##### Table of Contents





United States

Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended December 29, 2007

or



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

For the transition period from  to

Commission File Number 333-127173





Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 20-0884389                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



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

(541) 864-2362

(Registrants telephone number including area code)

None

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





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

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

Large accelerated   ̈    Accelerated filer   ̈    Non-accelerated filer  x

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

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



|                             |  |                                   
|---------------------------- |  | ----------------------------------
|Class                        |  | Outstanding as of February 4, 2008
|Common stock $0.01 par value |  | 1,032,570                         









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##### Table of Contents

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |          |  |                                                                                                                                                                                                          |  |     
|----------------------------- |  | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |          |  |                                                                                                                                                                                                          |  | Page
|Part I. Financial Information |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Condensed Consolidated Financial Statements                                                                                                                                                              |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Balance Sheets  as of December 29, 2007, June 30, 2007 and December 30, 2006                                                                                                     |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended December 29, 2007 and December 30, 2006, Twenty-six Weeks ended December 29, 2007, and Twenty-seven Weeks ended December 30, 2006 |  | 4   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows  Twenty-six Weeks ended December 29, 2007 and Twenty-seven Weeks ended December 30, 2006                                                                |  | 5   
|                              |  |          | 
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                                     |  | 6   
|                              |  |          | 
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                    |  | 27  
|                              |  |          | 
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                               |  | 38  
|                              |  |          | 
|                              |  | Item 4.  |  | Controls and Procedures                                                                                                                                                                                  |  | 39  
|                              | 
|Part II. Other Information    |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Legal Proceedings                                                                                                                                                                                        |  | 40  
|                              |  |          | 
|                              |  | Item 1A. |  | Risk Factors                                                                                                                                                                                             |  | 40  
|                              |  |          | 
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                              |  | 40  
|                              |  |          | 
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                                                                                                          |  | 40  
|                              |  |          | 
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                                                                      |  | 40  
|                              |  |          | 
|                              |  | Item 5.  |  | Other Information                                                                                                                                                                                        |  | 40  
|                              |  |          | 
|                              |  | Item 6.  |  | Exhibits                                                                                                                                                                                                 |  | 40  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share and per Share Data)



|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------ | - | ------- | -------------------------- |  | - | -------
|                                                                                                                                                                                                      |  | December 29,2007 |         | June 30,2007 |   |         | December 30,2006(Restated)
|                                                                                                                                                                                                      |  | Unaudited        |         |              |   |         | Unaudited                 
|Assets                                                                                                                                                                                                |  |                  |         |              |   |         |                            |  |   |        
|Current assets:                                                                                                                                                                                       |  |                  |         |              |   |         |                            |  |   |        
|Cash and cash equivalents                                                                                                                                                                             |  | $                | 179,806 |              | $ | 49,408  |                            |  | $ | 150,128
|Short-term investments                                                                                                                                                                                |  |                  |        |              |   | 24,816  |                            |  |   |       
|Trade accounts receivable, net                                                                                                                                                                        |  |                  | 23,063  |              |   | 2,100   |                            |  |   | 29,100 
|Other receivables                                                                                                                                                                                     |  |                  | 5,644   |              |   | 10,907  |                            |  |   | 2,440  
|Inventories, net                                                                                                                                                                                      |  |                  | 46,183  |              |   | 62,406  |                            |  |   | 64,230 
|Deferred catalog expenses                                                                                                                                                                             |  |                  | 5,692   |              |   | 4,198   |                            |  |   | 7,860  
|Deferred income taxes                                                                                                                                                                                 |  |                  | 9,615   |              |   |        |                            |  |   |       
|Prepaid income taxes                                                                                                                                                                                  |  |                  |        |              |   | 774     |                            |  |   | 63     
|Other current assets                                                                                                                                                                                  |  |                  | 10,542  |              |   | 9,852   |                            |  |   | 9,820  
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total current assets                                                                                                                                                                                  |  |                  | 280,545 |              |   | 164,461 |                            |  |   | 263,641
|Fixed assets, net                                                                                                                                                                                     |  |                  | 165,709 |              |   | 163,273 |                            |  |   | 175,680
|Intangibles, net                                                                                                                                                                                      |  |                  | 28,228  |              |   | 29,089  |                            |  |   | 31,671 
|Deferred financing costs, net                                                                                                                                                                         |  |                  | 10,549  |              |   | 12,144  |                            |  |   | 13,461 
|Deferred income taxes                                                                                                                                                                                 |  |                  |        |              |   |        |                            |  |   | 2,608  
|Other assets                                                                                                                                                                                          |  |                  | 3,988   |              |   | 1,551   |                            |  |   | 520    
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total assets                                                                                                                                                                                          |  | $                | 489,019 |              | $ | 370,518 |                            |  | $ | 487,581
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|                                                                                                                                                                                                      |  |                  |        
|Liabilities and stockholders equity                                                                                                                                                                  |  |                  |         |              |   |         |                            |  |   |        
|Current liabilities:                                                                                                                                                                                  |  |                  |         |              |   |         |                            |  |   |        
|Accounts payable                                                                                                                                                                                      |  | $                | 46,617  |              | $ | 22,900  |                            |  | $ | 53,657 
|Accrued payroll and benefits                                                                                                                                                                          |  |                  | 14,386  |              |   | 21,175  |                            |  |   | 17,948 
|Income taxes payable                                                                                                                                                                                  |  |                  | 53,384  |              |   |        |                            |  |   |       
|Deferred revenue                                                                                                                                                                                      |  |                  | 33,829  |              |   | 12,914  |                            |  |   | 41,055 
|Deferred income taxes                                                                                                                                                                                 |  |                  |        |              |   | 18,670  |                            |  |   | 56,061 
|Accrued interest                                                                                                                                                                                      |  |                  | 5,752   |              |   | 5,921   |                            |  |   | 5,915  
|Other accrued liabilities                                                                                                                                                                             |  |                  | 13,425  |              |   | 7,409   |                            |  |   | 17,881 
|Current portion of capital lease obligations                                                                                                                                                          |  |                  | 318     |              |   | 1,366   |                            |  |   |       
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total current liabilities                                                                                                                                                                             |  |                  | 167,711 |              |   | 90,355  |                            |  |   | 192,517
|Long-term debt and capital lease obligations                                                                                                                                                          |  |                  | 235,351 |              |   | 245,669 |                            |  |   | 245,000
|Accrued pension liability                                                                                                                                                                             |  |                  | 11,402  |              |   | 15,504  |                            |  |   | 18,368 
|Deferred income taxes                                                                                                                                                                                 |  |                  | 11,016  |              |   | 8,422   |                            |  |   |       
|Other long-term liabilities                                                                                                                                                                           |  |                  | 9,833   |              |   | 6,304   |                            |  |   | 4,181  
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total liabilities                                                                                                                                                                                     |  |                  | 435,313 |              |   | 366,254 |                            |  |   | 460,066
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Commitments and contingencies (Note 12)                                                                                                                                                               |  |                  |         |              |   |         |                            |  |   |        
|Stockholders equity:                                                                                                                                                                                 |  |                  |         |              |   |         |                            |  |   |        
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,032,570, 1,032,241 and 1,031,673 shares at
December 29, 2007, June 30, 2007 and December 30, 2006, respectively |  |                  | 10      |              |   | 10      |                            |  |   | 10     
|Additional paid-in capital                                                                                                                                                                            |  |                  | 5,862   |              |   | 5,548   |                            |  |   | 5,233  
|Accumulated other comprehensive income                                                                                                                                                                |  |                  | 1,119   |              |   | 1,119   |                            |  |   |       
|Retained earnings (accumulated deficit)                                                                                                                                                               |  |                  | 46,715  |              |   | (2,413  | )                          |  |   | 22,272 
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total stockholders equity                                                                                                                                                                            |  |                  | 53,706  |              |   | 4,264   |                            |  |   | 27,515 
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        
|Total liabilities and stockholders equity                                                                                                                                                            |  | $                | 489,019 |              | $ | 370,518 |                            |  | $ | 487,581
|                                                                                                                                                                                                      |  |                  |         |              |   |         |                            |  |   |        

See accompanying Notes to Condensed Consolidated Financial Statements.



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)



|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|------------------------------------------------------- |  | ----------------------------------- | --------- | - | ----------------------------------- | - | --------- | ------------------------------------- |  | - | --------------------------------------- | - |  | - | --------- | -
|                                                        |  | Thirteenweeks endedDecember 29,2007 |           |   | Thirteenweeks endedDecember 30,2006 |   |           | Twenty-sixweeks endedDecember 29,2007 |  |   | Twenty-sevenweeks endedDecember 30,2006 |  
|Net sales                                               |  | $                                   | 363,978   |   |                                     | $ | 362,569   |                                       |  | $ | 419,432                                 |   |  | $ | 424,783   |  
|Costs of goods sold                                     |  |                                     | 167,468   |   |                                     |   | 169,478   |                                       |  |   | 203,603                                 |   |  |   | 209,003   |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Gross profit                                            |  |                                     | 196,510   |   |                                     |   | 193,091   |                                       |  |   | 215,829                                 |   |  |   | 215,780   |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Costs and expenses:                                     |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Selling, general and administrative                     |  |                                     | 86,455    |   |                                     |   | 83,999    |                                       |  |   | 124,707                                 |   |  |   | 122,284   |  
|Selling, general and administrative  related party     |  |                                     | 250       |   |                                     |   | 250       |                                       |  |   | 500                                     |   |  |   | 500       |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|                                                        |  |                                     | 86,705    |   |                                     |   | 84,249    |                                       |  |   | 125,207                                 |   |  |   | 122,784   |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Operating income                                        |  |                                     | 109,805   |   |                                     |   | 108,842   |                                       |  |   | 90,622                                  |   |  |   | 92,996    |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Other (income) expense:                                 |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Interest income                                         |  |                                     | (404      | ) |                                     |   | (319      | )                                     |  |   | (865                                    | ) |  |   | (437      | )
|Interest expense                                        |  |                                     | 6,842     |   |                                     |   | 7,742     |                                       |  |   | 13,304                                  |   |  |   | 15,130    |  
|Pension curtailment gain                                |  |                                     |          |   |                                     |   |          |                                       |  |   |                                        |   |  |   | (15,844   | )
|Gain on debt prepayment                                 |  |                                     | (303      | ) |                                     |   |          |                                       |  |   | (303                                    | ) |  |   |          |  
|Other (income) expense                                  |  |                                     | (118      | ) |                                     |   | (77       | )                                     |  |   | 48                                      |   |  |   | (77       | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|                                                        |  |                                     | 6,017     |   |                                     |   | 7,346     |                                       |  |   | 12,184                                  |   |  |   | (1,228    | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Income from continuing operations before income taxes   |  |                                     | 103,788   |   |                                     |   | 101,496   |                                       |  |   | 78,438                                  |   |  |   | 94,224    |  
|Provision for income taxes                              |  |                                     | 37,915    |   |                                     |   | 39,791    |                                       |  |   | 28,560                                  |   |  |   | 37,001    |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Net income from continuing operations                   |  |                                     | 65,873    |   |                                     |   | 61,705    |                                       |  |   | 49,878                                  |   |  |   | 57,223    |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Discontinued operations:                                |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Gain on sale of Jackson & Perkins                       |  |                                     | 182       |   |                                     |   |          |                                       |  |   | 200                                     |   |  |   |          |  
|Pretax income (loss) excluding gain on sale             |  |                                     | (32       | ) |                                     |   | 1,389     |                                       |  |   | (302                                    | ) |  |   | (853      | )
|Provision (benefit) for income taxes                    |  |                                     | 55        |   |                                     |   | 546       |                                       |  |   | (38                                     | ) |  |   | (316      | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Net income (loss) from discontinued operations          |  |                                     | 95        |   |                                     |   | 843       |                                       |  |   | (64                                     | ) |  |   | (537      | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Net income                                              |  | $                                   | 65,968    |   |                                     | $ | 62,548    |                                       |  | $ | 49,814                                  |   |  | $ | 56,686    |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Basic net income (loss) per share (Note 10):            |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Continuing operations                                   |  |                                     | 63.80     |   |                                     |   | 60.30     |                                       |  |   | 48.31                                   |   |  |   | 56.02     |  
|Discontinued operations                                 |  |                                     | 0.09      |   |                                     |   | 0.82      |                                       |  |   | (0.06                                   | ) |  |   | (0.53     | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Total basic net income per share                        |  | $                                   | 63.89     |   |                                     | $ | 61.12     |                                       |  | $ | 48.25                                   |   |  | $ | 55.49     |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Diluted net income (loss) per share (Note 10):          |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Continuing operations                                   |  |                                     | 63.12     |   |                                     |   | 60.30     |                                       |  |   | 47.82                                   |   |  |   | 56.02     |  
|Discontinued operations                                 |  |                                     | 0.09      |   |                                     |   | 0.82      |                                       |  |   | (0.06                                   | ) |  |   | (0.53     | )
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Total diluted net income per share                      |  | $                                   | 63.21     |   |                                     | $ | 61.12     |                                       |  | $ | 47.76                                   |   |  | $ | 55.49     |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Weighted-average shares used in per share calculations: |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Basic                                                   |  |                                     | 1,032,530 |   |                                     |   | 1,023,319 |                                       |  |   | 1,032,394                               |   |  |   | 1,021,561 |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  
|Diluted                                                 |  |                                     | 1,043,595 |   |                                     |   | 1,023,319 |                                       |  |   | 1,043,102                               |   |  |   | 1,021,561 |  
|                                                        |  |                                     |           |   |                                     |   |           |                                       |  |   |                                         |   |  |   |           |  

See accompanying Notes to Condensed Consolidated Financial Statements.



4



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------------------- | - | -------- | -
|                                                                                                                                        |  | Twenty-six weeksendedDecember 29,2007 |         |   | Twenty-seven weeksendedDecember 30,2006(Restated) |  
|Operating activities                                                                                                                    |  |                                       |         |   |                                                   |   |          |  
|Net income                                                                                                                              |  | $                                     | 49,814  |   |                                                   | $ | 56,686   |  
|Less: Net loss from discontinued operations                                                                                             |  |                                       | (64     | ) |                                                   |   | (537     | )
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net income from continuing operations                                                                                                   |  |                                       | 49,878  |   |                                                   |   | 57,223   |  
|Adjustments to reconcile net income from continuing operations to net cash provided by operating activities from continuing
operations: |  |                                       |         |   |                                                   |   |          |  
|Depreciation and amortization of fixed assets                                                                                           |  |                                       | 8,744   |   |                                                   |   | 8,316    |  
|Amortization of intangible assets                                                                                                       |  |                                       | 861     |   |                                                   |   | 986      |  
|Amortization of deferred financing costs                                                                                                |  |                                       | 1,311   |   |                                                   |   | 1,352    |  
|Stock option compensation expense                                                                                                       |  |                                       | 284     |   |                                                   |   | 309      |  
|Loss on disposal and impairment of fixed assets                                                                                         |  |                                       | 544     |   |                                                   |   | 189      |  
|Gains on short-term investments                                                                                                         |  |                                       | (162    | ) |                                                   |   |         |  
|Deferred income taxes                                                                                                                   |  |                                       | (26,765 | ) |                                                   |   | 36,620   |  
|Gain on debt prepayment                                                                                                                 |  |                                       | (303    | ) |                                                   |   |         |  
|Pension curtailment gain                                                                                                                |  |                                       |        |   |                                                   |   | (15,844  | )
|Changes in operating assets and liabilities:                                                                                            |  |                                       |         |   |                                                   |   |          |  
|Trade accounts receivable and other receivables                                                                                         |  |                                       | (22,287 | ) |                                                   |   | (19,873  | )
|Inventories                                                                                                                             |  |                                       | 16,223  |   |                                                   |   | 13,975   |  
|Deferred catalog expenses and other assets                                                                                              |  |                                       | (1,944  | ) |                                                   |   | (2,287   | )
|Accounts payable                                                                                                                        |  |                                       | 24,176  |   |                                                   |   | 30,402   |  
|Accrued liabilities                                                                                                                     |  |                                       | 51,431  |   |                                                   |   | 9,546    |  
|Deferred revenue                                                                                                                        |  |                                       | 20,915  |   |                                                   |   | 23,013   |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net cash provided by operating activities from continuing operations                                                                    |  |                                       | 122,906 |   |                                                   |   | 143,927  |  
|Net cash provided by (used in) operating activities from discontinued operations                                                        |  |                                       | 1,874   |   |                                                   |   | (2,808   | )
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net cash provided by operating activities                                                                                               |  |                                       | 124,780 |   |                                                   |   | 141,119  |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|                                                                                                                                        |  |                                      
|Investing activities                                                                                                                    |  |                                       |         |   |                                                   |   |          |  
|Acquisition of fixed assets                                                                                                             |  |                                       | (11,745 | ) |                                                   |   | (10,442  | )
|Proceeds from the sale of fixed assets                                                                                                  |  |                                       | 21      |   |                                                   |   | 1        |  
|Proceeds from the sale of held-to-maturity securities                                                                                   |  |                                       | 24,978  |   |                                                   |   |         |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net cash provided by (used in) investing activities from continuing operations                                                          |  |                                       | 13,254  |   |                                                   |   | (10,441  | )
|Net cash provided by (used in) investing activities from discontinued operations                                                        |  |                                       | 3,105   |   |                                                   |   | (157     | )
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net cash provided by (used in) investing activities                                                                                     |  |                                       | 16,359  |   |                                                   |   | (10,598  | )
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|                                                                                                                                        |  |                                      
|Financing activities                                                                                                                    |  |                                       |         |   |                                                   |   |          |  
|Borrowings of revolving debt                                                                                                            |  |                                       | 63,000  |   |                                                   |   | 108,500  |  
|Repayments of revolving debt                                                                                                            |  |                                       | (63,000 | ) |                                                   |   | (108,500 | )
|Repayments of capital lease obligations                                                                                                 |  |                                       | (1,366  | ) |                                                   |   |         |  
|Repayments of long-term debt                                                                                                            |  |                                       | (9,405  | ) |                                                   |   |         |  
|Proceeds from exercise of stock options                                                                                                 |  |                                       | 30      |   |                                                   |   | 970      |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Net cash provided by (used in) financing activities from continuing operations                                                          |  |                                       | (10,741 | ) |                                                   |   | 970      |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Increase in cash and cash equivalents                                                                                                   |  |                                       | 130,398 |   |                                                   |   | 131,491  |  
|Cash and cash equivalents, beginning of period                                                                                          |  |                                       | 49,408  |   |                                                   |   | 18,637   |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  
|Cash and cash equivalents, end of period                                                                                                |  | $                                     | 179,806 |   |                                                   | $ | 150,128  |  
|                                                                                                                                        |  |                                       |         |   |                                                   |   |          |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

NOTE 1BUSINESS

Harry & David Holdings, Inc. (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. The Company markets its products through
catalogs distributed through the mail, the Internet, business-to-business and consumer telemarketing, Harry and David stores and wholesale distribution to other retailers.

During the fourth quarter of fiscal 2007, the Company sold its Jackson and Perkins business. The effects of discontinued operations have been retrospectively applied to the consolidated statements of operations, cash
flows and footnotes for prior periods as applicable. See Note 5  Discontinued Operations.

NOTE 2BASIS OF PRESENTATION

These financial statements include the consolidated results of the Company and its wholly-owned subsidiaries. The Condensed Consolidated Balance Sheets
as of December 29, 2007 and December 30, 2006, the Condensed Consolidated Statements of Operations for the thirteen-week periods ended December 29, 2007 and December 30, 2006, the twenty-six week period ended December 29,
2007 and the twenty-seven week period ended December 30, 2006, and the Condensed Consolidated Statements of Cash Flows for the twenty-six week period ended December 29, 2007 and the twenty-seven week period ended December 30, 2006
have been prepared from the Companys unaudited Condensed Consolidated Financial Statements. In managements opinion, the Condensed Consolidated Financial Statements include all adjustments, which include those typically recurring
adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen-week periods and the twenty-six and twenty-seven week periods then ended. Significant intercompany balances and
transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 30, 2007 presented in this report has been derived from the Companys audited balance sheet not included in this report.

The results of operations for the interim periods shown are not necessarily indicative of results to be expected for the full fiscal year. In the second quarter of each
fiscal year, the Company typically realizes its highest sales for the fiscal year as it includes the most significant holidays that drive the largest portion of the gift-giving component of the Companys sales. It is also the period where the
Company incurs significant cost of goods sold in connection with the increased sales. Sales in the third fiscal 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 28, 2008 and June 30, 2007 contain fifty-two weeks and fifty-three weeks, respectively. The period ended December 29, 2007
contains twenty-six weeks while the period ended December 30, 2006 contains twenty-seven 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 30, 2007, not included in this report.

Certain reclassifications and revisions have been made to prior years to conform to the current
year presentation. These reclassifications and revisions had no impact on the consolidated statement of operations for any period. These changes include the restatement of the consolidated statement of operations and cash flows for discontinued
operations and the restatement of the consolidated balance sheets and consolidated statements of cash flows related to the classification of outstanding checks, see Note 3  Restatement. Asset retirement obligations have been
reclassified from current liabilities to non-current liabilities, and capitalized catalog costs, which were previously classified as prepaid catalog expenses or within other current assets, have been reclassified to deferred catalog expenses on the
consolidated balance sheets.

Other comprehensive net income was equal to total net income for both periods presented in the consolidated statement of
operations.



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NOTE 3RESTATEMENT OF FINANCIAL STATEMENTS

During fiscal 2007, the Company concluded that its historical practice of reclassifying outstanding checks to accounts payable and accrued payroll, related to its main banking relationship, was in error. The restated
amounts related to the Companys second quarter fiscal 2007 consolidated balance sheets and consolidated statements of cash flows are as follows:



|                                          |  |                  |        
|----------------------------------------- |  | ---------------- | -------
|                                          |  | December 30,2006
|Cash and cash equivalents                 |  |                  |        
|As previously reported                    |  | $                | 164,049
|As restated                               |  |                  | 150,128
|                                          | 
|Accounts Payable                          |  |                  |        
|As previously reported                    |  | $                | 65,806 
|As restated                               |  |                  | 53,657 
|                                          | 
|Accrued payroll and benefits              |  |                  |        
|As previously reported                    |  | $                | 19,720 
|As restated                               |  |                  | 17,948 
|                                          | 
|Net cash provided by operating activities |  |                  |        
|As previously reported                    |  | $                | 149,875
|As restated                               |  |                  | 141,119
|                                          | 
|Increase in cash and cash equivalents     |  |                  |        
|As previously reported                    |  | $                | 140,247
|As restated                               |  |                  | 131,491

The restatement had no impact on the Companys working capital or net income (loss) for any period presented.

NOTE 4NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS

In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141R (revised 2007), Business Combinations, which replaces SFAS No. 141. SFAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after December 15, 2008 (on or after June 28, 2009 of fiscal 2010). Early adoption is not permitted. After the effective date, the Company will apply the requirements
of SFAS No. 141R on its future business combinations.

In February 2007, the SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. This
statement gives entities the option to record certain financial assets and liabilities at fair value with the changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
Company is not planning to elect the option to record certain financial assets and liabilities at fair value and, therefore, this pronouncement is not expected to have a material impact on the Companys consolidated financial statements.

In September 2006, the SFAS No. 157, Fair Value Measurements,which establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is required to adopt SFAS No. 157 in the first quarter of its fiscal year ending June 28, 2009 and the adoption is not expected to have a material impact on the
Companys consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes in an enterprises financial statements in accordance with FASB



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Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was
adopted by the Company as of July 1, 2007 and required a cumulative adjustment to equity upon adoption for the accounting differences for uncertain tax positions under FASB Statement No. 5, Accounting for Contingencies as opposed to
FIN 48. For further information, see Note 7  Income Taxes.

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. The Company adopted EITF 06-2 in the first quarter of fiscal year 2008. The
impact on the Companys financial statements was a cumulative adjustment to retained earnings totaling $256, net of taxes of $164. In addition, for the twenty-six weeks ended December 29, 2007, a net credit adjustment of $50, or $0.05 per
share on basic and diluted pre-tax basis, was recorded in payroll expense, classified within selling, general and administrative expenses, in the condensed consolidated statement of operations pursuant to EITF 06-2.

NOTE 5DISCONTINUED OPERATIONS

During the fourth quarter of
fiscal 2007, the Company completed the sale of its Jackson & Perkins businesses. In a separate transaction, the Company sold its land and the associated buildings of its Wasco facility, which was primarily utilized to support rose growing
operations of Jackson & Perkins.

In connection with the sale of the business, the Company entered into an agreement with the buyers to provide
certain transitional services through June 2008 (the Transitional Services Agreement). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,the services rendered pursuant to the
Transitional Services Agreement are not considered significant continuing involvement and, as such, the results of operations of the sold entities, as well as the revenues and expenses associated with the Transitional Services Agreement, are
separately accounted for as discontinued operations for the thirteen and twenty-six weeks ended December 29, 2007 and the thirteen and twenty-seven weeks ended December 30, 2006, respectively.

The financial results included in discontinued operations in the consolidated statement of operations were as follows:



|                                                                |  |                                     |       |                                     |   |                                       |  |   |                                         |   |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------------------- | ----- | ----------------------------------- | - | ------------------------------------- |  | - | --------------------------------------- | - |  | - | ------ | -
|                                                                |  | Thirteenweeks endedDecember 29,2007 |       | Thirteenweeks endedDecember 30,2006 |   | Twenty-sixweeks endedDecember 29,2007 |  |   | Twenty-sevenweeks endedDecember 30,2006 |  
|Net sales                                                       |  | $                                   | 2,214 |                                     | $ | 26,583                                |  | $ | 3,308                                   |   |  | $ | 30,267 |  
|Gain on sale of Jackson & Perkins                               |  |                                     | 182   |                                     |   |                                      |  |   | 200                                     |   |  |   |       |  
|Provision (benefit) for income taxes on discontinued operations |  |                                     | 55    |                                     |   | 546                                   |  |   | (38                                     | ) |  |   | (316   | )
|Net income (loss) from discontinued operations                  |  |                                     | 95    |                                     |   | 843                                   |  |   | (64                                     | ) |  |   | (537   | )

Net sales for the thirteen and twenty-seven week periods ended December 30, 2006 reflect sales activity that
occurred prior to the completion of the sale of the Jackson & Perkins business on April 10, 2007. Included in net sales from discontinued operations for the thirteen and twenty-six week periods ended December 29, 2007 are revenues
associated with the Transitional Services Agreement and residual farm crop sales.



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NOTE 6BALANCE SHEET INFORMATION

Inventories

Inventories consist of the following:



|                                                   |  |                  |        |              |   |                  |  |   |       
|-------------------------------------------------- |  | ---------------- | ------ | ------------ | - | ---------------- |  | - | ------
|                                                   |  | December 29,2007 |        | June 30,2007 |   | December 30,2006
|Finished goods                                     |  | $                | 26,349 |              | $ | 19,540           |  | $ | 24,935
|Materials, packaging supplies, and work-in process |  |                  | 18,267 |              |   | 36,056           |  |   | 25,802
|Growing crops                                      |  |                  | 1,567  |              |   | 6,810            |  |   | 13,493
|                                                   |  |                  |        |              |   |                  |  |   |       
|Total                                              |  | $                | 46,183 |              | $ | 62,406           |  | $ | 64,230
|                                                   |  |                  |        |              |   |                  |  |   |       

Fixed Assets

Fixed assets consist of the following:



|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|----------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | ---------------- |  | - | ------- | -
|                                                |  | December 29,2007 |         |   | June 30,2007 |   |         | December 30,2006 | 
|Land                                            |  | $                | 19,607  |   |              | $ | 19,607  |                  |  | $ | 30,547  |  
|Land improvements and orchard development costs |  |                  | 30,490  |   |              |   | 29,749  |                  |  |   | 31,534  |  
|Buildings and improvements                      |  |                  | 55,578  |   |              |   | 55,309  |                  |  |   | 57,846  |  
|Machinery and equipment                         |  |                  | 62,651  |   |              |   | 55,734  |                  |  |   | 57,960  |  
|Leasehold improvements                          |  |                  | 12,776  |   |              |   | 9,509   |                  |  |   | 9,010   |  
|Purchased and internally developed software     |  |                  | 22,403  |   |              |   | 22,129  |                  |  |   | 21,346  |  
|Capital projects-in-progress                    |  |                  | 15,006  |   |              |   | 15,611  |                  |  |   | 6,323   |  
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|                                                |  |                  | 218,511 |   |              |   | 207,648 |                  |  |   | 214,566 |  
|Accumulated depreciation and amortization       |  |                  | (52,802 | ) |              |   | (44,375 | )                |  |   | (38,886 | )
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  
|Total                                           |  | $                | 165,709 |   |              | $ | 163,273 |                  |  | $ | 175,680 |  
|                                                |  |                  |         |   |              |   |         |                  |  |   |         |  

As of December 29, 2007 and June 30, 2007, capital projects-in-progress included an Enterprise Resource
Planning (ERP) software package acquired for $2,144. Purchased and internally developed software includes software licenses acquired for $968. Both of these software assets were obtained through capital lease agreements. See Note 8 
Borrowing Arrangements. Accumulated depreciation and amortization includes accumulated amortization of purchased and internally developed software costs of $11,508, $9,652 and $9,957 as of December 29, 2007, June 30, 2007 and
December 30, 2006, respectively.

During the thirteen and twenty-six weeks ended December 29, 2007, the Company determined that one
underperforming store was impaired and recorded a non-cash charge for the impairment of long-lived assets in the amount of $192, reported in selling, general and administrative expenses in the condensed consolidated statement of operations.

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 remaining estimated useful lives of less than one year. The
favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases, ranging from two to five 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 $417 and $490 for the thirteen weeks ended December 29, 2007 and the thirteen weeks ended December 30, 2006, respectively, $861 and $986 for the twenty-six weeks and twenty-seven weeks ended December 29, 2007
and December 30, 2006, 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:



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|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|----------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                          |  | December 29, 2007   |        | June 30, 2007          
|                                          |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names and trademarks                |  | $                   | 26,921 |                         | $ |       |                   |  | $                   | 26,921 |                         | $ | 26,921 |                   | $ |       |   |  | $ | 26,921
|Harry and David customer and rental lists |  |                     | 6,652  |                         |   | (6,018 | )                 |  |                     | 634    |                         |   | 6,652  |                   |   | (5,311 | ) |  |   | 1,341 
|Favorable lease agreements                |  |                     | 1,971  |                         |   | (1,298 | )                 |  |                     | 673    |                         |   | 1,971  |                   |   | (1,144 | ) |  |   | 827   
|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|                                          |  | $                   | 35,544 |                         | $ | (7,316 | )                 |  | $                   | 28,228 |                         | $ | 35,544 |                   | $ | (6,455 | ) |  | $ | 29,089
|                                          |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       

The estimated amortization expense for the remainder of fiscal 2008 and for each of the next four years is as
follows:



|                  |  |                                         |     |                          |   |                          |  |   |      
|----------------- |  | --------------------------------------- | --- | ------------------------ | - | ------------------------ |  | - | -----
|Fiscal Period:    |  | Harry and DavidCustomer andRental
Lists |     | FavorableLeaseAgreements |   | TotalAmortizationExpense
|Remainder of 2008 |  | $                                       | 634 |                          | $ | 135                      |  | $ | 769  
|2009              |  |                                         |    |                          |   | 244                      |  |   | 244  
|2010              |  |                                         |    |                          |   | 169                      |  |   | 169  
|2011              |  |                                         |    |                          |   | 88                       |  |   | 88   
|2012              |  |                                         |    |                          |   | 37                       |  |   | 37   
|                  |  |                                         |     |                          |   |                          |  |   |      
|Total             |  | $                                       | 634 |                          | $ | 673                      |  | $ | 1,307
|                  |  |                                         |     |                          |   |                          |  |   |      

NOTE 7INCOME TAXES

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was adopted by the Company as of July 1,
2007 and requires a cumulative adjustment to equity upon adoption for the accounting differences for uncertain tax positions under FASB Statement No. 5, Accounting for Contingencies as opposed to FIN 48. As a result of the adoption of
FIN 48, the Company recorded a cumulative effect adjustment which reduced retained earnings by $430 as of July 1, 2007. On the date of adoption, the gross amount of unrecognized tax benefits was $3,819, excluding penalty and interest
accrued; a net amount of $1,589 was recorded as a reduction to existing net operating losses; and a net amount of $2,662 was recorded in other long-term liabilities. Of these amounts, if recognized, $1,992 would favorably impact the effective tax
rate.

Due to the Companys November 30 tax year end, a FIN 48 liability of $399 was recorded in other long-term liabilities relating to current
period uncertain state tax positions. As of December 29, 2007, the gross amount of unrecognized tax benefits is $4,462, excluding penalty and interest accrued, reflecting an increase of $643, while a net amount of $3,125, including penalty and
interest, is recorded in other long-term liabilities. Of these amounts, if recognized, $2,398 would favorably impact the effective tax rate.

The Company
recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Interest and penalties, net of tax, of $65, or $0.06 per share, and $135, or $0.13 per share, were accrued for the thirteen weeks and twenty-six
weeks ended December 29, 2007, respectively. The Company had accrued interest and penalties, net of tax, of approximately $1,365 and $1,230 at December 29, 2007 and July 1, 2007, respectively.

Due to the expiration of federal statutes of limitation, it is reasonably possible that the unrecognized tax benefits for uncertain tax positions may materially change
in the next twelve months from that which is recorded as of December 29, 2007. It is not currently possible to accurately estimate this impact.

The
Company defines the federal jurisdiction as well as various multi-state jurisdictions as major jurisdictions (within the meaning of FIN 48). As of December 29, 2007, the Company is not subject to federal and state examinations for
years prior to 2004. Tax years subsequent to June 17, 2004 remain open to examination by these major jurisdictions.



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The Companys effective tax rate for the second quarter of fiscal 2008 was 36.5%. The difference in the effective
rate and the federal statutory rate is primarily due to state income taxes.

NOTE 8BORROWING ARRANGEMENTS

Revolving Credit Facilities

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

In connection with this facility and related amendments, the Company has remaining deferred financing costs of $4,038 and $4,659 on its condensed
consolidated balance sheets as of December 29, 2007 and June 30, 2007, respectively.

On June 21, 2007, the Credit Agreement was amended to
increase the capital expenditure limitations and modify the borrowing base calculation. The Company did not incur any debt issuance fees related to this amendment.

On November 30, 2007, Harry and David entered into an assumption agreement with the lenders party to the Credit Agreement, to assume the obligations of Harry & David Operations Corp. under the agreement.

As of December 29, 2007, there were no outstanding borrowings and unused borrowings under the revolving credit facility were $123,800, excluding $1,200 in letters
of credit outstanding. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at December 29, 2007 was $59,786. The Company is
required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitments fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense
in the Consolidated Statement of Operations.

The terms of the Credit Agreement include customary representations and warranties, affirmative and negative
covenants and events of default. The Credit Agreement requires the Company to comply with certain covenants, which primarily include a minimum cash balance and limits to capital expenditures. At December 29, 2007, the Company was in compliance with
these covenants.

Long-Term Debt

In February 2005, the
Companys subsidiary, Harry & David Operations, Inc., 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). In fiscal 2006,
Harry & David Operations, Corp. completed the public exchange offer for 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
10.12% and 10.36% at December 29, 2007 and June 30, 2007, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December. Subsequent
to the debt prepayment described below, there were $68,000 in Senior Floating Rate Notes and $167,000 in Senior Fixed Rate outstanding as of December 29, 2007.

The fees associated with original issuance and public exchange costs are being amortized over the remaining life of the associated Senior Notes. As of December 29, 2007 and June 30, 2007, respectively,
$6,511 and $7,485 remained on the balance sheet as deferred financing costs. As described below in Long-Term Debt Prepayment the Company wrote-off $284 of deferred financing costs associated with a partial prepayment of the Senior Notes
during the second quarter of fiscal 2008.

In the fourth quarter of fiscal 2007, the Company
completed the sale of the Jackson & Perkins businesses, including the direct marketing and wholesale business, the Jackson & Perkins® brand, catalog, e-commerce website
and associated inventories and in a separate transaction, completed the sale of the land and assets used by the Jackson & Perkins rose growing operations. As the Company has applied the net proceeds from the sale of Jackson &
Perkins businesses and assets to pay down the Companys revolver for working capital and for capital expenditures, and for the purchase of Wolfermans, LLC as described in Note 15Subsequent Events, the Company will not be
required to make an offer to repurchase the Senior Notes, under the asset sale covenant of the indenture.



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On November 30, 2007, in connection with an internal corporate re-organization, Harry & David Operations,
Corp. merged with and into Harry and David, its wholly-owned subsidiary, and Harry and David assumed all of Harry & David Operations Corp.s obligations under the Senior Notes pursuant to a supplemental indenture.

The Senior Notes represent the senior unsecured obligations of Harry and David, and are guaranteed on a senior unsecured basis by Harry & David Holdings,
Inc. and all of the Companys current subsidiaries. Refer to Note 14Condensed Consolidating Financial Statements for additional information related to the Companys internal re-organization in November of fiscal 2008. The
indentures governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens
and transactions with affiliates. The Company was in compliance with all of the covenants contained in the indenture under the Senior Notes at December 29, 2007.

Long-Term Debt Prepayment

During the thirteen and twenty-six weeks ended December 29, 2007, the Company prepaid
$9,405 of its fixed and floating rate Senior Notes in open market purchases. The debt prepayment resulted in a net gain of $303, comprised of a $595 discount on the repayment of $10,000 of outstanding principal of the Senior Notes, partially offset
by the write-off of $284 of unamortized deferred financing costs and third-party expenses of $8 in connection therewith.

Amortization of Deferred
Financing Costs

Total amortization expense of all deferred financing costs was $653 and $658 for the thirteen weeks ended December 29, 2007 and
the thirteen weeks ended December 30, 2006, respectively, and $1,311 and $1,352 for the twenty-six weeks ended December 29, 2007 and the twenty-seven weeks ended December 30, 2006, respectively, and are included within interest
expense in the accompanying Condensed Consolidated Statements of Operations.

Capital Lease Obligations

In fiscal 2007, the Company acquired an Enterprise Resource Planning (ERP) software package for $2,144, financed through a capital lease agreement. The agreement had an
implied interest rate of 22.4% due in installments of principal and interest of $584. The remaining obligation in the consolidated balance sheet at June 30, 2007 was $1,067, which was fully paid-off in the first quarter of fiscal 2008.

Also in fiscal 2007, the Company acquired a software license for $968, financed by a capital lease agreement. The interest rate on the agreement is 10.36%
due in three annual installments of principal and interest. The current and non-current portions of the remaining obligation in the consolidated balance sheet as of December 29, 2007 were $318 and $351, respectively.

NOTE 9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 the date of final vesting and the expiration of the option. 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.

A summary of assumptions utilized for grants in each of the fiscal periods is
presented below:



|                         |  |                                                    |           |   |                                                      |   |           |  
|------------------------ |  | -------------------------------------------------- | --------- | - | ---------------------------------------------------- | - | --------- | -
|                         |  | Thirteen andTwenty-sixweeks endedDecember 29, 2007 |           |   | Thirteen andTwenty-sevenweeks
endedDecember 30, 2006 |  
|Expected volatility      |  |                                                    | 41.0      | % |                                                      |   | 38.8      | %
|Expected dividends       |  | $                                                  | 0         |   |                                                      | $ | 0         |  
|Expected term (in years) |  |                                                    | 6.1 years |   |                                                      |   | 4.6 years |  
|Risk-free rate           |  |                                                    | 3.93      | % |                                                      |   | 4.57      | %



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A summary of option activity under the Plan for the twenty-six weeks ended December 29, 2007 is presented below:



|                                 |  |              |   |  |                               |        |                                          |          
|-------------------------------- |  | ------------ | - |  | ----------------------------- | ------ | ---------------------------------------- | ---------
|Options                          |  | OptionShares |   |  | Weighted-AverageExercisePrice |        | Weighted-AverageRemainingContractualTerm
|Outstanding at June 30, 2007     |  | 66,251       |   |  | $                             | 112.94 |                                          | 8.2 years
|Granted                          |  | 1,539        |   |  |                               | 300.00 |                                          | 9.9 years
|Exercised                        |  | (329         | ) |  |                               | 93.37  |                                          |         
|Forfeited                        |  | (2,965       | ) |  |                               | 112.86 |                                          |         
|                                 |  |              |   |  |                               |        |                                          |          
|Outstanding at December 29, 2007 |  | 64,496       |   |  | $                             | 114.68 |                                          | 7.7 years
|                                 |  |              |   |  |                               |        |                                          |          

As of December 29, 2007, 64,496 options were outstanding, of which 27,460 were fully vested and exercisable.
The weighted average remaining contractual term of vested options was 7.4 years. The total fair value of all options outstanding at December 29, 2007 was $1,640.

A summary of the status of the Companys nonvested option shares as of December 29, 2007, and changes during the twenty-six weeks ended December 29, 2007, are presented below:



|                                 |  |              |   |  |                                                |      
|-------------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares          |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at June 30, 2007     |  | 45,694       |   |  | $                                              | 23.98
|Granted options                  |  | 1,539        |   |  |                                                | 31.67
|Vested                           |  | (7,678       | ) |  |                                                | 30.04
|Forfeited                        |  | (2,519       | ) |  |                                                | 15.10
|                                 |  |              |   |  |                                                |      
|Outstanding at December 29, 2007 |  | 37,036       |   |  | $                                              | 23.65
|                                 |  |              |   |  |                                                |      

For the thirteen and twenty-six week periods ended December 29, 2007, the Company recognized stock
compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $144 and $284, respectively, and total tax expense recognized was $58 and $112 respectively. For the thirteen and twenty-seven week
periods ended December 30, 2006, stock option compensation expense was $188 and $309, respectively, and total tax expense was $90 and $44, respectively. As of December 29, 2007 there remained a total of $853 of total unrecognized pretax
compensation cost related to nonvested share-based compensation arrangements granted under the Plan and will be recognized over the remaining vesting period. The weighted-average period of the remaining cost is 2.2 years.

NOTE 10EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per
share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the weighted-average common shares outstanding for the period, including the dilutive effect of stock options as
determined under the treasury stock method. For the thirteen and twenty-six weeks ended December 29, 2007, weighted-average common shares outstanding for the period, including the dilutive effect of stock options of 11,065 and 10,708,
respectively, are included in the weighted average shares denominator for the calculation of diluted earnings per share for those periods. For the thirteen and twenty-six weeks ended December 29, 2007 and for the thirteen and twenty-seven weeks
ended December 30, 2006, common shares relating to the stock options of 17,687, 18,099, 60,552 and 61,855, respectively, are excluded from the diluted earnings per share calculation as the related impact would have been anti-dilutive because
the options had an exercise price greater than the fair value. The calculations are as follows (amounts are in thousands except share and per share data):



|                                               |  |                                     |        |                                     |   |                                      |  |   |                                         |   |  |   |        |  
|---------------------------------------------- |  | ----------------------------------- | ------ | ----------------------------------- | - | ------------------------------------ |  | - | --------------------------------------- | - |  | - | ------ | -
|                                               |  | Thirteen weeksendedDecember 29,2007 |        | Thirteen weeksendedDecember 30,2006 |   | Twenty-sixweeksendedDecember 29,2007 |  |   | Twenty-seven weeksendedDecember 30,2006 |  
|Net income from continuing operations          |  | $                                   | 65,873 |                                     | $ | 61,705                               |  | $ | 49,878                                  |   |  | $ | 57,223 |  
|Net income (loss) from discontinued operations |  |                                     | 95     |                                     |   | 843                                  |  |   | (64                                     | ) |  |   | (537   | )
|                                               |  |                                     |        |                                     |   |                                      |  |   |                                         |   |  |   |        |  
|Net income                                     |  | $                                   | 65,968 |                                     | $ | 62,548                               |  | $ | 49,814                                  |   |  | $ | 56,686 |  
|                                               |  |                                     |        |                                     |   |                                      |  |   |                                         |   |  |   |        |  



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|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|------------------------------------------------------- |  | - | --------- |  | - | --------- |  | - | --------- | - |  | - | --------- | -
|Basic net income (loss) per share:                      |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Continuing operations                                   |  |   | 63.80     |  |   | 60.30     |  |   | 48.31     |   |  |   | 56.02     |  
|Discontinued operations                                 |  |   | 0.09      |  |   | 0.82      |  |   | (0.06     | ) |  |   | (0.53     | )
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Total basic net income per share                        |  | $ | 63.89     |  | $ | 61.12     |  | $ | 48.25     |   |  | $ | 55.49     |  
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Diluted net income (loss) per share:                    |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Continuing operations                                   |  |   | 63.12     |  |   | 60.30     |  |   | 47.82     |   |  |   | 56.02     |  
|Discontinued operations                                 |  |   | 0.09      |  |   | 0.82      |  |   | (0.06     | ) |  |   | (0.53     | )
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Total diluted net income per share                      |  | $ | 63.21     |  | $ | 61.12     |  | $ | 47.76     |   |  | $ | 55.49     |  
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Weighted-average shares used in per share calculations: |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Basic                                                   |  |   | 1,032,530 |  |   | 1,023,319 |  |   | 1,032,394 |   |  |   | 1,021,561 |  
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  
|Diluted                                                 |  |   | 1,043,595 |  |   | 1,023,319 |  |   | 1,043,102 |   |  |   | 1,021,561 |  
|                                                        |  |   |           |  |   |           |  |   |           |   |  |   |           |  

Per share amounts are calculated separately for net income (loss) from continuing operations and discontinued
operations and total net income and, as such, the per share amounts for continuing operations and discontinued operations may not sum to the total net income per share.

NOTE 11BENEFIT PROGRAMS

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



|                                       |  |                                     |      |   |                                     |   |       |                                       |  |   |                                         |   |  |   |        |  
|-------------------------------------- |  | ----------------------------------- | ---- | - | ----------------------------------- | - | ----- | ------------------------------------- |  | - | --------------------------------------- | - |  | - | ------ | -
|                                       |  | Thirteen weeksendedDecember 29,2007 |      |   | Thirteen weeksendedDecember 30,2006 |   |       | Twenty-sixweeks endedDecember 29,2007 |  |   | Twenty-sevenweeks endedDecember 30,2006 |  
|Service cost                           |  | $                                   |     |   |                                     | $ | 1,096 |                                       |  | $ |                                        |   |  | $ | 2,192  |  
|Interest cost                          |  |                                     | 753  |   |                                     |   | 721   |                                       |  |   | 1,506                                   |   |  |   | 1,443  |  
|Expected return on plan assets         |  |                                     | (766 | ) |                                     |   | (722  | )                                     |  |   | (1,532                                  | ) |  |   | (1,445 | )
|Amortization of prior service cost     |  |                                     |     |   |                                     |   |      |                                       |  |   |                                        |   |  |   |       |  
|Settlement gain                        |  |                                     |     |   |                                     |   |      |                                       |  |   |                                        |   |  |   |       |  
|                                       |  |                                     |      |   |                                     |   |       |                                       |  |   |                                         |   |  |   |        |  
|Net periodic pension (benefit) expense |  | $                                   | (13  | ) |                                     | $ | 1,095 |                                       |  | $ | (26                                     | ) |  | $ | 2,190  |  
|                                       |  |                                     |      |   |                                     |   |       |                                       |  |   |                                         |   |  |   |        |  

During the thirteen weeks and the twenty-six weeks ended December 30, 2007, and the thirteen and twenty-seven
weeks ended December 30, 2006, the Company contributed $1,614, $4,076, $1,335 and $3,599, respectively, to its defined benefit pension plans.

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 qualified to enter into the plan. A full freeze of the benefit
accrual for the plan was 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 continued through the end of fiscal
2007. 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 No.87, Employers Accounting for Pensions (SFAS No. 87).

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 continued 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 No. 87.



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NOTE 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 material effect on the Companys results of operations, financial position or cash flows.

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

In fiscal 2007,
Harry and David was served with a complaint alleging violations of 15 U.S.C. §1681c(g), a provision of the Fair and Accurate Credit Transactions Act (FACTA), which relates to credit and debit card data that may be included on the electronically
printed receipts provided to retail customers at the point of sale. To the Companys knowledge, similar complaints were filed against numerous other prominent retailers. The Company has not yet determined the extent of potential financial
impact, if any.

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

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

Total rental expense for all operating leases was as follows:



|                        |  |                                     |       |                                     |   |                                       |  |                                         |        |  |   |       
|----------------------- |  | ----------------------------------- | ----- | ----------------------------------- | - | ------------------------------------- |  | --------------------------------------- | ------ |  | - | ------
|                        |  | Thirteen weeksendedDecember 29,2007 |       | Thirteen weeksendedDecember 30,2006 |   | Twenty-sixweeks endedDecember 29,2007 |  | Twenty-sevenweeks endedDecember 30,2006
|Minimum rent expense    |  | $                                   | 8,255 |                                     | $ | 8,234                                 |  | $                                       | 13,673 |  | $ | 13,542
|Contingent rent expense |  |                                     | 116   |                                     |   | 221                                   |  |                                         | 173    |  |   | 272   
|                        |  |                                     |       |                                     |   |                                       |  |                                         |        |  |   |       
|Total rent expense      |  | $                                   | 8,371 |                                     | $ | 8,455                                 |  | $                                       | 13,846 |  | $ | 13,814
|                        |  |                                     |       |                                     |   |                                       |  |                                         |        |  |   |       

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% vest in the next twelve quarters.

As of December 29, 2007, 70% of the award was vested. 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



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in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a
certain level; (iii) the Company has available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash
or, in some circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of December 29, 2007, the Company has concluded that it
is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program for the thirteen weeks then ended.

The Company has
entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under
this agreement. The fees are accrued to the extent that they are not paid in any such period. During both the thirteen weeks ended December 29, 2007 and December 30, 2006, the Company paid $250 and during both the twenty-six weeks ended
December 29, 2007 and the twenty-seven weeks ended December 30, 2006, the Company paid $500 in such management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and
administrative expenses  related party.

NOTE 13SEGMENT REPORTING

Prior to the sale of Jackson & Perkins, the Company had three reportable segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins. The Company also had an
Other category, which included the Harry and David Wholesale division. As a result of the sale of Jackson & Perkins, Harry and David Wholesale has become a more significant portion of the continuing operations and is treated as
a reportable segment. All prior periods have been revised to present Harry and David Wholesale as a standalone segment. The Other category includes all of the Companys other operating units.

The results of the Jackson & Perkins business are included as discontinued operations in the consolidated statement of operations and footnotes for all periods
presented. General corporate overhead expenses, which were previously allocated to the Jackson & Perkins business, but will remain after the disposal, have been reclassified to the continuing segments in the consolidated financial
statements for all periods presented. See Note 5  Discontinued Operations.

The
Harry and David Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts under the Harry and David ® brand by marketing through the Harry
and David catalog, Internet (harryanddavid.com), business-to-business and consumer telemarketing operations. Harry and David catalogs reach customers throughout the United States and, to a lesser extent, in Canada. The Harry and David Stores segment
generates net sales of Harry and David merchandise at various retail locations (outlet stores, specialty stores, and a Country Village Store). As of December 29, 2007, the Company operated 146 Harry and David Stores in 37 states in the United
States. The Harry and David Wholesale segment generates net sales by selling Harry and David ® brand wholesale products to national retailers. Business units not disclosed separately for
segment reporting purposes are grouped in the Other category and include commercial sales of surplus, non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon, 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. Net intersegment sales originate in our manufacturing
unit within the Other category, which also includes the elimination of intercompany and intersegment transactions. For the thirteen weeks ended December 29, 2007 and December 30, 2006, the twenty-six weeks ended December 29, 2007, and
the twenty-seven weeks ended December 30, 2006, net intersegment sales were $91,991, $93,701, $130,252 and $133,660, respectively. Total assets in the Other category include corporate cash and cash equivalents, short-term investments, the net
book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets, including manufacturing facilities.



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|                                                             |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|------------------------------------------------------------ |  | ------------------------------ | ------- | --------------------- | - | ----------------------- |  | ----- | ------ |  | ----- | ------- | - |  | - | -------
|Dollars in thousands                                         |  | Harry andDavid DirectMarketing |         | Harry andDavid Stores |   | Harry andDavidWholesale |  | Other |        |  | Total
|Thirteen weeks ended December 29, 2007                       |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|Net external sales                                           |  | $                              | 272,099 |                       | $ | 70,958                  |  | $     | 19,835 |  | $     | 1,086   |   |  | $ | 363,978
|Depreciation and amortization expense (1)                    |  |                                | 341     |                       |   | 1,030                   |  |       |       |  |       | 3,565   |   |  |   | 4,936  
|Operating income from continuing operations                  |  |                                | 92,074  |                       |   | 15,980                  |  |       | 1,749  |  |       | 2       |   |  |   | 109,805
|Interest expense, net from continuing operations             |  |                                |        |                       |   | 2                       |  |       |       |  |       | 6,436   |   |  |   | 6,438  
|Income (loss) from continuing operations before income taxes |  |                                | 92,414  |                       |   | 16,053                  |  |       | 1,755  |  |       | (6,434  | ) |  |   | 103,788
|Capital expenditures (2)                                     |  |                                |        |                       |   | 2,411                   |  |       |       |  |       | 3,168   |   |  |   | 5,579  
|Total assets                                                 |  |                                | 53,540  |                       |   | 38,961                  |  |       | 12,917 |  |       | 383,601 |   |  |   | 489,019
|                                                             |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|                                                             |  |                                |         |                       |  
|Thirteen weeks ended December 30, 2006                       |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|Net external sales                                           |  | $                              | 270,466 |                       | $ | 71,552                  |  | $     | 19,676 |  | $     | 875     |   |  | $ | 362,569
|Depreciation and amortization expense (1)                    |  |                                | 398     |                       |   | 979                     |  |       |       |  |       | 3,527   |   |  |   | 4,904  
|Operating income from continuing operations                  |  |                                | 87,424  |                       |   | 18,525                  |  |       | 2,893  |  |       |        |   |  |   | 108,842
|Interest expense, net from continuing operations             |  |                                |        |                       |   |                        |  |       |       |  |       | 7,423   |   |  |   | 7,423  
|Income (loss) from continuing operations before income taxes |  |                                | 87,484  |                       |   | 18,538                  |  |       | 2,894  |  |       | (7,420  | ) |  |   | 101,496
|Capital expenditures (2)                                     |  |                                |        |                       |   | 431                     |  |       |       |  |       | 2,779   |   |  |   | 3,210  
|Total assets                                                 |  |                                | 58,311  |                       |   | 33,244                  |  |       | 11,158 |  |       | 384,868 |   |  |   | 487,581
|                                                             |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|                                                             |  |                                |         |                       |  
|Twenty-six weeks ended December 29, 2007                     |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|Net external sales                                           |  | $                              | 294,926 |                       | $ | 95,567                  |  | $     | 27,520 |  | $     | 1,419   |   |  | $ | 419,432
|Depreciation and amortization expense (1)                    |  |                                | 708     |                       |   | 1,907                   |  |       |       |  |       | 6,990   |   |  |   | 9,605  
|Operating income from continuing operations                  |  |                                | 77,412  |                       |   | 9,708                   |  |       | 3,500  |  |       | 2       |   |  |   | 90,622 
|Interest expense, net from continuing operations             |  |                                |        |                       |   | 2                       |  |       |       |  |       | 12,437  |   |  |   | 12,439 
|Income (loss) from continuing operations before income taxes |  |                                | 77,555  |                       |   | 9,737                   |  |       | 3,503  |  |       | (12,357 | ) |  |   | 78,438 
|Capital expenditures (2)                                     |  |                                |        |                       |   | 4,326                   |  |       |       |  |       | 7,419   |   |  |   | 11,745 
|Total assets                                                 |  |                                | 53,540  |                       |   | 38,961                  |  |       | 12,917 |  |       | 383,601 |   |  |   | 489,019
|                                                             |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|                                                             |  |                                |         |                       |  
|Twenty-seven weeks ended December 30, 2006                   |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        
|Net external sales                                           |  | $                              | 298,219 |                       | $ | 96,983                  |  | $     | 28,339 |  | $     | 1,242   |   |  | $ | 424,783
|Depreciation and amortization expense (1)                    |  |                                | 795     |                       |   | 1,765                   |  |       |       |  |       | 6,742   |   |  |   | 9,302  
|Operating income from continuing operations                  |  |                                | 74,417  |                       |   | 13,752                  |  |       | 4,827  |  |       |        |   |  |   | 92,996 
|Interest expense, net from continuing operations             |  |                                |        |                       |   |                        |  |       |       |  |       | 14,693  |   |  |   | 14,693 
|Income from continuing operations before income taxes        |  |                                | 74,477  |                       |   | 13,765                  |  |       | 4,828  |  |       | 1,154   |   |  |   | 94,224 
|Capital expenditures (2)                                     |  |                                |        |                       |   | 1,282                   |  |       |       |  |       | 9,160   |   |  |   | 10,442 
|Total assets                                                 |  |                                | 58,311  |                       |   | 33,244                  |  |       | 11,158 |  |       | 384,868 |   |  |   | 487,581
|                                                             |  |                                |         |                       |   |                         |  |       |        |  |       |         |   |  |   |        



|(1) | Depreciation and amortization expense from discontinued operations was $0 and $391 for fiscal 2008 and 2007, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------

|(2) | Capital expenditures from discontinued operations were $0 and $157 for fiscal 2008 and 2007, respectively.
|--- | ----------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

NOTE 14CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

On November 30, 2007, Harry & David Operations Corp., (the Predecessor), effected an internal corporate reorganization pursuant to which its
wholly-owned subsidiaries, Bear Creek Stores, Inc. and Bear Creek Direct Marketing, Inc. (both being guarantors under the Indenture referred to below), merged with and into Harry and David, an Oregon corporation and subsidiary guarantor of the
Predecessor (the Successor), (collectively, the Reorganization). As a result of the Reorganization, the Predecessor entered into the First Supplemental Indenture (the Supplemental Indenture) among the Successor,
the Company, Bear Creek Orchards, Inc. (BC Orchards), Harry & David Operations, Inc. (H&D Operations) (formerly Bear Creek Operations, Inc) and Wells Fargo Bank, N.A., as Trustee (the Trustee) to the
Indenture, among the Predecessor, the Successor, as a guarantor, Holdings, BC Orchards, BC Operations, the other guarantors party thereto, and the Trustee under which the Senior Notes were issued. Pursuant to the Supplemental Indenture, the
Successor assumed all of the rights and obligations of the Predecessor under the Indenture and the Senior Notes and each of the Predecessor, Bear Creek Stores, Inc. and Bear Creek Direct Marketing, Inc. was released and discharged from their
respective obligations under the Indenture.

The following consolidating financial information presents financial information which reflects the
Reorganization, in separate columns, for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) Harry &
David Holdings, Inc.s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on
a consolidated basis, and (v) the Company on a consolidated basis, as of December 29, 2007, and June 30, 2007, and for the thirteen and twenty-six weeks ended December 29, 2007 and the thirteen and twenty-seven weeks ended
December 30, 2006. 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.



18



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##### Table of Contents

Condensed Consolidating Balance Sheet

As of December 29, 2007

(in thousands)



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | -------
|                                                     |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Cash and cash equivalents                            |  | $                                        | 1,509   |   |                 | $ | 30,066   |                       |  | $ | 148,231                          |   |  | $            |         |   |  | $ | 179,806
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 22,626   |                       |  |   | 437                              |   |  |              |         |   |  |   | 23,063 
|Other receivables                                    |  |                                          |        |   |                 |   | 772      |                       |  |   | 4,872                            |   |  |              |         |   |  |   | 5,644  
|Inventories, net                                     |  |                                          |        |   |                 |   | 24,276   |                       |  |   | 21,907                           |   |  |              |         |   |  |   | 46,183 
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 5,692    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,692  
|Deferred income taxes                                |  |                                          | 9,615   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 9,615  
|Other current assets                                 |  |                                          |        |   |                 |   | 4,385    |                       |  |   | 6,157                            |   |  |              |         |   |  |   | 10,542 
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total current assets                                 |  |                                          | 11,124  |   |                 |   | 87,817   |                       |  |   | 181,604                          |   |  |              |         |   |  |   | 280,545
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 17,115   |                       |  |   | 148,594                          |   |  |              |         |   |  |   | 165,709
|Intangibles, net                                     |  |                                          |        |   |                 |   | 28,228   |                       |  |   |                                 |   |  |              |         |   |  |   | 28,228 
|Investment in subsidiaries                           |  |                                          | 268,923 |   |                 |   | (57,355  | )                     |  |   |                                 |   |  |              | (211,568 | ) |  |   |       
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 10,549   |                       |  |   |                                 |   |  |              |         |   |  |   | 10,549 
|Other assets                                         |  |                                          | 2,430   |   |                 |   | 472      |                       |  |   | 1,086                            |   |  |              |         |   |  |   | 3,988  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total assets                                         |  | $                                        | 282,477 |   |                 | $ | 86,826   |                       |  | $ | 331,284                          |   |  | $            | (211,568 | ) |  | $ | 489,019
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|                                                     |  |                                          |         |   |                
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 25,603   |                       |  | $ | 21,014                           |   |  | $            |         |   |  | $ | 46,617 
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 5,945    |                       |  |   | 8,441                            |   |  |              |         |   |  |   | 14,386 
|Deferred revenue                                     |  |                                          |        |   |                 |   | 33,829   |                       |  |   |                                 |   |  |              |         |   |  |   | 33,829 
|Income taxes payable                                 |  |                                          | 53,384  |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 53,384 
|Accrued interest                                     |  |                                          |        |   |                 |   | 5,752    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,752  
|Other accrued liabilities                            |  |                                          | (25     | ) |                 |   | 12,689   |                       |  |   | 761                              |   |  |              |         |   |  |   | 13,425 
|Capital lease note payable                           |  |                                          |        |   |                 |   | 318      |                       |  |   |                                 |   |  |              |         |   |  |   | 318    
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total current liabilities                            |  |                                          | 53,359  |   |                 |   | 84,136   |                       |  |   | 30,216                           |   |  |              |         |   |  |   | 167,711
|Long-term debt and capital lease obligations         |  |                                          |        |   |                 |   | 235,351  |                       |  |   |                                 |   |  |              |         |   |  |   | 235,351
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 11,402                           |   |  |              |         |   |  |   | 11,402 
|Deferred income taxes                                |  |                                          | 11,016  |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 11,016 
|Intercompany debt                                    |  |                                          | 161,201 |   |                 |   | (507,199 | )                     |  |   | 345,998                          |   |  |              |         |   |  |   |       
|Other long-term liabilities                          |  |                                          | 3,195   |   |                 |   | 5,615    |                       |  |   | 1,023                            |   |  |              |         |   |  |   | 9,833  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities                                    |  |                                          | 228,771 |   |                 |   | (182,097 | )                     |  |   | 388,639                          |   |  |              |         |   |  |   | 435,313
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10     
|Additional paid-in capital                           |  |                                          | 5,862   |   |                 |   | 232,458  |                       |  |   | 53,784                           |   |  |              | (286,242 | ) |  |   | 5,862  
|Accumulated other comprehensive income               |  |                                          | 1,119   |   |                 |   |         |                       |  |   | 1,119                            |   |  |              | (1,119   | ) |  |   | 1,119  
|Retained earnings (accumulated deficit)              |  |                                          | 46,715  |   |                 |   | 36,464   |                       |  |   | (112,258                         | ) |  |              | 75,794   |   |  |   | 46,715 
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total stockholders equity (deficit)                 |  |                                          | 53,706  |   |                 |   | 268,923  |                       |  |   | (57,355                          | ) |  |              | (211,568 | ) |  |   | 53,706 
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities and stockholders equity (deficit) |  | $                                        | 282,477 |   |                 | $ | 86,826   |                       |  | $ | 331,284                          |   |  | $            | (211,568 | ) |  | $ | 489,019
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |        



19



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##### Table of Contents

Condensed Consolidating Balance Sheet

As of June 30, 2007

(in thousands)



|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|-------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | -------------------------------- | ------- |  | ------------ | -------- | - |  | - | ------- | -
|                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  | EliminationsandReclassifications |         |  | Consolidated |         
|Assets                                       |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Current assets:                              |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Cash and cash equivalents                    |  | $                                        | 1,480   |   |                 | $ | 9,953    |                       |  | $                                | 37,975  |  | $            |         |   |  | $ | 49,408  |  
|Short-term investments                       |  |                                          |        |   |                 |   |         |                       |  |                                  | 24,816  |  |              |         |   |  |   | 24,816  |  
|Trade accounts receivable, net               |  |                                          |        |   |                 |   | 1,788    |                       |  |                                  | 312     |  |              |         |   |  |   | 2,100   |  
|Other receivables                            |  |                                          |        |   |                 |   | 2,375    |                       |  |                                  | 8,532   |  |              |         |   |  |   | 10,907  |  
|Inventories, net                             |  |                                          |        |   |                 |   | 17,818   |                       |  |                                  | 44,588  |  |              |         |   |  |   | 62,406  |  
|Deferred catalog expenses                    |  |                                          |        |   |                 |   | 3,840    |                       |  |                                  | 358     |  |              |         |   |  |   | 4,198   |  
|Prepaid income taxes                         |  |                                          | 774     |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 774     |  
|Other current assets                         |  |                                          | 7       |   |                 |   | 6,248    |                       |  |                                  | 3,597   |  |              |         |   |  |   | 9,852   |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total current assets                         |  |                                          | 2,261   |   |                 |   | 42,022   |                       |  |                                  | 120,178 |  |              |         |   |  |   | 164,461 |  
|Fixed assets, net                            |  |                                          |        |   |                 |   | 44,981   |                       |  |                                  | 118,292 |  |              |         |   |  |   | 163,273 |  
|Intangibles, net                             |  |                                          |        |   |                 |   | 29,089   |                       |  |                                  |        |  |              |         |   |  |   | 29,089  |  
|Investment in subsidiaries                   |  |                                          | 198,762 |   |                 |   | 109,832  |                       |  |                                  |        |  |              | (308,594 | ) |  |   |        |  
|Deferred financing costs, net                |  |                                          |        |   |                 |   | 12,144   |                       |  |                                  |        |  |              |         |   |  |   | 12,144  |  
|Other assets                                 |  |                                          |        |   |                 |   | 505      |                       |  |                                  | 1,046   |  |              |         |   |  |   | 1,551   |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total assets                                 |  | $                                        | 201,023 |   |                 | $ | 238,573  |                       |  | $                                | 239,516 |  | $            | (308,594 | ) |  | $ | 370,518 |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|                                             |  |                                          |         |   |                
|Liabilities and stockholders equity         |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Current liabilities:                         |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Accounts payable                             |  | $                                        |        |   |                 | $ | 12,710   |                       |  | $                                | 10,223  |  | $            | (33      | ) |  | $ | 22,900  |  
|Accrued payroll and benefits                 |  |                                          |        |   |                 |   | 13,012   |                       |  |                                  | 8,163   |  |              |         |   |  |   | 21,175  |  
|Deferred revenue                             |  |                                          |        |   |                 |   | 12,914   |                       |  |                                  |        |  |              |         |   |  |   | 12,914  |  
|Deferred income taxes                        |  |                                          | 18,670  |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 18,670  |  
|Accrued interest                             |  |                                          |        |   |                 |   | 5,921    |                       |  |                                  |        |  |              |         |   |  |   | 5,921   |  
|Other accrued liabilities                    |  |                                          |        |   |                 |   | 6,362    |                       |  |                                  | 1,047   |  |              |         |   |  |   | 7,409   |  
|Current portion of capital lease obligation  |  |                                          |        |   |                 |   | 1,366    |                       |  |                                  |        |  |              |         |   |  |   | 1,366   |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total current liabilities                    |  |                                          | 18,670  |   |                 |   | 52,285   |                       |  |                                  | 19,433  |  |              | (33      | ) |  |   | 90,355  |  
|Long-term debt and capital lease obligations |  |                                          |        |   |                 |   | 245,669  |                       |  |                                  |        |  |              |         |   |  |   | 245,669 |  
|Accrued pension liability                    |  |                                          |        |   |                 |   |         |                       |  |                                  | 15,504  |  |              |         |   |  |   | 15,504  |  
|Deferred income taxes                        |  |                                          | 8,422   |   |                 |   |         |                       |  |                                  |        |  |              |         |   |  |   | 8,422   |  
|Intercompany debt                            |  |                                          | 168,626 |   |                 |   | (262,418 | )                     |  |                                  | 93,759  |  |              | 33       |   |  |   |        |  
|Other long-term liabilities                  |  |                                          | 1,041   |   |                 |   | 4,275    |                       |  |                                  | 988     |  |              |         |   |  |   | 6,304   |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities                            |  |                                          | 196,759 |   |                 |   | 39,811   |                       |  |                                  | 129,684 |  |              |         |   |  |   | 366,254 |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Stockholders equity:                        |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Common stock                                 |  |                                          | 10      |   |                 |   | 1        |                       |  |                                  | 100     |  |              | (101     | ) |  |   | 10      |  
|Additional paid-in capital                   |  |                                          | 5,548   |   |                 |   | 232,428  |                       |  |                                  | 94,114  |  |              | (326,542 | ) |  |   | 5,548   |  
|Accumulated other comprehensive income       |  |                                          | 1,119   |   |                 |   |         |                       |  |                                  | 1,119   |  |              | (1,119   | ) |  |   | 1,119   |  
|Retained earnings (accumulated deficit)      |  |                                          | (2,413  | ) |                 |   | (33,667  | )                     |  |                                  | 14,499  |  |              | 19,168   |   |  |   | (2,413  | )
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total stockholders equity                   |  |                                          | 4,264   |   |                 |   | 198,762  |                       |  |                                  | 109,832 |  |              | (308,594 | ) |  |   | 4,264   |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity   |  | $                                        | 201,023 |   |                 | $ | 238,573  |                       |  | $                                | 239,516 |  | $            | (308,594 | ) |  | $ | 370,518 |  
|                                             |  |                                          |         |   |                 |   |          |                       |  |                                  |         |  |              |          |   |  |   |         |  



20



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 29, 2007

(in thousands)



|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | -------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |          |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                                    |  | $                                        |         |   |                 | $ | 362,894 |                       |  | $ | 93,075                            |   |  | $            | (91,991  | ) |  | $ | 363,978 |  
|Cost of goods sold                                           |  |                                          |         |   |                 |   | 166,384 |                       |  |   | 93,075                            |   |  |              | (91,991  | ) |  |   | 167,468 |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                                 |  |                                          |         |   |                 |   | 196,510 |                       |  |   |                                  |   |  |              |         |   |  |   | 196,510 |  
|Selling, general and administrative                          |  |                                          |         |   |                 |   | 85,744  |                       |  |   | 961                               |   |  |              |         |   |  |   | 86,705  |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |         |   |                 |   | 110,766 |                       |  |   | (961                              | ) |  |              |         |   |  |   | 109,805 |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                              |  |                                          |         |   |                 |   | (35     | )                     |  |   | (369                              | ) |  |              |         |   |  |   | (404    | )
|Interest expense                                             |  |                                          |         |   |                 |   | 6,836   |                       |  |   | 6                                 |   |  |              |         |   |  |   | 6,842   |  
|Other (income) expense, net                                  |  |                                          | 99       |   |                 |   | (217    | )                     |  |   |                                  |   |  |              |         |   |  |   | (118    | )
|Gain on debt prepayment                                      |  |                                          |         |   |                 |   | (303    | )                     |  |   |                                  |   |  |              |         |   |  |   | (303    | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | (104,104 | ) |                 |   | 495     |                       |  |   |                                  |   |  |              | 103,609  |   |  |   |        |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | (104,005 | ) |                 |   | 6,776   |                       |  |   | (363                              | ) |  |              | 103,609  |   |  |   | 6,017   |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | 104,005  |   |                 |   | 103,990 |                       |  |   | (598                              | ) |  |              | (103,609 | ) |  |   | 103,788 |  
|Provision for income taxes                                   |  |                                          | 37,915   |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 37,915  |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | 66,090   |   |                 |   | 103,990 |                       |  |   | (598                              | ) |  |              | (103,609 | ) |  |   | 65,873  |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |         |   |                 |   |        |                       |  |   | 182                               |   |  |              |         |   |  |   | 182     |  
|Pretax income (loss) excluding gain on sale                  |  |                                          | (67      | ) |                 |   | 114     |                       |  |   | (79                               | ) |  |              |         |   |  |   | (32     | )
|Provision for income taxes on discontinued operations        |  |                                          | 55       |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 55      |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | (122     | ) |                 |   | 114     |                       |  |   | 103                               |   |  |              |         |   |  |   | 95      |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | 65,968   |   |                 | $ | 104,104 |                       |  | $ | (495                              | ) |  | $            | (103,609 | ) |  | $ | 65,968  |  
|                                                             |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  



21



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended December 30, 2006

(in thousands)



|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | -------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |          |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                             |  | $                                        |         |   |                 | $ | 361,695 |                       |  | $ | 94,574                            |   |  | $            | (93,700  | ) |  | $ | 362,569 |  
|Cost of goods sold                                    |  |                                          |         |   |                 |   | 168,602 |                       |  |   | 94,576                            |   |  |              | (93,700  | ) |  |   | 169,478 |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                          |  |                                          |         |   |                 |   | 193,093 |                       |  |   | (2                                | ) |  |              |         |   |  |   | 193,091 |  
|Selling, general and administrative                   |  |                                          |         |   |                 |   | 84,249  |                       |  |   |                                  |   |  |              |         |   |  |   | 84,249  |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income (loss)                               |  |                                          |         |   |                 |   | 108,844 |                       |  |   | (2                                | ) |  |              |         |   |  |   | 108,842 |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                               |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                       |  |                                          |         |   |                 |   |        |                       |  |   | (319                              | ) |  |              |         |   |  |   | (319    | )
|Interest expense                                      |  |                                          |         |   |                 |   | 7,710   |                       |  |   | 32                                |   |  |              |         |   |  |   | 7,742   |  
|Other (income) expense, net                           |  |                                          |         |   |                 |   | (77     | )                     |  |   |                                  |   |  |              |         |   |  |   | (77     | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (102,885 | ) |                 |   | (1,674  | )                     |  |   |                                  |   |  |              | 104,559  |   |  |   |        |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (102,885 | ) |                 |   | 5,959   |                       |  |   | (287                              | ) |  |              | 104,559  |   |  |   | 7,346   |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 102,885  |   |                 |   | 102,885 |                       |  |   | 285                               |   |  |              | (104,559 | ) |  |   | 101,496 |  
|Provision for income taxes                            |  |                                          | 39,791   |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 39,791  |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 63,094   |   |                 |   | 102,885 |                       |  |   | 285                               |   |  |              | (104,559 | ) |  |   | 61,705  |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Discontinued operations:                              |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Pretax income                                         |  |                                          |         |   |                 |   |        |                       |  |   | 1,389                             |   |  |              |         |   |  |   | 1,389   |  
|Provision for income taxes on discontinued operations |  |                                          | 546      |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 546     |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (546     | ) |                 |   |        |                       |  |   | 1,389                             |   |  |              |         |   |  |   | 843     |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income                                            |  | $                                        | 62,548   |   |                 | $ | 102,885 |                       |  | $ | 1,674                             |   |  | $            | (104,559 | ) |  | $ | 62,548  |  
|                                                      |  |                                          |          |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  



22



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Twenty-six Weeks Ended December 29, 2007

(in thousands)



|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                                    |  | $                                        |        |   |                 | $ | 418,014 |                       |  | $ | 131,670                           |   |  | $            | (130,252 | ) |  | $ | 419,432 |  
|Cost of goods sold                                           |  |                                          |        |   |                 |   | 202,183 |                       |  |   | 131,672                           |   |  |              | (130,252 | ) |  |   | 203,603 |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                 |   | 215,831 |                       |  |   | (2                                | ) |  |              |         |   |  |   | 215,829 |  
|Selling, general and administrative                          |  |                                          |        |   |                 |   | 124,275 |                       |  |   | 932                               |   |  |              |         |   |  |   | 125,207 |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |        |   |                 |   | 91,556  |                       |  |   | (934                              | ) |  |              |         |   |  |   | 90,622  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                              |  |                                          |        |   |                 |   |        |                       |  |   | (865                              | ) |  |              |         |   |  |   | (865    | )
|Interest expense                                             |  |                                          |        |   |                 |   | 13,298  |                       |  |   | 6                                 |   |  |              |         |   |  |   | 13,304  |  
|Other (income) expense, net                                  |  |                                          | 20      |   |                 |   | 28      |                       |  |   |                                  |   |  |              |         |   |  |   | 48      |  
|Gain on debt prepayment                                      |  |                                          |        |   |                 |   | (303    | )                     |  |   |                                  |   |  |              |         |   |  |   | (303    | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | (78,356 | ) |                 |   | 291     |                       |  |   |                                  |   |  |              | 78,065   |   |  |   |        |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | (78,336 | ) |                 |   | 13,314  |                       |  |   | (859                              | ) |  |              | 78,065   |   |  |   | 12,184  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | 78,336  |   |                 |   | 78,242  |                       |  |   | (75                               | ) |  |              | (78,065  | ) |  |   | 78,438  |  
|Provision for income taxes                                   |  |                                          | 28,560  |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 28,560  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | 49,776  |   |                 |   | 78,242  |                       |  |   | (75                               | ) |  |              | (78,065  | ) |  |   | 49,878  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |        |   |                 |   |        |                       |  |   | 200                               |   |  |              |         |   |  |   | 200     |  
|Pretax income (loss) excluding gain on sale                  |  |                                          |        |   |                 |   | 114     |                       |  |   | (416                              | ) |  |              |         |   |  |   | (302    | )
|Benefit for income taxes on discontinued operations          |  |                                          | (38     | ) |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | (38     | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | 38      |   |                 |   | 114     |                       |  |   | (216                              | ) |  |              |         |   |  |   | (64     | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | 49,814  |   |                 | $ | 78,356  |                       |  | $ | (291                              | ) |  | $            | (78,065  | ) |  | $ | 49,814  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  



23



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Twenty-seven Weeks Ended December 30, 2006

(in thousands)



|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                             |  | $                                        |        |   |                 | $ | 423,541 |                       |  | $ | 134,902                           |   |  | $            | (133,660 | ) |  | $ | 424,783 |  
|Cost of goods sold                                    |  |                                          |        |   |                 |   | 207,759 |                       |  |   | 134,904                           |   |  |              | (133,660 | ) |  |   | 209,003 |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                          |  |                                          |        |   |                 |   | 215,782 |                       |  |   | (2                                | ) |  |              |         |   |  |   | 215,780 |  
|Selling, general and administrative                   |  |                                          |        |   |                 |   | 122,786 |                       |  |   | (2                                | ) |  |              |         |   |  |   | 122,784 |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income                                      |  |                                          |        |   |                 |   | 92,996  |                       |  |   |                                  |   |  |              |         |   |  |   | 92,996  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                               |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                       |  |                                          |        |   |                 |   |        |                       |  |   | (437                              | ) |  |              |         |   |  |   | (437    | )
|Interest expense                                      |  |                                          |        |   |                 |   | 15,058  |                       |  |   | 72                                |   |  |              |         |   |  |   | 15,130  |  
|Pension curtailment gain                              |  |                                          |        |   |                 |   |        |                       |  |   | (15,844                           | ) |  |              |         |   |  |   | (15,844 | )
|Other (income) expense, net                           |  |                                          |        |   |                 |   | (77     | )                     |  |   |                                  |   |  |              |         |   |  |   | (77     | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (93,371 | ) |                 |   | (15,356 | )                     |  |   |                                  |   |  |              | 108,727  |   |  |   |        |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (93,371 | ) |                 |   | (375    | )                     |  |   | (16,209                           | ) |  |              | 108,727  |   |  |   | (1,228  | )
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 93,371  |   |                 |   | 93,371  |                       |  |   | 16,209                            |   |  |              | (108,727 | ) |  |   | 94,224  |  
|Provision for income taxes                            |  |                                          | 37,001  |   |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | 37,001  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 56,370  |   |                 |   | 93,371  |                       |  |   | 16,209                            |   |  |              | (108,727 | ) |  |   | 57,223  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Discontinued operations:                              |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Pretax loss excluding gain on sale                    |  |                                          |        |   |                 |   |        |                       |  |   | (853                              | ) |  |              |         |   |  |   | (853    | )
|Benefit for income taxes on discontinued operations   |  |                                          | (316    | ) |                 |   |        |                       |  |   |                                  |   |  |              |         |   |  |   | (316    | )
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | 316     |   |                 |   |        |                       |  |   | (853                              | ) |  |              |         |   |  |   | (537    | )
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income                                            |  | $                                        | 56,686  |   |                 | $ | 93,371  |                       |  | $ | 15,356                            |   |  | $            | (108,727 | ) |  | $ | 56,686  |  
|                                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |          |   |  |   |         |  



24



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##### Table of Contents

Condensed Consolidating Statement of Cash Flows

For the Twenty-six Weeks Ended December 29, 2007

(in thousands)



|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                    |  | Harry & DavidHoldings, Inc.(Parent-Only) |       |   | Harry and David |   |         | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) operating activities |  | $                                        | (351  | ) |                 | $ | 94,081  |                       |  | $ | 31,050                            |   |              | $ |  |  | $ | 124,780 |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                    |  |                                          |       |   |                
|Investing activities                                |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                         |  |                                          |      |   |                 |   | (7,975  | )                     |  |   | (3,770                            | ) |              |   |  |  |   | (11,745 | )
|Proceeds from the sale of fixed assets              |  |                                          |      |   |                 |   |        |                       |  |   | 21                                |   |              |   |  |  |   | 21      |  
|Proceeds from the sale of business                  |  |                                          |      |   |                 |   |        |                       |  |   | 3,105                             |   |              |   |  |  |   | 3,105   |  
|Proceeds from the sale of short-term investments    |  |                                          |      |   |                 |   |        |                       |  |   | 24,978                            |   |              |   |  |  |   | 24,978  |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities |  | $                                        |      |   |                 | $ | (7,975  | )                     |  | $ | 24,334                            |   |              | $ |  |  | $ | 16,359  |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                    |  |                                          |       |   |                
|Financing activities                                |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                        |  |                                          |      |   |                 |   | 63,000  |                       |  |   |                                  |   |              |   |  |  |   | 63,000  |  
|Repayments of revolving debt                        |  |                                          |      |   |                 |   | (63,000 | )                     |  |   |                                  |   |              |   |  |  |   | (63,000 | )
|Repayments of capital lease obligation              |  |                                          |      |   |                 |   | (1,366  | )                     |  |   |                                  |   |              |   |  |  |   | (1,366  | )
|Repayments of long-term debt                        |  |                                          |      |   |                 |   | (9,405  | )                     |  |   |                                  |   |              |   |  |  |   | (9,405  | )
|Proceeds for exercise of stock options              |  |                                          | 30    |   |                 |   |        |                       |  |   |                                  |   |              |   |  |  |   | 30      |  
|Net (payments) receipts on intercompany debt        |  |                                          | 350   |   |                 |   | (55,222 | )                     |  |   | 54,872                            |   |              |   |  |  |   |        |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  | $                                        | 380   |   |                 | $ | (65,993 | )                     |  | $ | 54,872                            |   |              | $ |  |  | $ | (10,741 | )
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Increase in cash and cash equivalents               |  |                                          | 29    |   |                 |   | 20,113  |                       |  |   | 110,256                           |   |              |   |  |  |   | 130,398 |  
|Cash and cash equivalents, beginning of period      |  |                                          | 1,480 |   |                 |   | 9,953   |                       |  |   | 37,975                            |   |              |   |  |  |   | 49,408  |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period            |  | $                                        | 1,509 |   |                 | $ | 30,066  |                       |  | $ | 148,231                           |   |              | $ |  |  | $ | 179,806 |  
|                                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  



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Condensed Consolidating Statement of Cash Flows

For the Twenty-seven Weeks Ended December 30, 2006

(in thousands)



|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|--------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | --------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                    |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | Guarantorsubsidiaries |  |   | Eliminations andReclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Net cash provided by operating activities           |  | $                                        | 17,455  |   |                 | $ | 97,285   |                       |  | $ | 26,379                            |   |              | $ |  |  | $ | 141,119  |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|                                                    |  |                                          |         |   |                
|Investing activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                          |        |   |                 |   | (5,763   | )                     |  |   | (4,836                            | ) |              |   |  |  |   | (10,599  | )
|Proceeds from the sale of fixed assets              |  |                                          |        |   |                 |   |         |                       |  |   | 1                                 |   |              |   |  |  |   | 1        |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Net cash used in investing activities               |  | $                                        |        |   |                 | $ | (5,763   | )                     |  | $ | (4,835                            | ) |              | $ |  |  | $ | (10,598  | )
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|                                                    |  |                                          |         |   |                
|Financing activities                                |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                          |        |   |                 |   | 108,500  |                       |  |   |                                  |   |              |   |  |  |   | 108,500  |  
|Repayments of revolving debt                        |  |                                          |        |   |                 |   | (108,500 | )                     |  |   |                                  |   |              |   |  |  |   | (108,500 | )
|Proceeds for exercise of stock options              |  |                                          | 970     |   |                 |   |         |                       |  |   |                                  |   |              |   |  |  |   | 970      |  
|Net (payments) receipts on intercompany debt        |  |                                          | (17,455 | ) |                 |   | (92,333  | )                     |  |   | 109,788                           |   |              |   |  |  |   |         |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities |  | $                                        | (16,485 | ) |                 | $ | (92,333  | )                     |  | $ | 109,788                           |   |              | $ |  |  | $ | 970      |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents    |  |                                          | 970     |   |                 |   | (811     | )                     |  |   | 131,332                           |   |              |   |  |  |   | 131,491  |  
|Cash and cash equivalents, beginning of period      |  |                                          | 463     |   |                 |   | 4,381    |                       |  |   | 13,793                            |   |              |   |  |  |   | 18,637   |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                        | 1,433   |   |                 | $ | 3,570    |                       |  | $ | 145,125                           |   |              | $ |  |  | $ | 150,128  |  
|                                                    |  |                                          |         |   |                 |   |          |                       |  |   |                                   |   |              |   |   |  |   |          |  

NOTE 15SUBSEQUENT EVENTS

On January 15, 2008, the Company completed the acquisition of Wolfermans, LLC, a direct-marketing
company specializing in English muffins and other breakfast products sold primarily under the Wolfermans® brand from Williams Foods, Inc., for a net purchase price of approximately
$22,500, subject to customary final working capital adjustments. The Company paid for the acquisition of Wolfermans with available cash balances. Williams Foods, Inc., has agreed to provide certain transitional services, as needed, through
September 2008.



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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. These risks and uncertainties include, but are not limited to risks relating to market demand for the Companys
products, production capabilities, relationships with customers, implementation of the Companys business and marketing strategies, competition, continued rising fuel energy cost, financial leverage, postal rate increases, increase in labor
costs and the availability of a seasonal workforce and changes in federal and state tax laws. 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 30, 2007, 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

General

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

We grow,
manufacture, design and package products that account for the significant majority of our sales annually. 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, quality assurance, manufacturing capacity, and
inventory. Accordingly, we expect to derive cost structure and operating margin benefits as revenues increase. We believe that our vertical integration allows us to maintain a high degree of control over product quality compared with that of our
competitors as we rely less heavily on third-party suppliers, particularly during peak periods. In addition, our vertical integration generally lowers our product sourcing costs, allows us to optimally adjust the assortment of products we offer and
enables us to adjust product inventory levels to quickly respond to changes in customer demand.

Sale of the Jackson & Perkins business

We sold our Jackson & Perkins business in the fourth quarter of fiscal 2007, including the
direct marketing and wholesale businesses, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventory, including rose plants, horticultural products and
home and garden décor, as well as its direct marketing and wholesale customer lists and relationships. In association with the sale of the Jackson & Perkins business, we also sold approximately 3,200 acres of land in Wasco,
California, which had been used primarily to support the rose growing operations of Jackson & Perkins, as well as the related buildings and equipment. In connection with the sale of the business, we entered into an agreement with the buyer
to provide certain transitional services through June 2008.

For further information regarding the sale of the Jackson & Perkins businesses, see
Note 5- Discontinued Operations in the notes to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.



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Unless otherwise noted, the results of our former Jackson & Perkins segment are generally not discussed in this
managements discussion and analysis, which is limited to continuing operations.

Acquisition of Wolfermans business

On January 15, 2008, we completed the acquisition of Wolfermans, LLC, a direct-marketing company
specializing in English muffins and other breakfast products sold primarily under the Wolfermans® brand from Williams Foods, Inc., for a net purchase price of approximately $22.5
million, subject to customary final working capital adjustments. We paid for the acquisition of Wolfermans with available cash balances. We anticipate this acquisition will leverage our infrastructure and generate operating and marketing
synergies and productivity improvements for both the Harry and David® and Wolfermans® brands. In connection with the
acquisition, Williams Foods, Inc., has agreed to provide certain transitional services, as needed, through September 2008.

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 2008, beginning July 1, 2007 and ending June 28, 2008, includes 52 weeks versus 53 weeks in fiscal year 2007, from June 25, 2006 through June 30, 2007. Therefore, the fiscal 2008 year-to-date period includes
26 weeks versus 27 weeks for fiscal 2007 year-to-date period. Accordingly, results for these two periods may not be comparable.

RESULTS OF OPERATIONS

NET SALES

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



|                 |  |                     |       |                 |                     |   |                  |                       |                 |  |                         |                  |  |                 |       |  |                  |   |                 |   |       |  |       |  
|---------------- |  | ------------------- | ----- | --------------- | ------------------- | - | ---------------- | --------------------- | --------------- |  | ----------------------- | ---------------- |  | --------------- | ----- |  | ---------------- | - | --------------- | - | ----- |  | ----- | -
|                 |  | Thirteen WeeksEnded |       |                 | Thirteen WeeksEnded |   |                  | Twenty-six WeeksEnded |                 |  | Twenty-seven WeeksEnded |                 
|                 |  | December 29,2007    |       | Percentof Total |                     |   | December 30,2006 |                       | Percentof Total |  |                         | December 29,2007 |  | Percentof Total |       |  | December 30,2006 |   | Percentof Total |  
|Direct Marketing |  | $                   | 272.1 |                 | 74.8                | % |                  | $                     | 270.4           |  | 74.6                    | %                |  | $               | 294.9 |  | 70.3             | % |                 | $ | 298.2 |  | 70.2  | %
|Stores           |  |                     | 71.0  |                 | 19.5                | % |                  |                       | 71.6            |  | 19.7                    | %                |  |                 | 95.6  |  | 22.8             | % |                 |   | 97.0  |  | 22.8  | %
|Wholesale        |  |                     | 19.8  |                 | 5.4                 | % |                  |                       | 19.6            |  | 5.4                     | %                |  |                 | 27.5  |  | 6.6              | % |                 |   | 28.3  |  | 6.7   | %
|Other            |  |                     | 1.1   |                 | 0.3                 | % |                  |                       | 1.0             |  | 0.3                     | %                |  |                 | 1.4   |  | 0.3              | % |                 |   | 1.3   |  | 0.3   | %
|                 |  |                     |       |                 |                     |   |                  |                       |                 |  |                         |                  |  |                 |       |  |                  |   |                 |   |       |  |       |  
|Total Net Sales  |  | $                   | 364.0 |                 | 100.0               | % |                  | $                     | 362.6           |  | 100.0                   | %                |  | $               | 419.4 |  | 100.0            | % |                 | $ | 424.8 |  | 100.0 | %
|                 |  |                     |       |                 |                     |   |                  |                       |                 |  |                         |                  |  |                 |       |  |                  |   |                 |   |       |  |       |  

Net sales from continuing operations for the thirteen weeks ended December 29, 2007, increased $1.4 million,
or 0.4%, over the thirteen weeks ended December 30, 2006. The net sales increase of $1.4 million was driven by our Direct Marketing and Wholesale segments, partially offset by volume decreases in our Stores segment due to weaker consumer
demand, reflecting broader trends in the retail market.

Net sales from continuing operations for the twenty-six weeks ended December 29, 2007,
decreased $5.4 million, or 1.3%, over the twenty-seven weeks ended December 30, 2006. Net sales decreased $2.2 million, or 0.5%, from fiscal 2007 to fiscal 2008, normalized for a twenty-six week period. This $2.2 million net sales decrease was
driven by volume declines in our Direct Marketing, Wholesale and Stores segments. These declines were partially offset by selected price increases in our Direct Marketing and Stores segments, sales generated from new (non-comparable) stores and a
slight net sales increase in our Other category.

Direct Marketing

Our Direct Marketing segment net sales increased $1.7 million, or 0.6%, to $272.1 million in the thirteen-week
period ended December 29, 2007, from $270.4 million in the thirteen-week period ended December 30, 2006, primarily due the timing of Fruit-of-the-Month Club® product shipments,
which shipped in December this fiscal year rather than in January in the previous fiscal year, and to a lesser extent, due to an increase in average order size due to higher net sales per package, partially offset by a decline in order volume.



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For the year-to-date comparable periods, after taking into account
the extra week in fiscal 2007, which represented $1.4 million in sales, our Direct Marketing segment net sales decreased $1.9 million, or 0.6%, for the twenty-six weeks ended December 29, 2007 compared to the prior fiscal year. The decrease was
primarily due to the decline in order volume, partially offset by the benefit from the shift in Fruit-of-the-Month Club® product shipments.

Stores

Our Stores segment net sales decreased $0.6 million, or 0.8%,
to $71.0 million in the thirteen-week period ended December 29, 2007, from $71.6 million in the thirteen-week period ended December 30, 2006. Comparable store sales for the same period were down 5.4%, which was driven by decline in
customer traffic , partially offset by sales generated from new (non-comparable) stores and higher average unit retail sales.

For the year-to-date
comparable periods, after taking into account the twenty-seventh week in fiscal 2007, which impacted sales by $1.6 million, our Stores segment net sales increased $0.2 million, or 0.2%, driven by sales generated from new (non-comparable) stores and
higher average sales per unit offset by lower customer traffic as compared to last year.

As of December 29, 2007, we had 146 stores in operation, as
compared to 135 stores in operation as of the same period last fiscal year, representing the net impact of 12 new stores and 1 store closure. 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. If 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.

Wholesale

Our Wholesale segment
net sales increased $0.2 million, or 1.0%, to $19.8 million, in the thirteen weeks ended December 29, 2007 as compared to the prior year. The increase was primarily due to higher sales to new customers and reduced sales discounts due to a
favorable change in mix among our existing wholesale customers.

For the year-to-date comparable periods, after taking into account the twenty-seventh week
in fiscal 2007, which impacted sales by $0.2 million, our Wholesale segment net sales declined $0.6 million, or 2.1%, from fiscal 2007 to fiscal 2008. The decline was primarily due to lower repeat volumes with certain large customers, partially
offset by the factors discussed above in the thirteen-week period.

Other

Other category net sales, which primarily consist of commercial fruit products, were up $0.1 million for both the thirteen and twenty-six weeks ended December 29, 2007 as compared to the prior year.

GROSS PROFIT

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



|                   |  |                     |       |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  
|------------------ |  | ------------------- | ----- | ------------------ | ------------------- | - | ---------------- | --------------------- | ------------------ |  | ----------------------- | ---------------- |  | ------------------ | ----- |  | ---------------- | - | ------------------ | - | ----- |  | ---- | -
|                   |  | Thirteen WeeksEnded |       |                    | Thirteen WeeksEnded |   |                  | Twenty-six WeeksEnded |                    |  | Twenty-seven WeeksEnded |                 
|                   |  | December 29,2007    |       | Percentof NetSales |                     |   | December 30,2006 |                       | Percentof NetSales |  |                         | December 29,2007 |  | Percentof NetSales |       |  | December 30,2006 |   | Percentof NetSales |  
|Direct Marketing   |  | $                   | 156.3 |                    | 57.4                | % |                  | $                     | 150.6              |  | 55.7                    | %                |  | $                  | 161.9 |  | 54.9             | % |                    | $ | 158.4 |  | 53.1 | %
|Stores             |  |                     | 37.0  |                    | 52.1                | % |                  |                       | 38.3               |  | 53.5                    | %                |  |                    | 48.2  |  | 50.4             | % |                    |   | 50.5  |  | 52.1 | %
|Wholesale          |  |                     | 3.2   |                    | 16.2                | % |                  |                       | 4.2                |  | 21.4                    | %                |  |                    | 5.7   |  | 20.7             | % |                    |   | 6.9   |  | 24.4 | %
|Other              |  |                     | 0.0   |                    | 0.0                 | % |                  |                       | 0.0                |  | 0.0                     | %                |  |                    | 0.0   |  | 0.0              | % |                    |   | 0.0   |  | 0.0  | %
|                   |  |                     |       |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  
|Total Gross Profit |  | $                   | 196.5 |                    | 54.0                | % |                  | $                     | 193.1              |  | 53.3                    | %                |  | $                  | 215.8 |  | 51.5             | % |                    | $ | 215.8 |  | 50.8 | %
|                   |  |                     |       |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  

Gross profit from continuing operations increased $3.4 million, or 1.8%, to $196.5 million in the thirteen-week
period ended December 29, 2007, from $193.1 million in the thirteen-week period ended December 30, 2006. Consolidated gross profit as a percentage of consolidated net sales was 54.0% in the thirteen-week period ended December 29,
2007, and 53.3% in the thirteen-week period ended December 30, 2006. The gross profit and gross margin increases were generated by the



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improvement in our Direct Marketing segment, which resulted from lower product costs due to orchard, production and fulfillment efficiencies and selected
price increases. The increases were partially offset by declines in our Stores and Wholesale segments, as discussed below.

Excluding the twenty-seventh
week, which accounted for $1.2 million of gross profit in fiscal 2007, gross profit increased $1.2 million, or 0.6% in the year-to-date period ended December 29, 2007. Consolidated gross profit as a percentage of consolidated net sales was
51.5% in the twenty six-week period ended December 29, 2007, and 50.8% in the twenty seven-week period ended December 30, 2006. The drivers for the year-to-date increases were primarily the same as those discussed above for the second
fiscal quarter.

Direct Marketing

Our Direct Marketing segment gross profit increased $5.7 million, or 3.8%, to $156.3 million in the thirteen-week
period ended December 29, 2007, from $150.6 million in the thirteen-week period ended December 30, 2006. On a rate basis, gross profit improved to 57.4% in the current fiscal period compared to 55.7% in the prior fiscal period. The gross
profit and gross margin improvements were driven by a combination of lower product costs due to orchard, production and fulfillment efficiencies and lower allocated fixed costs, higher net sales per package, as well as the shift in
Fruit-of-the-Month Club® product shipments, partially offset by lower order volumes.

For the
year-to-date period, after taking into account the extra week in fiscal 2007, which impacted gross profit by $0.5 million, our Direct Marketing segment gross profit increased $4.0 million, or 2.5%. The Direct Marketing dollar and rate increases for
the year-to-date period were primarily due to the factors described above for the second fiscal quarter.

Stores

Our Stores segment gross profit decreased $1.3 million, or 3.4%, to $37.0 million in the thirteen-week period ended December 29, 2007, from $38.3 million in the
thirteen-week period ended December 30, 2006 and gross profit as a percentage of segment net sales was 52.1% in the thirteen weeks ended December 29, 2007, compared to 53.5% in the prior quarter. The decrease in gross profit was driven by
lower customer traffic, increased markdowns as well as higher allocated fixed costs, which were partially offset by gross profit contribution from new stores. The gross margin decrease is attributable to higher allocated fixed costs partially offset
by higher average unit retail sales.

Excluding the twenty-seventh week, which contributed $0.6 million of gross profit, the decrease in the twenty six
weeks ended December 29, 2007 versus the prior year was $1.7 million, or 3.4%, and the rate declined to 50.4% as compared to 52.1% in the prior year. The drivers for the decreases in the year-to-date period were primarily the same as those
discussed above for the second fiscal quarter.

Wholesale

Our Wholesale segment gross profit decreased $1.0 million, or 23.8%, to $3.2 million in the thirteen-week period ended December 29, 2007, from $4.2 million in the thirteen-week period ended December 30, 2006. On a rate basis,
gross profit declined to 16.2% in the current fiscal quarter compared to 21.4% in the prior fiscal quarter. For the year-to-date comparable periods, after taking into account the twenty-seventh week, which contributed $0.1 million of gross profit,
the decrease versus last year was $1.1 million, or 16.2% and gross margin declined to 20.7% from 24.4% in the prior year. The gross profit and gross margin declines for both the thirteen and twenty six week-periods ended December 29, 2007 were
primarily due higher allocated fixed costs and increased freight costs, partially offset by a favorable shift in customer mix which reduced sales discounts.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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



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|                                         |  |                     |      |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  
|---------------------------------------- |  | ------------------- | ---- | ------------------ | ------------------- | - | ---------------- | --------------------- | ------------------ |  | ----------------------- | ---------------- |  | ------------------ | ----- |  | ---------------- | - | ------------------ | - | ----- |  | ---- | -
|                                         |  | Thirteen WeeksEnded |      |                    | Thirteen WeeksEnded |   |                  | Twenty-six WeeksEnded |                    |  | Twenty-seven WeeksEnded |                 
|                                         |  | December 29,2007    |      | Percentof NetSales |                     |   | December 30,2006 |                       | Percentof NetSales |  |                         | December 29,2007 |  | Percentof NetSales |       |  | December 30,2006 |   | Percentof NetSales |  
|Direct Marketing                         |  | $                   | 64.4 |                    | 23.7                | % |                  | $                     | 63.1               |  | 23.3                    | %                |  | $                  | 84.6  |  | 28.7             | % |                    | $ | 84.0  |  | 28.2 | %
|Stores                                   |  |                     | 21.0 |                    | 29.6                | % |                  |                       | 19.8               |  | 27.7                    | %                |  |                    | 38.5  |  | 40.3             | % |                    |   | 36.7  |  | 37.8 | %
|Wholesale                                |  |                     | 1.3  |                    | 6.6                 | % |                  |                       | 1.4                |  | 7.1                     | %                |  |                    | 2.1   |  | 7.6              | % |                    |   | 2.1   |  | 7.4  | %
|Other                                    |  |                     | 0.0  |                    | 0.0                 | % |                  |                       | 0.0                |  | 0.0                     | %                |  |                    | 0.0   |  | 0.0              | % |                    |   | 0.0   |  | 0.0  | %
|                                         |  |                     |      |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  
|Total Selling, General, & Administrative |  | $                   | 86.7 |                    | 23.8                | % |                  | $                     | 84.3               |  | 23.2                    | %                |  | $                  | 125.2 |  | 29.9             | % |                    | $ | 122.8 |  | 28.9 | %
|                                         |  |                     |      |                    |                     |   |                  |                       |                    |  |                         |                  |  |                    |       |  |                  |   |                    |   |       |  |      |  

Selling, general and administrative expenses from continuing operations increased $2.4 million during the
thirteen-week period ended December 29, 2007 as compared to the thirteen-week period ended December 30, 2006. The increase in selling, general and administrative expenses for the quarter was driven by a combination of advertising costs in
our Direct Marketing segment, largely attributable to increased catalog circulation and postage rate increases, higher payroll and related benefit expenses relating to merit and personnel increases, and higher lease and operating costs related to
new stores. These increases were partially offset by a decrease in incentive compensation expenses in the current fiscal year, as well as reduced outside consulting costs in the current period.

In the year-to-date comparable periods, after taking into account the twenty-seventh week, selling, general and administrative expenses were approximately $5.1 million
or 4.2% higher in fiscal 2008, as compared to fiscal 2007. The increase was primarily attributable to the factors discussed above in the thirteen-week period.

Consolidated selling, general and administrative expenses as a percentage of consolidated net sales were 23.8% in the current quarter as compared to 23.2% in the prior quarter and 29.9% in the current year twenty-six week period as compared
to 28.9% in the prior year twenty-seven week period.

OTHER (INCOME) EXPENSE

Other expense from continuing operations decreased by $1.3 million, to $6.0 million in the thirteen-week period ended December 29, 2007, from $7.3 million in the thirteen-week period ended December 30, 2006.
The other expense for the thirteen weeks ended December 29, 2007 was primarily comprised of $6.4 million in net interest expense, partially offset by $0.3 million of net gain on our debt prepayment (as discussed in Note 8-Borrowing
Arrangements in Item I in this Form 10-Q) and $0.1 million of net other income. The other expense for the thirteen weeks ended December 30, 2006, was primarily comprised of net interest expense of $7.4 million, partially offset by $0.1
million in other income related to legal settlements.

Other (income) expense decreased $13.4 million, to $12.2 million of other expense in the twenty-six
week period ended December 29, 2007 compared to $1.2 million of other income in the twenty-seven week period ended December 30, 2006. The other expense for the current fiscal period was primarily comprised of net interest expense of $12.4
million, partially offset by the gain on debt prepayment as noted above. The other income for the twenty-seven weeks ended December 30, 2006 included the recognition of a non-cash curtailment gain of $15.8 million associated with the soft
freeze of our qualified and non-qualified pension plans, partially offset by net interest expense of $14.7 million. The decrease in net interest expense from the prior year was primarily attributable to lower borrowings on our revolving credit
facility and lower variable interest rates on our floating rate senior notes.

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. For fiscal 2008, the difference in the effective rate and the federal statutory rate is primarily due to state income taxes.

EBITDA

Our earnings before income taxes, interest, and depreciation and amortization (EBITDA) from continuing operations for the
thirteen-week period ended December 29, 2007 increased $1.4 million from the prior year, primarily due to improved operating results, as described above. EBITDA from continuing operations for the twenty six-week period ended December 29,
2007 decreased $17.7 million from the prior year primarily due to the prior year pension curtailment gain, which resulted in a $15.8 million benefit to EBITDA in the first quarter of fiscal 2007, and to a lesser extent, due to higher selling,
general and administrative expenses, as described above.



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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 from continuing operations to net cash provided by operating activities, which we believe to be
the closest GAAP liquidity measure to EBITDA, and net income, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in millions). Certain rounded amounts below have been adjusted in order to agree to net income from
continuing operations.



|                                                                       |  |                                     |       |   |                                     |   |       |                                       |  |   |                                         |   |  |   |       |  
|---------------------------------------------------------------------- |  | ----------------------------------- | ----- | - | ----------------------------------- | - | ----- | ------------------------------------- |  | - | --------------------------------------- | - |  | - | ----- | -
|                                                                       |  | Thirteenweeks endedDecember 29,2007 |       |   | Thirteenweeks endedDecember 30,2006 |   |       | Twenty-sixweeks
endedDecember 29,2007 |  |   | Twenty-sevenweeks
endedDecember 30,2006 |  
|Net income from continuing operations                                  |  | $                                   | 65.9  |   |                                     | $ | 61.7  |                                       |  | $ | 49.9                                    |   |  | $ | 57.2  |  
|Interest expense, net from continuing operations                       |  |                                     | 6.4   |   |                                     |   | 7.4   |                                       |  |   | 12.4                                    |   |  |   | 14.7  |  
|Provision for income taxes from continuing operations                  |  |                                     | 38.0  |   |                                     |   | 39.8  |                                       |  |   | 28.6                                    |   |  |   | 37.0  |  
|Depreciation and amortization from continuing operations               |  |                                     | 4.9   |   |                                     |   | 4.9   |                                       |  |   | 9.6                                     |   |  |   | 9.3   |  
|                                                                       |  |                                     |       |   |                                     |   |       |                                       |  |   |                                         |   |  |   |       |  
|EBITDA from continuing operations                                      |  | $                                   | 115.2 |   |                                     | $ | 113.8 |                                       |  | $ | 100.5                                   |   |  | $ | 118.2 |  
|                                                                       |  |                                     |       |  
|Interest expense, net from continuing operations                       |  |                                     | (6.4  | ) |                                     |   | (7.4  | )                                     |  |   | (12.4                                   | ) |  |   | (14.7 | )
|Provision for income taxes from continuing operations                  |  |                                     | (38.0 | ) |                                     |   | (39.8 | )                                     |  |   | (28.6                                   | ) |  |   | (37.0 | )
|Amortization of deferred financing costs                               |  |                                     | 0.6   |   |                                     |   | 0.7   |                                       |  |   | 1.3                                     |   |  |   | 1.4   |  
|Stock option compensation expense                                      |  |                                     | 0.2   |   |                                     |   | 0.2   |                                       |  |   | 0.3                                     |   |  |   | 0.3   |  
|Loss on disposal and impairment of fixed assets                        |  |                                     | 0.4   |   |                                     |   | 0.1   |                                       |  |   | 0.5                                     |   |  |   | 0.2   |  
|Gain on short-term investments                                         |  |                                     |      |   |                                     |   |      |                                       |  |   | (0.2                                    | ) |  |   |      |  
|Deferred income taxes                                                  |  |                                     | (17.1 | ) |                                     |   | 39.7  |                                       |  |   | (26.8                                   | ) |  |   | 36.6  |  
|Gain on debt prepayment                                                |  |                                     | (0.3  | ) |                                     |   |      |                                       |  |   | (0.3                                    | ) |  |   |      |  
|Pension curtailment gain                                               |  |                                     |      |   |                                     |   |      |                                       |  |   |                                        |   |  |   | (15.8 | )
|Changes in operating assets and liabilities from continuing operations |  |                                     | 156.5 |   |                                     |   | 107.6 |                                       |  |   | 88.6                                    |   |  |   | 54.7  |  
|Net cash provided by (used in) discontinued operations                 |  |                                     | (0.7  | ) |                                     |   | 0.7   |                                       |  |   | 1.9                                     |   |  |   | (2.8  | )
|                                                                       |  |                                     |       |   |                                     |   |       |                                       |  |   |                                         |   |  |   |       |  
|Net cash provided by operating activities                              |  | $                                   | 210.4 |   |                                     | $ | 215.6 |                                       |  | $ | 124.8                                   |   |  | $ | 141.1 |  
|                                                                       |  |                                     |       |   |                                     |   |       |                                       |  |   |                                         |   |  |   |       |  

In the thirteen-week period ended December 29, 2007, net income and EBITDA from continuing operations
included:



| |  |  | $1.2 million of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | $0.4 million loss on disposal and impairment of fixed assets;
| | - |  | -------------------------------------------------------------



| |  |  | $0.3 million net gain on prepayment of long-term debt;
| | - |  | ------------------------------------------------------



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



| |  |  | $0.2 million of severance and re-organization payroll and benefits.
| | - |  | -------------------------------------------------------------------

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



| |  |  | $2.4 million of consulting fees associated with the implementation of our ERP software project, other IT strategy projects and, to a lesser extent, employee
executive recruiting charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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In the twenty-six week period ended December 29, 2007, net income and EBITDA from continuing operations included:



| |  |  | $1.8 million of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | $0.5 million loss on disposal and impairment of fixed assets;
| | - |  | -------------------------------------------------------------



| |  |  | $0.3 million net gain on prepayment of long-term debt;
| | - |  | ------------------------------------------------------



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



| |  |  | $0.3 million of costs associated with legal settlements; and
| | - |  | ------------------------------------------------------------



| |  |  | $0.4 million of severance and re-organization payroll and benefits;
| | - |  | -------------------------------------------------------------------

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



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



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



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



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



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



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

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity and capital resource needs are to service our debt, finance working capital and make
capital expenditures. At December 29, 2007, our primary sources of liquidity were cash and cash equivalents of $179.8 million and unused borrowings under our revolving credit facility of approximately $123.8 million to the extent of our current
available borrowing base. As of December 29, 2007, we had no borrowings outstanding and $1.2 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit facility are
determined in accordance with our asset-based debt limitation formula. Total available borrowings at December 29, 2007, were approximately $59.8 million. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit
facility to finance operations leading up to the December holiday selling season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday
selling season. Generally, cash provided by operations peaks during the fourth calendar quarter (our second fiscal quarter) because of the holiday selling season (see Seasonality below).

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

Cash Flows Provided by Operating Activities from Continuing Operations

Cash provided by operating activities from continuing operations totaled $122.9 million in the twenty-six week period ended December 29, 2007, compared to $143.9 million in the twenty-seven week period ended December 30, 2006. The
$21.0 million decrease over prior year was primarily attributable to the use of working capital to fund accounts payable and incentive compensation payments.



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

Cash provided by investing activities from continuing operations totaled $13.3 million in the twenty-six week period ended

December 29, 2007, compared to a usage of $10.4 million in the twenty-seven week period ended December 30, 2006. Investing activities in the first half of
fiscal 2008 consisted primarily of proceeds from short-term investments, partially offset by capital expenditures highlighted by spending for new stores, our optical defect pear sorter, and our ERP system implementation.

Cash Flows Provided by Financing Activities from Continuing Operations

Cash used in financing activities from continuing operations totaled $10.7 million for the twenty-six weeks ended December 29, 2007, compared to a $1.0 million source of cash provided in the twenty-seven weeks ended December 30,
2006. Financing activities in the first half of fiscal 2008 primarily consisted of borrowings and repayments on our revolving credit facility, $9.4 million repayments for our senior notes and $1.4 million in repayments for our capital lease
obligations. The financing activities in the prior fiscal period were primarily comprised of borrowings and repayments on our revolving credit facility and $1.0 million in cash provided by proceeds from stock option exercises.

Cash Flows from Discontinued Operations

Cash flows provided by
operating activities from discontinued operations totaled $1.9 million for the twenty-six weeks ended December 29, 2007, compared to a cash usage of $2.8 million in the twenty-seven weeks ended December 30, 2006. The increase in operating
cash for the twenty-six weeks ended December 29, 2007 compared to the twenty-seven weeks ended December 30, 2006, was due to cash payments made to us for transitional services we provided to the buyers of Jackson & Perkins. Cash
flows provided by investing activities were $3.1 million for the twenty-six weeks ended December 29, 2007 and were primarily comprised of the proceeds received for certain amounts due in connection with the sale of Jackson & Perkins in
the fourth quarter of fiscal 2007. Cash flows used by investing activities were $0.2 million in the twenty-seven weeks ended December 30, 2006, consisting primarily of capital expenditures in the prior year period.

The sale of the Jackson & Perkins business did not impact our cash flows from financing activities.

Borrowing Arrangements

Revolving Credit Facility

Our principal sources of liquidity are available cash, cash flows from operations, borrowings under our revolving credit facility originally
entered into by our previous subsidiary, Harry & David Operations Corp., on November 30, 2007 Harry & David Operations, Corp. merged with and into Harry and David, pursuant to an internal corporate re-organization, and Harry and
David entered into an assumption agreement with our lenders whereby Harry and David became the borrower and assumed all payment obligations under the credit agreement. See also Note-14 Condensed Consolidating Financial Statements in Item
I in this Form 10-Q for further information on our internal corporate re-organization.

The revolving credit facility has a maturity date of March 20,
2011. Our ability to borrow under the revolving credit facility is subject to compliance with the borrowing base and with financial covenants and other customary conditions, including that no default under the facility shall have occurred and be
continuing. Borrowings under the revolving credit facility bear interest, at our option, at either a base rate, based on the higher of the federal funds rate plus 0.5% or the corporate base lending rate of UBS AG, or a Eurodollar rate, based on the
rate offered in the London interbank market (LIBOR), plus in each case a borrowing margin determined based on our consolidated leverage ratio.

Due to the seasonal nature of our business, we draw on our revolving credit facility to provide seasonal working capital to support inventory buildup and catalog production in advance of the holiday selling season and for other general
corporate purposes. We have consistently generated substantial amounts of cash each holiday selling season. We are required by our banks to pay down the revolving credit facility to zero by the next business day following December 25th of each
year. Cash generated during the holiday selling season is also typically used to fund our operations for several months during the post-holiday selling season, until we begin to build inventories and other working capital components to support our
next holiday selling season.

As of December 29, 2007, we had no outstanding borrowings and $1.2 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 December 29, 2007, were approximately



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$59.8 million. We are required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of
credit. The commitments fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the consolidated statement of operations.

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

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

In addition, the revolving credit facility requires that, on a consolidated basis, we maintain as of
December 31 each year an available cash balance (defined as all cash, cash equivalents and short-term investments, minus all accounts payable) of $50.0 million, failing which we are required to meet and maintain a minimum fixed charge coverage
ratio, subject to certain definitions and conditions. We also are limited to amount of capital expenditures in each fiscal year, subject to certain adjustments, through the term of the revolving credit facility.

Our ability to comply with these covenants and to meet and maintain such financial ratios and tests may be affected by events beyond our control, such as those described
under Item 1A  Risk Factors in our Annual Report on Form 10-K. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and
payable which could also trigger a similar right under other agreements, including our indenture. At December 29, 2007, we were in compliance with our covenants.

Long-term Debt

In February 2005, Harry & David Operations, Corp. 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). In fiscal 2006, Harry & David Operations, Corp. completed the public exchange
offer for 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 10.12% and 10.36% at December 29, 2007, and June 30, 2007,
respectively. The $175.0 million of Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first of March and December.

During the twenty-six weeks ended December 29, 2007, we prepaid $9.4 million of our fixed and floating rate Senior Notes in open market purchases. The debt prepayment resulted in a net gain of $0.3 million,
comprised of a $0.6 million discount on the repayment of $10.0 million of outstanding principal of the Senior Notes, partially offset by the write-off of $0.3 million of unamortized deferred financing costs and third-party expenses of less than $0.1
million relating to the debt prepayment. Subsequent to our debt prepayment, we had $68.0 million in Senior Floating Rate Notes and $167.0 million in Senior Fixed Rate outstanding as of December 29, 2007.

In the fourth quarter of fiscal 2007, we completed the sale of the Jackson & Perkins businesses,
including the direct marketing and wholesale business, the Jackson & Perkins® brand, catalog, e-commerce website and associated inventories and in a separate transaction, completed
the sale of the land and assets used by the Jackson & Perkins rose growing operations. Since we have applied the net proceeds from the sale of Jackson & Perkins businesses and assets to pay down the our revolver, for working
capital and for capital expenditures, and for the purchase of Wolfermans LLC as described in Note 15  Subsequent Events, then under the asset sale covenant of the indenture, we will not be required to make an offer to
repurchase the Senior Notes.



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On November 30, 2007, in connection with an internal corporate re-organization, Harry & David Operations,
Corp. merged with and into Harry and David, its wholly-owned subsidiary, and Harry and David assumed all of Harry & David Operations Corp.s obligations under the Senior Notes pursuant to a supplemental indenture.

The Senior Notes represent the senior unsecured obligations of Harry and David and are guaranteed on a senior unsecured basis by Harry & David Holdings,
Inc. and all of our subsidiaries. See Note 14Condensed Consolidating Financial Statements in Item I in this Form 10-Q. 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 subsidiaries ability to pay dividends and other restricted payments, our ability to incur liens and transactions with
affiliates. Our ability to comply with these covenants may be affected by events beyond our control, such as those described under Risk Factors in our Annual Report on Form 10-K. If we do not remain in compliance with these covenants, we
may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could accelerate all amounts outstanding to be immediately due and payable.

At December 29, 2007, we were in compliance with all of our covenants under the indenture. Our debt service requirements consist primarily of interest expense on
the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under various
operating leases and repayment of any borrowings under our revolving credit facility.

Although we do not have an extensive history of acquisitions, we may
make acquisitions in the future. While our recent acquisition of Wolfermans, LLC was financed with cash on hand, we expect to finance any future acquisitions using cash, capital stock, debt securities or the assumption of indebtedness.
However, the restrictions imposed on us by the agreements governing our debt outstanding at the time may affect this strategy. In addition, to 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.



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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.

Income Taxes

We account for income taxes under the liability method pursuant to SFAS 109. Under this method,
deferred income tax liabilities and assets are based on the difference between the financial statements and tax basis of assets and liabilities multiplied by the expected tax rate in the year the differences are expected to reverse. Deferred income
tax expense or benefit results from the change in the net deferred tax asset or liability between periods.

We record a valuation allowance to reduce our
deferred tax assets to an amount that is more likely than not to be realized. We have considered carryback and carryforward periods, historical and forecasted income, the apportioned earnings in the jurisdictions in which we and our subsidiaries
operate, and tax planning strategies in estimating a valuation allowance against our deferred tax assets. If we determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized, an adjustment to the
deferred tax assets is charged to earnings in the period in which we make such a determination. Conversely, if we determine that it is more likely than not that the deferred tax assets will be realized, we would reverse the applicable portion of the
previously estimated valuation allowance.

The amount of income taxes we pay is subject to periodic audits by federal and state tax authorities and these
audits may result in proposed deficiency assessments. In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes,(FIN 48) which clarifies the accounting for uncertainty in income taxes in an
enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 as of July 1,
2007.

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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

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

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

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



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



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



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



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



| |  |  | 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.



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INTEREST RATE RISK

Interest on our floating rate notes and on our borrowings under the revolving credit facility accrues at variable rates based on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow the entire amount
available under our revolving credit facility, together with the floating rate notes, a 1.0% change in the interest rate on our variable rate debt would result in a $1.93 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 December 29, 2007. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that, as of December 29, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure.

We are assessing our internal controls and procedures over financial reporting and will take action as
necessary or appropriate to address any matters we identify 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
|------- | -----------------

For details regarding our legal proceedings, see
Footnote 12  Commitments and Contingencies within Part I of this Form 10-Q.



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

There have been no material changes from the risk
factors disclosed under Risk Factors in Item 1.A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, except as set forth below:

Implementation of the ERP System may pose certain risks

The Company is currently planning to implement portions of
the Enterprise Resource Planning (ERP) System, impacting purchasing, manufacturing and accounts payable function during the last month of the third quarter of fiscal 2008 (i.e. February 24, 2008, the beginning of fiscal March). There are
inherent risks associated with replacing our core systems, including that we may be unable to successfully launch new systems or that the launch may occur with disruptions. Any disruptions could cause us to incur unanticipated expenses, thereby
reducing our profitability. Disruptions in the launch may also prevent us from being able to timely close and report our third quarter results.



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

During
the thirteen and twenty-six week periods ending December 29, 2007, we issued and sold an aggregate amount of 175 and 329 shares of common stock, respectively, par value $0.01 per share, upon exercise of employee stock options under our Amended
and Restated 2004 Stock Option Plan for an aggregate consideration of less than $0.1 million in cash. These issuances of common stock were made in reliance on Section 4(2) of the Securities Act of 1933, as amended.



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

None.



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

None.



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

None.



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



|     |  |                                                                                                                                                                                                                                     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | First Supplemental Indenture among Harry and David, Wells Fargo Bank, N.A. and the Guarantors party thereto, dated as of November 30, 2007, filed herewith.                                                                         
|     | 
|10.2 |  | Assumption Agreement among Harry and David, UBS AG, Stamford Branch, as Administrative Agent and GMAC Commercial Finance, LLC, as Collateral Agent, and the Guarantors party thereto, dated as of
November 30, 2007, filed herewith.
|     | 
|31.1 |  | Certification of Principal Executive Officer                                                                                                                                                                                        
|     | 
|31.2 |  | Certification of Principal Financial Officer                                                                                                                                                                                        
|     | 
|32.1 |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer                                                                                                                                                   



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SIGNATURES

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



HARRY & DAVID HOLDINGS, INC.By:

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

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


Date: February 8, 2008



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