##### Table of Contents

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United States

Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2006

or



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

For the transition period from  to

Commission File Number 333-128870



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Harry & David Holdings,
Inc.

(Exact name of registrant as specified in its charter)



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

(541) 864-2362

(Registrants telephone number including area code)

None

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



---

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

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

Large accelerated ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)    Yes ̈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 13, 2006
|Common stock $0.01 par value |  | 1,019,929                          



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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 30, 2006, June 24, 2006 and September 24, 2005                                |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Operations  Fourteen Weeks ended September 30, 2006 and Thirteen Weeks ended September 24, 2005 |  | 4   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows  Fourteen Weeks ended September 30, 2006 and Thirteen Weeks ended September 24, 2005 |  | 5   
|                              |  |          | 
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                                                  |  | 6   
|                              |  |          | 
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                 |  | 21  
|                              |  |          | 
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                                            |  | 33  
|                              |  |          | 
|                              |  | Item 4.  |  | Controls and Procedures                                                                                                               |  | 33  
|                              | 
|Part II. Other Information    |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Legal Proceedings                                                                                                                     |  | 35  
|                              |  |          | 
|                              |  | Item 1A. |  | Risk Factors                                                                                                                          |  | 35  
|                              |  |          | 
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                           |  | 35  
|                              |  |          | 
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                                       |  | 35  
|                              |  |          | 
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 35  
|                              |  |          | 
|                              |  | Item 5.  |  | Other Information                                                                                                                     |  | 35  
|                              |  |          | 
|                              |  | Item 6.  |  | Exhibits                                                                                                                              |  | 35  



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 Data)



|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | ------------------ |  | - | ------- | -
|                                                                                                                                                                                                        |  | September 30, 2006 |         |   | June 24, 2006 |   |         | September 24, 2005 | 
|                                                                                                                                                                                                        |  | Unaudited          |         |   |               |   |         | Unaudited          | 
|Assets                                                                                                                                                                                                  |  |                    |         |   |               |   |         |                    |  |   |         |  
|Current assets:                                                                                                                                                                                         |  |                    |         |   |               |   |         |                    |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                               |  | $                  | 4,004   |   |               | $ | 23,802  |                    |  | $ | 13,708  |  
|Trade accounts receivable, net                                                                                                                                                                          |  |                    | 10,455  |   |               |   | 8,926   |                    |  |   | 6,780   |  
|Other receivables                                                                                                                                                                                       |  |                    | 3,278   |   |               |   | 3,059   |                    |  |   | 3,142   |  
|Inventories, net                                                                                                                                                                                        |  |                    | 123,523 |   |               |   | 74,117  |                    |  |   | 117,154 |  
|Prepaid catalog expenses                                                                                                                                                                                |  |                    | 9,100   |   |               |   | 3,066   |                    |  |   | 10,907  |  
|Income taxes receivable                                                                                                                                                                                 |  |                    | 62      |   |               |   | 556     |                    |  |   | 399     |  
|Other current assets                                                                                                                                                                                    |  |                    | 17,420  |   |               |   | 10,561  |                    |  |   | 13,867  |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total current assets                                                                                                                                                                                    |  |                    | 167,842 |   |               |   | 124,087 |                    |  |   | 165,957 |  
|                                                                                                                                                                                                        |  |                    |        
|Fixed assets, net                                                                                                                                                                                       |  |                    | 177,170 |   |               |   | 174,010 |                    |  |   | 175,915 |  
|Intangibles, net                                                                                                                                                                                        |  |                    | 32,157  |   |               |   | 32,657  |                    |  |   | 34,593  |  
|Deferred financing costs, net                                                                                                                                                                           |  |                    | 14,119  |   |               |   | 14,813  |                    |  |   | 13,686  |  
|Deferred income taxes                                                                                                                                                                                   |  |                    | 9,293   |   |               |   | 9,293   |                    |  |   | 4,599   |  
|Other assets                                                                                                                                                                                            |  |                    | 489     |   |               |   | 488     |                    |  |   | 577     |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total assets                                                                                                                                                                                            |  | $                  | 401,070 |   |               | $ | 355,348 |                    |  | $ | 395,327 |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Liabilities and stockholders deficit                                                                                                                                                                   |  |                    |         |   |               |   |         |                    |  |   |         |  
|Current liabilities:                                                                                                                                                                                    |  |                    |         |   |               |   |         |                    |  |   |         |  
|Accounts payable                                                                                                                                                                                        |  | $                  | 43,645  |   |               | $ | 26,455  |                    |  | $ | 44,627  |  
|Accrued payroll and benefits                                                                                                                                                                            |  |                    | 14,902  |   |               |   | 14,895  |                    |  |   | 16,054  |  
|Deferred revenue                                                                                                                                                                                        |  |                    | 9,595   |   |               |   | 17,188  |                    |  |   | 7,991   |  
|Deferred income taxes                                                                                                                                                                                   |  |                    | 22,483  |   |               |   | 26,442  |                    |  |   | 9,142   |  
|Accrued interest                                                                                                                                                                                        |  |                    | 2,440   |   |               |   | 5,604   |                    |  |   | 2,030   |  
|Accrued restructuring costs                                                                                                                                                                             |  |                    |        |   |               |   |        |                    |  |   | 1,359   |  
|Other accrued liabilities                                                                                                                                                                               |  |                    | 11,375  |   |               |   | 11,474  |                    |  |   | 8,198   |  
|Revolving credit facility                                                                                                                                                                               |  |                    | 66,000  |   |               |   |        |                    |  |   | 63,000  |  
|Notes payable                                                                                                                                                                                           |  |                    |        |   |               |   |        |                    |  |   | 125     |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total current liabilities                                                                                                                                                                               |  |                    | 170,440 |   |               |   | 102,058 |                    |  |   | 152,526 |  
|                                                                                                                                                                                                        |  |                    |        
|Long-term debt                                                                                                                                                                                          |  |                    | 245,000 |   |               |   | 245,000 |                    |  |   | 245,000 |  
|Accrued pension liability                                                                                                                                                                               |  |                    | 18,608  |   |               |   | 35,621  |                    |  |   | 31,929  |  
|Other long-term liabilities                                                                                                                                                                             |  |                    | 3,213   |   |               |   | 3,119   |                    |  |   | 2,022   |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total liabilities                                                                                                                                                                                       |  |                    | 437,261 |   |               |   | 385,798 |                    |  |   | 431,477 |  
|                                                                                                                                                                                                        |  |                    |        
|Commitments and contingencies                                                                                                                                                                           |  |                    |        |   |               |   |        |                    |  |   |        |  
|                                                                                                                                                                                                        |  |                    |        
|Stockholders deficit                                                                                                                                                                                   |  |                    |         |   |               |   |         |                    |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,019,929, 1,019,929 and 1,014,888 shares at
September 30, 2006, June 24, 2006 and September 24, 2005, respectively |  |                    | 10      |   |               |   | 10      |                    |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                                              |  |                    | 4,075   |   |               |   | 3,954   |                    |  |   | 3,207   |  
|Accumulated deficit                                                                                                                                                                                     |  |                    | (40,276 | ) |               |   | (34,414 | )                  |  |   | (39,367 | )
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total stockholders deficit                                                                                                                                                                             |  |                    | (36,191 | ) |               |   | (30,450 | )                  |  |   | (36,150 | )
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  
|Total liabilities and stockholders deficit                                                                                                                                                             |  | $                  | 401,070 |   |               | $ | 355,348 |                    |  | $ | 395,327 |  
|                                                                                                                                                                                                        |  |                    |         |   |               |   |         |                    |  |   |         |  

See accompanying notes.



3



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)



|                                                        |  |                                         |           |   |                                        |   |           |  
|------------------------------------------------------- |  | --------------------------------------- | --------- | - | -------------------------------------- | - | --------- | -
|                                                        |  | Fourteen weeks ended September 30, 2006 |           |   | Thirteen weeks ended September 24,2005 |  
|Net sales                                               |  | $                                       | 65,898    |   |                                        | $ | 57,723    |  
|Costs and expenses:                                     |  |                                         |           |   |                                        |   |           |  
|Cost of goods sold                                      |  |                                         | 42,475    |   |                                        |   | 42,756    |  
|Selling, general and administrative                     |  |                                         | 41,065    |   |                                        |   | 39,399    |  
|Selling, general and administrative  related party     |  |                                         | 250       |   |                                        |   | 250       |  
|Provision for doubtful accounts                         |  |                                         | 386       |   |                                        |   | 137       |  
|                                                        |  |                                         |           |   |                                        |   |           |  
|                                                        |  |                                         | 84,176    |   |                                        |   | 82,542    |  
|                                                        |  |                                         |           |   |                                        |   |           |  
|Operating loss                                          |  |                                         | (18,278   | ) |                                        |   | (24,819   | )
|                                                        |  |                                        
|Other (income) expense:                                 |  |                                         |           |   |                                        |   |           |  
|Interest income                                         |  |                                         | (118      | ) |                                        |   | (102      | )
|Interest expense                                        |  |                                         | 7,388     |   |                                        |   | 6,453     |  
|Pension curtailment gain                                |  |                                         | (15,844   | ) |                                        |   |          |  
|Other (income) expense                                  |  |                                         | (190      | ) |                                        |   |          |  
|                                                        |  |                                         |           |   |                                        |   |           |  
|                                                        |  |                                         | (8,764    | ) |                                        |   | 6,351     |  
|                                                        |  |                                         |           |   |                                        |   |           |  
|Loss before income taxes                                |  |                                         | (9,514    | ) |                                        |   | (31,170   | )
|Benefit for income taxes                                |  |                                         | (3,652    | ) |                                        |   | (13,904   | )
|                                                        |  |                                         |           |   |                                        |   |           |  
|Net loss                                                |  | $                                       | (5,862    | ) |                                        | $ | (17,266   | )
|                                                        |  |                                         |           |   |                                        |   |           |  
|Loss per share:                                         |  |                                         |           |   |                                        |   |           |  
|Basic and diluted                                       |  | $                                       | (5.75     | ) |                                        | $ | (17.11    | )
|                                                        |  |                                         |           |   |                                        |   |           |  
|Weighted-average shares used in per share calculations: |  |                                         |           |   |                                        |   |           |  
|Basic and diluted                                       |  |                                         | 1,019,929 |   |                                        |   | 1,009,454 |  
|                                                        |  |                                         |           |   |                                        |   |           |  

See accompanying notes.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                            |  |                                         |         |   |                                         |   |         |  
|--------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | --------------------------------------- | - | ------- | -
|                                                                            |  | Fourteen weeks ended September 30, 2006 |         |   | Thirteen weeks ended September 24, 2005 |  
|Operating activities                                                        |  |                                         |         |   |                                         |   |         |  
|Net loss                                                                    |  | $                                       | (5,862  | ) |                                         | $ | (17,266 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                         |         |   |                                         |   |         |  
|Depreciation and amortization of fixed assets                               |  |                                         | 4,086   |   |                                         |   | 4,695   |  
|Amortization of intangible assets                                           |  |                                         | 396     |   |                                         |   | 481     |  
|Amortization of deferred financing costs                                    |  |                                         | 694     |   |                                         |   | 583     |  
|Stock option compensation expense                                           |  |                                         | 121     |   |                                         |   | 113     |  
|Loss on disposal of fixed assets                                            |  |                                         | 87      |   |                                         |   | 75      |  
|Deferred income taxes                                                       |  |                                         | (3,959  | ) |                                         |   | (13,715 | )
|Pension curtailment gain                                                    |  |                                         | (15,844 | ) |                                         |   |        |  
|Changes in operating assets and liabilities:                                |  |                                         |         |   |                                         |   |         |  
|Accounts receivable                                                         |  |                                         | (1,748  | ) |                                         |   | 537     |  
|Inventories                                                                 |  |                                         | (49,406 | ) |                                         |   | (48,494 | )
|Prepaid catalog and other assets                                            |  |                                         | (12,295 | ) |                                         |   | (14,741 | )
|Accounts payable and accrued liabilities                                    |  |                                         | 12,858  |   |                                         |   | 23,580  |  
|Deferred revenue                                                            |  |                                         | (7,593  | ) |                                         |   | (7,011  | )
|                                                                            |  |                                         |         |   |                                         |   |         |  
|Net cash used in operating activities                                       |  |                                         | (78,465 | ) |                                         |   | (71,163 | )
|                                                                            |  |                                        
|Investing activities                                                        |  |                                         |         |   |                                         |   |         |  
|Acquisition of fixed assets                                                 |  |                                         | (7,334  | ) |                                         |   | (4,078  | )
|Proceeds from the sale of fixed assets                                      |  |                                         | 1       |   |                                         |   | 8       |  
|                                                                            |  |                                         |         |   |                                         |   |         |  
|Net cash used in investing activities                                       |  |                                         | (7,333  | ) |                                         |   | (4,070  | )
|                                                                            |  |                                        
|Financing activities                                                        |  |                                         |         |   |                                         |   |         |  
|Borrowings of revolving debt                                                |  |                                         | 66,000  |   |                                         |   | 63,000  |  
|Payments of notes payable                                                   |  |                                         |        |   |                                         |   | (143    | )
|Proceeds from exercise of stock options                                     |  |                                         |        |   |                                         |   | 1,230   |  
|                                                                            |  |                                         |         |   |                                         |   |         |  
|Net cash provided by financing activities                                   |  |                                         | 66,000  |   |                                         |   | 64,087  |  
|                                                                            |  |                                         |         |   |                                         |   |         |  
|Decrease in cash and cash equivalents                                       |  |                                         | (19,798 | ) |                                         |   | (11,146 | )
|Cash and cash equivalents, beginning of period                              |  |                                         | 23,802  |   |                                         |   | 24,854  |  
|                                                                            |  |                                         |         |   |                                         |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                                       | 4,004   |   |                                         | $ | 13,708  |  
|                                                                            |  |                                         |         |   |                                         |   |         |  

See accompanying notes.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

1. BUSINESS

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

2. BASIS OF PRESENTATION

These financial statements include the
consolidated results of the Company and its wholly owned subsidiaries. The Condensed Consolidated Balance Sheets as of September 30, 2006 and September 24, 2005, the Condensed Consolidated Statements of Operations for the fourteen-week
period ended September 30, 2006 and the thirteen-week period ended September 24, 2005, and the Condensed Consolidated Statements of Cash Flows for the fourteen-week period ended September 30, 2006 and the thirteen-week period ended
September 24, 2005 have been prepared from the Companys unaudited Condensed Consolidated Financial Statements. In managements opinion, the Condensed Consolidated Financial Statements include all adjustments, which include those
typically recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the fourteen and thirteen week periods then ended. Significant intercompany balances and transactions
have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 24, 2006 presented in this report has been derived from the Companys audited balance sheet not included in this report.

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

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

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

Certain
reclassifications have been made to the September 24, 2005 financial statements to conform to the September 30, 2006, presentation. Such reclassifications had no effect on net income as originally reported. These reclassifications include
the balance sheet presentation of fixed assets, prepaid advertising and gift card liability.

3. NEW ACCOUNTING PRONOUNCEMENTS

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



6



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)

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

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

In October 2004, the American Jobs Creation Act, or the Jobs Act, was signed into law. The Jobs Act provides a special deduction
with respect to the income of certain U.S. manufacturing activities and a one-time 85% deduction of dividends received for certain foreign earnings that are repatriated, as defined in the Jobs Act. We are currently evaluating the impact of the
manufacturing deduction, which may impact our consolidated financial statements as early as the fiscal year beginning June 25, 2006. In December 2004, the FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which allows a company additional time to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings. We do not have
foreign operations, and as such do not expect that this aspect of the Jobs Act will have a significant impact on our consolidated financial statements.

4. INVENTORIES

Inventories consist of the following:



|                                                   |  |                    |         |               |   |                    |  |   |        
|-------------------------------------------------- |  | ------------------ | ------- | ------------- | - | ------------------ |  | - | -------
|                                                   |  | September 30, 2006 |         | June 24, 2006 |   | September 24, 2005
|Finished goods                                     |  | $                  | 61,597  |               | $ | 20,382             |  | $ | 43,678 
|Materials, packaging supplies, and work-in process |  |                    | 43,973  |               |   | 31,915             |  |   | 51,007 
|Growing crops                                      |  |                    | 17,953  |               |   | 21,820             |  |   | 22,469 
|                                                   |  |                    |         |               |   |                    |  |   |        
|Total                                              |  | $                  | 123,523 |               | $ | 74,117             |  | $ | 117,154
|                                                   |  |                    |         |               |   |                    |  |   |        

5. INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated annual effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates for the first quarters of
fiscal 2007 and fiscal 2006 were 38.4% and 44.6%, respectively. The lower tax rate in the first quarter of fiscal 2007, when compared to fiscal 2006, was due to a higher state effective tax rate and adjustments to state net operating losses
(NOLs) in fiscal 2006. Due to the existence of NOL carryforwards, the Company expects that its cash income tax payments will be immaterial in fiscal 2007.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

6. ACCRUED RESTRUCTURING COSTS

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

7. BORROWING ARRANGEMENTS

Revolving Credit Facilities

On June 17, 2004, the Company entered into a revolving credit agreement with a group of lenders that provided for $150,000 of revolving credit secured by the assets
of the Company. In conjunction with a refinancing on February 25, 2005, this agreement was amended to reduce the revolving credit to $125,000. In connection with the issuance of this facility, the Company incurred debt issuance fees of $7,812,
which were recorded as deferred financing costs within long-term assets. As a result of the modification to the agreement in February 2005, the Company charged $1,098 of financing fees to interest expense, proportional to the decrease in borrowing
capacity of the old arrangement and at September 30, 2006 and September 24, 2005, $3,935 and $4,930 remained in deferred financing costs, respectively.

On March 20, 2006, the Company replaced its existing credit facility with a new revolving credit agreement (the Credit Agreement) with a group of lenders that provides for $125,000 of revolving credit secured by the assets
of the Company. The Credit Agreement has a maturity date of March 20, 2011. Borrowings under the Credit Agreement may be used for the Companys general corporate purposes, including capital expenditures, subject to certain limitations. The
terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. At September 30, 2006, the Company was in compliance with all of its covenants under the Credit Agreement.

The Company has accounted for the new Credit Agreement pursuant to EITF Issue No. 98-14, Debtors Accounting for Changes in Lines-of-Credit
or Revolving-Debt Agreements, and accordingly has continued to defer $3,935 of unamortized deferred financing costs associated with the old credit agreement at September 30, 2006. Such deferred costs will be amortized over the term of the
Credit Agreement. In connection with this facility, the Company incurred additional debt issuance fees of $1,848, which are recorded as deferred financing costs. The costs are amortized over the remaining life of the Credit Agreement and, as of
September 30, 2006, $1,657 of these costs remained as deferred financing costs.

As of September 24, 2005, the Company had $63,000 in outstanding
borrowings under the prior credit facility. Interest on the borrowings was payable at a base rate or Eurocurrency rate of 6.30%, plus an applicable margin and fees. As of September 30, 2006, the Company had $66,000 in outstanding borrowings
under the Credit Agreement. Interest on the borrowings is payable at a base rate or Eurocurrency rate of 7.08%, plus an applicable margin and fees.

The
maximum available borrowings under the Credit Agreement are determined in accordance with an asset-based debt limitation formula. Total available borrowings at September 30, 2006 were $38,930, which were reduced by outstanding letters of credit
totaling $2,000.

Long-Term Debt

In February 2005, the
Company issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to
LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 10.40% and 8.87% at September 30, 2006 and September 24, 2005, respectively. The $175,000 of Senior Fixed Rate Notes accrue interest at an annual fixed rate of
9.0%, with semiannual interest payments commencing on December 1, 2005. The Company incurred $9,490 in deferred financing fees in connection with this note offering that have been recorded in deferred financing costs within long-term assets.

On December 16, 2005, the Company completed the public exchange offer for the Senior Notes. The Company incurred costs in connection with this
exchange offer in the amount of $1,169 that are recorded as deferred financing costs in addition



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

7. BORROWING ARRANGEMENTS (Continued)

Long-Term Debt (Continued)

to the original fees in long-term assets. The costs are amortized over the remaining life of the associated Senior Notes and as of September 30, 2006 and
September 24, 2005, $8,527 and $8,756, respectively, remained on the balance sheet for all associated fees.

These Senior Notes represent the senior
unsecured obligations of Harry & David Operations Corp., a wholly owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the
Companys subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and
other restricted payments, liens and transactions with affiliates. The Company was in compliance with all of its covenants at September 30, 2006.

Interest Expense

The components of interest expense are as follows:



|                                         |  |                                         |       |   |                                         |   |       |  
|---------------------------------------- |  | --------------------------------------- | ----- | - | --------------------------------------- | - | ----- | -
|                                         |  | Fourteen weeks ended September 30, 2006 |       |   | Thirteen weeks ended September 24, 2005 |  
|Interest expense on debt                 |  | $                                       | 6,668 |   |                                         | $ | 5,749 |  
|Amortization of deferred financing costs |  |                                         | 694   |   |                                         |   | 583   |  
|Commitment fees                          |  |                                         | 118   |   |                                         |   | 206   |  
|                                         |  |                                         |       |   |                                         |   |       |  
|Total interest costs                     |  |                                         | 7,480 |   |                                         |   | 6,538 |  
|Less amounts capitalized                 |  |                                         | (92   | ) |                                         |   | (85   | )
|                                         |  |                                         |       |   |                                         |   |       |  
|Net interest expense                     |  | $                                       | 7,388 |   |                                         | $ | 6,453 |  
|                                         |  |                                         |       |   |                                         |   |       |  

8. STOCK OPTION PLAN

In February 2005, the Company adopted a Non-Qualified Stock Option Plan (Plan). The Company accounts for stock-based compensation using the fair-value method under Statement of Financial Accounting Standards (SFAS) No. 123(R) Share
Base Payment.The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on an average historical
volatility of the publicly traded stock of a representative set of comparable companies. The expected term of options granted is derived from the time between initial grant and date of final vesting, as is a customary assumption for stock options in
private equity-controlled companies. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.



|                         |  |                                         |           |  
|------------------------ |  | --------------------------------------- | --------- | -
|                         |  | Fourteen weeks ended September 30, 2006 |          
|Expected volatility      |  |                                         | 44.97     | %
|Expected dividends       |  | $                                       | 0         |  
|Expected term (in years) |  |                                         | 4.3 years |  
|Risk-free rate           |  |                                         | 4.12      | %



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

8. STOCK OPTION PLAN (continued)

A summary of option activity under the Plan for the fourteen weeks ended
September 30, 2006 is presented below:

Fourteen weeks ended September 30, 2006



|                                  |  |               |   |  |                                  |       |                                              |           
|--------------------------------- |  | ------------- | - |  | -------------------------------- | ----- | -------------------------------------------- | ----------
|Options                           |  | Option Shares |   |  | Weighted- Average Exercise Price |       | Weighted- Average Remaining Contractual Term
|Outstanding at June 24, 2006      |  | 63,377        |   |  | $                                | 82.60 |                                              | 8.0 years 
|Granted                           |  |              |   |  |                                  |      |                                              |          
|Exercised                         |  |              |   |  |                                  |      |                                              |          
|Forfeited                         |  | (220          | ) |  |                                  | 82.60 |                                              |          
|                                  |  |               |   |  |                                  |       |                                              |           
|Outstanding at September 30, 2006 |  | 63,157        |   |  | $                                | 82.60 |                                              | 7.75 years
|                                  |  |               |   |  |                                  |       |                                              |           

Of the 63,157 options outstanding at September 30, 2006, 17,539 were fully vested and exercisable. The
weighted average remaining contractual term of vested options was 7.75 years. The total value of all options outstanding at September 30, 2006 was $1,897.

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



|                                  |  |               |   |  |                                                    |      
|--------------------------------- |  | ------------- | - |  | -------------------------------------------------- | -----
|Nonvested Option Shares           |  | Option Shares |   |  | Weighted- Average Grant-Date Fair Value of Options
|Outstanding at June 24, 2006      |  | 49,874        |   |  | $                                                  | 30.04
|Granted options                   |  |              |   |  |                                                    |     
|Vested                            |  | (4,179        | ) |  |                                                    |     
|Forfeited                         |  | (77           | ) |  |                                                    | 30.04
|                                  |  |               |   |  |                                                    |      
|Outstanding at September 30, 2006 |  | 45,618        |   |  | $                                                  | 30.04
|                                  |  |               |   |  |                                                    |      

For the fourteen weeks ended September 30, 2006 and the thirteen weeks ended September 24, 2005, the
Company recognized stock compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $121 and $113, respectively. The total tax benefit recognized for these periods was $48 and $45,
respectively. As of September 30, 2006 and September 24, 2005, there remained a total of $1,445 and $1,896 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan,
respectively. That cost is recognized over a remaining weighted-average period of 2.75 years. An assumption of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

9. BENEFIT PROGRAMS

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



|                                   |  |                                        |       |   |                                         |   |       |  
|---------------------------------- |  | -------------------------------------- | ----- | - | --------------------------------------- | - | ----- | -
|                                   |  | Fourteen weeks ended September 30,2006 |       |   | Thirteen weeks ended September 24, 2005 |  
|Service cost                       |  | $                                      | 1,096 |   |                                         | $ | 1,132 |  
|Interest cost                      |  |                                        | 721   |   |                                         |   | 938   |  
|Expected return on plan assets     |  |                                        | (722  | ) |                                         |   | (762  | )
|Amortization of prior service cost |  |                                        |      |   |                                         |   | 2     |  
|Settlement gain                    |  |                                        |      |   |                                         |   | (13   | )
|                                   |  |                                        |       |   |                                         |   |       |  
|Net periodic benefit expense       |  | $                                      | 1,095 |   |                                         | $ | 1,297 |  
|                                   |  |                                        |       |   |                                         |   |       |  

During the fourteen weeks ended September 30, 2006 and the thirteen weeks ended September 24, 2005, the
Company made a $2,264 and $350 contribution to its defined benefit plans, respectively.

On June 22, 2006, the board of directors approved a soft
freeze of the Companys qualified pension plan effective as of June 25, 2006, whereby no new participants will qualify to enter into the plan. A full freeze of the benefit accrual for the plan will be effective June 30,
2007. Under the provisions of SFAS No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88),these benefit changes resulted in the
recognition of a non-cash net curtailment gain of $13,959. The curtailment gain was recognized in the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007; however, no new participants
will enter or qualify for the plan. After July 1, 2007, the Company has a continuing obligation to fund the plan and will continue to recognize net periodic pension cost under SFAS 132(R), Employers Disclosures About Pensions and
Other Post Retirement Benefits (as amended)(SFAS 132(R)).

In addition, on August 1, 2006 the board of directors approved the
adoption of a non-qualified pension plan, effective as of June 17, 2004, and approved a hard freeze of this plan effective June 30, 2007. Under the provisions of SFAS No. 88,these benefit changes resulted in the
recognition of a non-cash net curtailment gain of $1,885. The curtailment gain was recognized in the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007. After July 1, 2007, the
Company has a continuing obligation to pay plan participants and will continue to recognize net periodic pension cost under SFAS 132(R).

10.
EARNINGS (LOSS) PER SHARE

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



|                                           |  |                                        |           |   |                                         |   |           |  
|------------------------------------------ |  | -------------------------------------- | --------- | - | --------------------------------------- | - | --------- | -
|                                           |  | Fourteen weeks ended September 30,2006 |           |   | Thirteen weeks ended September 24, 2005 |  
|Net loss                                   |  | $                                      | (5,862    | ) |                                         | $ | (17,266   | )
|                                           |  |                                        |           |   |                                         |   |           |  
|Weighted average common shares outstanding |  |                                        | 1,019,929 |   |                                         |   | 1,009,454 |  
|                                           |  |                                        |           |   |                                         |   |           |  
|Basic and diluted loss per share           |  | $                                      | (5.75     | ) |                                         | $ | (17.11    | )
|                                           |  |                                        |           |   |                                         |   |           |  

Options with an exercise price greater than or equal to the estimated fair market value per common share were
63,157 and 74,126 at September 30, 2006, and September 24, 2005, respectively, and were not included in the computation of diluted earnings per share, as their inclusion would be anti-dilutive.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

11. INTANGIBLES

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

The
customer mailing lists and rental lists and favorable lease agreements are being amortized using the straight-line method over their estimated useful lives. Amortization expense was $396 and $481 for the fourteen weeks ended September 30, 2006
and the thirteen weeks ended September 24, 2005, 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 30, 2006    |        | September 24, 2005      
|                                          |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|Trade names and trademarks                |  | $                     | 28,437 |                          | $ |        |                     |  | $                     | 28,437 |                          | $ | 28,768 |                     | $ |        |   |  | $ | 28,768
|Harry and David customer and rental lists |  |                       | 6,728  |                          |   | (4,098 | )                   |  |                       | 2,630  |                          |   | 6,805  |                     |   | (2,464 | ) |  |   | 4,341 
|Favorable lease agreements                |  |                       | 1,971  |                          |   | (881   | )                   |  |                       | 1,090  |                          |   | 1,971  |                     |   | (487   | ) |  |   | 1,484 
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|                                          |  | $                     | 37,136 |                          | $ | (4,979 | )                   |  | $                     | 32,157 |                          | $ | 37,544 |                     | $ | (2,951 | ) |  | $ | 34,593
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       

Amortization expense for fiscal 2007 is projected to be $1,935. The estimated amortization expense for each of the
next four years and thereafter is as follows:



|                 |  |   |      
|---------------- |  | - | -----
|Fiscal year 2008 |  | $ | 1,706
|Fiscal year 2009 |  |   | 244  
|Fiscal year 2010 |  |   | 169  
|Fiscal year 2011 |  |   | 88   
|Thereafter       |  |   | 37   

12. 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 materially adverse effect on the Companys results of operations, financial position or cash flows.

The
Companys food and horticultural products are subject to regulation and inspection by various governmental agencies, and involve the risk of injury to consumers. During the first quarter ended September 30, 2006, the Company was required
to recall some of its products. The Company maintains product liability insurance in an amount that it believes is adequate to cover the costs associated with these recalls.

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



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

12. COMMITMENTS AND CONTINGENCIES (continued)

Total rental expense for all operating leases was as follows:



|                        |  |                                        |       |                                         |   |      
|----------------------- |  | -------------------------------------- | ----- | --------------------------------------- | - | -----
|                        |  | Fourteen weeks ended September 30,2006 |       | Thirteen weeks ended September 24, 2005
|Minimum rent expense    |  | $                                      | 5,308 |                                         | $ | 5,177
|Contingent rent expense |  |                                        | 51    |                                         |   | 44   
|                        |  |                                        |       |                                         |   |      
|Total rent expense      |  | $                                      | 5,359 |                                         | $ | 5,221
|                        |  |                                        |       |                                         |   |      

On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior
management team who had received stock options under the 2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,197, or 7.5% of the portion of the proceeds from the sale of notes
which were distributed on February 25, 2005 to the Companys equity sponsors as a return of capital. The amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded
as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the award vested on June 17, 2006, and 5% will vest in the next twelve quarters. In each case, vesting occurs so long as the
award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined)
occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable,
non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash consideration received in the change
of control either at the time of the change of control or, in some circumstances, at a later specified date. As of September 30, 2006, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the
fourteen weeks then ended.

In connection with the Acquisition, the Company entered into an agreement with its shareholders, Wasserstein and Highfields,
for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such
period. During the fourteen weeks ended September 30, 2006, and the thirteen weeks ended September 24, 2005, the Company paid $250 in each period in such management fees to Wasserstein and Highfields in connection with this agreement.
These amounts were charged to selling, general and administrative expenses  related party.

13. SEGMENT REPORTING

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



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

13. SEGMENT REPORTING (continued)



|                                        |  |                                  |         |   |                        |   |        |                   |  |   |        |   |  |       |         |   |  |   |         |  
|--------------------------------------- |  | -------------------------------- | ------- | - | ---------------------- | - | ------ | ----------------- |  | - | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|Dollars in thousands                    |  | Harry and David Direct Marketing |         |   | Harry and David Stores |   |        | Jackson & Perkins |  |   | Other  |   |  | Total |        
|Fourteen weeks ended September 30, 2006 | 
|Net external sales                      |  | $                                | 27,753  |   |                        | $ | 25,431 |                   |  | $ | 3,684  |   |  | $     | 9,030   |   |  | $ | 65,898  |  
|Net intersegment sales                  |  |                                  | (32,339 | ) |                        |   | (7,173 | )                 |  |   | (447   | ) |  |       | 39,959  |   |  |   |        |  
|Operating income (loss)                 |  |                                  | (11,589 | ) |                        |   | (4,773 | )                 |  |   | (3,849 | ) |  |       | 1,933   |   |  |   | (18,278 | )
|Net interest expense                    |  |                                  |        |   |                        |   |       |                   |  |   |       |   |  |       | 7,270   |   |  |   | 7,270   |  
|Pretax income (loss)                    |  |                                  | (11,589 | ) |                        |   | (4,773 | )                 |  |   | (3,659 | ) |  |       | 10,507  |   |  |   | (9,514  | )
|Net income (loss)                       |  |                                  | (11,589 | ) |                        |   | (4,773 | )                 |  |   | (3,659 | ) |  |       | 14,159  |   |  |   | (5,862  | )
|Total assets                            |  |                                  | 63,295  |   |                        |   | 38,962 |                   |  |   | 46,248 |   |  |       | 252,565 |   |  |   | 401,070 |  
|                                        |  |                                  |         |   |                        |   |        |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Thirteen weeks ended September 24, 2005 |  |                                  |         |   |                        |   |        |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                      |  | $                                | 26,085  |   |                        | $ | 21,757 |                   |  | $ | 5,684  |   |  | $     | 4,197   |   |  | $ | 57,723  |  
|Net intersegment sales                  |  |                                  | (22,692 | ) |                        |   | (6,409 | )                 |  |   | (257   | ) |  |       | 29,358  |   |  |   |        |  
|Operating income (loss)                 |  |                                  | (15,673 | ) |                        |   | (6,062 | )                 |  |   | (3,568 | ) |  |       | 484     |   |  |   | (24,819 | )
|Net interest expense (income)           |  |                                  |        |   |                        |   | (3     | )                 |  |   |       |   |  |       | 6,354   |   |  |   | 6,351   |  
|Pretax income (loss)                    |  |                                  | (15,673 | ) |                        |   | (6,059 | )                 |  |   | (3,568 | ) |  |       | (5,870  | ) |  |   | (31,170 | )
|Net income (loss)                       |  |                                  | (11,473 | ) |                        |   | (4,552 | )                 |  |   | (2,943 | ) |  |       | 1,702   |   |  |   | (17,266 | )
|Total assets                            |  |                                  | 70,949  |   |                        |   | 39,856 |                   |  |   | 53,752 |   |  |       | 230,770 |   |  |   | 395,327 |  
|                                        |  |                                  |         |   |                        |   |        |                   |  |   |        |   |  |       |         |   |  |   |         |  

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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



14



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance
Sheet

As of September 30, 2006



|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | -------------------------------- | ------- |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  | EliminationsandReclassifications |         |  | Consolidated |         
|Assets                                               |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                          | 463     |   |                                | $ | 1,230    |                        |  | $                                | 2,311   |  | $            |         |   |  | $ | 4,004   |  
|Trade accounts receivable, net                       |  |                                            |        |   |                                |   |         |                        |  |                                  | 10,455  |  |              |         |   |  |   | 10,455  |  
|Other receivables                                    |  |                                            |        |   |                                |   | 2        |                        |  |                                  | 3,276   |  |              |         |   |  |   | 3,278   |  
|Inventories, net                                     |  |                                            |        |   |                                |   |         |                        |  |                                  | 123,523 |  |              |         |   |  |   | 123,523 |  
|Prepaid catalog expenses                             |  |                                            |        |   |                                |   |         |                        |  |                                  | 9,100   |  |              |         |   |  |   | 9,100   |  
|Income taxes receivable                              |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              | 62       |   |  |   | 62      |  
|Other current assets                                 |  |                                            |        |   |                                |   | 2,732    |                        |  |                                  | 14,688  |  |              |         |   |  |   | 17,420  |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                            | 463     |   |                                |   | 3,964    |                        |  |                                  | 163,353 |  |              | 62       |   |  |   | 167,842 |  
|                                                     |  |                                            |         |   |                               
|Fixed assets, net                                    |  |                                            |        |   |                                |   | 25,992   |                        |  |                                  | 151,178 |  |              |         |   |  |   | 177,170 |  
|Intangibles, net                                     |  |                                            |        |   |                                |   |         |                        |  |                                  | 32,157  |  |              |         |   |  |   | 32,157  |  
|Investment in subsidiaries                           |  |                                            | 84,005  |   |                                |   | 158,676  |                        |  |                                  |        |  |              | (242,681 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                            |        |   |                                |   | 14,119   |                        |  |                                  |        |  |              |         |   |  |   | 14,119  |  
|Deferred income taxes                                |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              | 9,293    |   |  |   | 9,293   |  
|Other assets                                         |  |                                            |        |   |                                |   | 293      |                        |  |                                  | 196     |  |              |         |   |  |   | 489     |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                          | 84,468  |   |                                | $ | 203,044  |                        |  | $                                | 346,884 |  | $            | (233,326 | ) |  | $ | 401,070 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                          |        |   |                                | $ | 14,673   |                        |  | $                                | 28,972  |  | $            |         |   |  | $ | 43,645  |  
|Accrued payroll and benefits                         |  |                                            |        |   |                                |   | 3,683    |                        |  |                                  | 11,219  |  |              |         |   |  |   | 14,902  |  
|Income taxes payable                                 |  |                                            | (62     | ) |                                |   |         |                        |  |                                  |        |  |              | 62       |   |  |   |        |  
|Deferred revenue                                     |  |                                            |        |   |                                |   |         |                        |  |                                  | 9,595   |  |              |         |   |  |   | 9,595   |  
|Deferred income taxes                                |  |                                            | 22,483  |   |                                |   |         |                        |  |                                  |        |  |              |         |   |  |   | 22,483  |  
|Accrued interest                                     |  |                                            |        |   |                                |   | 2,440    |                        |  |                                  |        |  |              |         |   |  |   | 2,440   |  
|Other accrued liabilities                            |  |                                            |        |   |                                |   | 913      |                        |  |                                  | 10,462  |  |              |         |   |  |   | 11,375  |  
|Revolving credit facility                            |  |                                            |        |   |                                |   | 66,000   |                        |  |                                  |        |  |              |         |   |  |   | 66,000  |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                            | 22,421  |   |                                |   | 87,709   |                        |  |                                  | 60,248  |  |              | 62       |   |  |   | 170,440 |  
|                                                     |  |                                            |         |   |                               
|Long-term debt                                       |  |                                            |        |   |                                |   | 245,000  |                        |  |                                  |        |  |              |         |   |  |   | 245,000 |  
|Accrued pension liability                            |  |                                            |        |   |                                |   |         |                        |  |                                  | 18,608  |  |              |         |   |  |   | 18,608  |  
|Deferred income taxes                                |  |                                            | (9,293  | ) |                                |   |         |                        |  |                                  |        |  |              | 9,293    |   |  |   |        |  
|Intercompany debt                                    |  |                                            | 167,790 |   |                                |   | (310,341 | )                      |  |                                  | 142,551 |  |              |         |   |  |   |        |  
|Other long-term liabilities                          |  |                                            |        |   |                                |   |         |                        |  |                                  | 3,213   |  |              |         |   |  |   | 3,213   |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                            | 180,918 |   |                                |   | 22,368   |                        |  |                                  | 224,620 |  |              | 9,355    |   |  |   | 437,261 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                            | 10      |   |                                |   | 1        |                        |  |                                  | 100     |  |              | (101     | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                            | (80,303 | ) |                                |   | 221,440  |                        |  |                                  | 105,519 |  |              | (242,581 | ) |  |   | 4,075   |  
|Retained earnings (accumulated deficit)              |  |                                            | (16,157 | ) |                                |   | (40,765  | )                      |  |                                  | 16,645  |  |              | 1        |   |  |   | (40,276 | )
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                            | (96,450 | ) |                                |   | 180,676  |                        |  |                                  | 122,264 |  |              | (242,681 | ) |  |   | (36,191 | )
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                          | 84,468  |   |                                | $ | 203,044  |                        |  | $                                | 346,884 |  | $            | (233,326 | ) |  | $ | 401,070 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |         |  



15



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance
Sheet

As of September 24, 2005



|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                          | 2,641   |   |                                | $ | 8,494    |                        |  | $ | 2,573                            |   |  | $            |         |   |  | $ | 13,708  |  
|Trade accounts receivable, net                       |  |                                            |        |   |                                |   |         |                        |  |   | 6,780                            |   |  |              |         |   |  |   | 6,780   |  
|Other receivables                                    |  |                                            | 165     |   |                                |   | (15,672  | )                      |  |   | 18,649                           |   |  |              |         |   |  |   | 3,142   |  
|Inventories, net                                     |  |                                            |        |   |                                |   |         |                        |  |   | 117,154                          |   |  |              |         |   |  |   | 117,154 |  
|Prepaid catalog expenses                             |  |                                            |        |   |                                |   |         |                        |  |   | 10,907                           |   |  |              |         |   |  |   | 10,907  |  
|Income taxes receivable                              |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              | 399      |   |  |   | 399     |  
|Other current assets                                 |  |                                            |        |   |                                |   | 3,650    |                        |  |   | 10,217                           |   |  |              |         |   |  |   | 13,867  |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                            | 2,806   |   |                                |   | (3,528   | )                      |  |   | 166,280                          |   |  |              | 399      |   |  |   | 165,957 |  
|                                                     |  |                                            |         |   |                               
|Fixed assets, net                                    |  |                                            |        |   |                                |   | 24,768   |                        |  |   | 151,147                          |   |  |              |         |   |  |   | 175,915 |  
|Intangibles, net                                     |  |                                            |        |   |                                |   |         |                        |  |   | 34,593                           |   |  |              |         |   |  |   | 34,593  |  
|Investment in subsidiaries                           |  |                                            | 84,005  |   |                                |   | 158,578  |                        |  |   |                                 |   |  |              | (242,583 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                            |        |   |                                |   | 13,686   |                        |  |   |                                 |   |  |              |         |   |  |   | 13,686  |  
|Deferred income taxes                                |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              | 4,599    |   |  |   | 4,599   |  
|Other assets                                         |  |                                            |        |   |                                |   | 283      |                        |  |   | 294                              |   |  |              |         |   |  |   | 577     |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                          | 86,811  |   |                                | $ | 193,787  |                        |  | $ | 352,314                          |   |  | $            | (237,585 | ) |  | $ | 395,327 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                          |        |   |                                | $ | 6,473    |                        |  | $ | 38,154                           |   |  | $            |         |   |  | $ | 44,627  |  
|Accrued payroll and benefits                         |  |                                            | 60      |   |                                |   | 3,851    |                        |  |   | 12,143                           |   |  |              |         |   |  |   | 16,054  |  
|Income taxes payable                                 |  |                                            | (3      | ) |                                |   | (14,037  | )                      |  |   | 13,641                           |   |  |              | 399      |   |  |   |        |  
|Deferred revenue                                     |  |                                            |        |   |                                |   |         |                        |  |   | 7,991                            |   |  |              |         |   |  |   | 7,991   |  
|Deferred income taxes                                |  |                                            | (5,052  | ) |                                |   | (18,913  | )                      |  |   | 33,108                           |   |  |              | (1       | ) |  |   | 9,142   |  
|Accrued interest                                     |  |                                            |        |   |                                |   | 2,030    |                        |  |   |                                 |   |  |              |         |   |  |   | 2,030   |  
|Accrued restructuring costs                          |  |                                            |        |   |                                |   | 108      |                        |  |   | 1,251                            |   |  |              |         |   |  |   | 1,359   |  
|Other accrued liabilities                            |  |                                            |        |   |                                |   | 1,795    |                        |  |   | 6,404                            |   |  |              | (1       | ) |  |   | 8,198   |  
|Revolving credit facility                            |  |                                            |        |   |                                |   | 63,000   |                        |  |   |                                 |   |  |              |         |   |  |   | 63,000  |  
|Notes payable                                        |  |                                            |        |   |                                |   | 125      |                        |  |   |                                 |   |  |              |         |   |  |   | 125     |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                            | (4,995  | ) |                                |   | 44,432   |                        |  |   | 112,692                          |   |  |              | 397      |   |  |   | 152,526 |  
|Long-term debt                                       |  |                                            |        |   |                                |   | 245,000  |                        |  |   |                                 |   |  |              |         |   |  |   | 245,000 |  
|Accrued pension liability                            |  |                                            |        |   |                                |   |         |                        |  |   | 31,929                           |   |  |              |         |   |  |   | 31,929  |  
|Deferred income taxes                                |  |                                            | (641    | ) |                                |   | (12,482  | )                      |  |   | 8,523                            |   |  |              | 4,600    |   |  |   |        |  
|Intercompany debt                                    |  |                                            | 190,420 |   |                                |   | (299,137 | )                      |  |   | 108,716                          |   |  |              | 1        |   |  |   |        |  
|Other long-term liabilities                          |  |                                            |        |   |                                |   |         |                        |  |   | 2,022                            |   |  |              |         |   |  |   | 2,022   |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                            | 184,784 |   |                                |   | (22,187  | )                      |  |   | 263,882                          |   |  |              | 4,998    |   |  |   | 431,477 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                            |        |   |                                |   | 11       |                        |  |   | 2                                |   |  |              | (3       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                            | (80,755 | ) |                                |   | 221,024  |                        |  |   | 105,518                          |   |  |              | (242,580 | ) |  |   | 3,207   |  
|Retained earnings (accumulated deficit)              |  |                                            | (17,218 | ) |                                |   | (5,061   | )                      |  |   | (17,088                          | ) |  |              |         |   |  |   | (39,367 | )
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                            | (97,973 | ) |                                |   | 215,974  |                        |  |   | 88,432                           |   |  |              | (242,583 | ) |  |   | (36,150 | )
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                          | 86,811  |   |                                | $ | 193,787  |                        |  | $ | 352,314                          |   |  | $            | (237,585 | ) |  | $ | 395,327 |  
|                                                     |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  



16



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of
Operations

For the Fourteen Weeks Ended September 30, 2006



|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------ | - | ------ | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                    |  | Harry & David Holdings, Inc. (Parent-Only) |        |   | Harry & David Operations Corp. |   |        | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                           |  | $                                          |       |   |                                | $ |       |                        |  | $ | 106,179                          |   |  | $            | (40,281 | ) |  | $ | 65,898  |  
|Costs and expenses:                                 |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cost of goods sold                                  |  |                                            |       |   |                                |   |       |                        |  |   | 82,756                           |   |  |              | (40,281 | ) |  |   | 42,475  |  
|Selling, general and administrative                 |  |                                            |       |   |                                |   |       |                        |  |   | 41,065                           |   |  |              |        |   |  |   | 41,065  |  
|Selling, general and administrative  related party |  |                                            |       |   |                                |   |       |                        |  |   | 250                              |   |  |              |        |   |  |   | 250     |  
|Provision for doubtful accounts                     |  |                                            |       |   |                                |   |       |                        |  |   | 386                              |   |  |              |        |   |  |   | 386     |  
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                    |  |                                            |       |   |                                |   |       |                        |  |   | 124,457                          |   |  |              | (40,281 | ) |  |   | 84,176  |  
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating loss                                      |  |                                            |       |   |                                |   |       |                        |  |   | (18,278                          | ) |  |              |        |   |  |   | (18,278 | )
|                                                    |  |                                            |        |   |                               
|Other (income) expense:                             |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                     |  |                                            |       |   |                                |   |       |                        |  |   | (118                             | ) |  |              |        |   |  |   | (118    | )
|Interest expense                                    |  |                                            |       |   |                                |   | 7,348  |                        |  |   | 40                               |   |  |              |        |   |  |   | 7,388   |  
|Pension curtailment gain                            |  |                                            |       |   |                                |   |       |                        |  |   | (15,844                          | ) |  |              |        |   |  |   | (15,844 | )
|Other (income) expense                              |  |                                            |       |   |                                |   |       |                        |  |   | (190                             | ) |  |              |        |   |  |   | (190    | )
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                    |  |                                            |       |   |                                |   | 7,348  |                        |  |   | (16,112                          | ) |  |              |        |   |  |   | (8,764  | )
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Loss before benefit for income taxes                |  |                                            |       |   |                                |   | (7,348 | )                      |  |   | (2,166                           | ) |  |              |        |   |  |   | (9,514  | )
|Benefit for income taxes                            |  |                                            | (3,652 | ) |                                |   |       |                        |  |   |                                 |   |  |              |        |   |  |   | (3,652  | )
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                   |  | $                                          | 3,652  |   |                                | $ | (7,348 | )                      |  | $ | (2,166                           | ) |  | $            |        |   |  | $ | (5,862  | )
|                                                    |  |                                            |        |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended September 24, 2005



|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------------------------------ | -- | - | ------------------------------ | - | ------ | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                 |  | Harry & David Holdings, Inc. (Parent-Only) |    |   | Harry & David Operations Corp. |   |        | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                        |  | $                                          |   |   |                                | $ |       |                        |  | $ | 87,387                           |   |  | $            | (29,664 | ) |  | $ | 57,723  |  
|Costs and expenses:                              |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cost of goods sold                               |  |                                            |   |   |                                |   |       |                        |  |   | 72,420                           |   |  |              | (29,664 | ) |  |   | 42,756  |  
|Selling, general and administrative              |  |                                            |   |   |                                |   |       |                        |  |   | 39,649                           |   |  |              |        |   |  |   | 39,649  |  
|Provision for doubtful accounts                  |  |                                            |   |   |                                |   |       |                        |  |   | 137                              |   |  |              |         |   |  |   | 137     |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            |   |   |                                |   |       |                        |  |   | 112,206                          |   |  |              | (29,664 | ) |  |   | 82,542  |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating loss                                   |  |                                            |   |   |                                |   |       |                        |  |   | (24,819                          | ) |  |              |        |   |  |   | (24,819 | )
|                                                 |  |                                            |    |   |                               
|Other (income) expense:                          |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                  |  |                                            | (6 | ) |                                |   |       |                        |  |   | (96                              | ) |  |              |        |   |  |   | (102    | )
|Interest expense                                 |  |                                            |   |   |                                |   | 6,454  |                        |  |   | (1                               | ) |  |              |        |   |  |   | 6,453   |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            | (6 | ) |                                |   | 6,454  |                        |  |   | (97                              | ) |  |              |        |   |  |   | 6,351   |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Loss before provision (benefit) for income taxes |  |                                            | 6  |   |                                |   | (6,454 | )                      |  |   | (24,722                          | ) |  |              |        |   |  |   | (31,170 | )
|Benefit for income taxes                         |  |                                            | (3 | ) |                                |   | (7,765 | )                      |  |   | (6,136                           | ) |  |              |        |   |  |   | (13,904 | )
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                |  | $                                          | 9  |   |                                | $ | 1,311  |                        |  | $ | (18,586                          | ) |  | $            |        |   |  | $ | (17,266 | )
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  



17



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of
Cash Flows

For the Fourteen Weeks Ended September 30, 2006



|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ---- | - |  | - | ------- | -
|                                                                                                   |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |     
|Operating activities                                                                               |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|                                                                                                   |  |                                            |         |   |                               
|Net income (loss)                                                                                  |  | $                                          | 3,652   |   |                                | $ | (7,348  | )                      |  | $ | (2,166                           | ) |  | $            |     |   |  | $ | (5,862  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Depreciation and amortization of fixed assets                                                      |  |                                            |        |   |                                |   | 1,554   |                        |  |   | 2,532                            |   |  |              |     |   |  |   | 4,086   |  
|Amortization of intangible assets                                                                  |  |                                            |        |   |                                |   |        |                        |  |   | 396                              |   |  |              |     |   |  |   | 396     |  
|Amortization of deferred financing costs                                                           |  |                                            |        |   |                                |   | 694     |                        |  |   |                                 |   |  |              |     |   |  |   | 694     |  
|Stock option compensation expense                                                                  |  |                                            | 121     |   |                                |   |        |                        |  |   |                                 |   |  |              |     |   |  |   | 121     |  
|Loss on disposal of fixed assets                                                                   |  |                                            |        |   |                                |   | 14      |                        |  |   | 73                               |   |  |              |     |   |  |   | 87      |  
|Deferred income taxes                                                                              |  |                                            | 13,372  |   |                                |   | 11,167  |                        |  |   | (28,498                          | ) |  |              |     |   |  |   | (3,959  | )
|Pension curtailment gain                                                                           |  |                                            |        |   |                                |   |        |                        |  |   | (15,844                          | ) |  |              |     |   |  |   | (15,844 | )
|Changes in operating assets and liabilities:                                                       |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Accounts receivable                                                                                |  |                                            |        |   |                                |   | 356     |                        |  |   | (2,104                           | ) |  |              |     |   |  |   | (1,748  | )
|Inventories                                                                                        |  |                                            |        |   |                                |   |        |                        |  |   | (49,406                          | ) |  |              |     |   |  |   | (49,406 | )
|Prepaid advertising and other assets                                                               |  |                                            |        |   |                                |   | (420    | )                      |  |   | (12,371                          | ) |  |              | 496  |   |  |   | (12,295 | )
|Accounts payable and accrued liabilities                                                           |  |                                            | 121     |   |                                |   | (19,708 | )                      |  |   | 32,941                           |   |  |              | (496 | ) |  |   | 12,858  |  
|Deferred revenue                                                                                   |  |                                            |        |   |                                |   |        |                        |  |   | (7,593                           | ) |  |              |     |   |  |   | (7,593  | )
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                                            | 17,266  |   |                                |   | (13,691 | )                      |  |   | (82,040                          | ) |  |              |     |   |  |   | (78,465 | )
|                                                                                                   |  |                                            |         |   |                               
|Investing activities                                                                               |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Acquisition of fixed assets                                                                        |  |                                            |        |   |                                |   | (3,037  | )                      |  |   | (4,297                           | ) |  |              |     |   |  |   | (7,334  | )
|Proceeds from the sale of fixed assets                                                             |  |                                            |        |   |                                |   |        |                        |  |   | 1                                |   |  |              |     |   |  |   | 1       |  
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Net cash used in investing activities                                                              |  |                                            |        |   |                                |   | (3,037  | )                      |  |   | (4,296                           | ) |  |              |     |   |  |   | (7,333  | )
|                                                                                                   |  |                                            |         |   |                               
|Financing activities                                                                               |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Borrowings of revolving debt                                                                       |  |                                            |        |   |                                |   | 66,000  |                        |  |   |                                 |   |  |              |     |   |  |   | 66,000  |  
|Net (payments) receipts on intercompany debt                                                       |  |                                            | (17,266 | ) |                                |   | (55,469 | )                      |  |   | 72,735                           |   |  |              |     |   |  |   |        |  
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                                            | (17,266 | ) |                                |   | 10,531  |                        |  |   | 72,735                           |   |  |              |     |   |  |   | 66,000  |  
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Decrease in cash and cash equivalents                                                              |  |                                            |        |   |                                |   | (6,197  | )                      |  |   | (13,601                          | ) |  |              |     |   |  |   | (19,798 | )
|Cash and cash equivalents, beginning of period                                                     |  |                                            | 463     |   |                                |   | 7,427   |                        |  |   | 15,912                           |   |  |              |     |   |  |   | 23,802  |  
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $                                          | 463     |   |                                | $ | 1,230   |                        |  | $ | 2,311                            |   |  | $            |     |   |  | $ | 4,004   |  
|                                                                                                   |  |                                            |         |   |                                |   |         |                        |  |   |                                  |   |  |              |      |   |  |   |         |  



18



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of
Cash Flows

For the Thirteen Weeks Ended September 24, 2005



|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | --- | - |  | - | ------- | -
|                                                                                                   |  | Harry & David Holdings, Inc. (Parent-Only) |        |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |    
|Operating activities                                                                               |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Net income (loss)                                                                                  |  | $                                          | 9      |   |                                | $ | 1,311   |                        |  | $ | (18,586                          | ) |  | $            |    |   |  | $ | (17,266 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Depreciation and amortization of fixed assets                                                      |  |                                            |       |   |                                |   | 1,629   |                        |  |   | 3,066                            |   |  |              |    |   |  |   | 4,695   |  
|Amortization of intangible assets                                                                  |  |                                            |       |   |                                |   |        |                        |  |   | 481                              |   |  |              |    |   |  |   | 481     |  
|Stock option compensation expense                                                                  |  |                                            | 113    |   |                                |   |        |                        |  |   |                                 |   |  |              |    |   |  |   | 113     |  
|Amortization of deferred financing costs                                                           |  |                                            | (3,213 | ) |                                |   | 3,796   |                        |  |   |                                 |   |  |              |    |   |  |   | 583     |  
|Loss on disposal of fixed assets                                                                   |  |                                            |       |   |                                |   |        |                        |  |   |                                 |   |  |              | 75  |   |  |   | 75      |  
|Deferred income taxes                                                                              |  |                                            |       |   |                                |   | (13,715 | )                      |  |   |                                 |   |  |              |    |   |  |   | (13,715 | )
|Changes in operating assets and liabilities:                                                       |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Accounts receivable                                                                                |  |                                            |       |   |                                |   | 220     |                        |  |   | 317                              |   |  |              |    |   |  |   | 537     |  
|Inventories                                                                                        |  |                                            |       |   |                                |   |        |                        |  |   | (48,494                          | ) |  |              |    |   |  |   | (48,494 | )
|Prepaid advertising and other assets                                                               |  |                                            | (3     | ) |                                |   | 4,056   |                        |  |   | (18,794                          | ) |  |              |    |   |  |   | (14,741 | )
|Accounts payable and accrued liabilities                                                           |  |                                            | 59     |   |                                |   | (2,624  | )                      |  |   | 26,145                           |   |  |              |    |   |  |   | 23,580  |  
|Deferred revenue                                                                                   |  |                                            |       |   |                                |   |        |                        |  |   | (7,011                           | ) |  |              |    |   |  |   | (7,011  | )
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Net cash used in operating activities                                                              |  |                                            | (3,035 | ) |                                |   | (5,327  | )                      |  |   | (62,876                          | ) |  |              | 75  |   |  |   | (71,163 | )
|                                                                                                   |  |                                            |        |   |                               
|Investing activities                                                                               |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Acquisition of fixed assets                                                                        |  |                                            |       |   |                                |   | (1,686  | )                      |  |   | (2,392                           | ) |  |              |    |   |  |   | (4,078  | )
|Proceeds from the sale of fixed assets                                                             |  |                                            |       |   |                                |   |        |                        |  |   | 83                               |   |  |              | (75 | ) |  |   | 8       |  
|Transfer of fixed assets                                                                           |  |                                            |       |   |                                |   | (345    | )                      |  |   | 345                              |   |  |              |    |   |  |   |        |  
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Net cash used in investing activities                                                              |  |                                            |       |   |                                |   | (2,031  | )                      |  |   | (1,964                           | ) |  |              | (75 | ) |  |   | (4,070  | )
|                                                                                                   |  |                                            |        |   |                               
|Financing activities                                                                               |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Borrowings of revolving debt                                                                       |  |                                            |       |   |                                |   | 63,000  |                        |  |   |                                 |   |  |              |    |   |  |   | 63,000  |  
|Payments of notes payable                                                                          |  |                                            |       |   |                                |   | (143    | )                      |  |   |                                 |   |  |              |    |   |  |   | (143    | )
|Net (payments) receipts on intercompany debt                                                       |  |                                            | 3,041  |   |                                |   | (60,736 | )                      |  |   | 57,695                           |   |  |              |    |   |  |   |        |  
|Proceeds from exercise of stock options                                                            |  |                                            | 1,230  |   |                                |   |        |                        |  |   |                                 |   |  |              |    |   |  |   | 1,230   |  
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Net cash provided by financing activities                                                          |  |                                            | 4,271  |   |                                |   | 2,121   |                        |  |   | 57,695                           |   |  |              |    |   |  |   | 64,087  |  
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                   |  |                                            | 1,236  |   |                                |   | (5,237  | )                      |  |   | (7,145                           | ) |  |              |    |   |  |   | (11,146 | )
|Cash and cash equivalents, beginning of period                                                     |  |                                            | 1,405  |   |                                |   | 13,731  |                        |  |   | 9,718                            |   |  |              |    |   |  |   | 24,854  |  
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $                                          | 2,641  |   |                                | $ | 8,494   |                        |  | $ | 2,573                            |   |  | $            |    |   |  | $ | 13,708  |  
|                                                                                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |     |   |  |   |         |  



19



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

15. STOCKHOLDERS EQUITY (DEFICIT)



|                                 |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|-------------------------------- |  | ------------ |  | -------------------------- | -- | ------------------------------------- | - | ----- | ----- | - | ------- | - |  | - | ------- | -
|                                 |  | Common Stock |  | Additional Paid-in Capital |    | RetainedEarnings(Accumulated Deficit) |   |       | Total |  
|                                 |  | Shares       |  | Value                      |    |                                       |  
|Balance at June 25, 2005         |  | 1,000,000    |  | $                          | 10 |                                       | $ | 1,864 |       | $ | (22,101 | ) |  | $ | (20,227 | )
|Exercise of common stock options |  | 14,888       |  |                            |   |                                       |   | 1,230 |       |   |        |   |  |   | 1,230   |  
|Stock compensation expense       |  |             |  |                            |   |                                       |   | 113   |       |   |        |   |  |   | 113     |  
|Dividends paid                   |  |             |  |                            |   |                                       |   |      |       |   |        |   |  |   |        |  
|Net loss and comprehensive loss  |  |             |  |                            |   |                                       |   |      |       |   | (17,266 | ) |  |   | (17,266 | )
|                                 |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|Balance at September 24, 2005    |  | 1,014,888    |  | $                          | 10 |                                       | $ | 3,207 |       | $ | (39,367 | ) |  | $ | (36,150 | )
|                                 |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|                                 |  |              |  |                           
|                                 |  | Common Stock |  | Additional Paid-in Capital |    | Accumulated Deficit                   |   |       | Total |  
|                                 |  | Shares       |  | Value                      |    |                                       |  
|Balance at June 24, 2006         |  | 1,019,929    |  | $                          | 10 |                                       | $ | 3,954 |       | $ | (34,414 | ) |  | $ | (30,450 | )
|Exercise of common stock options |  |             |  |                            |   |                                       |   |      |       |   |        |   |  |   |        |  
|Stock compensation expense       |  |             |  |                            |   |                                       |   | 121   |       |   |        |   |  |   | 121     |  
|Dividends paid                   |  |             |  |                            |   |                                       |   |      |       |   |        |   |  |   |        |  
|Net loss and comprehensive loss  |  |             |  |                            |   |                                       |   |      |       |   | (5,862  | ) |  |   | (5,862  | )
|                                 |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|Balance at September 30, 2006    |  | 1,019,929    |  | $                          | 10 |                                       | $ | 4,075 |       | $ | (40,276 | ) |  | $ | (36,191 | )
|                                 |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  

The Companys comprehensive loss and net loss were the same for the fourteen weeks ended September 30,
2006, and the thirteen weeks ended September 24, 2005.

16. SUBSEQUENT EVENTS

On November 14, 2006, the Board of Directors and the stockholders authorized an amendment to and restatement of the Companys 2004 Stock Option Plan (the Plan) to increase the authorized number
of shares which may be issued pursuant to options granted under the Plan from 100,000 to 150,000 and to provide for forfeited options to be automatically returned to the authorized number of shares available for issuance under the Plan.

The foregoing is only a summary of the amendments to the Plan and is qualified in its entirety by reference to the Amended and Restated 2004 Stock Option Plan
attached as Exhibit 10.1 hereto and incorporated herein by reference. Because this Quarterly Report on Form 10-Q is being filed within four business days from November 14, 2006, the amendments are being disclosed hereunder rather than under
Item 5.02 of Form 8-K.



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

FORWARD-LOOKING
STATEMENTS

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

Risk factors that may affect our results include the Risk Factors set forth in Harry and Davids Annual Report on Form 10-K for the fiscal year ended
June 24, 2006, as updated in Part II, Item 1-A Risk Factors of this Quarterly Report, and those risks which may be described from time to time in Harry and Davids other filings with the Securities and Exchange Commission.

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

OVERVIEW

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

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

MATTERS
AFFECTING COMPARABILITY

We report our financial statements using a 52/53-week year with our quarters ending on the last Saturday of September,
December, March and June. Fiscal year 2007, beginning June 25, 2006 and ending June 30, 2007, includes 53 weeks versus 52 weeks in fiscal year 2006, from June 26, 2005, through June 24, 2006. The first quarter in 2007 includes 14
weeks versus 13 weeks in the first quarter of 2006. For purposes of the consolidated financial statements, the end of the first quarter is September 30, 2006, for fiscal 2007 and September 24, 2005, for fiscal 2006.



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RESULTS OF OPERATIONS

NET SALES

The following table summarizes our consolidated net sales and net sales by operating
segment for the periods indicated.



|                                 |  |                      |        |                  |                      |   |                    |   |                  |  |       |  
|-------------------------------- |  | -------------------- | ------ | ---------------- | -------------------- | - | ------------------ | - | ---------------- |  | ----- | -
|(Dollars in thousands)           |  | Fourteen Weeks Ended |        |                  | Thirteen Weeks Ended |  
|                                 |  | September 30, 2006   |        | Percent of Total |                      |   | September 24, 2005 |   | Percent of Total | 
|Harry and David Direct Marketing |  | $                    | 27,753 |                  | 42.1                 | % |                    | $ | 26,085           |  | 45.2  | %
|Harry and David Stores           |  |                      | 25,431 |                  | 38.6                 | % |                    |   | 21,757           |  | 37.7  | %
|Jackson & Perkins                |  |                      | 3,684  |                  | 5.6                  | % |                    |   | 5,684            |  | 9.8   | %
|Other                            |  |                      | 9,030  |                  | 13.7                 | % |                    |   | 4,197            |  | 7.3   | %
|                                 |  |                      |        |                  |                      |   |                    |   |                  |  |       |  
|Total                            |  | $                    | 65,898 |                  | 100.0                | % |                    | $ | 57,723           |  | 100.0 | %
|                                 |  |                      |        |                  |                      |   |                    |   |                  |  |       |  

Consolidated net sales of $65.9 million for the fourteen-week period ended September 30, 2006, increased $8.2
million, or 14.2%, over the thirteen-week period ended September 24, 2005. The net sales increase of approximately $2.4 million from fiscal 2006 to fiscal 2007, normalized for a thirteen-week period, was primarily driven by the Stores segment
and the Harry and David wholesale division within the Other segment. Stores growth over the prior fiscal year is attributable to higher average dollar transactions as well as higher transaction counts over the prior year. We believe that a portion
of this increase is due to the impact of hurricanes in the United States that negatively affected sales in the prior year. The remaining increase is attributable to overall positive customer response to new Harry and David merchandising, packaging,
and marketing efforts. The growth in Harry and David wholesale division is primarily due to an increase in order volume and earlier ordering from large customers over the prior year.

In our Harry and David Direct Marketing and Jackson & Perkins Direct Marketing segments, we received approximately 252 thousand telephone, mail, fax and Internet orders and shipped approximately
748 thousand packages during the fourteen weeks ended September 30, 2006, a decrease of 2.6% in orders and a 7.8% reduction in shipped packages over the prior fiscal year period.

Harry and David Direct Marketing

Harry and David Direct Marketing
segment net sales, which include catalog, Internet, business-to-business and outbound telemarketing sales, as well as delivery income, increased $1.7 million, or 6.5%, to $27.8 million in the fourteen-week period ended September 30, 2006, from
$26.1 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for approximately $1.6 million of this increase, sales in the first quarter of this fiscal year were relatively flat compared to
the same period last fiscal year. Although fewer items were shipped in the first thirteen weeks this fiscal year versus the same thirteen weeks last fiscal year, sales were achieved through a combination of increased product prices and delivery
charges that took effect in the Spring of fiscal 2006, as well as lower markdowns and discounts compared to the first quarter of the prior fiscal year and a shipment carry-in from the fourth quarter of fiscal 2006.

Harry and David Stores

Harry and David Stores segment net sales
increased $3.6 million, or 16.5%, to $25.4 million in the fourteen-week period ended September 30, 2006, from $21.8 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which contributed $1.9 million
in net sales, the remaining increase of $1.7 million was due to strong comparable store sale increases, selected product price increases and favorable changes in product mix. We currently have 134 stores in operation compared to 135 stores in
operation during the same quarter last fiscal year. We opened four new stores during the first quarter of fiscal 2007. Sales for comparable stores were up 17.0% for the fourteen weeks ended September 30, 2006, compared to the thirteen-week
period ended September 24, 2005. Excluding the fourteenth week, comparable store sales increased 8.5% this fiscal year as compared to last fiscal year. September 2006 marks the thirty-fourth consecutive month of positive comparable store sales.
A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months, at which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of
reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a comparable store.



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Jackson & Perkins

Jackson & Perkins segment net sales decreased $2.0 million, or 35.1%, to $3.7 million in the fourteen-week period ended September 30, 2006, from $5.7 million in the thirteen-week period ended September 24, 2005.

Jackson & Perkins direct marketing division net sales, which include catalog, Internet, business-to-business and outbound telemarketing sales, as
well as delivery income, increased approximately $0.1 million, or 4.2%, to $2.5 million in the fourteen-week period ended September 30, 2006, from $2.4 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth
week, which accounted for approximately $0.4 million, net sales were $2.1 million, reflecting a decrease of $0.3 million. The primary driver of this decrease was a reduction in catalog circulation. The 29.3% reduction of circulation was part of an
overall strategy to reduce mailings to less profitable customers as well as to reduce the amount of mailings to prospective customers.

Jackson &
Perkins wholesale division net sales decreased $1.9 million, or 90.5%, to $0.2 million in the fourteen-week period ended September 30, 2006, from $2.1 million in the thirteen-week period ended September 24, 2005. The decrease was primarily
driven by later timing of royalty income.

Sales from non-rose farm crops decreased $0.2 million, or 16.7%, to $1.0 million, in the fourteen-week period
ended September 30, 2006, from $1.2 million in the thirteen-week period ended September 24, 2005. The main driver of this decrease was less contracted acres than in the prior fiscal year.

Other

Other category net sales increased $4.8 million, or 114.3%, to
$9.0 million in the fourteen-week period ended September 30, 2006, from $4.2 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for $1.9 million of this increase, the remaining $2.9
million increase was due primarily to Harry and David wholesales successful marketing efforts to enhance strategic partnerships and expand distribution. This resulted in significantly increased orders in the first quarter of the current fiscal
year, predominantly driven by sales to large customers, whose programs expanded. A portion of these increased sales is attributable to a timing shift of customer orders to the first quarter this fiscal year that occurred in the second quarter last
fiscal year.

COST OF GOODS SOLD

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

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



|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  
|-------------------------------- |  | -------------------- | ------ | -------------- | -------------------- | - | ------------------ | - | -------------- |  | ---- | -
|(Dollars in thousands)           |  | Fourteen Weeks Ended |        |                | Thirteen Weeks Ended |  
|                                 |  | September 30, 2006   |        | % of Net Sales |                      |   | September 24, 2005 |   | % of Net Sales | 
|Harry and David Direct Marketing |  | $                    | 19,851 |                | 71.5                 | % |                    | $ | 22,230         |  | 85.2 | %
|Harry and David Stores           |  |                      | 13,262 |                | 52.1                 | % |                    |   | 11,901         |  | 54.7 | %
|Jackson & Perkins                |  |                      | 3,008  |                | 81.7                 | % |                    |   | 5,550          |  | 97.6 | %
|Other                            |  |                      | 6,354  |                | 70.4                 | % |                    |   | 3,075          |  | 73.3 | %
|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  
|Total                            |  | $                    | 42,475 |                | 64.5                 | % |                    | $ | 42,756         |  | 74.1 | %
|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  



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Consolidated cost of goods sold decreased $0.3 million, or 0.7%, to $42.5 million in the fourteen-week period ended
September 30, 2006, from $42.8 million in the thirteen-week period ended September 24, 2005.

Consolidated cost of goods sold as a percentage of
consolidated net sales was 64.5% in the fourteen-week period ended September 30, 2006, compared to 74.1% in the thirteen-week period ended September 24, 2005. This rate reduction was driven by increased product prices and delivery charges
combined with lower delivery expenses, the timing of recognizing royalty expenses, higher deferred costs driven by higher year over year inventory levels, and efficiencies in production due to capital investment and higher volumes.

Harry and David Direct Marketing segment cost of goods sold decreased $2.3 million, or 10.4%, to $19.9 million in the fourteen-week period ended September 30, 2006,
from $22.2 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for approximately $1.0 million, cost of goods sold decreased $3.4 million. Approximately $1.5 million of the decrease was
attributable to lower volume of merchandise shipped, which translated into lower variable product costs and lower delivery expenses. Favorable quarter-end allocation adjustments from operations in conjunction with favorable quarter-end fixed
deferral costs driven by timing of higher inventory levels contributed $1.1 million of this decrease. The favorable fixed deferral cost amount of approximately $0.5 million is expected to reverse in the second quarter of fiscal 2007 as we normalize
volumes of production. Lower replacement costs and lower excess inventory write-offs accounted for $0.8 million of the decrease. Cost of goods sold as a percentage of net sales was 71.5% in the fourteen-week period ended September 30, 2006,
compared to 85.2% in the thirteen-week period ended September 24, 2005. The rate decrease was driven by increased product prices and delivery charges combined with lower variable cost of goods sold and lower delivery expenses, favorable
allocation adjustments from operations, and higher deferred fixed costs driven by higher inventory levels, as mentioned above.

Harry and David Stores
segment cost of goods sold increased $1.4 million, or 11.8%, to $13.3 million in the fourteen-week period ended September 30, 2006, from $11.9 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week,
which accounted for approximately $0.9 million of this increase, cost of goods sold increased $0.5 million. This increase was driven by an increase in sales of 7.8%. Cost of goods sold as a percentage of net sales was 52.1% in the fourteen-week
period ended September 30, 2006, compared to 54.7% in the thirteen-week period ended September 24, 2005. The rate decrease was driven by selected product price increases, fewer promotions and markdowns and a favorable change in margins due
to a change in product mix.

Jackson & Perkins segment cost of goods sold decreased $2.6 million, or 46.4%, to $3.0 million in the fourteen-week
period ended September 30, 2006, from $5.6 million in the thirteen-week period ended September 24, 2005. Jackson & Perkins segment cost of goods sold as a percentage of net sales was 81.7% in the fourteen-week period ended
September 30, 2006, compared to 97.6% in the thirteen-week period ended September 24, 2005. The main drivers of this rate decrease were lower delivery expenses, higher product prices, as well as a higher percentage of packages delivered
using standard delivery methods versus expedited delivery methods, and the timing of royalty expenses.

Jackson & Perkins direct marketing
division cost of goods sold decreased $0.4 million, or 18.2%, to $1.8 million in the fourteen-week period ended September 30, 2006, from $2.2 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week,
which accounted for approximately $0.2 million, cost of goods sold decreased $0.6 million. The decrease was primarily driven by lower shipped volumes, which reduced variable cost of goods sold and delivery expenses. Cost of goods sold as a
percentage of net sales was 74.4% in the fourteen-week period ended September 30, 2006, compared to 92.0% in the thirteen-week period ended September 24, 2005. The rate decrease was driven primarily by those factors mentioned above.

Jackson & Perkins wholesale division cost of goods sold decreased $2.0 million to $0.2 million in the fourteen-week period ended
September 30, 2006, from $2.2 million in the thirteen-week period ended September 24, 2005. This was driven by the timing of royalty expenses that were recognized in fiscal 2006.

The Other category cost of goods sold increased $3.3 million, or 106.5%, to $6.4 million in the fourteen-week period ended September 30, 2006, from $3.1 million in
the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for $1.3 million of this increase, cost of goods sold increased approximately $1.9 million as a result of higher sales in Harry and David
wholesale division. Cost of goods sold as a percentage of net sales decreased to 70.4% in the fourteen-week period ended September 30, 2006, compared to 73.3% in the thirteen-week period ended September 24, 2005, primarily due to $0.5
million in higher deferred fixed costs driven by higher inventory levels.



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GROSS PROFIT

The following table summarizes our consolidated gross profit, gross profit by segment, and gross profit as a percentage of consolidated and segment net sales for the periods indicated.



|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  
|-------------------------------- |  | -------------------- | ------ | -------------- | -------------------- | - | ------------------ | - | -------------- |  | ---- | -
|(Dollars in thousands)           |  | Fourteen Weeks Ended |        |                | Thirteen Weeks Ended |  
|                                 |  | September 30, 2006   |        | % of Net Sales |                      |   | September 24, 2005 |   | % of Net Sales | 
|Harry and David Direct Marketing |  | $                    | 7,902  |                | 28.5                 | % |                    | $ | 3,855          |  | 14.8 | %
|Harry and David Stores           |  |                      | 12,169 |                | 47.9                 |   |                    |   | 9,856          |  | 45.3 |  
|Jackson & Perkins                |  |                      | 676    |                | 18.3                 |   |                    |   | 134            |  | 2.4  |  
|Other                            |  |                      | 2,676  |                | 29.6                 |   |                    |   | 1,122          |  | 26.7 |  
|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  
|Total                            |  | $                    | 23,423 |                | 35.5                 | % |                    | $ | 14,967         |  | 25.9 | %
|                                 |  |                      |        |                |                      |   |                    |   |                |  |      |  

Consolidated gross profit increased $8.4 million, or 56.0%, to $23.4 million in the fourteen-week period ended
September 30, 2006, from $15.0 million in the thirteen-week period ended September 24, 2005. The increase was driven by strong store sales, increased product prices and delivery charges combined with lower delivery and royalty expenses,
increases in deferred costs driven by higher inventory levels and efficiencies in production due to capital investment and higher volumes.

Consolidated
gross profit as a percentage of consolidated net sales was 35.5% in the fourteen-week period ended September 30, 2006, and 25.9% in the thirteen-week period ended September 24, 2005. The improvement was driven by increased product prices
and delivery charges, lower markdowns and discounts combined with lower delivery expenses, the timing of royalty expenses, a timing shift in deferred costs driven by higher inventory levels and production efficiencies.

Harry and David Direct Marketing segment gross profit increased $4.0 million, or 102.6%, to $7.9 million in the fourteen-week period ended September 30, 2006, from
$3.9 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for $0.6 million, gross profit increased $3.4 million. The increase was primarily driven by higher product prices and delivery
charges. Also adding to the improvement were lower replacement costs, reduced inventory write-offs, higher fixed deferred costs driven by higher inventory levels, favorable allocations from operations based on lower spending and a shipment carry-in
from the fourth quarter of fiscal 2006. We anticipate that the favorable fixed deferred costs in the first quarter of fiscal 2007 will reverse in the second quarter as production volumes normalize. Harry and David Direct Marketing segment gross
profit as a percentage of segment net sales was 28.5% in the fourteen-week period ended September 30, 2006, and 14.8% in the thirteen-week period ended September 24, 2005.

Harry and David Stores segment gross profit increased $2.3 million, or 23.2%, to $12.2 million in the fourteen-week period ended September 30, 2006, from $9.9 million in the thirteen-week period ended
September 24, 2005, due to higher sales driven by comparable store sales, selected product price increases, reduced cost of goods sold, and favorable changes to product mix. Harry and David Stores segment gross profit as a percentage of segment
net sales was 47.9% in the fourteen-week period ended September 30, 2006, compared to 45.3% in the thirteen-week period ended September 24, 2005.

Jackson & Perkins segment gross profit increased $0.6 million to $0.7 million in the fourteen-week period ended September 30, 2006, from $0.1 million in the thirteen-week period ended September 24, 2005. The increase was
driven by cost reductions, primarily in shipping in the Jackson & Perkins direct marketing division. Jackson & Perkins segment gross profit as a percentage of segment net sales was 18.3% in the fourteen-week period ended
September 30, 2006, and 2.4% in the thirteen-week period ended September 24, 2005.

Jackson & Perkins direct marketing division gross
profit increased $0.4 million to $0.6 million in the fourteen-week period ended September 30, 2006, from $0.2 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, which accounted for $0.2 million,
gross profit increased $0.2 million. The increase was due to higher product prices and delivery charges, delivery expense savings driven by a favorable mix of standard delivery versus higher-cost expedited delivery methods.

Other segment gross profit increased $1.6 million, or 145.5%, to $2.7 million in the fourteen-week period ended September 30, 2006, from $1.1 million in the
thirteen-week period ended September 24, 2005. Excluding the fourteenth week for Harry and David wholesale, which contributed $0.6 million of gross profit, the increase versus last year was $1.0 million. This



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increase was driven by the increased sales volume in the first quarter of fiscal 2007 compared to the first quarter in
fiscal 2006 as well as a favorable quarter end fixed deferral entry due to higher inventory levels. We expect this deferred fixed cost to reverse in the second quarter of fiscal 2007 as production volumes normalize. Other segment gross profit as a
percentage of segment net sales was 29.6% in the fourteen-week period ended September 30, 2006, and 26.7% in the thirteen-week period ended September 24, 2005. The favorable rate variance was primarily driven by favorable quarter end fixed
cost deferrals in Harry and David wholesale, driven by higher inventory levels. We expect this to reverse in the second quarter of fiscal 2007 as production volumes normalize.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

The
following table summarizes our consolidated SG&A expenses, SG&A expenses by segment, and SG&A expenses as a percentage of consolidated and segment net sales for the periods indicated.



|                                 |  |                      |        |             |                      |   |                    |   |             |  |      |  
|-------------------------------- |  | -------------------- | ------ | ----------- | -------------------- | - | ------------------ | - | ----------- |  | ---- | -
|(Dollars in thousands)           |  | Fourteen Weeks Ended |        |             | Thirteen Weeks Ended |  
|                                 |  | September 30, 2006   |        | % Net Sales |                      |   | September 24, 2005 |   | % Net Sales | 
|Harry and David Direct Marketing |  | $                    | 19,491 |             | 70.2                 | % |                    | $ | 19,528      |  | 74.9 | %
|Harry and David Stores           |  |                      | 16,942 |             | 66.6                 | % |                    |   | 15,918      |  | 73.2 | %
|Jackson & Perkins                |  |                      | 4,525  |             | 122.8                | % |                    |   | 3,702       |  | 65.1 | %
|Other                            |  |                      | 743    |             | 8.2                  | % |                    |   | 638         |  | 15.2 | %
|                                 |  |                      |        |             |                      |   |                    |   |             |  |      |  
|Total                            |  | $                    | 41,701 |             | 63.3                 | % |                    | $ | 39,786      |  | 68.9 | %
|                                 |  |                      |        |             |                      |   |                    |   |             |  |      |  

Consolidated SG&A expenses increased $1.9 million, or 4.8%, to $41.7 million in the fourteen-week period ended
September 30, 2006, compared to $39.8 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, SG&A expenses this fiscal quarter were approximately $1.5 million lower than the same period last fiscal
year. The increase was due to a combination of higher payroll expenses due to the filling of new positions and overall headcount, consulting expenses for strategic projects, an increase in bad debt reserves in the Jackson & Perkins
wholesale division, and higher insurance costs.

Consolidated SG&A expenses as a percentage of consolidated net sales was 63.3% in the fourteen-week
period ended September 30, 2006, compared to 68.9% in the thirteen-week period ended September 24, 2005. The rate improvement was primarily the result of leveraging fixed consolidated SG&A expenses over higher consolidated net sales as
well as benefiting from lower payroll expenses. In addition, favorable payroll benefits expense due to lower insurance claims, the timing of advertising expenses, and lower depreciation and amortization on a rate basis also contributed to the
improvement.

Harry and David Direct Marketing segment SG&A expenses were flat at $19.5 million in the fourteen-week period ended September 30,
2006, compared to $19.5 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, SG&A was approximately $1.3 million lower than the same period last fiscal year. This reduction compared to the same period
in fiscal 2006 was primarily driven by $0.8 million in reduced advertising expenses due to 7.5% less catalog circulation and a reduction in Internet advertising spending. In addition, corporate overhead allocations were favorable $0.5 million driven
by reductions in those areas. Harry and David Direct Marketing segment SG&A expenses as a percentage of segment net sales decreased to 70.2% in the fourteen-week period ended September 30, 2006 from 74.9% in the thirteen weeks ended
September 24, 2005.

Harry and David Stores segment SG&A expenses increased $1.0 million, or 6.3%, to $16.9 million in the fourteen-week period
ended September 30, 2006, compared to $15.9 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, SG&A expenses were approximately $0.4 million lower than last year due to fewer asset write-offs
from fewer store remodels and relocations and lower depreciation, which was partially offset by an increase in payroll. Harry and David Stores segment SG&A expenses as a percentage of segment net sales decreased to 66.6% in the fourteen-week
period ended September 30, 2006 from 73.2% in the thirteen weeks ended September 24, 2005.



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Jackson and Perkins segment SG&A expenses increased $0.8 million, or 21.6%, to $4.5 million in the fourteen-week
period ended September 30, 2006, compared to $3.7 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week, Jackson and Perkins direct marketing SG&A expenses were approximately $0.2 million less this
fiscal quarter than the same period last fiscal year. This decrease was driven primarily by savings in advertising from reduced circulation, which was down 29.3% versus last fiscal year due to reduced circulation to less profitable customers and
fewer mailings to prospective customers. In addition, savings in corporate overhead allocations were favorable compared to the same period in fiscal 2006. Jackson and Perkins wholesale SG&A expenses increased $0.5 million, of which approximately
$0.3 million was due to the timing of travel expenses, outside services and trade show expenses, and $0.2 million was due to bad debt expense. Jackson & Perkins segment SG&A expenses as a percentage of segment net sales increased to
122.8% in the fourteen-week period ended September 30, 2006, primarily as the result of lower net sales.

Other category SG&A expenses increased
$0.1 million, or 16.7%, to $0.7 million in the fourteen-week period ended September 30, 2006, compared to $0.6 million in the thirteen-week period ended September 24, 2005. Excluding the fourteenth week in Harry and David wholesale, which
contributed approximately $0.1 million of expense, SG&A was flat compared to last year. Other category SG&A expenses as a percentage of segment net sales decreased to 8.2% in the fourteen-week period ended September 30, 2006.

OTHER (INCOME) EXPENSE

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



|                                 |  |                      |        |   |                      |       |    |                    |   |       |             |  |       |  
|-------------------------------- |  | -------------------- | ------ | - | -------------------- | ----- | -- | ------------------ | - | ----- | ----------- |  | ----- | -
|(Dollars in thousands)           |  | Fourteen Weeks Ended |        |   | Thirteen Weeks Ended |      
|                                 |  | September 30, 2006   |        |   | % Net Sales          |       |    | September 24, 2005 |   |       | % Net Sales | 
|Harry and David Direct Marketing |  | $                    |       |   |                      |      |    |                    | $ |      |             |  |      |  
|Harry and David Stores           |  |                      |       |   |                      |      |    |                    |   | (3    | )           |  |      |  
|Jackson & Perkins                |  |                      | (190   | ) |                      | (5.2  | )% |                    |   |      |             |  |      |  
|Other                            |  |                      | (8,574 | ) |                      | (95.0 | )% |                    |   | 6,354 |             |  | 151.4 | %
|                                 |  |                      |        |   |                      |       |    |                    |   |       |             |  |       |  
|Total                            |  | $                    | (8,764 | ) |                      | (13.3 | )% |                    | $ | 6,351 |             |  | 11.0  | %
|                                 |  |                      |        |   |                      |       |    |                    |   |       |             |  |       |  

For the fourteen-week period ended September 30, 2006, we had $8.8 million in other income, compared to other
expense of $6.4 million in the thirteen-week period ended September 24, 2005. The primary source of other income for the fourteen weeks ended September 30, 2006, was the recognition of a one-time, non-cash curtailment gain of $15.8 million
associated with the soft freeze of our qualified and non-qualified pension plans effective June 25, 2006, offset by interest expense. The other expense for the thirteen weeks ended September 24, 2005, was primarily interest expense.

INCOME TAXES

For interim financial reporting
purposes, tax expense or benefit is calculated based on the estimated annual effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates for the first quarter of fiscal 2007 and fiscal 2006 were 38.4%
and 44.6%, respectively. The lower tax rate in the first quarter of fiscal 2007 when compared to fiscal 2006 was due to a higher state effective tax rate and adjustments to state net operating losses (NOL) in fiscal 2006. Due to the existence of NOL
carryforwards, we expect that our cash income tax payments will be immaterial in fiscal 2007.

EBITDA

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



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|                                            |  |                                        |         |   |                                        |   |         |  
|------------------------------------------- |  | -------------------------------------- | ------- | - | -------------------------------------- | - | ------- | -
|                                            |  | Fourteen weeks endedSeptember 30, 2006 |         |   | Thirteen weeks endedSeptember 24, 2005 |  
|Net cash used in operating activities       |  | $                                      | (78,465 | ) |                                        | $ | (71,163 | )
|Stock option compensation expense           |  |                                        | 121     |   |                                        |   | 113     |  
|Changes in operating assets and liabilities |  |                                        | (58,184 | ) |                                        |   | (46,129 | )
|Loss on disposal of fixed assets            |  |                                        | 87      |   |                                        |   | 75      |  
|Deferred income taxes                       |  |                                        | (3,959  | ) |                                        |   | (13,715 | )
|Pension curtailment gain                    |  |                                        | (15,844 | ) |                                        |   |         |  
|Amortization of deferred financing costs    |  |                                        | 694     |   |                                        |   | 583     |  
|Depreciation and amortization               |  |                                        | 4,482   |   |                                        |   | 5,176   |  
|                                            |  |                                        |         |   |                                        |   |         |  
|Net loss                                    |  |                                        | (5,862  | ) |                                        | $ | (17,266 | )
|Interest expense, net                       |  |                                        | 7,270   |   |                                        |   | 6,351   |  
|Benefit for income taxes                    |  |                                        | (3,652  | ) |                                        |   | (13,904 | )
|Depreciation and amortization               |  |                                        | 4,482   |   |                                        |   | 5,176   |  
|                                            |  |                                        |         |   |                                        |   |         |  
|EBITDA                                      |  |                                        | 2,238   |   |                                        | $ | (19,643 | )

In the fourteen-week period ended September 30, 2006, net loss and EBITDA
included:



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



| |  |  | $0.6 million of consulting fees associated with information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | $0.2 million of severance expense;
| | - |  | ----------------------------------



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



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



| |  |  | $0.2 million of income recognized from vendor settlements.
| | - |  | ----------------------------------------------------------

In the thirteen-week period ended September 24, 2005, net loss and EBITDA included:



| |  |  | $0.4 million of losses related to closed stores;
| | - |  | ------------------------------------------------



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



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



| |  |  | $0.1 million of rent expenses due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.1 million of charges related to stock option grants:
| | - |  | -------------------------------------------------------



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



| |  |  | $0.5 million of incremental employee executive recruiting and relocation charges.
| | - |  | ---------------------------------------------------------------------------------

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 30, 2006, our primary sources of liquidity were cash and cash equivalents of $4.0 million and unused borrowings under our revolving credit facility of $57.0 million to the extent of our current available
borrowing base. As of September 30, 2006, we had approximately $66.0 million in borrowings and $2.0 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit
facility are determined in accordance with our asset-based debt limitation formula. Total available borrowings at September 30, 2006, were approximately $39.2 million. Due to the highly seasonal nature of our business, we rely heavily on our
revolving credit facility starting in July of each year to finance operations leading up to the December holiday selling season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog advertising and
marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during the fourth calendar quarter (our second fiscal quarter) because of the holiday selling season (see Seasonality below).



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

Cash Flows Used in Operating Activities

Cash used in operating activities totaled ($78.5) million in the fourteen-week period ended September 30, 2006, compared to ($71.2) million in the thirteen-week period ended September 24, 2005. The $7.3
million increase in cash used was primarily attributable to the extra week of operating activity in the current fiscal year, mainly payments to vendors for inventory and timing of payroll.

Cash Flows Used in Investment Activities

Cash used in investment
activities totaled $7.3 million in the fourteen-week period ended September 30, 2006, compared to $4.1 million in the thirteen-week period ended September 24, 2005. Capital expenditures in the first fourteen weeks of fiscal 2007 included
investment in an Enterprise Resource Planning (ERP) system, manufacturing capacity, new stores, and infrastructure for the Companys new Eugene, Oregon call center.

We currently expect our capital expenditures to be approximately $23 million for fiscal 2007, primarily for the implementation of the ERP system, manufacturing improvements, new store openings, and systems
modernization. However, our capital expenditures may be different than currently anticipated depending upon the size and nature of new business opportunities and actual cash flows generated by our operations.

Cash Flows Provided by Financing Activities

Cash provided by
financing activities totaled $66.0 million for the fourteen weeks ended September 30, 2006, compared to $64.1 million in cash provided in the thirteen weeks ended September 24, 2005. The increase was primarily driven by increased
borrowings required to fund our payments made for inventory during the additional week of operations in the first quarter of fiscal 2007.

Borrowing
Arrangements

Revolving Credit Facility

Since the 2004 Acquisition, our principal sources of liquidity have been available cash, cash flows from operations, borrowings under our former $125.0 million revolving credit facility and our current $125.0 million revolving credit
facility entered into by our subsidiary, Harry & David Operations Corp. on March 20, 2006, to replace the prior facility. The current revolving credit facility has a maturity date of March 20, 2011. Harry & David
Operations Corp.s ability to borrow under the revolving credit facility is subject to compliance with the borrowing base and with financial covenants and other customary conditions, including that no default under the facility shall have
occurred and be continuing. Borrowings under the revolving credit facility bear interest, at Harry & David Operations Corp.s option, at either a base rate, based on the higher of the federal funds rate plus 0.5% or the corporate base
lending rate of UBS AG, or a Eurodollar rate, based on the rate offered in the London interbank market (LIBOR), plus in each case a borrowing margin determined based on our consolidated leverage ratio. Due to the seasonal nature of our
business, we draw on our revolving credit facility to provide seasonal working capital to support inventory buildup and catalog production in advance of the holiday selling season and for other general corporate purposes. We have consistently
generated substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 25thof each year. Cash generated during the holiday selling season is also typically used to fund our operations for several months during the post-holiday
selling season, until we begin to build inventories and other working capital components to support our next holiday selling season.

As of
September 30, 2006, we had approximately $66.0 million in borrowings and $2.0 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the credit agreement are determined in accordance
with our asset-based debt limitation formula. Total additional available borrowings at September 30, 2006, were approximately $39.2 million.



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

The revolving credit facility requires mandatory prepayments upon the receipt
of proceeds from certain assets sales, casualty events and debt offerings. The revolving credit facility contains customary affirmative and negative covenants for senior secured credit facilities of this type, including, but not limited to,
limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. In addition, the revolving credit facility requires that, on a
consolidated basis, we meet and maintain a minimum fixed charge coverage ratio, subject to certain definitions and conditions, and maximum capital expenditures.

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

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

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

Long-term
Debt

In February 2005, Harry & David Operations Corp., our wholly owned subsidiary, issued $70.0 million in Senior Floating Rate Notes due
March 1, 2012, and $175.0 million of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid
quarterly. The interest rate was set at 10.40% and 8.87% at September 30, 2006, and September 24, 2005, respectively. The $175.0 million of Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest
payments commencing on December 1, 2005.

On December 16, 2005, Harry & David Operations Corp. completed an exchange offer for the
Senior Notes and issued a like principal amount of unrestricted Senior Notes. The Senior Notes are the senior unsecured obligations of Harry & David Operations Corp. and are guaranteed on a senior unsecured basis by us and all of
Harry & David Operations Corp.s subsidiaries.

The indenture governing the Senior Notes contains various restrictive covenants including,
but not limited to, limitations on the incurrence of indebtedness, engaging in asset dispositions or acquisitions, making investments, and our and our subsidiaries ability to pay dividends and other restricted payments, our ability to incur
liens and transactions with affiliates. See Item 1 - Financial Information  Notes to Condensed Consolidated Financial Statements  Note 7  Borrowing Arrangements.

Our ability to comply with these covenants may be affected by events beyond our control, such as those described under Risk Factors in our Annual Report on Form 10-K. If we do not remain in compliance with
these covenants, we may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes could accelerate all amounts outstanding to be immediately due and payable.

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

Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility.
Our other short-term cash requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.



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

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

Seasonality

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

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

CRITICAL ACCOUNTING
POLICIES

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

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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



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

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

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



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



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



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



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



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

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

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

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

As a performance measure, we also use return on capital employed to assist us in making budgeting decisions related to how debt and equity capital is being employed and how it will be employed in the future. Historical measures of return on
capital employed, which include the use of EBITDA, are used in estimating and predicting future return on capital trends. Combined with other GAAP financial measures, historical return on capital information helps us make decisions about how to
employ capital effectively going forward. However, because EBITDA does not take into account certain of these non-cash items, which do affect our operations and performance, EBITDA has inherent limitations as an operating measure. These limitations
include:



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



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



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



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



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



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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

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

Interest Rate Risk

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

Commodity Risk

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

ITEM 4. CONTROLS AND PROCEDURES

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

We have carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The
evaluation examined those disclosure controls and procedures as of September 30, 2006. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 30,
2006, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.



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



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

On November 14, 2006, the Board of Directors and the stockholders authorized an amendment
to and restatement of the Companys 2004 Stock Option Plan (the Plan) to increase the authorized number of shares which may be issued pursuant to options granted under the Plan from 100,000 to 150,000 and to provide for forfeited
options to be automatically returned to the authorized number of shares available for issuance under the Plan.

The foregoing is only a summary of the
amendments to the Plan and is qualified in its entirety by reference to the Amended and Restated 2004 Stock Option Plan attached as Exhibit 10.1 hereto and incorporated herein by reference. Because this Quarterly Report on Form 10-Q is being filed
within four business days from November 14, 2006, the amendments are being disclosed hereunder rather than under Item 5.02 of Form 8-K.

ITEM 6. EXHIBITS



|10.1 | Amended and Restated 2004 Stock Option Plan
|---- | -------------------------------------------



|31.1 | Certification of Principal Executive Officer
|---- | --------------------------------------------



|31.2 | Certification of Principal Financial Officer
|---- | --------------------------------------------



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



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SIGNATURES

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



HARRY & DAVID HOLDINGS, INC.By:

/S/ WILLIAM H. WILLIAMSWilliam H. Williams President and Chief Executive OfficerBy:

/S/ STEPHEN V. OCONNELLStephen V. OConnell Chief Financial Officer and Chief Administrative Officer


November 14, 2006



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