##### 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 March 28, 2009

or



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

For the transition period from  to

Commission File Number 333-127173





Harry & David
Holdings, Inc.

(Exact name of registrant as specified in its charter)







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

(541) 864-2362

(Registrants telephone number including area code)

None

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





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

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

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

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

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

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



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class                        |  | Outstanding as of May 1, 2009
|Common stock $0.01 par value |  | 1,033,295                    









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##### Table of Contents

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |                                                                                                                                                                          |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                              |  |                                                                                                                                                                          |  | Page
|Part I. Financial Information |  |                                                                                                                                                                         
|                              |  |                                                                                                                                                                         
|Item 1.                       |  | Condensed Consolidated (unaudited) Financial Statements                                                                                                                  |  | 3   
|                              |  |                                                                                                                                                                         
|                              |  | Condensed Consolidated Balance Sheets  as of March 28, 2009, June 28, 2008 and March 29,
2008                                                                           |  | 3   
|                              |  |                                                                                                                                                                         
|                              |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended March 28, 2009 and March 
29, 2008, and Thirty-nine Weeks ended March 28, 2009 and March 29, 2008 |  | 4   
|                              |  |                                                                                                                                                                         
|                              |  | Condensed Consolidated Statements of Cash Flows  Thirty-nine Weeks ended March 28, 2009 and March 29,
2008                                                              |  | 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                                                                                                               |  | 37  
|                              |  |                                                                                                                                                                         
|Item 4.                       |  | Controls and Procedures                                                                                                                                                  |  | 38  
|                              | 
|Part II. Other Information    |  |                                                                                                                                                                         
|                              |  |                                                                                                                                                                         
|Item 1.                       |  | Legal Proceedings                                                                                                                                                        |  | 38  
|                              |  |                                                                                                                                                                         
|Item 1A.                      |  | Risk Factors                                                                                                                                                             |  | 38  
|                              |  |                                                                                                                                                                         
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                              |  | 38  
|                              |  |                                                                                                                                                                         
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                          |  | 38  
|                              |  |                                                                                                                                                                         
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                      |  | 38  
|                              |  |                                                                                                                                                                         
|Item 5.                       |  | Other Information                                                                                                                                                        |  | 38  
|                              |  |                                                                                                                                                                         
|Item 6.                       |  | Exhibits                                                                                                                                                                 |  | 38  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share and Per Share Data)



|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | ------------- |  | - | ------- | -
|                                                                                                                                                                                                |  | March 28,2009 |         |   | June 28,2008 |   |         | March 29,2008 | 
|                                                                                                                                                                                                |  | Unaudited     |         |   |              |   |         | Unaudited     | 
|Assets                                                                                                                                                                                          |  |               |         |   |              |   |         |               |  |   |         |  
|Current assets                                                                                                                                                                                  |  |               |         |   |              |   |         |               |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                       |  | $             | 33,581  |   |              | $ | 40,792  |               |  | $ | 80,132  |  
|Short-term investments                                                                                                                                                                          |  |               |        |   |              |   | 15,033  |               |  |   | 10,000  |  
|Trade accounts receivable, net                                                                                                                                                                  |  |               | 4,184   |   |              |   | 2,084   |               |  |   | 3,201   |  
|Other receivables                                                                                                                                                                               |  |               | 3,459   |   |              |   | 2,843   |               |  |   | 4,816   |  
|Inventories, net                                                                                                                                                                                |  |               | 41,366  |   |              |   | 54,463  |               |  |   | 48,293  |  
|Deferred catalog expenses                                                                                                                                                                       |  |               | 4,265   |   |              |   | 6,258   |               |  |   | 5,328   |  
|Deferred income taxes                                                                                                                                                                           |  |               | 1,010   |   |              |   | 3,230   |               |  |   | 2,771   |  
|Other current assets                                                                                                                                                                            |  |               | 8,866   |   |              |   | 7,491   |               |  |   | 10,234  |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total current assets                                                                                                                                                                            |  |               | 96,731  |   |              |   | 132,194 |               |  |   | 164,775 |  
|Fixed assets, net                                                                                                                                                                               |  |               | 150,528 |   |              |   | 162,214 |               |  |   | 162,950 |  
|Goodwill                                                                                                                                                                                        |  |               | 11,000  |   |              |   | 3,690   |               |  |   | 3,454   |  
|Intangibles, net                                                                                                                                                                                |  |               | 33,418  |   |              |   | 45,677  |               |  |   | 46,267  |  
|Deferred financing costs, net                                                                                                                                                                   |  |               | 6,568   |   |              |   | 9,266   |               |  |   | 9,914   |  
|Other assets                                                                                                                                                                                    |  |               | 3,403   |   |              |   | 3,596   |               |  |   | 4,005   |  
|Deferred income taxes                                                                                                                                                                           |  |               | 324     |   |              |   |        |               |  |   |        |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total assets                                                                                                                                                                                    |  | $             | 301,972 |   |              | $ | 356,637 |               |  | $ | 391,365 |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Liabilities and stockholders equity (deficit)                                                                                                                                                  |  |               |         |   |              |   |         |               |  |   |         |  
|Current liabilities                                                                                                                                                                             |  |               |         |   |              |   |         |               |  |   |         |  
|Accounts payable                                                                                                                                                                                |  | $             | 10,299  |   |              | $ | 18,981  |               |  | $ | 13,272  |  
|Accrued payroll and benefits                                                                                                                                                                    |  |               | 14,437  |   |              |   | 14,052  |               |  |   | 14,611  |  
|Deferred revenue                                                                                                                                                                                |  |               | 22,497  |   |              |   | 17,072  |               |  |   | 24,651  |  
|Income taxes payable                                                                                                                                                                            |  |               | 19,360  |   |              |   | 23,610  |               |  |   | 40,444  |  
|Accrued interest                                                                                                                                                                                |  |               | 1,470   |   |              |   | 5,523   |               |  |   | 1,856   |  
|Other accrued liabilities                                                                                                                                                                       |  |               | 3,879   |   |              |   | 4,527   |               |  |   | 3,241   |  
|Current portion of capital lease obligations                                                                                                                                                    |  |               | 642     |   |              |   | 647     |               |  |   | 318     |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total current liabilities                                                                                                                                                                       |  |               | 72,584  |   |              |   | 84,412  |               |  |   | 98,393  |  
|Long-term debt and capital lease obligations                                                                                                                                                    |  |               | 198,671 |   |              |   | 235,599 |               |  |   | 235,351 |  
|Accrued pension liabilities                                                                                                                                                                     |  |               | 24,088  |   |              |   | 17,494  |               |  |   | 15,416  |  
|Deferred income taxes                                                                                                                                                                           |  |               |        |   |              |   | 4,074   |               |  |   | 1,528   |  
|Other long-term liabilities                                                                                                                                                                     |  |               | 10,162  |   |              |   | 10,906  |               |  |   | 10,751  |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total liabilities                                                                                                                                                                               |  |               | 305,505 |   |              |   | 352,485 |               |  |   | 361,439 |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Commitments and contingencies (Note 12)                                                                                                                                                         |  |               |         |   |              |   |         |               |  |   |         |  
|Stockholders equity (deficit)                                                                                                                                                                  |  |               |         |   |              |   |         |               |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,033,295, 1,033,295 and 1,032,614 shares at
March 28, 2009, June 28, 2008 and March 29, 2008, respectively |  |               | 10      |   |              |   | 10      |               |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                                      |  |               | 6,547   |   |              |   | 6,191   |               |  |   | 5,996   |  
|Accumulated other comprehensive income (loss), net of taxes                                                                                                                                     |  |               | (7,992  | ) |              |   | (3,558  | )             |  |   | (2,004  | )
|Retained earnings (accumulated deficit)                                                                                                                                                         |  |               | (2,098  | ) |              |   | 1,509   |               |  |   | 25,924  |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                            |  |               | (3,533  | ) |              |   | 4,152   |               |  |   | 29,926  |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                            |  | $             | 301,972 |   |              | $ | 356,637 |               |  | $ | 391,365 |  
|                                                                                                                                                                                                |  |               |         |   |              |   |         |               |  |   |         |  

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)



|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|------------------------------------------------------------ | ------------- | -------------------- | --------- | ------------- | ----------------------- | - | ------------- | - |  | ------------- | --------- | - |  | - | --------- | -
|                                                             |               | Thirteen Weeks Ended |           |               | Thirty-nine Weeks Ended |  
|                                                             | March 28,2009 |                      |           | March 29,2008 |                         |   | March 28,2009 |   |  | March 29,2008 |          
|Net sales                                                    |               | $                    | 74,912    |               |                         | $ | 68,315        |   |  | $             | 435,245   |   |  | $ | 487,747   |  
|Cost of goods sold                                           |               |                      | 52,194    |               |                         |   | 48,546        |   |  |               | 249,702   |   |  |   | 252,149   |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Gross profit                                                 |               |                      | 22,718    |               |                         |   | 19,769        |   |  |               | 185,543   |   |  |   | 235,598   |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Operating expenses:                                          |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Selling, general and administrative                          |               |                      | 48,548    |               |                         |   | 46,969        |   |  |               | 190,917   |   |  |   | 171,676   |  
|Selling, general and administrative  related party          |               |                      | 250       |               |                         |   | 250           |   |  |               | 750       |   |  |   | 750       |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|                                                             |               |                      | 48,798    |               |                         |   | 47,219        |   |  |               | 191,667   |   |  |   | 172,426   |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Operating income (loss)                                      |               |                      | (26,080   | )             |                         |   | (27,450       | ) |  |               | (6,124    | ) |  |   | 63,172    |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Other (income) expense:                                      |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Interest income                                              |               |                      | (22       | )             |                         |   | (1,292        | ) |  |               | (246      | ) |  |   | (2,157    | )
|Interest expense                                             |               |                      | 4,870     |               |                         |   | 6,059         |   |  |               | 16,694    |   |  |   | 19,363    |  
|Gain on debt repayment                                       |               |                      |          |               |                         |   |              |   |  |               | (15,416   | ) |  |   | (303      | )
|Other (income) expense, net                                  |               |                      | (27       | )             |                         |   | 7             |   |  |               | (50       | ) |  |   | 55        |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|                                                             |               |                      | 4,821     |               |                         |   | 4,774         |   |  |               | 982       |   |  |   | 16,958    |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Income (loss) from continuing operations before income taxes |               |                      | (30,901   | )             |                         |   | (32,224       | ) |  |               | (7,106    | ) |  |   | 46,214    |  
|Provision (benefit) for income taxes                         |               |                      | (12,702   | )             |                         |   | (11,227       | ) |  |               | (3,165    | ) |  |   | 17,333    |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Net income (loss) from continuing operations                 |               |                      | (18,199   | )             |                         |   | (20,997       | ) |  |               | (3,941    | ) |  |   | 28,881    |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Discontinued operations:                                     |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Gain on sale of Jackson & Perkins                            |               |                      | 22        |               |                         |   | 42            |   |  |               | 64        |   |  |   | 242       |  
|Operating income (loss) from discontinued operations         |               |                      | 146       |               |                         |   | 274           |   |  |               | 485       |   |  |   | (28       | )
|Provision for income taxes on discontinued operations        |               |                      | 69        |               |                         |   | 110           |   |  |               | 215       |   |  |   | 72        |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Net income from discontinued operations                      |               |                      | 99        |               |                         |   | 206           |   |  |               | 334       |   |  |   | 142       |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Net income (loss)                                            |               | $                    | (18,100   | )             |                         | $ | (20,791       | ) |  | $             | (3,607    | ) |  | $ | 29,023    |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Basic net income (loss) per share (Note 10):                 |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Continuing operations                                        |               |                      | (17.61    | )             |                         |   | (20.33        | ) |  |               | (3.81     | ) |  |   | 27.97     |  
|Discontinued operations                                      |               |                      | 0.10      |               |                         |   | 0.20          |   |  |               | 0.32      |   |  |   | 0.14      |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Total basic net income (loss) per share                      |               | $                    | (17.52    | )             |                         | $ | (20.14        | ) |  | $             | (3.49     | ) |  | $ | 28.11     |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Diluted net income (loss) per share (Note 10):               |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Continuing operations                                        |               |                      | (17.61    | )             |                         |   | (20.33        | ) |  |               | (3.81     | ) |  |   | 27.69     |  
|Discontinued operations                                      |               |                      | 0.10      |               |                         |   | 0.20          |   |  |               | 0.32      |   |  |   | 0.14      |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Total diluted net income (loss) per share                    |               | $                    | (17.52    | )             |                         | $ | (20.14        | ) |  | $             | (3.49     | ) |  | $ | 27.82     |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Weighted-average shares used in per share calculations:      |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Basic                                                        |               |                      | 1,033,295 |               |                         |   | 1,032,576     |   |  |               | 1,033,295 |   |  |   | 1,032,455 |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  
|Diluted                                                      |               |                      | 1,033,295 |               |                         |   | 1,032,576     |   |  |               | 1,033,295 |   |  |   | 1,043,111 |  
|                                                             |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |           |  

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)



|                                                                                                                                               |               |                         |          |               |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----------------------- | -------- | ------------- |  | - | ------- | -
|                                                                                                                                               |               | Thirty-nine Weeks Ended |         
|                                                                                                                                               | March 28,2009 |                         |          | March 29,2008 | 
|Operating activities                                                                                                                           |               |                         |          |               |  |   |         |  
|Net income (loss)                                                                                                                              |               | $                       | (3,607   | )             |  | $ | 29,023  |  
|Less: Net income (loss) from discontinued operations                                                                                           |               |                         | 334      |               |  |   | 142     |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net income (loss) from continuing operations                                                                                                   |               |                         | (3,941   | )             |  |   | 28,881  |  
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities from continuing operations: |               |                         |          |               |  |   |         |  
|Depreciation and amortization of fixed assets                                                                                                  |               |                         | 14,388   |               |  |   | 13,464  |  
|Amortization of intangible assets                                                                                                              |               |                         | 1,397    |               |  |   | 1,532   |  
|Amortization of deferred financing costs                                                                                                       |               |                         | 1,842    |               |  |   | 1,956   |  
|Stock option compensation expense                                                                                                              |               |                         | 356      |               |  |   | 414     |  
|Loss on disposal and impairment of fixed assets and other long-lived assets                                                                    |               |                         | 15,070   |               |  |   | 1,700   |  
|Gains on short-term investments                                                                                                                |               |                         | (64      | )             |  |   | (162    | )
|Deferred income taxes                                                                                                                          |               |                         | 471      |               |  |   | (27,362 | )
|Amortization of deferred pension loss, net of taxes                                                                                            |               |                         | 1,418    |               |  |   |        |  
|Gain on debt repayment                                                                                                                         |               |                         | (15,416  | )             |  |   | (303    | )
|Changes in operating assets and liabilities:                                                                                                   |               |                         |          |               |  |   |         |  
|Trade accounts receivable and other receivables                                                                                                |               |                         | (2,997   | )             |  |   | (1,978  | )
|Inventories                                                                                                                                    |               |                         | 13,741   |               |  |   | 15,791  |  
|Deferred catalog expenses and other assets                                                                                                     |               |                         | 969      |               |  |   | (785    | )
|Accounts payable                                                                                                                               |               |                         | (8,838   | )             |  |   | (10,586 | )
|Accrued liabilities                                                                                                                            |               |                         | (5,482   | )             |  |   | (9,104  | )
|Income taxes                                                                                                                                   |               |                         | (4,250   | )             |  |   | 41,218  |  
|Accrued pension liabilities                                                                                                                    |               |                         | (2,122   | )             |  |   | (5,368  | )
|Deferred revenue                                                                                                                               |               |                         | 5,425    |               |  |   | 8,659   |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net cash provided by operating activities from continuing operations                                                                           |               |                         | 11,967   |               |  |   | 57,967  |  
|Net cash provided by operating activities from discontinued operations                                                                         |               |                         | 881      |               |  |   | 3,086   |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net cash provided by operating activities                                                                                                      |               |                         | 12,848   |               |  |   | 61,053  |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Investing activities                                                                                                                           |               |                         |          |               |  |   |         |  
|Acquisition of fixed assets                                                                                                                    |               |                         | (6,005   | )             |  |   | (14,638 | )
|Acquisition of business                                                                                                                        |               |                         | (8,509   | )             |  |   | (23,104 | )
|Acquisition of available-for-sale securities                                                                                                   |               |                         |         |               |  |   | (10,000 | )
|Proceeds from the sale of fixed assets                                                                                                         |               |                         | 19       |               |  |   | 21      |  
|Proceeds from the sale of held-to-maturity securities                                                                                          |               |                         | 5,000    |               |  |   |        |  
|Proceeds from the sale of available-for-sale securities                                                                                        |               |                         | 10,097   |               |  |   | 24,978  |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net cash provided by (used in) investing activities from continuing operations                                                                 |               |                         | 602      |               |  |   | (22,743 | )
|Net cash provided by investing activities from discontinued operations                                                                         |               |                         |         |               |  |   | 3,161   |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net cash provided by (used in) investing activities                                                                                            |               |                         | 602      |               |  |   | (19,582 | )
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Financing activities                                                                                                                           |               |                         |          |               |  |   |         |  
|Borrowings of revolving debt                                                                                                                   |               |                         | 113,000  |               |  |   | 63,000  |  
|Repayments of revolving debt                                                                                                                   |               |                         | (113,000 | )             |  |   | (63,000 | )
|Repayments of capital lease obligations                                                                                                        |               |                         | (295     | )             |  |   | (1,366  | )
|Repayments of long-term debt                                                                                                                   |               |                         | (20,366  | )             |  |   | (9,405  | )
|Payments for deferred financing costs                                                                                                          |               |                         |         |               |  |   | (10     | )
|Proceeds from exercise of stock options                                                                                                        |               |                         |         |               |  |   | 34      |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Net cash used in financing activities from continuing operations                                                                               |               |                         | (20,661  | )             |  |   | (10,747 | )
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                                                                               |               |                         | (7,211   | )             |  |   | 30,724  |  
|Cash and cash equivalents, beginning of period                                                                                                 |               |                         | 40,792   |               |  |   | 49,408  |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  
|Cash and cash equivalents, end of period                                                                                                       |               | $                       | 33,581   |               |  | $ | 80,132  |  
|                                                                                                                                               |               |                         |          |               |  |   |         |  

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) is a vertically integrated multichannel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and gifts marketed under the Harry and David®, Wolfermans® and Cushmans brands. For information regarding the Companys
recent acquisitions, see Note 4  Acquisitions. The Company markets and sells its products through catalogs distributed through the mail, the Internet, business-to-business and consumer telemarketing, Company-owned stores and
wholesale distribution to other retailers.

During the fourth quarter of fiscal 2007, the Company divested its Jackson & Perkins business. The
results of operations and cash flows of the Jackson & Perkins business are reported as discontinued operations. 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 March 28, 2009 and March 29, 2008, the condensed consolidated statements of operations for the thirteen-week and the thirty-nine week periods ended March 28,
2009 and March 29, 2008, and the condensed consolidated statements of cash flows for the thirty-nine week periods ended March 28, 2009 and March 29, 2008, 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 typically
recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen-week and thirty-nine week periods then ended. Significant intercompany balances and transactions have
been eliminated in consolidation. The condensed consolidated balance sheet at June 28, 2008 presented in this Form 10-Q has been derived from the Companys audited balance sheet not included in this report.

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

The 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 audited financial statements. As allowed, certain
notes and other information have been condensed or omitted from the interim condensed consolidated financial statements presented in this Form 10-Q. For further information, refer to the consolidated financial statements and the notes thereto for
the year ended June 28, 2008, not included in this report.

Certain reclassifications have been made to the prior year to conform to the current year
presentation. The Company has reclassified activity related to its accrued pension liabilities and income taxes to individual captions on its condensed consolidated statement of cash flows. In the prior period the activity related to accrued pension
liabilities and income taxes were included within Accrued Liabilities in the statement of cash flows. Additionally, the Company has reclassified amounts related to its outstanding gift cards to Deferred Revenue from
Accrued Liabilities and amounts related to securities to Short-term investments from Cash and cash equivalents in the condensed consolidated balance sheets with corresponding reclassifications on its condensed
consolidated statements of cash flows.

In addition to prior period reclassifications, as described in Note 4  Acquisitions the Company
recorded reclassification from Intangibles, net to Goodwill related to a purchase price allocation associated with its Wolfermans acquisition. The Company has also reclassified revenue from commercial fruit sales from
the Other segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. In the current fiscal year, the Company also
reclassified certain activities related to Cushmans from the Direct Marketing segment to the Wholesale segment.

The
Companys total comprehensive loss for the thirteen and thirty-nine weeks ended March 28, 2009 of $22,592 and $8,041, respectively, included an adjustment to comprehensive income (loss) related to its deferred pension losses (net of income
taxes) of $4,492 and $4,434, respectively. The Companys total comprehensive income (loss) for the thirteen and thirty-nine weeks ended March 29, 2008 was a loss of $23,914 and income of $25,900, respectively. These amounts included $3,123
of deferred losses (net of income taxes) related to the Companys pension liabilities. For a further discussion on the Companys defined benefit plan activity see Note 11- Benefit Programs.



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NOTE 3NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 107-1 (FSP FAS 107-1) and
APB 28-1 (APB 28-1), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial
instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position is not expected to have a material impact on the
Companys financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position No. 157-4 (FSP FAS 157-4),
which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. This FSP does not change the requirements in paragraphs
2427 of Statement 157, which provide guidance on the use of Level 1 inputs. FSP FAS 157-4 shall be effective for interim and annual reporting periods ending after June 15, 2009. The Company has not determined the impact, if any, of its
adoption of this staff position.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (FSP FAS 115-2) and FASB Staff Position
No. 124-2 (FSP FAS 124-2), which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 shall be effective for interim and annual reporting periods ending after
June 15, 2009. The Company has not determined the impact, if any, of its adoption of this staff position.

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

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

In May 2008, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. SFAS 162 was effective November 15, 2008. The Companys
adoption of SFAS 162 did not have a material effect on its consolidated financial statements.

In April 2008, the FASB issued FSP No. 142-3,
Determination of the Useful Life of Intangible Assets (FSP 142-3) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopt FSP 142-3 in fiscal year 2010. Early
adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset in FSP 142-3 is to be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements in FSP 142-3 are to
be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The Company is currently evaluating the impact the adoption of FSP 142-3 may have, if any, on the Companys consolidated financial
statements.

In December 2007, the FASB issued 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 was effective on December 15, 2008. The Company will apply the requirements of SFAS No. 141R to any future business combinations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 expands the use of
fair value accounting but does not affect existing standards, which requires 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 financial statements issued for fiscal years beginning after November 15, 2007. The Company has not elected the option to record certain financial assets and
liabilities at fair value and, therefore, the adoption of this pronouncement did not have a material impact on the Companys consolidated financial statements.



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In September 2006, the FASB issued 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 and to allow additional time to resolve certain issues, the FASB delayed the effective date for one year for certain types of nonfinancial assets
and nonfinancial liabilities, via the issuance of FSP No. FAS 157-2, Effective Date of FASB Statement No. 157. In October 2008, the FASB also issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That
Asset Is Not Active, which clarifies the application of SFAS No. 157 in an inactive market and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Companys adoption of this
statement, effective June 29, 2008, except for nonfinancial assets and nonfinancial liabilities, did not have a material impact on its consolidated financial statements. The Company currently holds cash and cash equivalents that are subject to
its current SFAS No. 157 adoption and are measured using Level 1 inputs. The Company is continuing its evaluation of the impact of adopting the provisions of SFAS No. 157 as it relates to nonfinancial assets and liabilities.

SFAS No. 157 defines fair value and establishes a three-level hierarchy for measuring fair value of certain financial instruments based on the source of information
used to determine fair value. SFAS No. 157 also expands disclosures about fair value measurements. The hierarchy of fair value measurements is described below.

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

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

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

NOTE 4ACQUISITIONS

Cushmans

On August 8, 2008, the Company completed the
acquisition of certain assets of Cushman Fruit Company, Inc. (the Cushmans Acquisition), a privately held, multi-channel direct marketer of specialty foods, primarily Florida citrus, for a net purchase price of $8,509, including
$450 of acquisition related costs.

The Company paid for the Cushmans Acquisition with available cash. The Companys revolving credit agreement
was amended to permit the acquisition and to address other administrative matters. Unless otherwise defined or noted, references in this Form 10-Q to Cushmans refers to the brand or business, as owned and operated by the Company,
subsequent to the acquisition on August 8, 2008. The operating results of Cushmans are included in the Companys results of operations only for periods subsequent to the acquisition date.

The preliminary allocation of the purchase price is based on managements estimates and assumptions, and other information compiled by management utilizing
established valuation techniques appropriate for the retail industry. The purchase price will be finalized upon ultimate payment of severance and costs associated with the exit of existing locations as discussed below, incremental professional fees,
as well as the Companys final determination of fair value of the acquired fixed assets and intangibles. The following table presents the preliminary allocation of the purchase price of the acquisition, including professional fees and other
related acquisition costs, to the net assets acquired based on their fair values (in thousands):



|                      |  |   |       |  
|--------------------- |  | - | ----- | -
|Current assets        |  | $ | 853   |  
|Fixed assets          |  |   | 241   |  
|Intangible assets     |  |   | 2,600 |  
|Goodwill              |  |   | 5,393 |  
|                      |  |   |       |  
|Total assets acquired |  |   | 9,087 |  
|Current liabilities   |  |   | (578  | )
|                      |  |   |       |  
|Net assets acquired   |  | $ | 8,509 |  
|                      |  |   |       |  

The acquired intangible assets are comprised of
Cushmans and related trademarks totaling $1,489 and customer lists of $1,111. The trademarks have indefinite lives, while the customer lists will be amortized on a weighted basis
over a four year period. Of the $5,393 goodwill previously allocated entirely to the Direct Marketing segment, $2,188 is now allocated to the Direct Marketing segment and $3,205 is allocated to the Wholesale segment due to changes in the
Companys reporting structure as further discussed in Note 13. All



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##### Table of Contents

intangibles are expected to be fully deductible for tax purposes. While goodwill represents the excess purchase price over the fair value of net assets
acquired, the Company anticipates the acquisition will leverage its existing infrastructure and generate operating and marketing synergies and productivity improvements for its consolidated businesses.

In accordance with EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the Company recorded a liability of
$167 for severance costs related to managements plan for a reduction in force associated with the closure of the existing Cushmans locations. Managements plan for reduction in force and closure was developed concurrently with the
acquisition and requires the transition of certain functions to the Companys existing personnel and locations. The Company expects all exit activities to be complete within twelve months of the acquisition. As of March 28, 2009, $162
severance and closure costs remain unpaid and are included in Accrued payroll and benefits in the condensed consolidated balance sheets.

The
following unaudited pro forma consolidated results of operations for the thirteen weeks ended March 29, 2008, and the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively, have been prepared as if the Cushmans
Acquisition had occurred at the beginning of those respective periods (in thousands, except per share data):



|                                                             |  |                                  |         |   |                                     |   |         |                                     |  |   |        
|------------------------------------------------------------ |  | -------------------------------- | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | -------
|                                                             |  | Thirteenweeks endedMarch 29,2008 |         |   | Thirty-nineweeks endedMarch 28,2009 |   |         | Thirty-nineweeks endedMarch 29,2008
|Netsales                                                     |  | $                                | 74,268  |   |                                     | $ | 435,274 |                                     |  | $ | 506,916
|Gross profit                                                 |  |                                  | 21,694  |   |                                     |   | 185,520 |                                     |  |   | 242,722
|Operating income (loss)                                      |  |                                  | (27,712 | ) |                                     |   | (6,329  | )                                   |  |   | 64,628 
|Income (loss) from continuing operations before income taxes |  |                                  | (32,519 | ) |                                     |   | (7,325  | )                                   |  |   | 47,497 
|Net income (loss)                                            |  |                                  | (20,978 | ) |                                     |   | (3,738  | )                                   |  |   | 29,839 
|Basic net income (loss) per share                            |  | $                                | (20.32  | ) |                                     | $ | (3.62   | )                                   |  | $ | 28.90  
|Diluted net income (loss) per share                          |  | $                                | (20.32  | ) |                                     | $ | (3.62   | )                                   |  | $ | 28.61  

Prior to the acquisition, Cushmans utilized a calendar month-end for its fiscal periods. No adjustments have
been made to conform the activity to the Companys historical fiscal calendar.

The unaudited pro forma consolidated results of operations do not
purport to be indicative of results that may be obtained in the future and do not include any cost savings related to synergies expected to be obtained as the Cushmans business is integrated into the Companys operations. The unaudited
pro forma consolidated results of operations include adjustments to net income or loss to give effect to amortization of intangibles acquired, depreciation and related adjustments to fixed assets based on the fair value assigned to those assets and
income taxes.

Wolfermans

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 $22,784, which included $622 of transaction related expenses. The Company paid for the acquisition of
Wolfermans with available cash. The results of operations of Wolfermans are included in the consolidated statements of operations for the periods subsequent to the acquisition date.

The preliminary allocation of the purchase price was based on managements estimates and assumptions, and other information compiled by management utilizing
established valuation techniques appropriate for the retail industry. During the thirteen weeks ended December 27, 2008 the Company recorded a reclassification of $3,814 from customer lists to goodwill as a result of managements review of
the independent third party valuation firms final report and data underlying the related purchase price allocation assumptions. The Company considers the impact of the correction to be immaterial to its result of operations and cash flows in
the current and previously reported periods. The purchase price allocation below is considered final and includes professional fees and other related acquisition costs, allocated to the net assets acquired based on their fair values (in thousands):



|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|Current assets        |  | $ | 2,525  |  
|Fixed assets          |  |   | 134    |  
|Intangible assets     |  |   | 15,036 |  
|Goodwill              |  |   | 7,504  |  
|                      |  |   |        |  
|Total assets acquired |  |   | 25,199 |  
|Current liabilities   |  |   | (2,415 | )
|                      |  |   |        |  
|Net assets acquired   |  | $ | 22,784 |  
|                      |  |   |        |  



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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, the Company entered
into an agreement with the buyers to provide transitional services through June 2008 (the Transitional Services Agreement). As of March 28, 2009, the Company continues to provide certain transitional services to the buyers of
Jackson & Perkins. The revenue and expenses associated with the continuation of these services are not expected to be material to the Companys operating results or financial condition. The revenues and expenses associated with the
Transitional Services Agreement, as well as residual activity of the divested business, are accounted for and reported as discontinued operations.

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



|                                                      |               |                      |               |                         |               |       |               |   |     |  |   |      
|----------------------------------------------------- | ------------- | -------------------- | ------------- | ----------------------- | ------------- | ----- | ------------- | - | --- |  | - | -----
|                                                      |               | Thirteen Weeks Ended |               | Thirty-nine Weeks Ended
|                                                      | March 28,2009 |                      | March 29,2008 |                         | March 28,2009 |       | March 29,2008
|Net sales                                             |               | $                    | 100           |                         | $             | 1,241 |               | $ | 228 |  | $ | 4,549
|Gain on sale of Jackson & Perkins                     |               |                      | 22            |                         |               | 42    |               |   | 64  |  |   | 242  
|Provision for income taxes on discontinued operations |               |                      | 69            |                         |               | 110   |               |   | 215 |  |   | 72   
|Net income from discontinued operations               |               |                      | 99            |                         |               | 206   |               |   | 334 |  |   | 142  

NOTE 6BALANCE SHEET INFORMATION

Inventories

Inventories consist of the following:



|                                                   |  |               |        |              |   |               |  |   |       
|-------------------------------------------------- |  | ------------- | ------ | ------------ | - | ------------- |  | - | ------
|                                                   |  | March 28,2009 |        | June 28,2008 |   | March 29,2008
|Finished goods                                     |  | $             | 22,719 |              | $ | 19,492        |  | $ | 22,260
|Materials, packaging supplies, and work-in-process |  |               | 14,982 |              |   | 28,222        |  |   | 21,994
|Growing crops                                      |  |               | 3,665  |              |   | 6,749         |  |   | 4,039 
|                                                   |  |               |        |              |   |               |  |   |       
|Total                                              |  | $             | 41,366 |              | $ | 54,463        |  | $ | 48,293
|                                                   |  |               |        |              |   |               |  |   |       

The Company has recorded excess and obsolete inventory reserves against the various categories of inventories
noted above. Due to a significant decline in sales and order demand during the thirteen weeks ended December 27, 2008, and the Companys evaluation of future sales for the remainder of fiscal 2009, the Company recorded inventory
write-downs of $6,228 at December 27, 2008, which were materially larger than the Companys historical experience. During the thirteen-week period ending March 28, 2009, the Company recognized a benefit in the amount of $1,529 as a
result of inventory sold or consumed during the quarter that had been reserved for previously.

Fixed assets

Fixed assets consist of the following:



|                                                |  |               |         |   |              |   |         |               |  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | ------------- |  | - | ------- | -
|                                                |  | March 28,2009 |         |   | June 28,2008 |   |         | March 29,2008 | 
|Land                                            |  | $             | 19,607  |   |              | $ | 19,607  |               |  | $ | 19,607  |  
|Land improvements and orchard development costs |  |               | 30,674  |   |              |   | 30,485  |               |  |   | 30,490  |  
|Buildings and improvements                      |  |               | 58,073  |   |              |   | 55,699  |               |  |   | 55,686  |  
|Machinery and equipment                         |  |               | 66,774  |   |              |   | 64,470  |               |  |   | 63,147  |  
|Leasehold improvements                          |  |               | 10,511  |   |              |   | 12,940  |               |  |   | 12,730  |  
|Purchased and internally developed software     |  |               | 36,216  |   |              |   | 34,732  |               |  |   | 31,554  |  
|Capital projects-in-process                     |  |               | 4,324   |   |              |   | 5,987   |               |  |   | 6,561   |  
|                                                |  |               |         |   |              |   |         |               |  |   |         |  
|                                                |  |               | 226,179 |   |              |   | 223,920 |               |  |   | 219,775 |  
|Accumulated depreciation and amortization       |  |               | (75,651 | ) |              |   | (61,706 | )             |  |   | (56,825 | )
|                                                |  |               |         |   |              |   |         |               |  |   |         |  
|Total                                           |  | $             | 150,528 |   |              | $ | 162,214 |               |  | $ | 162,950 |  
|                                                |  |               |         |   |              |   |         |               |  |   |         |  



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As of March 28, 2009, purchased and internally developed software includes software licenses acquired for $1,863
financed through outstanding capital lease agreements. See Note 8  Borrowing Arrangements. Accumulated amortization of purchased and internally developed software costs was $17,604, $13,607 and $12,360 as of March 28,
2009, June 28, 2008 and March 29, 2008, respectively. Amortization of software costs, which include software assets financed through capital leases, were $1,333 and $1,048 for the thirteen weeks ended March 28, 2009 and
March 29, 2008, respectively, and $3,997 and $2,899 for the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively.

Due to
the decline in sales and order demand during the thirteen weeks ended December 27, 2008, and its evaluation of future sales for the remainder of fiscal 2009, the Company completed an evaluation of its Stores segment and related fixed assets and
certain other long-lived assets. As a result of that evaluation the Company recorded a non-cash impairment charge for 30 stores at December 27, 2008 of $3,600, of which $3,471 was related to fixed assets and $129 to fair value lease
intangibles. The impairment charge was recorded within selling, general and administrative expenses within the fiscal 2009 condensed consolidated statement of operations. The impairment amount was calculated by comparing the applicable stores net
assets to fair value, which was based on a discounted cash flow model. During the thirty-nine weeks ended March 29, 2008, the Company determined that 14 underperforming stores were impaired and recorded a non-cash charge for the impairment of
certain fixed assets and other long-lived assets in the amount of $1,190, of which $192 was recorded in the Companys second fiscal quarter and $998 in the third fiscal quarter, reported in selling, general and administrative expenses in the
fiscal 2008 condensed consolidated statement of operations.

Intangibles

Goodwill and 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s goodwill is related to the Wolfermans and
Cushmans reporting units included in the Companys Direct Marketing segment. In accordance with SFAS No. 142, the Company tests goodwill and other intangible assets for impairment annually and on an interim date should factors or
indicators become apparent that would require an interim impairment test. Historically, the annual impairment testing has occurred during the fourth quarter of each fiscal year for the reporting units.

Beginning in the second quarter of fiscal 2009, the retail industry declined at a rate that exceeded the Companys forecasted expectations and negatively impacted
the Companys operating results for the second quarter and the future outlook on the industry. Management believed the decline in the overall industry, the resulting decline in the Companys operating results from plan, and downward
revisions to financial forecasts to be factors that require the Company to perform an interim impairment test in accordance with SFAS No. 142. As a result, in connection with the preparation of its second quarter financial statements, the
Company performed an interim impairment test on its goodwill, indefinite lived and other intangible balances.

The estimated fair value of each of the
reporting units included the impact of trends in the business and industry noted in fiscal 2009, primarily the decline in sales caused by the adverse economic climate. Using a discounted cash flow model, the Harry and David trade name,
Wolfermans customer list and the goodwill and related intangibles associated with the Cushmans Acquisition were tested and no impairment was indicated as of December 27, 2008. Based on the testing the Company concluded that the fair
values of the Wolfermans goodwill, recipe and trade name were less than their related book values. As a result, the Company recorded an impairment charge of $11,416 ($1,897 related to goodwill and $9,519 related to the recipe and trade name)
in the second quarter within selling, general and administrative expenses within the fiscal 2009 condensed consolidated statement of operations. No impairment charges were recorded in prior fiscal year comparable periods.

Amortization expense was $465 and $671 for the thirteen weeks ended March 28, 2009 and March 29, 2008, respectively, and $1,397 and $1,532 for the thirty-nine
weeks ended March 28, 2009 and March 29, 2008, respectively, and is included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Goodwill and intangible assets as of March 28, 2009 include those assets acquired in the Companys fiscal 2008 acquisition of the Wolfermans business and
its recent Cushmans Acquisition. See Note 4  Acquisitions for further information. The following is a summary of intangible assets:



|                                   |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|---------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                   |  | March 28, 2009      |        | June 28, 2008          
|                                   |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names, trademarks and recipe |  | $                   | 32,441 |                         | $ |       |                   |  | $                   | 32,441 |                         | $ | 40,471 |                   | $ |       |   |  | $ | 40,471
|Goodwill                           |  |                     | 11,000 |                         |   |       |                   |  |                     | 11,000 |                         |   | 3,690  |                   |   |       |   |  |   | 3,690 
|Direct marketing customer lists    |  |                     | 9,249  |                         |   | (8,437 | )                 |  |                     | 812    |                         |   | 11,952 |                   |   | (7,158 | ) |  |   | 4,794 
|Favorable lease agreements         |  |                     | 1,676  |                         |   | (1,511 | )                 |  |                     | 165    |                         |   | 1,805  |                   |   | (1,393 | ) |  |   | 412   
|                                   |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|                                   |  | $                   | 54,366 |                         | $ | (9,948 | )                 |  | $                   | 44,418 |                         | $ | 57,918 |                   | $ | (8,551 | ) |  | $ | 49,367
|                                   |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       



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The following table represents activity for goodwill and other intangibles for the thirty-nine weeks ended March 28,
2009.



|                                 |  |          |        |   |                             |   |        |                           |  |   |        |  
|-------------------------------- |  | -------- | ------ | - | --------------------------- | - | ------ | ------------------------- |  | - | ------ | -
|                                 |  | Goodwill |        |   | Indefinite-LivedIntangibles |   |        | Definite-LivedIntangibles | 
|Net balance as of June 28, 2008  |  | $        | 3,690  |   |                             | $ | 40,471 |                           |  | $ | 5,206  |  
|Additions                        |  |          | 5,393  |   |                             |   | 1,489  |                           |  |   | 1,111  |  
|Reclassification                 |  |          | 3,814  |   |                             |   |        |                           |  |   | (3,814 | )
|Impairment charges               |  |          | (1,897 | ) |                             |   | (9,519 | )                         |  |   | (129   | )
|Amortization expense             |  |          |       |   |                             |   |       |                           |  |   | (1,397 | )
|                                 |  |          |        |   |                             |   |        |                           |  |   |        |  
|Net balance as of March 28, 2009 |  | $        | 11,000 |   |                             | $ | 32,441 |                           |  | $ | 977    |  
|                                 |  |          |        |   |                             |   |        |                           |  |   |        |  

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



|               |  |                                          |     |                           |   |                          |  |   |    
|-------------- |  | ---------------------------------------- | --- | ------------------------- | - | ------------------------ |  | - | ---
|Fiscal Period: |  | Direct MarketingCustomer andRental Lists |     | Favorable LeaseAgreements |   | TotalAmortizationExpense
|Remaining 2009 |  |                                          | 35  |                           |   | 29                       |  |   | 64 
|2010           |  |                                          | 596 |                           |   | 76                       |  |   | 672
|2011           |  |                                          | 142 |                           |   | 39                       |  |   | 181
|2012           |  |                                          | 37  |                           |   | 21                       |  |   | 58 
|2013           |  |                                          | 2   |                           |   |                         |  |   | 2  
|               |  |                                          |     |                           |   |                          |  |   |    
|Total          |  | $                                        | 812 |                           | $ | 165                      |  | $ | 977
|               |  |                                          |     |                           |   |                          |  |   |    

Impairment Estimates and Assumptions

The impairment charges related to our indefinite-lived intangible assets, our goodwill and long-lived assets associated with stores were calculated using managements estimates of future forecasted cash flows to
be generated from the respective assets and a discount rate inherent within the Companys cost of capital. The nature of these analyses requires significant judgment by management about future operating results, including revenues, margins,
operating expenses and applicable discount rate. If the Company had used different assumptions and estimates regarding the future operating results or discount rate, the impairment charges might have been materially different. However, management
believes that the assumptions and estimates are reasonable and represent the most likely future operating results based upon the current information available.

NOTE 7INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective
tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates from continuing operations for the third quarter of fiscal 2009 and fiscal 2008 were 41.1% and 34.8%, respectively.

Under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FAS 109,the Company classifies interest expense and
penalties related to unrecognized tax benefits as income tax expense. During the third quarter of fiscal 2009, unrecognized tax benefits decreased by $723 due to settlements with taxing authorities. The Company anticipates that it is reasonably
possible that the total amount of unrecognized tax benefits at March 28, 2009 may decrease by $1,126 within 12 months of the reporting date as a result of the expiration of certain statute of limitations. The Company also anticipates that it is
reasonably possible that new issues will be raised by tax authorities which may require increases to the balance of unrecognized tax benefits. However, an estimate of such increases cannot reasonably be made.

NOTE 8BORROWING ARRANGEMENTS

Revolving Credit Facilities

The Companys current revolving credit agreement (the Credit Agreement) has a maximum borrowing capacity of $125,000, secured by
substantially all of the assets of the Company and its subsidiaries. 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.

As previously discussed, on August 8, 2008, the Companys Credit Agreement was amended to permit the Cushmans Acquisition and to address other administrative matters. The Company did not incur any debt
issuance fees related to this amendment. For purposes of applying the provisions of EITF 98-14, Debtors Accounting For Changes in Line-of-Credit or Revolving Debt Arrangements, the amendments to the Credit Agreement were with the same
primary creditor.



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In connection with this facility and related amendments, the Company had remaining deferred financing costs of $2,483 and
$3,416 as of March 28, 2009 and June 28, 2008, respectively.

As of March 28, 2009, the Company had $0 borrowings and $1,061 in outstanding
letters of credit under the revolving credit facility. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at March 28, 2009 was
$5,021. 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 condensed consolidated statement of operations.

The terms of the Credit Agreement include customary representations and
warranties, affirmative and negative covenants and events of default. The Credit Agreement requires the Company to comply with certain covenants, which primarily include a minimum cash balance and limits on capital expenditures. At March 28,
2009 the Company was in compliance with all Credit Agreement covenants.

Long-Term Debt

As of March 28, 2009 the Companys wholly-owned subsidiary, Harry and David, had outstanding $58,170 in Senior Floating Rate Notes due March 1, 2012 and
$140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). These amounts are net of the repurchases by the Company on the open-market in fiscal 2008 and in the first and second quarters of fiscal 2009.
For further details on the repurchases during the thirteen and thirty-nine weeks ended March 28, 2009, see Long-Term Debt Repurchases below.

The floating rate Senior Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was 6.26% and 7.68% at March 28, 2009 and June 28, 2008, respectively. The fixed rate
Senior Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December.

The deferred
financing fees incurred in connection with the note offering and related exchange have been recorded as deferred financing costs within long-term assets. These costs are amortized over the remaining life of the associated Senior Notes and as of
March 28, 2009 and June 28, 2008, $4,085 and $5,850, respectively, remained on the balance sheet for all associated fees related to the Senior Notes. As noted below under Long-Term Debt Repurchases, the Senior Notes deferred
financing costs are subject to write-off on a pro-rata basis due to early repurchase or repayment of the Senior Notes.

These Senior Notes represent the
senior unsecured obligations of Harry and David, a wholly-owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the Companys
subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted
payments, liens and transactions with affiliates. The Company was in compliance with all of the covenants at March 28, 2009.

Long-Term Debt
Repurchases

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

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

On a combined basis for the thirty-nine weeks ended March 28, 2009, the Company purchased $36,638 aggregate
principal amount of its fixed and floating rate Senior Notes in open-market purchases for $20,366. The debt prepayment resulted in a net gain of $15,416, comprised of a $16,272 discount on the repayment of outstanding principal, partially offset by
the write-off of $856 of unamortized deferred financing costs.

During the thirty-nine weeks ended March 29, 2008, the Company purchased $9,405
aggregate principal amount of its fixed and floating rate Senior Notes in open-market purchases. The debt prepayment resulted in a net gain of $303, comprised of $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 on deferred financing costs was $594 and $645 for the thirteen weeks ended March 28, 2009
and March 29, 2008, respectively, and $1,842 and $1,956 for the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively, and is included within interest expense in the accompanying condensed consolidated statements of
operations.



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Capital lease obligations

As of March 28, 2009 the Company had $951 of capital lease obligations representing amounts outstanding to acquire certain software licenses through two vendors. The current and non-current portions of the Companys capital lease
obligations are $642 and $309, respectively. The interest rates on these two agreements are 5.99% and 10.36%, with principal and interest payments due either quarterly or annually.

NOTE 9STOCK OPTION 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 certain assumptions for use
in the model. The expected volatility assumption is based on an average historical volatility of the publicly traded stock of a representative set of comparable companies. The expected term of options granted utilized is either the final vesting
date or a period derived from the time between the date of final vesting and the expiration of the option, depending on the vesting provisions of the underlying grant. As the Companys shares are not registered, nor publicly traded on a
national securities exchange, the liquidity of the option award is limited. As such, the Company has assumed for purposes of estimating the expected term of the stock option that the vested awards would forfeit post-termination. The risk-free rate
for the expected term is based on the U.S. Treasury yield curve in effect at the time of grant. The Company did not grant stock options during the thirteen or thirty-nine weeks ended March 28, 2009.

A summary of option activity under the Plan for the thirty-nine weeks ended March 28, 2009 is presented below:



|                              |  |              |   |  |                                |        |                                           |          
|----------------------------- |  | ------------ | - |  | ------------------------------ | ------ | ----------------------------------------- | ---------
|Options                       |  | OptionShares |   |  | Weighted-AverageExercise Price |        | Weighted-AverageRemainingContractual Term
|Outstanding at June 28, 2008  |  | 62,530       |   |  | $                              | 115.63 |                                           | 7.2 years
|Granted                       |  |             |   |  |                                |       |                                           |         
|Exercised                     |  |             |   |  |                                |       |                                           |         
|Forfeited                     |  | (2,962       | ) |  |                                | 150.69 |                                           |          
|                              |  |              |   |  |                                |        |                                           |          
|Outstanding at March 28, 2009 |  | 59,568       |   |  | $                              | 113.92 |                                           | 6.4 years
|                              |  |              |   |  |                                |        |                                           |          

Of the 59,568 options outstanding at March 28, 2009, 48,807 were fully vested and exercisable. The
weighted-average remaining contractual term of vested options was 6.3 years. The total grant date fair value of all options outstanding at March 28, 2009 was $1,521.

A summary of the status of the Companys nonvested option shares as of March 28, 2009, and activity during the thirty-nine weeks ended March 28, 2009, is presented below:



|                              |  |              |   |  |                                                |      
|----------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares       |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at June 28, 2008  |  | 25,019       |   |  | $                                              | 23.15
|Granted options               |  |             |   |  |                                                |     
|Vested                        |  | (13,346      | ) |  |                                                | 26.84
|Forfeited                     |  | (912         | ) |  |                                                | 14.49
|                              |  |              |   |  |                                                |      
|Outstanding at March 28, 2009 |  | 10,761       |   |  | $                                              | 19.31
|                              |  |              |   |  |                                                |      

For the thirteen and thirty-nine week periods ended March 28, 2009, the Company recognized stock compensation
expense, which represents the amortization of the estimated fair value of the stock options issued, of $118 and $356, respectively. The total tax benefit recognized for these periods was $46 and $140, respectively. As of March 28, 2009, there
remained a total of $208 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is recognized over a remaining weighted-average period of 1.3 years. An assumption
of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.

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 thirty-nine weeks ended March 29, 2008, weighted-average
common shares outstanding for the period include the dilutive effect of stock options of 10,656 in the weighted average shares denominator for



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the calculation of diluted earnings per share. For the thirteen and thirty-nine weeks ended March 28, 2009 and March 29, 2008, certain common
shares relating to the stock options are excluded from the diluted earnings per share calculation as the related impact would have been anti-dilutive. The excluded options were 59,568 and 63,717 for the thirteen weeks ended March 28, 2009 and
March 29, 2008, respectively and were 60,588 and 67,564 for the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively. The basic and diluted net income (loss) per share is as follows (in thousands except share and
per share data):



|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|------------------------------------------------------- | ------------- | -------------------- | --------- | ------------- | ----------------------- | - | ------------- | - |  | ------------- | --------- | - |  | - | ---------
|                                                        |               | Thirteen Weeks Ended |           |               | Thirty-nine Weeks Ended
|                                                        | March 28,2009 |                      |           | March 29,2008 |                         |   | March 28,2009 |   |  | March 29,2008
|Net income (loss) from continuing operations            |               | $                    | (18,199   | )             |                         | $ | (20,997       | ) |  | $             | (3,941    | ) |  | $ | 28,881   
|Net income from discontinued operations                 |               |                      | 99        |               |                         |   | 206           |   |  |               | 334       |   |  |   | 142      
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Net income (loss)                                       |               | $                    | (18,100   | )             |                         | $ | (20,791       | ) |  | $             | (3,607    | ) |  | $ | 29,023   
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Basic net income (loss) per share:                      |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Continuing operations                                   |               |                      | (17.61    | )             |                         |   | (20.33        | ) |  |               | (3.81     | ) |  |   | 27.97    
|Discontinued operations                                 |               |                      | 0.10      |               |                         |   | 0.20          |   |  |               | 0.32      |   |  |   | 0.14     
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Total basic net income (loss) per share                 |               | $                    | (17.52    | )             |                         | $ | (20.14        | ) |  | $             | (3.49     | ) |  | $ | 28.11    
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Diluted net income (loss) per share:                    |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Continuing operations                                   |               |                      | (17.61    | )             |                         |   | (20.33        | ) |  |               | (3.81     | ) |  |   | 27.69    
|Discontinued operations                                 |               |                      | 0.10      |               |                         |   | 0.20          |   |  |               | 0.32      |   |  |   | 0.14     
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Total diluted net income (loss) per share               |               | $                    | (17.52    | )             |                         | $ | (20.14        | ) |  | $             | (3.49     | ) |  | $ | 27.82    
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Weighted-average shares used in per share calculations: |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Basic                                                   |               |                      | 1,033,295 |               |                         |   | 1,032,576     |   |  |               | 1,033,295 |   |  |   | 1,032,455
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          
|Diluted                                                 |               |                      | 1,033,295 |               |                         |   | 1,032,576     |   |  |               | 1,033,295 |   |  |   | 1,043,111
|                                                        |               |                      |           |               |                         |   |               |   |  |               |           |   |  |   |          

Per share amounts are calculated separately for net income (loss) from continuing operations and discontinued
operations and total net income (loss). As such, the per share amounts for continuing operations and discontinued operations may not sum to the total net income (loss) 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 Weeks Ended |       |   | Thirty-nine Weeks Ended |  
|                                                      |  | March 28,2009        |       |   | March 29,2008           |   |      | March 28,2009 |  |   | March 29,2008 |  
|Service cost                                          |  | $                    |      |   |                         | $ |     |               |  | $ |              |   |  | $ |       |  
|Interest cost                                         |  |                      | 693   |   |                         |   | 753  |               |  |   | 2,200         |   |  |   | 2,259  |  
|Expected return on plan asset                         |  |                      | (467  | ) |                         |   | (766 | )             |  |   | (1,646        | ) |  |   | (2,298 | )
|Amortization of deferred losses                       |  |                      | 131   |   |                         |   |     |               |  |   | 227           |   |  |   |       |  
|Amortization of prior service credit                  |  |                      | (6    | ) |                         |   |     |               |  |   | (6            | ) |  |   |       |  
|                                                      |  |                      |       |   |                         |   |      |               |  |   |               |   |  |   |        |  
|Net periodic pension expense                          |  |                      | 351   |   |                         |   | (13  | )             |  |   | 775           |   |  |   | (39    | )
|Settlement losses                                     |  |                      | 1,196 |   |                         |   | 55   |               |  |   | 1,196         |   |  |   | 55     |  
|                                                      |  |                      |       |   |                         |   |      |               |  |   |               |   |  |   |        |  
|Net periodic pension expense with settlement expenses |  | $                    | 1,547 |   |                         | $ | 42   |               |  | $ | 1,971         |   |  | $ | 16     |  
|                                                      |  |                      |       |   |                         |   |      |               |  |   |               |   |  |   |        |  

The Company contributed $688 and $1,329 during the thirteen weeks ended March 28, 2009 and March 29,
2008, respectively, and $2,677 and $5,405 during the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively, to its defined benefit pension plans.

The Companys qualified and unqualified benefit plans were frozen effective June 30, 2007. The Company has a continuing obligation to fund these plans and will continue to recognize net periodic pension cost
under SFAS No. 87, Employers Accounting for Pensions(SFAS No. 87).

The Company recorded a non-cash settlement charge of
$1,196 in the thirteen and thirty-nine weeks ended March 28, 2009 related to lump sum distributions from our benefit pension plans. Statement No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits (SFAS 88), requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost
components of net



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periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the
percentage reduction of the plans projected benefit obligation. Immediately prior to the calculation of the settlement charge and the third quarter adoption and favorable impact of certain provisions under the Pension Protection Act, the
Company re-measured the funded status of the associated pension liabilities, in light of the unfavorable performance of its pension plan assets, and recorded an adjustment to other comprehensive income (loss) of $8,716, or $5,295 net of taxes in the
amount of $3,421, as allowed under guidance in Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R)(SFAS
No. 158).

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.

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

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

Total rental expense for all operating leases was as follows:



|                        |               |                      |               |                         |               |       |               |   |        |  |   |       
|----------------------- | ------------- | -------------------- | ------------- | ----------------------- | ------------- | ----- | ------------- | - | ------ |  | - | ------
|                        |               | Thirteen Weeks Ended |               | Thirty-nine Weeks Ended
|                        | March 28,2009 |                      | March 29,2008 |                         | March 28,2009 |       | March 29,2008
|Minimum rent expense    |               | $                    | 5,400         |                         | $             | 5,501 |               | $ | 19,416 |  | $ | 19,174
|Contingent rent expense |               |                      | 47            |                         |               | 64    |               |   | 160    |  |   | 236   
|                        |               |                      |               |                         |               |       |               |   |        |  |   |       
|Rent expense            |               | $                    | 5,447         |                         | $             | 5,565 |               | $ | 19,576 |  | $ | 19,410
|                        |               |                      |               |                         |               |       |               |   |        |  |   |       

On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior
management team who had received stock options under the 2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,372 or 7.5% of the portion of the proceeds from the sale of notes which
were distributed on February 25, 2005 to the Companys equity sponsors as a return of capital. The amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of
February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the award vested on June 17, 2006, and 5% vests quarterly over the next twelve successive quarters through June 2009. In each case,
vesting occurs so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a
change of control (as so defined) occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level; (iii) the Company has
available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some circumstances, the non-cash
consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of March 28, 2009, 95% of the award was vested, representing $5,756, which also reflects
forfeitures. As of March 28, 2009, 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.



16



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The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial
management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During
the both the thirteen weeks ended March 28, 2009 and March 29, 2008 the Company paid $250 and during both the thirty-nine weeks ended March 28, 2009 and March 29, 2008, the Company paid $750 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

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

The results of the Jackson &
Perkins business are included as discontinued operations in the consolidated statement of operations and footnotes for all periods presented.

The Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts
under the Harry and David®, Wolfermans® and Cushmans
brands by marketing through catalogs, the Internet, business-to-business and consumer telemarketing operations. The Companys catalogs reach customers throughout the United States and, to a lesser extent, in Canada. The Stores segment generates
net sales of Harry and David®, Wolfermans® and Cushmans
merchandise at various retail locations (outlet stores, specialty stores, and a Country Village Store). As of March 28, 2009, the Company operated 141 Harry and David stores and two Cushmans seasonal stores. The Wholesale segment
generates net sales by selling Harry and David® brand, Wolfermans® brand, and Cushmans brand wholesale products to national retailers as well as commercial sales of surplus, non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon. Business units not disclosed separately
for segment reporting purposes are grouped in the Other segment and include business units that support the Companys operations, including orchards, product supply, distribution, customer operations, facilities, information
technology services, and administrative and marketing support functions.

The Company reclassified revenue from commercial fruit sales from the
Other segment to the Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. In the current fiscal year, the Company also
reclassified certain activities related to Cushmans from the Direct Marketing segment to the Wholesale segment.

Net
intersegment sales were $13,137 and $18,750 for the thirteen weeks ended March 28, 2009 and March 29, 2008 respectively and $52,083 and $149,002 for the thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively.
Total assets in the Other segment include corporate cash and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived
assets, including the Companys manufacturing and distribution facilities.



|                                                              |  |                 |         |   |        |   |        |           |  |   |        |   |  |                           |         |   |  |   |         |  
|------------------------------------------------------------- |  | --------------- | ------- | - | ------ | - | ------ | --------- |  | - | ------ | - |  | ------------------------- | ------- | - |  | - | ------- | -
|Dollars in thousands                                          |  | DirectMarketing |         |   | Stores |   |        | Wholesale |  |   | Other  |   |  | TotalContinuingOperations |        
|Thirteen weeks ended March 28, 2009                           |  |                 |         |   |        |   |        |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 47,770  |   |        | $ | 20,884 |           |  | $ | 6,258  |   |  | $                         |        |   |  | $ | 74,912  |  
|Depreciation and amortization expense (1)                     |  |                 | 460     |   |        |   | 685    |           |  |   |       |   |  |                           | 4,033   |   |  |   | 5,178   |  
|Operating income (loss) from continuing operations            |  |                 | (17,625 | ) |        |   | (7,834 | )         |  |   | (635   | ) |  |                           | 14      |   |  |   | (26,080 | )
|Net interest expense (income) from continuing operations      |  |                 |        |   |        |   |       |           |  |   |       |   |  |                           | 4,848   |   |  |   | 4,848   |  
|Income (loss) from continuing operations, before income taxes |  |                 | (17,623 | ) |        |   | (7,834 | )         |  |   | (635   | ) |  |                           | (4,809  | ) |  |   | (30,901 | )
|Capital expenditures (2)                                      |  |                 |        |   |        |   | 31     |           |  |   |       |   |  |                           | 1,557   |   |  |   | 1,588   |  
|Total assets                                                  |  |                 | 50,061  |   |        |   | 28,810 |           |  |   | 11,976 |   |  |                           | 211,125 |   |  |   | 301,972 |  
|                                                              |  |                 |         |   |        |   |        |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Thirteen weeks ended March 29, 2008                           |  |                 |         |   |        |   |        |           |  |   |        |   |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 43,544  |   |        | $ | 21,917 |           |  | $ | 2,854  |   |  | $                         |        |   |  | $ | 68,315  |  
|Depreciation and amortization expense (1)                     |  |                 | 607     |   |        |   | 1,076  |           |  |   |       |   |  |                           | 3,708   |   |  |   | 5,391   |  
|Operating income (loss) from continuing operations            |  |                 | (16,491 | ) |        |   | (9,587 | )         |  |   | (1,332 | ) |  |                           | (40     | ) |  |   | (27,450 | )
|Net interest expense from continuing operations               |  |                 | 30      |   |        |   | 1      |           |  |   |       |   |  |                           | 4,736   |   |  |   | 4,767   |  
|Income (loss) from continuing operations, before income taxes |  |                 | (16,525 | ) |        |   | (9,590 | )         |  |   | (1,333 | ) |  |                           | (4,776  | ) |  |   | (32,224 | )
|Capital expenditures (2)                                      |  |                 | 9       |   |        |   | 953    |           |  |   |       |   |  |                           | 1,931   |   |  |   | 2,893   |  
|Total assets                                                  |  |                 | 63,588  |   |        |   | 36,048 |           |  |   | 2,818  |   |  |                           | 288,911 |   |  |   | 391,365 |  
|                                                              |  |                 |         |   |        |   |        |           |  |   |        |   |  |                           |         |   |  |   |         |  



17



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|                                                              |  |                 |         |   |        |   |         |           |  |       |        |  |                           |         |   |  |   |         |  
|------------------------------------------------------------- |  | --------------- | ------- | - | ------ | - | ------- | --------- |  | ----- | ------ |  | ------------------------- | ------- | - |  | - | ------- | -
|Dollars in thousands                                          |  | DirectMarketing |         |   | Stores |   |         | Wholesale |  | Other |        |  | TotalContinuingOperations |        
|Thirty-nine weeks ended March 28, 2009                        |  |                 |         |   |        |   |         |           |  |       |        |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 295,090 |   |        | $ | 105,048 |           |  | $     | 35,107 |  | $                         |        |   |  | $ | 435,245 |  
|Depreciation and amortization expense (1)                     |  |                 | 1,370   |   |        |   | 2,504   |           |  |       |       |  |                           | 11,911  |   |  |   | 15,785  |  
|Operating income (loss) from continuing operations            |  |                 | (528    | ) |        |   | (7,953  | )         |  |       | 2,305  |  |                           | 52      |   |  |   | (6,124  | )
|Net interest expense (income) from continuing operations      |  |                 |        |   |        |   | (7      | )         |  |       |       |  |                           | 16,455  |   |  |   | 16,448  |  
|Income (loss) from continuing operations, before income taxes |  |                 | 12,634  |   |        |   | (6,228  | )         |  |       | 2,843  |  |                           | (16,355 | ) |  |   | (7,106  | )
|Capital expenditures (2)                                      |  |                 | 239     |   |        |   | 563     |           |  |       |       |  |                           | 5,203   |   |  |   | 6,005   |  
|Total assets                                                  |  |                 | 50,061  |   |        |   | 28,810  |           |  |       | 11,976 |  |                           | 211,125 |   |  |   | 301,972 |  
|                                                              |  |                 |         |   |        |   |         |           |  |       |        |  |                           |         |   |  |   |         |  
|Thirty-nine weeks ended March 29, 2008                        |  |                 |         |   |        |   |         |           |  |       |        |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 338,470 |   |        | $ | 117,484 |           |  | $     | 31,793 |  | $                         |        |   |  | $ | 487,747 |  
|Depreciation and amortization expense (1)                     |  |                 | 1,315   |   |        |   | 2,983   |           |  |       |       |  |                           | 10,698  |   |  |   | 14,996  |  
|Operating income (loss) from continuing operations            |  |                 | 60,921  |   |        |   | 121     |           |  |       | 2,168  |  |                           | (38     | ) |  |   | 63,172  |  
|Net interest expense from continuing operations               |  |                 | 30      |   |        |   | 3       |           |  |       |       |  |                           | 17,173  |   |  |   | 17,206  |  
|Income (loss) from continuing operations, before income taxes |  |                 | 61,030  |   |        |   | 147     |           |  |       | 2,170  |  |                           | (17,133 | ) |  |   | 46,214  |  
|Capital expenditures (2)                                      |  |                 | 9       |   |        |   | 5,278   |           |  |       |       |  |                           | 9,351   |   |  |   | 14,638  |  
|Total assets                                                  |  |                 | 63,588  |   |        |   | 36,048  |           |  |       | 2,818  |  |                           | 288,911 |   |  |   | 391,365 |  
|                                                              |  |                 |         |   |        |   |         |           |  |       |        |  |                           |         |   |  |   |         |  



|(1) | Depreciation and amortization expense from discontinued operations was $0 for fiscal 2009 and 2008.
|--- | ---------------------------------------------------------------------------------------------------



|(2) | Capital expenditures from discontinued operations were $0 for fiscal 2009 and 2008.
|--- | -----------------------------------------------------------------------------------

NOTE 14CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Companys wholly-owned subsidiary, Harry and
David, has outstanding $58,170 of Senior Floating Rate Notes due 2012 and $140,192 of Senior Fixed Rate Notes due 2013 (collectively, the Senior Notes). The following consolidating financial information presents, in separate columns,
financial information for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) Harry & David Holdings,
Inc.s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated
basis, and (v) the Company on a consolidated basis, as of March 28, 2009, and June 28, 2008, and for the thirteen and thirty-nine weeks ended March 28, 2009 and March 29, 2008, respectively. The Senior Notes are fully and
unconditionally guaranteed on a joint and several basis by the Company and each of its existing and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the meaning of Rule 3-10 of Regulation
S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain restrictions on the payment of dividends, other payments or distributions by Harry and David and between the guarantors.



18



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##### Table of Contents

NOTE 14CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of March 28, 2009



|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                            |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                                      |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets                                              |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                                   |  | $                                        | 51      |   |                | $ | 13,850   |                       |  | $ | 19,680                           |   |  | $            |         |   |  | $ | 33,581  |  
|Trade accounts receivable, net                              |  |                                          |        |   |                |   | 4,031    |                       |  |   | 153                              |   |  |              |         |   |  |   | 4,184   |  
|Other receivables                                           |  |                                          |        |   |                |   | 1,089    |                       |  |   | 2,370                            |   |  |              |         |   |  |   | 3,459   |  
|Inventories, net                                            |  |                                          |        |   |                |   | 21,871   |                       |  |   | 19,495                           |   |  |              |         |   |  |   | 41,366  |  
|Deferred catalog expenses                                   |  |                                          |        |   |                |   | 4,265    |                       |  |   |                                 |   |  |              |         |   |  |   | 4,265   |  
|Deferred income taxes                                       |  |                                          | 1,010   |   |                |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 1,010   |  
|Other current assets                                        |  |                                          | 127     |   |                |   | 3,710    |                       |  |   | 5,029                            |   |  |              |         |   |  |   | 8,866   |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                        |  |                                          | 1,188   |   |                |   | 48,816   |                       |  |   | 46,727                           |   |  |              |         |   |  |   | 96,731  |  
|Fixed assets, net                                           |  |                                          |        |   |                |   | 10,125   |                       |  |   | 140,403                          |   |  |              |         |   |  |   | 150,528 |  
|Goodwill                                                    |  |                                          |        |   |                |   | 11,000   |                       |  |   |                                 |   |  |              |         |   |  |   | 11,000  |  
|Intangibles, net                                            |  |                                          |        |   |                |   | 33,418   |                       |  |   |                                 |   |  |              |         |   |  |   | 33,418  |  
|Investment in subsidiaries                                  |  |                                          | 181,138 |   |                |   | (79,572  | )                     |  |   |                                 |   |  |              | (101,566 | ) |  |   |        |  
|Deferred financing costs, net                               |  |                                          |        |   |                |   | 6,568    |                       |  |   |                                 |   |  |              |         |   |  |   | 6,568   |  
|Deferred income taxes                                       |  |                                          | 324     |   |                |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 324     |  
|Other assets                                                |  |                                          | 2,271   |   |                |   | 358      |                       |  |   | 774                              |   |  |              |         |   |  |   | 3,403   |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                                |  | $                                        | 184,921 |   |                | $ | 30,713   |                       |  | $ | 187,904                          |   |  | $            | (101,566 | ) |  | $ | 301,972 |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)              |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities                                         |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                            |  | $                                        |        |   |                | $ | 4,734    |                       |  | $ | 5,565                            |   |  | $            |         |   |  | $ | 10,299  |  
|Accrued payroll and benefits                                |  |                                          |        |   |                |   | 7,026    |                       |  |   | 7,411                            |   |  |              |         |   |  |   | 14,437  |  
|Deferred revenue                                            |  |                                          |        |   |                |   | 22,497   |                       |  |   |                                 |   |  |              |         |   |  |   | 22,497  |  
|Income taxes payable                                        |  |                                          | 19,434  |   |                |   | (78      | )                     |  |   | 4                                |   |  |              |         |   |  |   | 19,360  |  
|Accrued interest                                            |  |                                          |        |   |                |   | 1,470    |                       |  |   |                                 |   |  |              |         |   |  |   | 1,470   |  
|Other accrued liabilities                                   |  |                                          | 109     |   |                |   | 2,284    |                       |  |   | 1,486                            |   |  |              |         |   |  |   | 3,879   |  
|Current portion of capital lease obligations                |  |                                          |        |   |                |   | 642      |                       |  |   |                                 |   |  |              |         |   |  |   | 642     |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                                   |  |                                          | 19,543  |   |                |   | 38,575   |                       |  |   | 14,466                           |   |  |              |         |   |  |   | 72,584  |  
|Long-term debt and capital lease obligations                |  |                                          |        |   |                |   | 198,671  |                       |  |   |                                 |   |  |              |         |   |  |   | 198,671 |  
|Accrued pension liabilities                                 |  |                                          |        |   |                |   |         |                       |  |   | 24,088                           |   |  |              |         |   |  |   | 24,088  |  
|Other long-term liabilities                                 |  |                                          | 4,054   |   |                |   | 4,351    |                       |  |   | 1,757                            |   |  |              |         |   |  |   | 10,162  |  
|Intercompany debt                                           |  |                                          | 164,857 |   |                |   | (392,022 | )                     |  |   | 227,165                          |   |  |              |         |   |  |   |        |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                           |  |                                          | 188,454 |   |                |   | (150,425 | )                     |  |   | 267,476                          |   |  |              |         |   |  |   | 305,505 |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Commitments and contingencies                               |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit)                              |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                                |  |                                          | 10      |   |                |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                                  |  |                                          | 6,547   |   |                |   | 232,518  |                       |  |   | 53,785                           |   |  |              | (286,303 | ) |  |   | 6,547   |  
|Accumulated other comprehensive income (loss), net of taxes |  |                                          | (7,992  | ) |                |   |         |                       |  |   | (10,857                          | ) |  |              | 10,857   |   |  |   | (7,992  | )
|Retained earnings (accumulated deficit)                     |  |                                          | (2,098  | ) |                |   | (51,381  | )                     |  |   | (122,500                         | ) |  |              | 173,881  |   |  |   | (2,098  | )
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                        |  |                                          | (3,533  | ) |                |   | 181,138  |                       |  |   | (79,572                          | ) |  |              | (101,566 | ) |  |   | (3,533  | )
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit)        |  | $                                        | 184,921 |   |                | $ | 30,713   |                       |  | $ | 187,904                          |   |  | $            | (101,566 | ) |  | $ | 301,972 |  
|                                                            |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



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Condensed Consolidating Balance Sheet

As of June 28, 2008



|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets                                       |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 1,570   |   |                | $ | 9,723    |                       |  | $ | 29,499                           |   |  | $            |         |   |  | $ | 40,792  |  
|Short-term investments                               |  |                                          |        |   |                |   |         |                       |  |   | 15,033                           |   |  |              |         |   |  |   | 15,033  |  
|Trade accounts receivable, net                       |  |                                          |        |   |                |   | 1,928    |                       |  |   | 156                              |   |  |              |         |   |  |   | 2,084   |  
|Other receivables                                    |  |                                          |        |   |                |   | 1,094    |                       |  |   | 1,749                            |   |  |              |         |   |  |   | 2,843   |  
|Inventories, net                                     |  |                                          |        |   |                |   | 18,320   |                       |  |   | 36,143                           |   |  |              |         |   |  |   | 54,463  |  
|Deferred catalog expenses                            |  |                                          |        |   |                |   | 6,258    |                       |  |   |                                 |   |  |              |         |   |  |   | 6,258   |  
|Deferred income taxes                                |  |                                          | 3,230   |   |                |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 3,230   |  
|Other current assets                                 |  |                                          |        |   |                |   | 2,273    |                       |  |   | 5,218                            |   |  |              |         |   |  |   | 7,491   |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 4,800   |   |                |   | 39,596   |                       |  |   | 87,798                           |   |  |              |         |   |  |   | 132,194 |  
|Fixed assets, net                                    |  |                                          |        |   |                |   | 15,320   |                       |  |   | 146,894                          |   |  |              |         |   |  |   | 162,214 |  
|Goodwill                                             |  |                                          |        |   |                |   | 3,690    |                       |  |   |                                 |   |  |              |         |   |  |   | 3,690   |  
|Intangibles, net                                     |  |                                          |        |   |                |   | 45,677   |                       |  |   |                                 |   |  |              |         |   |  |   | 45,677  |  
|Investment in subsidiaries                           |  |                                          | 195,041 |   |                |   | (59,765  | )                     |  |   |                                 |   |  |              | (135,276 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                |   | 9,266    |                       |  |   |                                 |   |  |              |         |   |  |   | 9,266   |  
|Other assets                                         |  |                                          | 2,464   |   |                |   | 358      |                       |  |   | 774                              |   |  |              |         |   |  |   | 3,596   |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 202,305 |   |                | $ | 54,142   |                       |  | $ | 235,466                          |   |  | $            | (135,276 | ) |  | $ | 356,637 |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities                                  |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                | $ | 9,631    |                       |  | $ | 9,350                            |   |  | $            |         |   |  | $ | 18,981  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                |   | 7,396    |                       |  |   | 6,656                            |   |  |              |         |   |  |   | 14,052  |  
|Deferred revenue                                     |  |                                          |        |   |                |   | 17,072   |                       |  |   |                                 |   |  |              |         |   |  |   | 17,072  |  
|Income taxes payable                                 |  |                                          | 23,622  |   |                |   | (12      | )                     |  |   |                                 |   |  |              |         |   |  |   | 23,610  |  
|Accrued interest                                     |  |                                          |        |   |                |   | 5,523    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,523   |  
|Other accrued liabilities                            |  |                                          | (34     | ) |                |   | 2,172    |                       |  |   | 2,389                            |   |  |              |         |   |  |   | 4,527   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                |   | 647      |                       |  |   |                                 |   |  |              |         |   |  |   | 647     |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 23,588  |   |                |   | 42,429   |                       |  |   | 18,395                           |   |  |              |         |   |  |   | 84,412  |  
|Long-term debt and capital lease obligations         |  |                                          |        |   |                |   | 235,599  |                       |  |   |                                 |   |  |              |         |   |  |   | 235,599 |  
|Accrued pension liabilities                          |  |                                          |        |   |                |   |         |                       |  |   | 17,494                           |   |  |              |         |   |  |   | 17,494  |  
|Deferred income taxes                                |  |                                          | 4,074   |   |                |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 4,074   |  
|Other long-term liabilities                          |  |                                          | 4,925   |   |                |   | 4,798    |                       |  |   | 1,183                            |   |  |              |         |   |  |   | 10,906  |  
|Intercompany debt                                    |  |                                          | 165,566 |   |                |   | (423,725 | )                     |  |   | 258,159                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 198,153 |   |                |   | (140,899 | )                     |  |   | 295,231                          |   |  |              |         |   |  |   | 352,485 |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit)                       |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 6,191   |   |                |   | 232,518  |                       |  |   | 53,785                           |   |  |              | (286,303 | ) |  |   | 6,191   |  
|Accumulated other comprehensive loss, net of taxes   |  |                                          | (3,558  | ) |                |   |         |                       |  |   | (3,558                           | ) |  |              | 3,558    |   |  |   | (3,558  | )
|Retained earnings (accumulated deficit)              |  |                                          | 1,509   |   |                |   | (37,478  | )                     |  |   | (109,992                         | ) |  |              | 147,470  |   |  |   | 1,509   |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | 4,152   |   |                |   | 195,041  |                       |  |   | (59,765                          | ) |  |              | (135,276 | ) |  |   | 4,152   |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 202,305 |   |                | $ | 54,142   |                       |  | $ | 235,466                          |   |  | $            | (135,276 | ) |  | $ | 356,637 |  
|                                                     |  |                                          |         |   |                |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



20



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 28, 2009



|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                | $ | 76,577  |                       |  | $ | 11,472                           |   |  | $            | (13,137 | ) |  | $ | 74,912  |  
|Cost of goods sold                                           |  |                                          |        |   |                |   | 53,903  |                       |  |   | 11,428                           |   |  |              | (13,137 | ) |  |   | 52,194  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                |   | 22,674  |                       |  |   | 44                               |   |  |              |        |   |  |   | 22,718  |  
|Selling, general and administrative                          |  |                                          |        |   |                |   | 48,802  |                       |  |   | (4                               | ) |  |              |        |   |  |   | 48,798  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |        |   |                |   | (26,128 | )                     |  |   | 48                               |   |  |              |        |   |  |   | (26,080 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          |        |   |                |   |        |                       |  |   | (22                              | ) |  |              |        |   |  |   | (22     | )
|Interest expense                                             |  |                                          |        |   |                |   | 4,846   |                       |  |   | 24                               |   |  |              |        |   |  |   | 4,870   |  
|Other (income) expense, net                                  |  |                                          | (26     | ) |                |   | (1      | )                     |  |   |                                 |   |  |              |        |   |  |   | (27     | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | 30,759  |   |                |   | (210    | )                     |  |   |                                 |   |  |              | (30,549 | ) |  |   |        |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | 30,733  |   |                |   | 4,635   |                       |  |   | 2                                |   |  |              | (30,549 | ) |  |   | 4,821   |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | (30,733 | ) |                |   | (30,763 | )                     |  |   | 46                               |   |  |              | 30,549  |   |  |   | (30,901 | )
|Benefit for income taxes                                     |  |                                          | (12,702 | ) |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | (12,702 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | (18,031 | ) |                |   | (30,763 | )                     |  |   | 46                               |   |  |              | 30,549  |   |  |   | (18,199 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |        |   |                |   |        |                       |  |   | 22                               |   |  |              |        |   |  |   | 22      |  
|Operating income from discontinued operations                |  |                                          |        |   |                |   | 4       |                       |  |   | 142                              |   |  |              |        |   |  |   | 146     |  
|Provision for income taxes on discontinued operations        |  |                                          | 69      |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 69      |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | (69     | ) |                |   | 4       |                       |  |   | 164                              |   |  |              |        |   |  |   | 99      |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | (18,100 | ) |                | $ | (30,759 | )                     |  | $ | 210                              |   |  | $            | 30,549  |   |  | $ | (18,100 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



21



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 29, 2008



|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                | $ | 68,128  |                       |  | $ | 18,937                           |   |  | $            | (18,750 | ) |  | $ | 68,315  |  
|Cost of goods sold                                           |  |                                          |        |   |                |   | 48,341  |                       |  |   | 18,955                           |   |  |              | (18,750 | ) |  |   | 48,546  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                |   | 19,787  |                       |  |   | (18                              | ) |  |              |        |   |  |   | 19,769  |  
|Selling, general and administrative                          |  |                                          |        |   |                |   | 47,326  |                       |  |   | (107                             | ) |  |              |        |   |  |   | 47,219  |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |        |   |                |   | (27,539 | )                     |  |   | 89                               |   |  |              |        |   |  |   | (27,450 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          |        |   |                |   |         |                       |  |   | (1,292                           | ) |  |              |        |   |  |   | (1,292  | )
|Interest expense                                             |  |                                          |        |   |                |   | 6,036   |                       |  |   | 23                               |   |  |              |        |   |  |   | 6,059   |  
|Other (income) expense, net                                  |  |                                          | (98     | ) |                |   | 105     |                       |  |   |                                 |   |  |              |        |   |  |   | 7       |  
|Gain on debt repayment                                       |  |                                          |        |   |                |   |         |                       |  |   |                                 |   |  |              |        |   |  |   |         |  
|Equity in earnings of consolidated subsidiaries              |  |                                          | 32,006  |   |                |   | (1,619  | )                     |  |   |                                 |   |  |              | (30,387 | ) |  |   |        |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | 31,908  |   |                |   | 4,522   |                       |  |   | (1,269                           | ) |  |              | (30,387 | ) |  |   | 4,774   |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | (31,908 | ) |                |   | (32,061 | )                     |  |   | 1,358                            |   |  |              | 30,387  |   |  |   | (32,224 | )
|Benefit for income taxes                                     |  |                                          | (11,227 | ) |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | (11,227 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | (20,681 | ) |                |   | (32,061 | )                     |  |   | 1,358                            |   |  |              | 30,387  |   |  |   | (20,997 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |        |   |                |   |        |                       |  |   | 42                               |   |  |              |        |   |  |   | 42      |  
|Operating income (loss) excluding gain on sale               |  |                                          |         |   |                |   | 55      |                       |  |   | 219                              |   |  |              |        |   |  |   | 274     |  
|Provision for income taxes on discontinued operations        |  |                                          | 110     |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 110     |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | (110    | ) |                |   | 55      |                       |  |   | 261                              |   |  |              |        |   |  |   | 206     |  
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | (20,791 | ) |                | $ | (32,006 | )                     |  | $ | 1,619                            |   |  | $            | 30,387  |   |  | $ | (20,791 | )
|                                                             |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



22



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##### Table of Contents

Condensed Consolidating Statement of Operations

For the Thirty-nine Weeks Ended March 28, 2009



|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |       |   |                | $ | 436,275 |                       |  | $ | 51,053                           |   |  | $            | (52,083 | ) |  | $ | 435,245 |  
|Cost of goods sold                                           |  |                                          |       |   |                |   | 250,768 |                       |  |   | 51,017                           |   |  |              | (52,083 | ) |  |   | 249,702 |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |       |   |                |   | 185,507 |                       |  |   | 36                               |   |  |              |        |   |  |   | 185,543 |  
|Selling, general and administrative                          |  |                                          |       |   |                |   | 191,679 |                       |  |   | (12                              | ) |  |              |        |   |  |   | 191,667 |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |       |   |                |   | (6,172  | )                     |  |   | 48                               |   |  |              |        |   |  |   | (6,124  | )
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          |       |   |                |   |        |                       |  |   | (246                             | ) |  |              |        |   |  |   | (246    | )
|Interest expense                                             |  |                                          |       |   |                |   | 16,584  |                       |  |   | 110                              |   |  |              |        |   |  |   | 16,694  |  
|Other (income) expense, net                                  |  |                                          | (48    | ) |                |   | (2      | )                     |  |   |                                 |   |  |              |        |   |  |   | (50     | )
|Gain on debt repayment                                       |  |                                          |       |   |                |   | (15,416 | )                     |  |   |                                 |   |  |              |        |   |  |   | (15,416 | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | 6,605  |   |                |   | (619    | )                     |  |   |                                 |   |  |              | (5,986  | ) |  |   |        |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | 6,557  |   |                |   | 547     |                       |  |   | (136                             | ) |  |              | (5,986  | ) |  |   | 982     |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | (6,557 | ) |                |   | (6,719  | )                     |  |   | 184                              |   |  |              | 5,986   |   |  |   | (7,106  | )
|Benefit for income taxes                                     |  |                                          | (3,165 | ) |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | (3,165  | )
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | (3,392 | ) |                |   | (6,719  | )                     |  |   | 184                              |   |  |              | 5,986   |   |  |   | (3,941  | )
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |       |   |                |   |        |                       |  |   | 64                               |   |  |              |        |   |  |   | 64      |  
|Operating income from discontinued operations                |  |                                          |       |   |                |   | 114     |                       |  |   | 371                              |   |  |              |        |   |  |   | 485     |  
|Provision for income taxes on discontinued operations        |  |                                          | 215    |   |                |   |        |                       |  |   |                                 |   |  |              |        |   |  |   | 215     |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | (215   | ) |                |   | 114     |                       |  |   | 435                              |   |  |              |        |   |  |   | 334     |  
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | (3,607 | ) |                | $ | (6,605  | )                     |  | $ | 619                              |   |  | $            | 5,986   |   |  | $ | (3,607  | )
|                                                             |  |                                          |        |   |                |   |         |                       |  |   |                                  |   |  |              |         |   |  |   |         |  



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Condensed Consolidating Statement of Operations

For the Thirty-nine Weeks Ended March 29, 2008



|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ------- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net sales                                             |  | $                                        |        |   |                | $ | 486,142 |                       |  | $ | 150,607                          |   |  | $            | (149,002 | ) |  | $ | 487,747 |  
|Cost of goods sold                                    |  |                                          |        |   |                |   | 250,524 |                       |  |   | 150,627                          |   |  |              | (149,002 | ) |  |   | 252,149 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gross profit                                          |  |                                          |        |   |                |   | 235,618 |                       |  |   | (20                              | ) |  |              |         |   |  |   | 235,598 |  
|Selling, general and administrative                   |  |                                          |        |   |                |   | 171,601 |                       |  |   | 825                              |   |  |              |         |   |  |   | 172,426 |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income (loss)                               |  |                                          |        |   |                |   | 64,017  |                       |  |   | (845                             | ) |  |              |         |   |  |   | 63,172  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Other (income) expense:                               |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                       |  |                                          |        |   |                |   |        |                       |  |   | (2,157                           | ) |  |              |         |   |  |   | (2,157  | )
|Interest expense                                      |  |                                          |        |   |                |   | 19,334  |                       |  |   | 29                               |   |  |              |         |   |  |   | 19,363  |  
|Other (income) expense, net                           |  |                                          | (78     | ) |                |   | 133     |                       |  |   |                                 |   |  |              |         |   |  |   | 55      |  
|Gain on debt repayment                                |  |                                          |        |   |                |   | (303    | )                     |  |   |                                 |   |  |              |         |   |  |   | (303    | )
|Equity in earnings of consolidated subsidiaries       |  |                                          | (46,350 | ) |                |   | (1,328  | )                     |  |   |                                 |   |  |              | 47,678   |   |  |   |        |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total other (income) expense                          |  |                                          | (46,428 | ) |                |   | 17,836  |                       |  |   | (2,128                           | ) |  |              | 47,678   |   |  |   | 16,958  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income from continuing operations before income taxes |  |                                          | 46,428  |   |                |   | 46,181  |                       |  |   | 1,283                            |   |  |              | (47,678  | ) |  |   | 46,214  |  
|Provision for income taxes                            |  |                                          | 17,333  |   |                |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 17,333  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income from continuing operations                 |  |                                          | 29,095  |   |                |   | 46,181  |                       |  |   | 1,283                            |   |  |              | (47,678  | ) |  |   | 28,881  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Discontinued operations:                              |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Gain on sale of Jackson & Perkins                     |  |                                          |        |   |                |   |        |                       |  |   | 242                              |   |  |              |         |   |  |   | 242     |  
|Operating income (loss) excluding gain on sale        |  |                                          |        |   |                |   | 169     |                       |  |   | (197                             | ) |  |              |         |   |  |   | (28     | )
|Provision for income taxes on discontinued operations |  |                                          | 72      |   |                |   |        |                       |  |   |                                 |   |  |              |         |   |  |   | 72      |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss) from discontinued operations        |  |                                          | (72     | ) |                |   | 169     |                       |  |   | 45                               |   |  |              |         |   |  |   | 142     |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income                                            |  | $                                        | 29,023  |   |                | $ | 46,350  |                       |  | $ | 1,328                            |   |  | $            | (47,678  | ) |  | $ | 29,023  |  
|                                                      |  |                                          |         |   |                |   |         |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



24



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Condensed Consolidating Statement of Cash Flows

For the Thirty-nine Weeks Ended March 28, 2009



|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|------------------------------------------------------- |  | ---------------------------------------- | ------ | - | -------------- | - | -------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                        |  | Harry & DavidHoldings, Inc.(Parent-Only) |        |   | Harry andDavid |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) operating activities     |  | $                                        | (810   | ) |                | $ | (10,911  | )                     |  | $ | 24,569                           |   |              | $ |  |  | $ | 12,848   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                             |  |                                          |       |   |                |   | (579     | )                     |  |   | (5,426                           | ) |              |   |  |  |   | (6,005   | )
|Acquisition of business                                 |  |                                          |       |   |                |   | (8,509   | )                     |  |   |                                 |   |              |   |  |  |   | (8,509   | )
|Proceeds from the sale of fixed assets                  |  |                                          |       |   |                |   |         |                       |  |   | 19                               |   |              |   |  |  |   | 19       |  
|Proceeds from the sale of held-to-maturity securities   |  |                                          |       |   |                |   |         |                       |  |   | 5,000                            |   |              |   |  |  |   | 5,000    |  
|Proceeds from the sale of available-for-sale securities |  |                                          |       |   |                |   |         |                       |  |   | 10,097                           |   |              |   |  |  |   | 10,097   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) investing activities     |  |                                          |       |   |                |   | (9,088   | )                     |  |   | 9,690                            |   |              |   |  |  |   | 602      |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Financing activities                                    |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                            |  |                                          |       |   |                |   | 113,000  |                       |  |   |                                 |   |              |   |  |  |   | 113,000  |  
|Repayments of revolving debt                            |  |                                          |       |   |                |   | (113,000 | )                     |  |   |                                 |   |              |   |  |  |   | (113,000 | )
|Repayments of capital lease obligations                 |  |                                          |       |   |                |   | (295     | )                     |  |   |                                 |   |              |   |  |  |   | (295     | )
|Repayments of long-term debt                            |  |                                          |       |   |                |   | (20,366  | )                     |  |   |                                 |   |              |   |  |  |   | (20,366  | )
|Net (payments) receipts on intercompany debt            |  |                                          | (709   | ) |                |   | 44,787   |                       |  |   | (44,078                          | ) |              |   |  |  |   |         |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities     |  |                                          | (709   | ) |                |   | 24,126   |                       |  |   | (44,078                          | ) |              |   |  |  |   | (20,661  | )
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents        |  |                                          | (1,519 | ) |                |   | 4,127    |                       |  |   | (9,819                           | ) |              |   |  |  |   | (7,211   | )
|Cash and cash equivalents, beginning of period          |  |                                          | 1,570  |   |                |   | 9,723    |                       |  |   | 29,499                           |   |              |   |  |  |   | 40,792   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period                |  | $                                        | 51     |   |                | $ | 13,850   |                       |  | $ | 19,680                           |   |              | $ |  |  | $ | 33,581   |  
|                                                        |  |                                          |        |   |                |   |          |                       |  |   |                                  |   |              |   |   |  |   |          |  



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Condensed Consolidating Statement of Cash Flows

For the Thirty-nine Weeks Ended March 29, 2008



|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------------------- | ----- | - | -------------- | - | ------- | --------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                    |  | Harry & DavidHoldings, Inc.(Parent-Only) |       |   | Harry andDavid |   |         | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) operating activities |  | $                                        | (826  | ) |                | $ | 44,217  |                       |  | $ | 17,662                           |   |              | $ |  |  | $ | 61,053  |  
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Investing activities                                |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                         |  |                                          |      |   |                |   | (8,947  | )                     |  |   | (5,691                           | ) |              |   |  |  |   | (14,638 | )
|Acquisition of business                             |  |                                          |      |   |                |   | (23,104 | )                     |  |   |                                 |   |              |   |  |  |   | (23,104 | )
|Acquisition of available-for-sale securities        |  |                                          |      |   |                |   |        |                       |  |   | (10,000                          | ) |              |   |  |  |   | (10,000 | )
|Proceeds from the sale of fixed assets              |  |                                          |      |   |                |   |        |                       |  |   | 21                               |   |              |   |  |  |   | 21      |  
|Proceeds from the sale of business                  |  |                                          |      |   |                |   |        |                       |  |   | 3,161                            |   |              |   |  |  |   | 3,161   |  
|Proceeds from the sale of short-term investments    |  |                                          |      |   |                |   |        |                       |  |   | 24,978                           |   |              |   |  |  |   | 24,978  |  
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities |  | $                                        |      |   |                | $ | (32,051 | )                     |  | $ | 12,469                           |   |              | $ |  |  | $ | (19,582 | )
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Financing activities                                |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                        |  |                                          |      |   |                |   | 63,000  |                       |  |   |                                 |   |              |   |  |  |   | 63,000  |  
|Repayments of revolving debt                        |  |                                          |      |   |                |   | (63,000 | )                     |  |   |                                 |   |              |   |  |  |   | (63,000 | )
|Repayments of capital lease obligations             |  |                                          |      |   |                |   | (1,366  | )                     |  |   |                                 |   |              |   |  |  |   | (1,366  | )
|Repayments of long-term debt                        |  |                                          |      |   |                |   | (9,405  | )                     |  |   |                                 |   |              |   |  |  |   | (9,405  | )
|Payments for deferred financing fees                |  |                                          |      |   |                |   | (10     | )                     |  |   |                                 |   |              |   |  |  |   | (10     | )
|Proceeds from exercise of stock options             |  |                                          | 34    |   |                |   |        |                       |  |   |                                 |   |              |   |  |  |   | 34      |  
|Net (payments) receipts on intercompany debt        |  |                                          | 826   |   |                |   | (2,118  | )                     |  |   | 1,292                            |   |              |   |  |  |   |        |  
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities |  | $                                        | 860   |   |                | $ | (12,899 | )                     |  | $ | 1,292                            |   |              | $ |  |  | $ | (10,747 | )
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents    |  |                                          | 34    |   |                |   | (733    | )                     |  |   | 31,423                           |   |              |   |  |  |   | 30,724  |  
|Cash and cash equivalents, beginning of period      |  |                                          | 1,480 |   |                |   | 9,953   |                       |  |   | 37,975                           |   |              |   |  |  |   | 49,408  |  
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period            |  | $                                        | 1,514 |   |                | $ | 9,220   |                       |  | $ | 69,398                           |   |              | $ |  |  | $ | 80,132  |  
|                                                    |  |                                          |       |   |                |   |         |                       |  |   |                                  |   |              |   |   |  |   |         |  



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

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements 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 Form 10-Q to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs
concerning future events affecting us or our future financial performance and are subject to uncertainties and known or unknown risks and other factors relating to our operations and business environment, all of which are difficult to predict and
many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The risks, uncertainties and assumptions referred to above could cause our
results to differ materially from the results expressed or implied by such forward-looking statements.

Risk factors that may affect our results include
the Risk Factors set forth in Harry and Davids Annual Report on Form 10-K for the fiscal year ended June 28, 2008, Part III Item 1A of this Quarterly Report on Form 10-Q, and those risks which may be described from time to time in
Harry and Davids other filings with the Securities and Exchange Commission.

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

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

OVERVIEW

General

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

Recent Acquisitions

On August 8, 2008, we completed the
acquisition of certain of the assets of Cushman Fruit Company, Inc. (the Cushmans Acquisition), a privately held, multi-channel direct marketer of specialty foods, primarily Florida citrus, for a net purchase price of approximately
$8,509, and $450 of acquisition related costs. We paid for the Cushmans Acquisition with available cash balances. Our revolving credit agreement was amended to permit the acquisition and to address other administrative matters. Unless
otherwise defined or noted, references in this Form 10-Q to Cushmans refers to the brand or business, as owned and operated by us, subsequent to the acquisition on August 8, 2008. The operating results of Cushmans are
included in our results of operations only for the periods subsequent to the acquisition date. The operating results of Cushmans are included in our Direct Marketing segment and Wholesale segments according to the nature of the operating
activity.

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 $22,784. We paid for the acquisition of Wolfermans with available cash balances. The operating results of Wolfermans are included in both of our Direct Marketing and Wholesale segments according to the nature of the
operating activity.

Debt repurchases

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

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



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On a combined basis for the thirty-nine weeks ended March 28, 2009, the Company purchased $36,638 principal
aggregate amount of its fixed and floating rate Senior Notes in open-market purchases for $20,366. The debt prepayment resulted in a net gain of $15,416, comprised of a $16,272 discount on the repayment of outstanding principal, partially offset by
the write-off of $856 of unamortized deferred financing costs.

During the thirty-nine weeks ended March 29, 2008, the Company purchased $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 $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.

Sale of the Jackson & Perkins business

We divested our Jackson & Perkins business in the fourth quarter of fiscal 2007. In connection with the sale of the business, we entered into
an agreement with the buyer to provide transitional services through June 2008. As of March 28, 2009, we continue to provide certain minimal transitional services to the buyers of Jackson & Perkins. The revenue and expenses associated with
the continuation of these services is not expected to be material to our operating results or financial condition.

For further information regarding the
divestiture 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.

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.

MATTERS AFFECTING COMPARABILITY

A portion of our Direct Marketing sales are derived from Fruit-of-the-Month Club® product shipments (club shipments.) As such, results in this segment may vary between periods due to variations in fruit availability year-to-year, as well as other factors. Further, our recent
acquisitions affect the comparability to the current year results to the comparable prior period.

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 segment for the periods indicated (dollars are in thousands).



|                 |  |                      |        |                 |                         |   |               |   |                 |  |       |               |  |                 |         |  |               |   |                 |   |         |  |       |  
|---------------- |  | -------------------- | ------ | --------------- | ----------------------- | - | ------------- | - | --------------- |  | ----- | ------------- |  | --------------- | ------- |  | ------------- | - | --------------- | - | ------- |  | ----- | -
|                 |  | Thirteen Weeks Ended |        |                 | Thirty-nine Weeks Ended |  
|                 |  | March 28,2009        |        | Percent ofTotal |                         |   | March 29,2008 |   | Percent ofTotal |  |       | March 28,2009 |  | Percent ofTotal |         |  | March 29,2008 |   | Percent ofTotal |  
|Direct Marketing |  | $                    | 47,770 |                 | 63.8                    | % |               | $ | 43,544          |  | 63.7  | %             |  | $               | 295,090 |  | 67.8          | % |                 | $ | 338,470 |  | 69.4  | %
|Stores           |  |                      | 20,884 |                 | 27.9                    | % |               |   | 21,917          |  | 32.1  | %             |  |                 | 105,048 |  | 24.1          | % |                 |   | 117,484 |  | 24.1  | %
|Wholesale        |  |                      | 6,258  |                 | 8.3                     | % |               |   | 2,854           |  | 4.2   | %             |  |                 | 35,107  |  | 8.1           | % |                 |   | 31,793  |  | 6.5   | %
|Other            |  |                      |       |                 | 0.0                     | % |               |   |                |  | 0.0   | %             |  |                 |        |  | 0.0           | % |                 |   |        |  | 0.0   | %
|                 |  |                      |        |                 |                         |   |               |   |                 |  |       |               |  |                 |         |  |               |   |                 |   |         |  |       |  
|Total net sales  |  | $                    | 74,912 |                 | 100.0                   | % |               | $ | 68,315          |  | 100.0 | %             |  | $               | 435,245 |  | 100.0         | % |                 | $ | 487,747 |  | 100.0 | %
|                 |  |                      |        |                 |                         |   |               |   |                 |  |       |               |  |                 |         |  |               |   |                 |   |         |  |       |  

We have reclassified revenue from commercial fruit sales from the Other segment to the
Wholesale segment. Certain costs related to commercial fruit sales have not been reclassified as the impact is immaterial and it is impractical to do so. In the current fiscal year, we have also reclassified certain activities related to
Cushmans from the Direct Marketing segment to the Wholesale segment.

Net sales from continuing operations of $74,912 for the
thirteen weeks ended March 28, 2009, increased $6,597, or 9.7%, from the thirteen weeks ended March 29, 2008. The increase in net sales was driven by the Cushmans Acquisition, timing of club shipments, and higher sales of
Wolfermans products, partially offset by lower sales in Harry & David Direct Marketing as a result of higher markdowns and discounts, lower volume in Stores and the Easter shift into the fourth fiscal quarter of 2009, compared to the third
fiscal quarter of 2008.

Net sales from continuing operations of $435,245 for the thirty-nine weeks
ended March 28, 2009, decreased $52,502, or 10.8%, from the thirty-nine weeks ended March 29, 2008. The decline in net sales was driven by lower volumes and higher markdowns and discounts in the Harry & David Direct Marketing,
Stores and Wholesale divisions. These declines were partially offset by the addition of Wolfermans® and Cushmans brand sales.



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##### Table of Contents

Direct Marketing

Net
sales in our Direct Marketing segment increased $4,226, or 9.7%, from the thirteen weeks ended March 29, 2008 to the thirteen weeks ended March 28, 2009. The increase was driven by the Cushmans Acquisition, timing of club shipments,
and higher Wolfermans sales, partially offset by lower sales in Harry & David Direct Marketing as a result of higher markdowns and discounts and, to a lesser extent, the shift of Easter sales to the fiscal fourth quarter.

Net sales in our Direct Marketing segment decreased $43,380, or 12.8%, from the thirty-nine weeks ended March 29, 2008 to the thirty-nine weeks ended March 28,
2009. The decrease was driven by reduced overall order demand in our Harry & David Direct Marketing division and, to a lesser extent, lower average order unit size reflecting higher discounts. These declines attributable to our
Harry & David brand were partially offset by the addition of Wolfermans and Cushmans sales.

Stores

Our Stores segment net sales decreased $1,033, representing a 4.7% decline in total sales and a comparable stores sales decline of 8.4%, or approximately $1,759 from the
thirteen weeks ended March 29, 2008 to the thirteen weeks ended March 28, 2009. The decrease was driven by lower customer traffic and lower overall transaction volume, reflecting similar trends in the broader retail market. The comparable
store sales decrease was partially offset by approximately $1,640 net sales contribution from our new (non-comparable) stores which includes two acquired Cushmans stores.

Our Stores segment net sales decreased $12,436, representing a 10.6% decline in total sales and a decline of 13.0% or approximately $14,914, on a comparable store basis, from the thirty-nine weeks ended March 29,
2008 to the thirty-nine weeks ended March 28, 2009. The decrease was driven by lower customer traffic and lower overall transaction volume, reflecting similar trends in the broader retail market. The decrease was partially offset by a $5,571
contribution from our new (non-comparable) stores.

As of March 28, 2009, we had 141 stores in operation compared to 145 stores in operation during
the same quarter last fiscal year. Not included in these store counts are two seasonal Cushmans stores, and three temporary stores that operated in the second and third fiscal quarters.

A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months, at which point its results are included in comparable sales
comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a comparable store.

Wholesale

Our Wholesale segment net sales increased $3,404, or
119.3%, from the thirteen weeks ended March 29, 2008 to the thirteen weeks ended March 28, 2009. The increase was primarily due to the addition of Cushman wholesale sales as well as year over year increases in commercial fruit sales that
are now included in the Wholesale segment previously reported in the Other segment, slightly offset by lower volumes with certain wholesale customers.

Our
Wholesale segment net sales increased $3,314, or 10.4%, from the thirty-nine weeks ended March 29, 2008 to the thirty-nine weeks ended March 28, 2009. The increase was primarily due to the same factors mentioned above.

Other

Other segment net sales, which primarily consisted of
commercial fruit products, are now reported in the Wholesale segment.



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##### Table of Contents

GROSS PROFIT

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



|                   |  |                      |        |                     |                         |   |               |   |        |                     |  |       |               |  |                     |         |  |               |   |  |                     |         |   |  |      |  
|------------------ |  | -------------------- | ------ | ------------------- | ----------------------- | - | ------------- | - | ------ | ------------------- |  | ----- | ------------- |  | ------------------- | ------- |  | ------------- | - |  | ------------------- | ------- | - |  | ---- | -
|                   |  | Thirteen Weeks Ended |        |                     | Thirty-nine Weeks Ended |  
|                   |  | March 28,2009        |        | Percent ofNet Sales |                         |   | March 29,2008 |   |        | Percent ofNet Sales |  |       | March 28,2009 |  | Percent ofNet Sales |         |  | March 29,2008 |   |  | Percent ofNet Sales |        
|Direct Marketing   |  | $                    | 13,406 |                     | 28.1                    | % |               | $ | 11,889 |                     |  | 27.3  | %             |  | $                   | 130,484 |  | 44.2          | % |  | $                   | 173,848 |   |  | 51.4 | %
|Stores             |  |                      | 8,607  |                     | 41.2                    | % |               |   | 8,663  |                     |  | 39.5  | %             |  |                     | 48,577  |  | 46.2          | % |  |                     | 56,888  |   |  | 48.4 | %
|Wholesale          |  |                      | 695    |                     | 11.1                    | % |               |   | (749   | )                   |  | (26.2 | )%            |  |                     | 6,446   |  | 18.4          | % |  |                     | 4,898   |   |  | 15.4 | %
|Other              |  |                      | 10     |                     | 0.0                     | % |               |   | (34    | )                   |  | 0.0   | %             |  |                     | 36      |  | 0.0           | % |  |                     | (36     | ) |  | 0.0  | %
|                   |  |                      |        |                     |                         |   |               |   |        |                     |  |       |               |  |                     |         |  |               |   |  |                     |         |   |  |      |  
|Total Gross Profit |  | $                    | 22,718 |                     | 30.3                    | % |               | $ | 19,769 |                     |  | 28.9  | %             |  | $                   | 185,543 |  | 42.6          | % |  | $                   | 235,598 |   |  | 48.3 | %
|                   |  |                      |        |                     |                         |   |               |   |        |                     |  |       |               |  |                     |         |  |               |   |  |                     |         |   |  |      |  

Gross profit from continuing operations increased $2,949, or 14.9%, to $22,718 in the thirteen weeks ended
March 28, 2009, from $19,769 in the thirteen weeks ended March 29, 2008. Consolidated gross profit as a percentage of consolidated net sales was 30.3% in the thirteen-week period ended March 28, 2009, and 28.9% in the thirteen-week
period ended March 29, 2008.

Gross profit from continuing operations decreased $50,055, or 21.2%, to $185,543 in the thirty-nine weeks ended
March 28, 2009, from $235,598 in the thirty-nine weeks ended March 29, 2008. Consolidated gross profit as a percentage of consolidated net sales was 42.6% in the thirty-nine week period ended March 28, 2009, and 48.3% in the
thirty-nine week period ended March 29, 2008.

Direct Marketing

Our Direct Marketing segment gross profit increased $1,517, or 12.8%, with gross margin improving to 28.1% in the thirteen weeks ended March 28, 2009 from 27.3% in the thirteen weeks ended March 29, 2008.
The gross profit increase was primarily due to gross profit contributions from Cushmans products, overhead cost improvements from company initiatives in fixed and variable costs, and higher recovery on the sale of inventory reserved for in our
fiscal second quarter, offset by higher promotional activity.

Our Direct Marketing segment gross profit decreased $43,364, or 24.9%, with gross margin
declining to 44.2% in the thirty-nine weeks ended March 28, 2009 from 51.4% in the thirty-nine weeks ended March 29, 2008. The gross profit and gross margin declines were primarily due to lower overall product demand, higher product and
delivery markdowns and discounts, and, to a lesser extent, the addition of slightly lower gross margins in our acquired brands. Also contributing to the declines were increased inventory reserves, higher material costs, and the effect of lower sales
volume over our fixed costs, slightly offset by lower delivery expense.

Stores

Our Stores segment gross profit decreased $56, or 0.6%, with gross margin increasing to 41.2% in the thirteen weeks ended March 28, 2009 from 39.5% in the thirteen weeks ended March 29, 2008. The gross
profit decline was primarily due to lower sales offset by reduced freight expense and a favorable inventory adjustment. The increase in gross margin was attributable the reduced freight expense, a favorable inventory adjustment, and lower allocated
fixed overhead costs.

Our Stores segment gross profit decreased $8,311, or 14.6%, with gross margin declining to 46.2% in the thirty-nine weeks ended
March 28, 2009 from 48.4% in the thirty-nine weeks ended March 29, 2008. The gross profit decline was primarily due to lower sales volume and increased product discounts. The decline in gross margin was attributable to higher product
discounts reflecting a more aggressive promotional stance driven by increased competition across the broader retail market. Also contributing to the gross margin decline was the effect of lower sales on our fixed costs, slightly offset by lower
freight costs.

Wholesale

Our Wholesale segment gross
profit increased $1,444 or 192.8%, while gross margin increased to 11.1% in the thirteen weeks ended March 28, 2009 from -26.2% in the thirteen weeks ended March 29, 2008. The gross profit and gross margin increases were primarily
attributable to the addition of Cushmans, lower inventory write-offs and favorable overhead costs.

Our Wholesale segment gross profit increased
$1,548 or 31.6%, while gross margin increased to 18.4% in the thirty-nine weeks ended March 28, 2009 from 15.4% in the thirty-nine weeks ended March 29, 2008. The gross profit increase was attributable to Cushmans wholesale
activities offset by lower overall freight costs as well as sales increases in the drop-ship channel.



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##### Table of Contents

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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



|                                         |  |                      |        |   |                         |      |   |               |   |                     |  |      |               |  |   |                     |   |  |               |   |                     |   |         |  |      |  
|---------------------------------------- |  | -------------------- | ------ | - | ----------------------- | ---- | - | ------------- | - | ------------------- |  | ---- | ------------- |  | - | ------------------- | - |  | ------------- | - | ------------------- | - | ------- |  | ---- | -
|                                         |  | Thirteen Weeks Ended |        |   | Thirty-nine Weeks Ended |     
|                                         |  | March 28,2009        |        |   | Percent ofNet Sales     |      |   | March 29,2008 |   | Percent ofNet Sales |  |      | March 28,2009 |  |   | Percent ofNet Sales |   |  | March 29,2008 |   | Percent ofNet Sales |  
|Direct Marketing                         |  | $                    | 31,031 |   |                         | 65.0 | % |               | $ | 28,380              |  | 65.2 | %             |  | $ | 131,013             |   |  | 44.4          | % |                     | $ | 112,926 |  | 33.4 | %
|Stores                                   |  |                      | 16,440 |   |                         | 78.7 | % |               |   | 18,250              |  | 83.3 | %             |  |   | 56,529              |   |  | 53.8          | % |                     |   | 56,767  |  | 48.3 | %
|Wholesale                                |  |                      | 1,330  |   |                         | 21.3 | % |               |   | 584                 |  | 20.5 | %             |  |   | 4,141               |   |  | 11.8          | % |                     |   | 2,731   |  | 8.6  | %
|Other                                    |  |                      | (3     | ) |                         | 0.0  | % |               |   | 5                   |  | 0.0  | %             |  |   | (16                 | ) |  | 0.0           | % |                     |   | 2       |  | 0.0  | %
|                                         |  |                      |        |   |                         |      |   |               |   |                     |  |      |               |  |   |                     |   |  |               |   |                     |   |         |  |      |  
|Total Selling, General, & Administrative |  | $                    | 48,798 |   |                         | 65.1 | % |               | $ | 47,219              |  | 69.1 | %             |  | $ | 191,667             |   |  | 44.0          | % |                     | $ | 172,426 |  | 35.4 | %
|                                         |  |                      |        |   |                         |      |   |               |   |                     |  |      |               |  |   |                     |   |  |               |   |                     |   |         |  |      |  

Selling, general and administrative expenses from continuing operations increased $1,579, or 3.3% in the thirteen
weeks ended March 28, 2009 from the thirteen weeks ended March 29, 2008. The increase in selling, general and administrative expenses was due to the addition of costs associated with the Cushmans business, severance charges, and
increased pension expense, offset by lower costs in Harry & David advertising, outside services, repairs and maintenance, travel, and supplies as well as an absence of store impairment charges taken in the third quarter last year.

Selling, general and administrative expenses from continuing operations increased $19,241, or 11.2% in the thirty-nine weeks ended March 28, 2009
from the thirteen weeks ended March 29, 2008. The increase in selling, general and administrative expenses was due to $15,016 of non-cash charges for impairment of goodwill and intangible assets related to acquisitions and store impairments,
the addition of Wolfermans and Cushmans advertising costs in the Direct Marketing segment and severance charges, partially offset by lower advertising costs in the Harry & David Direct Marketing division and lower payroll,
outside services, repair and maintenance, and other expenses.

Consolidated selling, general and administrative expenses as a percentage of consolidated
net sales were 65.1% in the thirteen-week period ended March 28, 2009, compared to 69.1% in the thirteen-week period ended March 29, 2008, and 44.0% in the thirty-nine week period ended March 28, 2009, compared to 35.4% in the
thirty-nine week period ended March 29, 2008.

OTHER (INCOME) EXPENSE

For the thirteen-week period ended March 28, 2009, other expense was $4,821 compared to $4,774 in the thirteen-week period ended March 29, 2008. Other expense for the thirteen weeks ended March 28, 2009
was comprised primarily of net interest expense of $4,848. The primary source of other expense for the thirteen weeks ended March 29, 2008 was net interest expense of $4,767. Despite the lower outstanding balance on our Senior Notes in the
current period, the interest expense savings was largely offset by lower interest income.

Other expense for the thirty-nine weeks ended March 28,
2009 was $982 compared to $16,958 in the thirty-nine weeks ended March 29, 2008. Other expense for the thirty-nine weeks ended March 28, 2009 was comprised of net interest expense of $16,448 partially offset by a $15,416 gain on debt
repurchases, as previously described. The primary source of other expense for the thirty-nine weeks ended March 29, 2008 was net interest expense of $17,206.

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 2009, the difference in the effective rate and the federal statutory rate is primarily due to state tax obligations.

EBITDA

Our EBITDA from continuing operations for the
thirteen-week period ended March 28, 2009 increased $1,191. EBITDA from continuing operations for the thirty-nine week period ended March 28, 2009 decreased $53,289 primarily due to our operating performance which included $15,016 of
impairment charges partially offset by the gain of $15,416 on debt repayment.



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##### Table of Contents

For an explanation of why management believes EBITDA is a useful measure for understanding our results of operations and
a reconciliation of EBITDA to the most comparable GAAP measure, see note on page 36, Non-GAAP Financial Measure: EBITDA. The following table reconciles EBITDA from continuing operations to net cash provided by (used in) operating
activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net income or loss, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in thousands).



|                                                                                 |               |                      |         |               |                         |   |               |   |  |               |         |   |  |   |         |  
|-------------------------------------------------------------------------------- | ------------- | -------------------- | ------- | ------------- | ----------------------- | - | ------------- | - |  | ------------- | ------- | - |  | - | ------- | -
|                                                                                 |               | Thirteen Weeks Ended |         |               | Thirty-nine Weeks Ended |  
|                                                                                 | March 28,2009 |                      |         | March 29,2008 |                         |   | March 28,2009 |   |  | March 29,2008 |        
|Net income (loss) from continuing operations                                     |               | $                    | (18,199 | )             |                         | $ | (20,997       | ) |  | $             | (3,941  | ) |  | $ | 28,881  |  
|Interest expense, net from continuing operations                                 |               |                      | 4,848   |               |                         |   | 4,767         |   |  |               | 16,448  |   |  |   | 17,206  |  
|Provision (benefit) for income taxes from continuing operations                  |               |                      | (12,702 | )             |                         |   | (11,227       | ) |  |               | (3,165  | ) |  |   | 17,333  |  
|Depreciation and amortization from continuing operations                         |               |                      | 5,178   |               |                         |   | 5,391         |   |  |               | 15,785  |   |  |   | 14,996  |  
|                                                                                 |               |                      |         |               |                         |   |               |   |  |               |         |   |  |   |         |  
|EBITDA from continuing operations                                                |               | $                    | (20,875 | )             |                         | $ | (22,066       | ) |  | $             | 25,127  |   |  | $ | 78,416  |  
|Interest expense, net from continuing operations                                 |               |                      | (4,848  | )             |                         |   | (4,767        | ) |  |               | (16,448 | ) |  |   | (17,206 | )
|Provision for income taxes from continuing operations                            |               |                      | 12,702  |               |                         |   | 11,227        |   |  |               | 3,165   |   |  |   | (17,333 | )
|Amortization of deferred financing costs                                         |               |                      | 594     |               |                         |   | 645           |   |  |               | 1,842   |   |  |   | 1,956   |  
|Stock option compensation expense                                                |               |                      | 118     |               |                         |   | 130           |   |  |               | 356     |   |  |   | 414     |  
|Loss on disposal and impairment of fixed assets, goodwill, and other intangibles |               |                      | 11      |               |                         |   | 1,156         |   |  |               | 15,070  |   |  |   | 1,700   |  
|Gain on short-term investments                                                   |               |                      |        |               |                         |   |              |   |  |               | (64     | ) |  |   | (162    | )
|Deferred income taxes                                                            |               |                      | (1,993  | )             |                         |   | (597          | ) |  |               | 471     |   |  |   | (27,362 | )
|Amortization of deferred pension loss                                            |               |                      | 1,360   |               |                         |   |              |   |  |               | 1,418   |   |  |   |        |  
|Gain on debt repayment                                                           |               |                      |        |               |                         |   |              |   |  |               | (15,416 | ) |  |   | (303    | )
|Changes in operating assets and liabilities from continuing operations           |               |                      | (47,094 | )             |                         |   | (50,667       | ) |  |               | (3,554  | ) |  |   | 37,847  |  
|Net cash provided by discontinued operations                                     |               |                      | 146     |               |                         |   | 1,212         |   |  |               | 881     |   |  |   | 3,086   |  
|                                                                                 |               |                      |         |               |                         |   |               |   |  |               |         |   |  |   |         |  
|Net cash provided by (used in) operating activities                              |               | $                    | (59,879 | )             |                         | $ | (63,727       | ) |  | $             | 12,848  |   |  | $ | 61,053  |  
|                                                                                 |               |                      |         |               |                         |   |               |   |  |               |         |   |  |   |         |  

In the thirteen-week period ended March 28, 2009, net loss and EBITDA from continuing operations included:



| |  |  | $287 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $145 of integration expenses related to our acquisitions;
| | - |  | ---------------------------------------------------------



| |  |  | $11 loss on disposal of fixed assets;
| | - |  | -------------------------------------



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



| |  |  | $2,127 of severance payroll expenses;
| | - |  | -------------------------------------



| |  |  | $458 severance related benefits and outplacement services;
| | - |  | ----------------------------------------------------------



| |  |  | $1,529 of inventory reserve benefit;
| | - |  | ------------------------------------



| |  |  | $26 gain on FIN 48 tax adjustment; and
| | - |  | --------------------------------------



| |  |  | $196 in approved relocation and recruitment charges.
| | - |  | ----------------------------------------------------

In the thirteen-week period ended March 29, 2008, net loss and EBITDA from continuing operations included:



| |  |  | $1,574 of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $11 of employee executive recruiting charges;
| | - |  | ---------------------------------------------



| |  |  | $1,156 loss on disposal and impairment of fixed assets;
| | - |  | -------------------------------------------------------



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



| |  |  | $325 of severance and re-organization payroll and benefits;
| | - |  | -----------------------------------------------------------



| |  |  | $164 gain on FIN 48 tax adjustment;
| | - |  | -----------------------------------



| |  |  | $442 non-recurring inventory adjustment related to ERP conversion in the third quarter; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | $172 inventory step-up purchase accounting adjustment.
| | - |  | ------------------------------------------------------



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##### Table of Contents

In the thirty-nine week period ended March 28, 2009, net loss and EBITDA from continuing operations included:



| |  |  | $1,336 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ------------------------------------------------------------------------------------------------------------



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



| |  |  | $631 of integration expenses related to our acquisitions;
| | - |  | ---------------------------------------------------------



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



| |  |  | $54 loss on disposal of fixed assets;
| | - |  | -------------------------------------



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



| |  |  | $750 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $2,544 of severance payroll expenses;
| | - |  | -------------------------------------



| |  |  | $458 severance related benefits and outplacement services;
| | - |  | ----------------------------------------------------------



| |  |  | $15,016 of expenses recognized for impaired assets;
| | - |  | ---------------------------------------------------



| |  |  | $3,899 of inventory reserve expenses;
| | - |  | -------------------------------------



| |  |  | $48 gain on FIN 48 tax adjustment;
| | - |  | ----------------------------------



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



| |  |  | $196 of approved relocation and recruitment charges.
| | - |  | ----------------------------------------------------

In the thirty-nine week period ended March 29, 2008, net income and EBITDA from continuing operations included:



| |  |  | $3,323 of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $150 of employee executive recruiting charges;
| | - |  | ----------------------------------------------



| |  |  | $1,700 loss on disposal and impairment of fixed assets;
| | - |  | -------------------------------------------------------



| |  |  | $303 net gain on prepayment of long-term debt;
| | - |  | ----------------------------------------------



| |  |  | $750 of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | -------------------------------------------------------------------------------



| |  |  | $304 of costs associated with legal settlements;
| | - |  | ------------------------------------------------



| |  |  | $698 of severance and re-organization payroll and benefits;
| | - |  | -----------------------------------------------------------



| |  |  | $164 gain on FIN 48 tax adjustment;
| | - |  | -----------------------------------



| |  |  | $442 non-recurring inventory adjustment related to ERP conversion in the third quarter; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | $172 inventory step-up purchase accounting adjustment.
| | - |  | ------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES

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

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



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##### Table of Contents

Cash Flows Provided by Operating Activities from Continuing Operations

Cash provided by operating activities from continuing operations totaled $11,967 in the thirty-nine week period ended March 28, 2009, compared to $57,967 in the
thirty-nine week period ended March 29, 2008. The decrease in cash provided by continuing operations was primarily attributable to lower operating income driven by the factors described above.

Cash Flows Provided by Investing Activities from Continuing Operations

Cash provided by investing activities from continuing operations totaled $602 in the thirty-nine week period ended March 28, 2009, compared to cash usage of $22,743 in the thirty-nine week period ended March 29, 2008. Investing
activities in fiscal 2009 consisted primarily of proceeds on short-term investments, partially offset by cash used for the Cushmans acquisition and other capital expenditures. Investing activities in fiscal 2008 consisted primarily of cash
used for the Wolfermans acquisition and capital expenditures, partially offset by the proceeds from the sale of short-term investments.

Cash
Flows Used in Financing Activities from Continuing Operations

Cash used in financing activities from continuing operations totaled $20,661 for the
thirty-nine weeks ended March 28, 2009, compared to $10,747 in the thirty-nine weeks ended March 29, 2008. In both periods, financing activities were primarily comprised of the open-market repurchases of our Senior Notes.

Cash Flows from Discontinued Operations

Cash flows provided by
operating activities from discontinued operations totaled $881 for the thirty-nine weeks ended March 28, 2009 and $3,086 for the thirty-nine weeks ended March 29, 2008. Cash from discontinued operations for both periods was primarily 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 $3,161 for the thirty-nine weeks ended March 29, 2008 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. There were
no such amounts in fiscal 2009.

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

As of March 28, 2009, we had $0 in borrowings and $1,061 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 available borrowings at March 28, 2009, were approximately $5,021. 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s and each of the subsidiary guarantors equity interests and 65% of the equity interests of any future first-tier foreign subsidiaries, as well as first-priority security
interests in and mortgages on all of our, Harry and Davids and each of the subsidiary guarantors respective tangible and intangible property.

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



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In addition, the revolving credit facility requires that, on a consolidated basis, we maintain as of December 31 an
available cash balance (defined as all cash, cash equivalents and short-term investments, minus all accounts payable) of $50,000, failing which we are required to meet and maintain a minimum fixed charge coverage ratio, subject to certain
definitions and conditions. As of March 28, 2009, we were in compliance with this covenant. We also are limited to the amount of capital expenditures in each fiscal year, subject to certain adjustments, through the term of the revolving credit
facility.

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

At March 28, 2009, we were in compliance with all of our covenants under the Credit Agreement.

Long-term Debt

As of March 28, 2009, Harry and David, our wholly owned subsidiary, has outstanding
$58,170 in Senior Floating Rate Notes due March 1, 2012, and $140,192 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The $58,170 in Senior Floating Rate Notes accrues interest at a rate per annum
equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 6.26% at March 28, 2009. The $140,192 in Senior Fixed Rate Notes accrues interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the
first of March and December.

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

The indenture governing the Senior Notes contains various restrictive covenants including, but not
limited to, limitations on the incurrence of indebtedness, engaging in asset dispositions or acquisitions, making investments, and our and our subsidiaries ability to pay dividends and other restricted payments, our ability to incur liens and
transactions with affiliates. Our ability to comply with these covenants may be affected by events beyond our control, such as those described under Item 1A. -Risk Factors in our Annual Report on Form 10-K and Part III, Item 1A of
this Quarterly Report on Form 10-Q. 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 March 28, 2009, we were in compliance with all of our covenants under
the indenture. Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist
mainly of cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.

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

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

Seasonality

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



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

CRITICAL ACCOUNTING POLICIES

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

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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

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

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

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



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



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



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



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



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

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



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

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

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



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



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



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



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



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



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

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



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

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

Interest Rate Risk

Interest on our floating rate notes and on our borrowings under the revolving credit facility accrues at variable rates based on factors such as LIBOR and the federal funds overnight rate. Assuming we were to borrow the entire amount
available under our revolving credit facility, together with the principal amount due for our floating rate notes as of March 28, 2009, a 1.0% change in the interest rate on our variable rate debt would result in a $1,832 corresponding effect
on our interest expense on an annual basis.

Commodity Risk

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



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

We have carried out an evaluation, under
the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The evaluation examined
those disclosure controls and procedures as of March 28, 2009. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of March 28, 2009, our disclosure controls
and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

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

PART II. OTHER INFORMATION



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

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



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

As disclosed in our second quarter Form 10-Q filed on
February 9, 2009, other than the addition of the risk factor below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended June 28, 2008:

The recent changes in general economic conditions, and the impact on consumer confidence and consumer spending, could adversely impact our results of
operations.

The Companys performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer
spending. Recently, consumer confidence and consumer spending have deteriorated significantly, and could remain depressed for an extended period. Some of the factors influencing this deterioration include fluctuating interest rates and credit
availability, fluctuating fuel and other energy costs, fluctuating commodity prices, higher levels of unemployment, higher consumer debt levels, reductions in net worth based on market declines, and general uncertainty regarding the overall future
economic environment. Consumer purchases of discretionary items, including our merchandise, generally decline during periods where disposable income is adversely affected or there is economic uncertainty, and this could adversely impact our results
of operations.



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

None.



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

None.



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

None.



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

None.



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



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



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SIGNATURES

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





HARRY & DAVID HOLDINGS, INC.By:

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

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


May 8, 2009



39