011 as a result of shifting the production into the second quarter of fiscal 2011 and higher delivery discounts. Gross margin was also negatively effected by the impact of our
fixed costs over a lower sales base.

Stores

Our Stores segment gross profit decreased $628, or 6.3% in the thirteen weeks ended September 25, 2010, while our gross margin remained relatively flat at 48.3%. The gross profit decline was
primarily due to having fewer stores as compared to the same period last year.

Wholesale

Our Wholesale segment gross profit remained flat, while gross margin increased to 47.1% in the thirteen weeks ended September 25, 2010 from 24.0% in
the thirteen weeks ended September 26, 2009. The increase in gross margin was primarily due to favorable customer mix, lower inventory write-offs in the first quarter of current fiscal year and favorable impact of overhead expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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



|                                                   |  |                      |        |  |                      |  |      |                   |  |   |                    |  |  |  |      |  
|-------------------------------------------------- |  | -------------------- | ------ |  | -------------------- |  | ---- | ----------------- |  | - | ------------------ |  |  |  | ---- | -
|                                                   |  | Thirteen 
weeksended |        |  | Thirteen 
weeksended | 
|                                                   |  | September 25,2010    |        |  | Percentof NetSales   |  |      | September 26,2009 |  |   | Percentof NetSales | 
|Direct Marketing                                   |  | $                    | 16,747 |  |                      |  | 92.7 | %                 |  | $ | 17,054             |  |  |  | 86.7 | %
|Stores                                             |  |                      | 14,512 |  |                      |  | 74.5 | %                 |  |   | 15,510             |  |  |  | 74.2 | %
|Wholesale                                          |  |                      | 852    |  |                      |  | 29.5 | %                 |  |   | 1,030              |  |  |  | 18.1 | %
|                                                   |  |                      |        |  |                      |  |      |                   |  |   |                    |  |  |  |      |  
|Total selling, general and administrative expenses |  | $                    | 32,111 |  |                      |  | 79.4 | %                 |  | $ | 33,594             |  |  |  | 72.6 | %
|                                                   |  |                      |        |  |                      |  |      |                   |  |   |                    |  |  |  |      |  

Selling, general and administrative expenses decreased $1,483, or 4.4%, in the thirteen weeks ended
September 25, 2010 from the thirteen weeks ended September 26, 2009. The decrease in selling, general and administrative expenses was primarily due to lower payroll and lease expenses, partially offset by higher expenses associated with
marketing initiatives and other consulting fees.

OTHER (INCOME) EXPENSE

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



|                             |  |                                      |       |   |                                      |   |       |  
|---------------------------- |  | ------------------------------------ | ----- | - | ------------------------------------ | - | ----- | -
|                             |  | Thirteenweeks endedSeptember 25,2010 |       |   | Thirteenweeks endedSeptember 26,2009 |  
|Net interest expense         |  | $                                    | 5,323 |   |                                      | $ | 4,696 |  
|Other (income) expense, net  |  |                                      | (26   | ) |                                      |   | (23   | )
|                             |  |                                      |       |   |                                      |   |       |  
|Total other (income) expense |  | $                                    | 5,297 |   |                                      | $ | 4,673 |  
|                             |  |                                      |       |   |                                      |   |       |  



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The increase in interest expense is
associated with the amendment to our revolving credit facility and higher interest expense associated with higher level of seasonal borrowings.

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 first quarter of fiscal 2011 and fiscal 2010 were 27.9% and 1.5%, respectively. For the first quarter
of fiscal 2011, the difference in the effective rate and the federal statutory rate is primarily due to a valuation allowance adjustment benefit of $298, relating to certain deferred tax assets, and state tax expense of $138. For the first quarter
of fiscal 2010, the difference in the effective rate and the federal statutory rate is primarily due to charitable contributions benefit of $269, tax credits benefit of $226, and state tax benefit of $349.

We routinely review the future realization of deferred tax assets based on projected future reversal of taxable temporary differences, available tax
planning strategies and projected future taxable income. As of September 25, 2010, we have recorded a valuation allowance of $14,966 to reduce deferred tax assets to an amount that is more likely than not to be realized. The nature of these
analyses requires significant judgment by management about future operating results, including revenues, margins and operating expenses.



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EBITDA

EBITDA is defined as earnings before net interest expense, income taxes, depreciation, and amortization. Our EBITDA for the thirteen-week
period ended September 25, 2010 decreased $3,289, primarily due to the increase in the operating loss as a result of the factors discussed above.

For an explanation of why management believes EBITDA is a useful measure for understanding our results of operations, see Non-GAAP Financial Measure: EBITDA below. The following table
reconciles EBITDA to net cash used in operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net loss, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in thousands).



|                                                                            |  |                                      |         |   |                                      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                            |  | Thirteenweeks endedSeptember 25,2010 |         |   | Thirteenweeks endedSeptember 26,2009 |  
|Net loss                                                                    |  | $                                    | (18,177 | ) |                                      | $ | (21,724 | )
|Interest expense, net                                                       |  |                                      | 5,323   |   |                                      |   | 4,696   |  
|Benefit for income taxes                                                    |  |                                      | (7,029  | ) |                                      |   | (320    | )
|Depreciation and amortization                                               |  |                                      | 3,903   |   |                                      |   | 4,656   |  
|                                                                            |  |                                      |         |   |                                      |   |         |  
|EBITDA                                                                      |  | $                                    | (15,980 | ) |                                      | $ | (12,692 | )
|Interest expense, net                                                       |  |                                      | (5,323  | ) |                                      |   | (4,696  | )
|Benefit for income taxes                                                    |  |                                      | 7,029   |   |                                      |   | 320     |  
|Amortization of deferred financing costs                                    |  |                                      | 1,023   |   |                                      |   | 593     |  
|Stock option compensation expense                                           |  |                                      | 210     |   |                                      |   | 59      |  
|Loss on disposal and impairment of fixed assets and other long-lived assets |  |                                      | 101     |   |                                      |   | 16      |  
|Gain on sale of short-term investments                                      |  |                                      | (1      | ) |                                      |   |        |  
|Deferred income taxes                                                       |  |                                      | (7,158  | ) |                                      |   | 7,315   |  
|Amortization of deferred pension loss                                       |  |                                      | 425     |   |                                      |   | 312     |  
|Changes in operating assets and liabilities                                 |  |                                      | (48,022 | ) |                                      |   | (51,187 | )
|                                                                            |  |                                      |         |   |                                      |   |         |  
|Net cash used in operating activities                                       |  | $                                    | (67,696 | ) |                                      | $ | (59,960 | )
|                                                                            |  |                                      |         |   |                                      |   |         |  

In the thirteen-week period ended September 25, 2010, net loss and EBITDA included:



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



| |  |  | $210 of non-cash stock option compensation expenses;
| | - |  | ----------------------------------------------------



| |  |  | $178 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $129 benefit from severance and re-organization payroll and benefits;
| | - |  | ---------------------------------------------------------------------



| |  |  | $101 loss on disposal and impairment of fixed assets and other long-lived assets, net; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | $24 gain related to uncertain tax positions.
| | - |  | --------------------------------------------

In the thirteen-week period ended September 26, 2009, net loss and EBITDA included:



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



| |  |  | $196 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $114 benefit from severance and re-organization payroll and benefits;
| | - |  | ---------------------------------------------------------------------



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



| |  |  | $59 of non-cash stock option compensation expenses;
| | - |  | ---------------------------------------------------



| |  |  | $25 gain related to uncertain tax positions; and
| | - |  | ------------------------------------------------



| |  |  | $16 loss on disposal and impairment of fixed assets, and other long-lived assets.
| | - |  | ---------------------------------------------------------------------------------



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LIQUIDITY AND
CAPITAL RESOURCES

Our primary liquidity and capital resource needs are to service our debt, finance working capital and make capital
expenditures. At September 25, 2010, our primary sources of liquidity were cash, cash equivalents and available unused borrowings under our revolving credit facility. As of September 25, 2010, we had $58,000 in borrowings and $1,023 in
letters of credit outstanding under the revolving credit facility. As a result of an amendment to our credit facility in July 2010, the size of the facility was reduced from $125,000 to $105,000. The maximum available borrowings under the revolving
credit facility are determined in accordance with our asset-based debt limitation formula. Total available borrowings at September 25, 2010 were approximately $24,882. Due to the highly seasonal nature of our business, we rely heavily on our
revolving credit facility to finance operations leading up to the holiday selling season. The available borrowing amounts under the revolving credit facility vary significantly from January to July, when available borrowings are at a low point
compared to August to November, when significant amounts are available. As a result, our borrowings are used to fund inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season.
Historically, cash provided by operations peaks during our second fiscal quarter because of the holiday selling season and funds our operations from January to July.

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. We have consistently generated substantial amounts
of cash each holiday season. However, if the holiday selling season does not meet our current expectations, we may need to seek other forms of working capital. It is also possible that due to the impact of worsening economic conditions on our
business, should we need to access our credit facility, it may not be available in full, or at all, for future borrowings, due to borrowing base and other limitations.

Cash Flows Used in Operating Activities

Cash used in operating activities totaled $67,696
in the thirteen-week period ended September 25, 2010, compared to $59,960 in the thirteen-week period ended September 26, 2009. The increase in cash usage was driven by a higher amount of cash used for working capital needs, increased
operating loss and higher pension contributions.

Cash Flows Provided by (Used in) Investing Activities

Cash provided by investing activities totaled $3,888 for the thirteen weeks ended September 25, 2010, compared to cash flows used in investing
activities of $449 in the thirteen weeks ended September 26, 2009. Investing activities in the first quarter of fiscal 2011 consisted of proceeds from matured investment securities, partially offset by capital expenditures. Investing activities
in the first quarter of fiscal 2010 consisted primarily of capital expenditures.

Cash Flows Provided by Financing
Activities

Cash provided by financing activities totaled $55,331 for the thirteen weeks ended September 25, 2010, compared to $47,000
for the thirteen weeks ended September 26, 2009. Financing activities in the first quarter of fiscal 2011 were comprised of borrowings on our revolving credit facility of $58,000 partially offset by payments for financing fees associated with
the renewal of our revolving credit facility. Financing activities in the first quarter of fiscal 2010 were comprised of borrowings on our revolving credit facility of $47,000. The increase in borrowings in the first quarter of fiscal 2011 was
driven by higher cash usage in operating activities as described above, payments for financing fees associated with the amendment to our evolving credit facility and higher cash on hand.

Borrowing Arrangements

Revolving Credit Facility

Our principal sources of liquidity are available cash,
cash flows from operations, and borrowings under our revolving credit facility. Our ability to borrow under the revolving credit facility is subject to compliance with the borrowing base and with financial covenants and other customary conditions,
including that no default under the facility shall have occurred and be continuing. In July 2010, we amended our credit facility to, among other things, (A) extend the maturity date from March 20, 2011 to the earliest to occur of
(i) July 7, 2014, (ii) 45 days prior to the final maturity date of Harry and Davids Floating Rate Senior Notes due 2012 (unless such notes are paid in full prior to such date) and (iii) 45 days prior to the final maturity
date of Harry and Davids 9.0% Senior Notes due 2013 (unless such notes are paid in full prior to such date), (B) reduce the size of the facility from $125,000 to $105,000 (subject to an accordion feature providing Harry and David with an
option to increase the aggregate commitments under the Credit Agreement by up to $20,000, upon satisfaction of certain conditions and at the sole discretion of any existing lenders requested to provide any increased commitment), (C) increase
certain fees payable under the revolving credit facility and (D) increase the margins on borrowings under the revolving credit facility, (i) in the case of Eurodollar borrowings, from a range of 1.50% to 2.00% to a range of 3.25% to 3.50%
and (ii) in the case of Alternate Base Rate borrowings, from a range of .50% to 1.00% to a range of 2.25% to 2.50% and changed the basis for determining the applicable margin from the method based on our consolidated leverage ratio to a
usage-based method tied to the level of borrowings and letters of credit under the revolving credit facility.



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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 25th of each year. In addition, the revolving credit
facility requires that, on a consolidated basis, we maintain as of December 31st each year an available cash balance (defined as all cash, cash equivalents and short-term investments, minus all accounts payable) of at least $50,000, failing
which we are required to meet and maintain a minimum fixed charge coverage ratio (as defined in the revolving credit facility), subject to certain conditions. 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 September 25, 2010, unused borrowings under the revolving credit facility were $45,977, reflecting borrowings of $58,000 and $1,023 in outstanding letters of credit. However, the maximum
available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula, which reduced our available borrowing capacity to $24,882 at September 25, 2010. We are required to pay a commitment fee
equal to (i) 0.75% per annum on the average daily unused amount of the Revolving Commitment of such Lender for each day on which usage is greater than 60% or (ii) 1.00% per annum on the average daily unused amount of each
Commitment of such Lender for each day on which usage is less than or equal to 60%. The commitment fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the condensed
consolidated statement of operations.

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

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

Our ability
to comply with these covenants and to meet and maintain such financial ratios and tests may be affected by events beyond our control, such as those described under Item 1A  Risk Factors in our Annual Report on Form 10-K for the
fiscal year ended June 26, 2010. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and payable which could also trigger a similar
right under other agreements, including our indenture.

At September 25, 2010, we were in compliance with all of our covenants under the
revolving credit facility.

Long-term Debt

As of September 25, 2010, Harry and David, our wholly owned subsidiary, had outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012, and $140,192 of Senior Fixed Rate Notes due
March 1, 2013 (collectively, the Senior Notes). 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 5.30% and 5.54% at
September 25, 2010 and June 26, 2010, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments.

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

The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of
indebtedness, engaging in asset dispositions or acquisitions, making investments, and our and our subsidiaries ability to pay dividends and other restricted payments as well as our ability to incur liens and transactions with affiliates. Our
ability to comply with these covenants may be affected by events beyond our control, such as those described under Item 1A. -Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 26, 2010. If we do not remain
in compliance with these covenants, we may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could accelerate all amounts then outstanding to be
immediately due and payable.



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At September 25, 2010, we were in
compliance with all of our covenants under the indenture. Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash
requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.

While our recent acquisitions were financed with cash on hand, 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 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.

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

Seasonality

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

Accordingly, changing economic conditions or
deviations from projected demand for products during the holiday selling season (our 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, if our actual sales during that calendar quarter are lower than anticipated, our profitability and cash flows will be negatively impacted. In addition, our primary
growing season occurs during the second and third calendar quarters. Because we must commit to certain fixed costs before we know the results of a particular harvest, lower than expected harvest yields can also negatively impact our sales and
profitability.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. The accompanying Condensed Consolidated Financial Statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K. The estimates and assumptions are evaluated on
an ongoing basis and are based on historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

For details regarding recent accounting pronouncements, see Note 3  Recent Accounting Pronouncements and Developments in the notes to
our condensed consolidated financial statements included in this Form 10-Q.

NON-GAAP FINANCIAL MEASURE: EBITDA

Our measure of EBITDA is 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 Senior 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.



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

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



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



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



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



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



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

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

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.



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

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

Interest Rate Risk

Interest on our floating rate Senior Notes and on our borrowings under the revolving credit facility accrues at variable rates based
on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow the entire amount available under our revolving credit facility, together with the principal amount due for our floating rate Senior Notes as of
September 25, 2010, a 1.0% change in the interest rate on our variable rate debt would result in a $1,632 corresponding effect on our interest expense on an annual basis.

Commodity Risk

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



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

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of September 25, 2010. Based upon this evaluation, our management, including our Chief Executive Officer and our
Chief Financial Officer, concluded that, as of September 25, 2010, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure.

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



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PART II. OTHER
INFORMATION



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

None.



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

There have been no material
changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 26, 2010.



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

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | [REMOVED AND RESERVED]
|------- | ----------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



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



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SIGNATURES

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



HARRY & DAVID HOLDINGS, INC.By:

/S/    STEVEN J.
HEYERSteven J. HeyerChairman of the Board and Chief Executive OfficerBy:

/S/    EDWARD F.
DUNLAPEdward F. DunlapChief Financial Officer


Date:
November 4, 2010



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