##### Table of Contents





United States

Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended September 27, 2008

or



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

For the transition period from  to

Commission File Number 333-127173





Harry & David Holdings, Inc.

(Exact name of registrant as specified
in its charter)







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

(541) 864-2362

(Registrants telephone number including area code)

None

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





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

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer, 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 November 3, 2008
|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 September 27, 2008, June 28, 2008 and September 29, 2007           |  | 3   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended September 27, 2008 and September 29, 2007 |  | 4   
|                              |  |          | 
|                              |  |          |  | Condensed Consolidated Statements of Cash Flows  Thirteen Weeks ended September 27, 2008 and September 29, 2007 |  | 5   
|                              |  |          | 
|                              |  |          |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 6   
|                              |  |          | 
|                              |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 24  
|                              |  |          | 
|                              |  | Item 3.  |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 34  
|                              |  |          | 
|                              |  | Item 4.  |  | Controls and Procedures                                                                                          |  | 35  
|                              | 
|Part II. Other Information    |  |         
|                              |  |          | 
|                              |  | Item 1.  |  | Legal Proceedings                                                                                                |  | 35  
|                              |  |          | 
|                              |  | Item 1A. |  | Risk Factors                                                                                                     |  | 35  
|                              |  |          | 
|                              |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                      |  | 35  
|                              |  |          | 
|                              |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                  |  | 35  
|                              |  |          | 
|                              |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                              |  | 35  
|                              |  |          | 
|                              |  | Item 5.  |  | Other Information                                                                                                |  | 35  
|                              |  |          | 
|                              |  | Item 6.  |  | Exhibits                                                                                                         |  | 35  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share and Per Share Data)



|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | ----------------- |  | - | ------- | -
|                                                                                                                                                                                                        |  | September 27,2008 |         |   | June 28,2008 |   |         | September 29,2007 | 
|                                                                                                                                                                                                        |  | Unaudited         |         |   |              |   |         | Unaudited         | 
|Assets                                                                                                                                                                                                  |  |                   |         |   |              |   |         |                   |  |   |         |  
|Current assets                                                                                                                                                                                          |  |                   |         |   |              |   |         |                   |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                               |  | $                 | 27,950  |   |              | $ | 40,792  |                   |  | $ | 3,659   |  
|Short-term investments                                                                                                                                                                                  |  |                   |        |   |              |   | 15,033  |                   |  |   |        |  
|Trade accounts receivable, net                                                                                                                                                                          |  |                   | 6,482   |   |              |   | 2,084   |                   |  |   | 7,487   |  
|Other receivables                                                                                                                                                                                       |  |                   | 3,029   |   |              |   | 2,843   |                   |  |   | 3,967   |  
|Inventories, net                                                                                                                                                                                        |  |                   | 100,704 |   |              |   | 54,463  |                   |  |   | 106,137 |  
|Deferred catalog expenses                                                                                                                                                                               |  |                   | 18,214  |   |              |   | 6,258   |                   |  |   | 14,483  |  
|Deferred income taxes                                                                                                                                                                                   |  |                   | 3,861   |   |              |   | 3,230   |                   |  |   |        |  
|Prepaid income taxes                                                                                                                                                                                    |  |                   |        |   |              |   |        |                   |  |   | 864     |  
|Other current assets                                                                                                                                                                                    |  |                   | 10,642  |   |              |   | 7,491   |                   |  |   | 12,177  |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total current assets                                                                                                                                                                                    |  |                   | 170,882 |   |              |   | 132,194 |                   |  |   | 148,774 |  
|Fixed assets, net                                                                                                                                                                                       |  |                   | 159,404 |   |              |   | 162,214 |                   |  |   | 165,092 |  
|Goodwill                                                                                                                                                                                                |  |                   | 9,006   |   |              |   | 3,690   |                   |  |   |        |  
|Intangibles, net                                                                                                                                                                                        |  |                   | 47,984  |   |              |   | 45,677  |                   |  |   | 28,645  |  
|Deferred financing costs, net                                                                                                                                                                           |  |                   | 8,372   |   |              |   | 9,266   |                   |  |   | 11,486  |  
|Other assets                                                                                                                                                                                            |  |                   | 3,271   |   |              |   | 3,596   |                   |  |   | 3,721   |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total assets                                                                                                                                                                                            |  | $                 | 398,919 |   |              | $ | 356,637 |                   |  | $ | 357,718 |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|                                                                                                                                                                                                        |  |                   |        
|Liabilities and stockholders equity (deficit)                                                                                                                                                          |  |                   |         |   |              |   |         |                   |  |   |         |  
|Current liabilities                                                                                                                                                                                     |  |                   |         |   |              |   |         |                   |  |   |         |  
|Accounts payable                                                                                                                                                                                        |  | $                 | 33,267  |   |              | $ | 18,981  |                   |  | $ | 34,380  |  
|Accrued payroll and benefits                                                                                                                                                                            |  |                   | 14,211  |   |              |   | 14,052  |                   |  |   | 12,778  |  
|Deferred revenue                                                                                                                                                                                        |  |                   | 7,917   |   |              |   | 13,667  |                   |  |   | 8,562   |  
|Deferred income taxes                                                                                                                                                                                   |  |                   |        |   |              |   |        |                   |  |   | 9,496   |  
|Income taxes payable                                                                                                                                                                                    |  |                   | 8,627   |   |              |   | 23,610  |                   |  |   |        |  
|Accrued interest                                                                                                                                                                                        |  |                   | 1,814   |   |              |   | 5,523   |                   |  |   | 1,974   |  
|Other accrued liabilities                                                                                                                                                                               |  |                   | 7,945   |   |              |   | 7,932   |                   |  |   | 7,946   |  
|Current portion of capital lease obligations                                                                                                                                                            |  |                   | 633     |   |              |   | 647     |                   |  |   | 318     |  
|Revolving credit facility                                                                                                                                                                               |  |                   | 73,000  |   |              |   |        |                   |  |   | 19,000  |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total current liabilities                                                                                                                                                                               |  |                   | 147,414 |   |              |   | 84,412  |                   |  |   | 94,454  |  
|Long-term debt and capital lease obligations                                                                                                                                                            |  |                   | 225,256 |   |              |   | 235,599 |                   |  |   | 245,351 |  
|Accrued pension liabilities                                                                                                                                                                             |  |                   | 16,182  |   |              |   | 17,494  |                   |  |   | 13,029  |  
|Deferred income taxes                                                                                                                                                                                   |  |                   | 10,485  |   |              |   | 4,074   |                   |  |   | 8,890   |  
|Other long-term liabilities                                                                                                                                                                             |  |                   | 10,507  |   |              |   | 10,906  |                   |  |   | 8,414   |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total liabilities                                                                                                                                                                                       |  |                   | 409,844 |   |              |   | 352,485 |                   |  |   | 370,138 |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|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 1,032,395 shares at
September 27, 2008, June 28, 2008 and September 29, 2007, respectively |  |                   | 10      |   |              |   | 10      |                   |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                                              |  |                   | 6,310   |   |              |   | 6,191   |                   |  |   | 5,704   |  
|Accumulated other comprehensive income (loss), net of taxes                                                                                                                                             |  |                   | (3,529  | ) |              |   | (3,558  | )                 |  |   | 1,119   |  
|Retained earnings (accumulated deficit)                                                                                                                                                                 |  |                   | (13,716 | ) |              |   | 1,509   |                   |  |   | (19,253 | )
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                                    |  |                   | (10,925 | ) |              |   | 4,152   |                   |  |   | (12,420 | )
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                    |  | $                 | 398,919 |   |              | $ | 356,637 |                   |  | $ | 357,718 |  
|                                                                                                                                                                                                        |  |                   |         |   |              |   |         |                   |  |   |         |  

See accompanying Notes to Condensed Consolidated Financial Statements.



3



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)



|                                                                |  |                                      |           |   |                                      |   |           |  
|--------------------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | - | --------- | -
|                                                                |  | Thirteenweeks endedSeptember 27,2008 |           |   | Thirteenweeks endedSeptember 29,2007 |  
|Net sales                                                       |  | $                                    | 52,607    |   |                                      | $ | 55,454    |  
|Cost of goods sold                                              |  |                                      | 36,399    |   |                                      |   | 36,135    |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|Gross profit                                                    |  |                                      | 16,208    |   |                                      |   | 19,319    |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|Operating expenses:                                             |  |                                      |           |   |                                      |   |           |  
|Selling, general and administrative                             |  |                                      | 37,664    |   |                                      |   | 38,252    |  
|Selling, general and administrative  related party             |  |                                      | 250       |   |                                      |   | 250       |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|                                                                |  |                                      | 37,914    |   |                                      |   | 38,502    |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|Operating loss                                                  |  |                                      | (21,706   | ) |                                      |   | (19,183   | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Other (income) expense:                                         |  |                                      |           |   |                                      |   |           |  
|Interest income                                                 |  |                                      | (184      | ) |                                      |   | (461      | )
|Interest expense                                                |  |                                      | 5,921     |   |                                      |   | 6,462     |  
|Gain on debt repayment                                          |  |                                      | (2,843    | ) |                                      |   |          |  
|Other (income) expense, net                                     |  |                                      | 14        |   |                                      |   | 166       |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|                                                                |  |                                      | 2,908     |   |                                      |   | 6,167     |  
|                                                                |  |                                      |           |   |                                      |   |           |  
|Loss from continuing operations before income taxes             |  |                                      | (24,614   | ) |                                      |   | (25,350   | )
|Benefit for income taxes                                        |  |                                      | (9,264    | ) |                                      |   | (9,355    | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Net loss from continuing operations                             |  |                                      | (15,350   | ) |                                      |   | (15,995   | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Discontinued operations:                                        |  |                                      |           |   |                                      |   |           |  
|Gain on sale of Jackson & Perkins                               |  |                                      | 21        |   |                                      |   | 18        |  
|Operating income (loss) from discontinued operations            |  |                                      | 180       |   |                                      |   | (270      | )
|Provision (benefit) for income taxes on discontinued operations |  |                                      | 76        |   |                                      |   | (93       | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Net income (loss) from discontinued operations                  |  |                                      | 125       |   |                                      |   | (159      | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Net loss                                                        |  | $                                    | (15,225   | ) |                                      | $ | (16,154   | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Net income (loss) per share  basic and diluted (Note 10):      |  |                                      |           |   |                                      |   |           |  
|Continuing operations                                           |  |                                      | (14.86    | ) |                                      |   | (15.50    | )
|Discontinued operations                                         |  |                                      | 0.12      |   |                                      |   | (0.15     | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Total                                                           |  | $                                    | (14.73    | ) |                                      | $ | (15.65    | )
|                                                                |  |                                      |           |   |                                      |   |           |  
|Weighted-average shares used in per share calculations:         |  |                                      |           |   |                                      |   |           |  
|Basic and diluted                                               |  |                                      | 1,033,295 |   |                                      |   | 1,032,260 |  
|                                                                |  |                                      |           |   |                                      |   |           |  

See accompanying Notes to Condensed Consolidated Financial Statements.



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Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                                                                                  |  | Thirteenweeks endedSeptember 27,2008 |         |   | Thirteenweeks endedSeptember 29,2007 |  
|Operating activities                                                                                                              |  |                                      |         |   |                                      |   |         |  
|Net loss                                                                                                                          |  | $                                    | (15,225 | ) |                                      | $ | (16,154 | )
|Less: Net income (loss) from discontinued operations                                                                              |  |                                      | 125     |   |                                      |   | (159    | )
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net loss from continuing operations                                                                                               |  |                                      | (15,350 | ) |                                      |   | (15,995 | )
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities from continuing
operations: |  |                                      |         |   |                                      |   |         |  
|Depreciation and amortization of fixed assets                                                                                     |  |                                      | 4,790   |   |                                      |   | 4,225   |  
|Amortization of intangible assets                                                                                                 |  |                                      | 293     |   |                                      |   | 444     |  
|Amortization of deferred financing costs                                                                                          |  |                                      | 644     |   |                                      |   | 658     |  
|Stock option compensation expense                                                                                                 |  |                                      | 119     |   |                                      |   | 140     |  
|Loss (gain) on disposal of fixed assets                                                                                           |  |                                      | (5      | ) |                                      |   | 101     |  
|Gains on short-term investments                                                                                                   |  |                                      | (64     | ) |                                      |   | (162    | )
|Deferred income taxes                                                                                                             |  |                                      | 5,704   |   |                                      |   | (9,725  | )
|Amortization of deferred pension loss, net of taxes                                                                               |  |                                      | 29      |   |                                      |   |        |  
|Gain on debt repayment                                                                                                            |  |                                      | (2,843  | ) |                                      |   |        |  
|Changes in operating assets and liabilities:                                                                                      |  |                                      |         |   |                                      |   |         |  
|Trade accounts receivable and other receivables                                                                                   |  |                                      | (4,301  | ) |                                      |   | (5,839  | )
|Inventories                                                                                                                       |  |                                      | (45,537 | ) |                                      |   | (43,731 | )
|Deferred catalog expenses and other assets                                                                                        |  |                                      | (14,634 | ) |                                      |   | (12,897 | )
|Accounts payable                                                                                                                  |  |                                      | 14,130  |   |                                      |   | 11,855  |  
|Accrued liabilities                                                                                                               |  |                                      | (4,358  | ) |                                      |   | (10,388 | )
|Income taxes                                                                                                                      |  |                                      | (14,983 | ) |                                      |   | (90     | )
|Accrued pension liabilities                                                                                                       |  |                                      | (1,312  | ) |                                      |   | (2,475  | )
|Deferred revenue                                                                                                                  |  |                                      | (5,750  | ) |                                      |   | (4,352  | )
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash used in operating activities from continuing operations                                                                  |  |                                      | (83,428 | ) |                                      |   | (88,231 | )
|Net cash provided by operating activities from discontinued operations                                                            |  |                                      | 490     |   |                                      |   | 2,631   |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash used in operating activities                                                                                             |  |                                      | (82,938 | ) |                                      |   | (85,600 | )
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Investing activities                                                                                                              |  |                                      |         |   |                                      |   |         |  
|Acquisition of fixed assets                                                                                                       |  |                                      | (1,744  | ) |                                      |   | (6,166  | )
|Acquisition of business                                                                                                           |  |                                      | (9,003  | ) |                                      |   |        |  
|Proceeds from the sale of fixed assets                                                                                            |  |                                      | 10      |   |                                      |   | 21      |  
|Proceeds from the sale of held-to-maturity securities                                                                             |  |                                      | 5,000   |   |                                      |   | 24,978  |  
|Proceeds from the sale of available-for-sale securities                                                                           |  |                                      | 10,097  |   |                                      |   |        |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by investing activities from continuing operations                                                              |  |                                      | 4,360   |   |                                      |   | 18,833  |  
|Net cash provided by investing activities from discontinued operations                                                            |  |                                      |        |   |                                      |   | 3,368   |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by investing activities                                                                                         |  |                                      | 4,360   |   |                                      |   | 22,201  |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Financing activities                                                                                                              |  |                                      |         |   |                                      |   |         |  
|Borrowings of revolving debt                                                                                                      |  |                                      | 73,000  |   |                                      |   | 19,000  |  
|Repayments of long-term debt                                                                                                      |  |                                      | (7,107  | ) |                                      |   |        |  
|Repayments of capital lease obligations                                                                                           |  |                                      | (157    | ) |                                      |   | (1,366  | )
|Proceeds from exercise of stock options                                                                                           |  |                                      |        |   |                                      |   | 16      |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Net cash provided by financing activities from continuing operations                                                              |  |                                      | 65,736  |   |                                      |   | 17,650  |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Decrease in cash and cash equivalents                                                                                             |  |                                      | (12,842 | ) |                                      |   | (45,749 | )
|Cash and cash equivalents, beginning of period                                                                                    |  |                                      | 40,792  |   |                                      |   | 49,408  |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  
|Cash and cash equivalents, end of period                                                                                          |  | $                                    | 27,950  |   |                                      | $ | 3,659   |  
|                                                                                                                                  |  |                                      |         |   |                                      |   |         |  

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 Cushmans acquisition see Note
4-Acquisition. 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 September 27, 2008 and September 29, 2007, the Condensed Consolidated Statements of Operations for the thirteen-week periods ended September 27, 2008 and September 29, 2007, and the Condensed
Consolidated Statements of Cash Flows for the thirteen-week periods ended September 27, 2008 and September 29, 2007, have been prepared from the Companys unaudited Condensed Consolidated Financial Statements.

In managements opinion, the Condensed Consolidated Financial Statements include all adjustments, which include those typically recurring adjustments, necessary to
present fairly the financial position at the balance sheet dates and the results of operations for the thirteen week periods 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. In the second quarter of each fiscal year, the Company
realizes its highest sales for the fiscal year as such quarter includes the most significant holidays that drive the largest portion of the gift-giving component of the Companys sales. It is also the period where the Company incurs 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 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 statement of cash flows to conform to the current year presentation. The Company has reclassified activity
related to its accrued pension liabilities and income taxes to individual captions. In the prior period the activity related to accrued pension liabilities were included within Accrued Liabilities and income taxes were included within
Deferred catalog expenses and other assets in the statement of cash flows, respectively.

The Companys total comprehensive loss for the
thirteen weeks ended September 27, 2008 of $15,196 includes a $29 adjustment (net of tax) to comprehensive income (loss) related to its deferred pension amortization. For the thirteen weeks ended September 29, 2007 there were no
differences between the Companys net loss and comprehensive loss.

NOTE 3NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS

In May 2008, the FASB issued Statement of Financial Accounting Standards 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 is effective November 15, 2008. The Company is currently evaluating the impact of the adoption of SFAS 162 and does not expect there to be a material effect on its consolidated financial statements.



6



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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 beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is not permitted. After the effective date, 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.

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 is continuing its evaluation of the impact of
adopting the provisions of SFAS No. 157 as it relates to nonfinancial assets and liabilities.

SFAS 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 157 also expands disclosures about fair value measurements. The hierarchy of fair value
measurements is described below.

Level 1  Valuations are based on quoted prices that the Company has the ability to obtain in actively traded
markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, valuation of these instruments does not require a significant degree of
judgment.

Level 2  Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. The Company has no financial instruments requiring Level 2 valuation.

Level 3  Valuations are based on model-based techniques for which some or all of the assumptions are obtained from indirect market information that is significant
to the overall fair value measurement and which require a significant degree of management judgment. The Company has no financial instruments requiring Level 3 valuation.

NOTE 4ACQUISITION

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 approximately $8,482, which includes a final working capital
receivable of $521 due to the Company and $423 of acquisition related costs.

The Company paid for the Cushmans Acquisition with available cash
balances. 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.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



The 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        |  | $ | 903   |  
|Fixed assets          |  |   | 241   |  
|Intangible assets     |  |   | 2,600 |  
|Goodwill              |  |   | 5,316 |  
|                      |  |   |       |  
|Total assets acquired |  |   | 9,060 |  
|Current liabilities   |  |   | (578  | )
|                      |  |   |       |  
|Net assets acquired   |  | $ | 8,482 |  
|                      |  |   |       |  

The acquired intangible assets are comprised of
Cushmans and related trademarks totaling $1,490 and customer lists of $1,110. The trademarks have indefinite lives, while the customer lists will be amortized on a weighted basis
over a four year period. The $5,316 of goodwill is allocated to the Direct Marketing segment and is expected to be fully deductible for tax purposes. While goodwill represents the excess purchase over the fair value of net assets purchased, 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 September 27, 2008, all
amounts related to the severance and closure costs were unpaid.

The following unaudited pro forma consolidated results of operations for the thirteen
weeks ended September 27, 2008 and September 29, 2007, 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 endedSeptember 27,2008(unaudited) |         |   | Thirteenweeks endedSeptember 29,2007(unaudited) |  
|Net sales                                           |  | $                                               | 52,636  |   |                                                 | $ | 55,870  |  
|Gross profit                                        |  |                                                 | 16,185  |   |                                                 |   | 19,310  |  
|Operating loss                                      |  |                                                 | (21,911 | ) |                                                 |   | (19,856 | )
|Loss from continuing operations before income taxes |  |                                                 | (24,833 | ) |                                                 |   | (26,092 | )
|Net loss                                            |  |                                                 | (15,362 | ) |                                                 |   | (16,622 | )
|Basic net loss per share                            |  | $                                               | (14.87  | ) |                                                 | $ | (16.10  | )
|Diluted net loss per share                          |  | $                                               | (14.87  | ) |                                                 | $ | (16.10  | )

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.



8



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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 September 27, 2008, 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 is 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 as discontinued operations for the thirteen weeks ended September 27, 2008 and September 29, 2007, respectively.

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



|                                                                |  |                                      |     |                                      |   |       |  
|--------------------------------------------------------------- |  | ------------------------------------ | --- | ------------------------------------ | - | ----- | -
|                                                                |  | Thirteenweeks endedSeptember 27,2008 |     | Thirteenweeks endedSeptember 29,2007 |  
|Net sales                                                       |  | $                                    | 52  |                                      | $ | 1,094 |  
|Gain on sale of Jackson & Perkins                               |  |                                      | 21  |                                      |   | 18    |  
|Provision (benefit) for income taxes on discontinued operations |  |                                      | 76  |                                      |   | (93   | )
|Net income (loss) from discontinued operations                  |  |                                      | 125 |                                      |   | (159  | )

NOTE 6BALANCE SHEET INFORMATION

Inventories

Inventories consist of the following:



|                                                   |  |                   |         |              |   |                   |  |   |        
|-------------------------------------------------- |  | ----------------- | ------- | ------------ | - | ----------------- |  | - | -------
|                                                   |  | September 27,2008 |         | June 28,2008 |   | September 29,2007
|Finished goods                                     |  | $                 | 47,289  |              | $ | 19,492            |  | $ | 55,599 
|Materials, packaging supplies, and work-in-process |  |                   | 53,381  |              |   | 28,222            |  |   | 50,538 
|Growing crops                                      |  |                   | 34      |              |   | 6,749             |  |   |       
|                                                   |  |                   |         |              |   |                   |  |   |        
|Total                                              |  | $                 | 100,704 |              | $ | 54,463            |  | $ | 106,137
|                                                   |  |                   |         |              |   |                   |  |   |        

Fixed assets

Fixed assets consist of the following:



|                                                |  |                   |         |   |              |   |         |                   |  |   |         |  
|----------------------------------------------- |  | ----------------- | ------- | - | ------------ | - | ------- | ----------------- |  | - | ------- | -
|                                                |  | September 27,2008 |         |   | June 28,2008 |   |         | September 29,2007 | 
|Land                                            |  | $                 | 19,607  |   |              | $ | 19,607  |                   |  | $ | 19,607  |  
|Land improvements and orchard development costs |  |                   | 30,548  |   |              |   | 30,485  |                   |  |   | 30,322  |  
|Buildings and improvements                      |  |                   | 55,873  |   |              |   | 55,699  |                   |  |   | 55,394  |  
|Machinery and equipment                         |  |                   | 66,072  |   |              |   | 64,470  |                   |  |   | 58,008  |  
|Leasehold improvements                          |  |                   | 13,280  |   |              |   | 12,940  |                   |  |   | 10,924  |  
|Purchased and internally developed software     |  |                   | 35,215  |   |              |   | 34,732  |                   |  |   | 22,179  |  
|Capital projects-in-process                     |  |                   | 5,234   |   |              |   | 5,987   |                   |  |   | 17,162  |  
|                                                |  |                   |         |   |              |   |         |                   |  |   |         |  
|                                                |  |                   | 225,829 |   |              |   | 223,920 |                   |  |   | 213,596 |  
|Accumulated depreciation and amortization       |  |                   | (66,425 | ) |              |   | (61,706 | )                 |  |   | (48,504 | )
|                                                |  |                   |         |   |              |   |         |                   |  |   |         |  
|Total                                           |  | $                 | 159,404 |   |              | $ | 162,214 |                   |  | $ | 165,092 |  
|                                                |  |                   |         |   |              |   |         |                   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



As of September 27, 2008, 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 $14,906, $13,607 and $10,579 as of
September 27, 2008, June 28, 2008 and September 29, 2007, respectively. Amortization of software costs, which include software assets financed through capital leases, were $1,299 and $921 for the thirteen weeks ended
September 27, 2008 and September 29, 2007, respectively.

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 does not consider there to be any indication of impairment of its
goodwill, trade names, trademarks, recipe, and customer lists as of September 27, 2008. Prior to the current fiscal year, the Companys annual impairment tests for its intangibles were completed in the fourth quarter of its fiscal year.
However, to better align the annual impairment testing with the seasonal nature of the Companys businesses, the Company will perform its impairment tests in the third fiscal quarter for its Harry and David and Wolfermans related
intangibles and in the fourth fiscal quarter for Cushmans related intangibles.

Amortization expense was $293 and $444 for the thirteen weeks ended
September 27, 2008 and September 29, 2007, respectively, and is included within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

Goodwill and intangible assets as of September 27, 2008 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 Acquisition for further information. The following is a summary of intangible assets:



|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|------------------------------------------ |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- |  | ------------------- | ------ | ----------------------- | - | ------ | ----------------- | - | ------ | - |  | - | ------
|                                           |  | September 27, 2008  |        | June 28, 2008          
|                                           |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | NetCarryingAmount
|Trade names, trademarks and recipe         |  | $                   | 41,961 |                         | $ |       |                   |  | $                   | 41,961 |                         | $ | 40,471 |                   | $ |       |   |  | $ | 40,471
|Goodwill                                   |  |                     | 9,006  |                         |   |       |                   |  |                     | 9,006  |                         |   | 3,690  |                   |   |       |   |  |   | 3,690 
|Direct marketing customer and rental lists |  |                     | 13,062 |                         |   | (7,403 | )                 |  |                     | 5,659  |                         |   | 11,952 |                   |   | (7,158 | ) |  |   | 4,794 
|Favorable lease agreements                 |  |                     | 1,805  |                         |   | (1,441 | )                 |  |                     | 364    |                         |   | 1,805  |                   |   | (1,393 | ) |  |   | 412   
|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       
|                                           |  | $                   | 65,834 |                         | $ | (8,844 | )                 |  | $                   | 56,990 |                         | $ | 57,918 |                   | $ | (8,551 | ) |  | $ | 49,367
|                                           |  |                     |        |                         |   |        |                   |  |                     |        |                         |   |        |                   |   |        |   |  |   |       

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 |  |                                          | 3,994 |                           |   | 139                      |  |   | 4,133
|2010           |  |                                          | 1,334 |                           |   | 127                      |  |   | 1,461
|2011           |  |                                          | 267   |                           |   | 70                       |  |   | 337  
|2012           |  |                                          | 58    |                           |   | 28                       |  |   | 86   
|2013           |  |                                          | 6     |                           |   |                         |  |   | 6    
|               |  |                                          |       |                           |   |                          |  |   |      
|Total          |  | $                                        | 5,659 |                           | $ | 364                      |  | $ | 6,023
|               |  |                                          |       |                           |   |                          |  |   |      

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 first quarter of fiscal 2009 and fiscal 2008 were 37.6% and 36.9%, respectively.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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. 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 of September 27, 2008, the interest
rate on borrowings under the Credit Agreement was 4.68%.

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.

In connection
with this facility and related amendments, the Company has remaining deferred financing costs of $3,105 and $3,416 as of September 27, 2008 and June 28, 2008, respectively.

As of September 27, 2008, unused borrowings under the revolving credit facility were $51,300, representing $73,000 of borrowings and $700 in outstanding letters of credit. The maximum available borrowing under
the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at September 27, 2008 was $22,946. 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 to capital expenditures. At September 27, 2008 the Company was in compliance with all Credit Agreement covenants.

Long-Term Debt

As of September 27, 2008 the
Companys wholly-owned subsidiary, Harry and David, had outstanding $68,000 in Senior Floating Rate Notes due March 1, 2012 and $156,800 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes) These
amounts reflect amounts repurchased by the Company on the open-market in fiscal 2008 and in the first quarter of 2009. For further details on the repurchases during and subsequent to the thirteen weeks ended September 27, 2008, 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 set at 7.81% and 7.68% at September 27, 2008 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. The remaining costs are amortized over the remaining life of the associated Senior Notes and as of September 27, 2008 and June 28, 2008, $5,267 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 September 27, 2008.

Long-Term Debt Repurchases

During the thirteen weeks ended September 27, 2008, the Company purchased $10,200 of its 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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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Subsequent to September 27, 2008, the Company has purchased an additional $26,438 of outstanding notes
(comprised of $16,608 of the fixed rate Senior Notes and $9,830 of the floating rate Senior Notes) in open market purchases. These repurchases resulted in a net gain of approximately $12,573, comprised of a $13,179 discount on the outstanding
principal, partially offset by the write-off of $606 of unamortized deferred financing costs.

Amortization of Deferred Financing Costs

Total amortization expense on deferred financing costs was $644 and $658 for the thirteen weeks ended September 27, 2008 and September 29, 2007 and is
included within interest expense in the accompanying Condensed Consolidated Statements of Operations.

Capital lease obligations

As of September 27, 2008 the Company has $1,089 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 $633 and $456, 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 likely 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 weeks
ended September 27, 2008 or the thirteen weeks ended September 29, 2007.

A summary of option activity under the Plan for the thirteen weeks
ended September 27, 2008 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                         |  | (1,432       | ) |  |                                | 149.34 |                                           |         
|                                  |  |              |   |  |                                |        |                                           |          
|Outstanding at September 27, 2008 |  | 61,098       |   |  | $                              | 114.84 |                                           | 6.9 years
|                                  |  |              |   |  |                                |        |                                           |          

Of the 61,098 options outstanding at September 27, 2008, 40,922 were fully vested and exercisable. The
weighted average remaining contractual term of vested options was 6.8 years. The total grant date fair value of all options outstanding at September 27, 2008 was $1,549.

A summary of the status of the Companys nonvested option shares as of September 27, 2008, and activity during the thirteen weeks ended September 27, 2008, is presented below:



12



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



|                                  |  |              |   |  |                                                |      
|--------------------------------- |  | ------------ | - |  | ---------------------------------------------- | -----
|Nonvested Option Shares           |  | OptionShares |   |  | Weighted-AverageGrant-DateFair Valueof Options
|Outstanding at June 28, 2008      |  | 25,019       |   |  | $                                              | 23.15
|Granted options                   |  |             |   |  |                                                |     
|Vested                            |  | (4,475       | ) |  |                                                | 26.80
|Forfeited                         |  | (368         | ) |  |                                                | 15.57
|                                  |  |              |   |  |                                                |      
|Outstanding at September 27, 2008 |  | 20,176       |   |  | $                                              | 22.48
|                                  |  |              |   |  |                                                |      

For the thirteen weeks ended September 27, 2008 and September 29, 2007, the Company recognized stock
compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $119 and $140, respectively. The total tax benefit recognized for these periods was $47 and $53, respectively. As of
September 27, 2008, there remained a total of $454 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 1.6 years. An assumption of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



NOTE 10EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the weighted-average common shares outstanding for the
period, including the dilutive effect of stock options as determined under the treasury stock method. For the thirteen weeks ended September 27, 2008 and September 29, 2007, 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 because the Company generated a net loss in those periods. The excluded options for the thirteen weeks ended September 27, 2008 and September 29,
2007 were 61,098 and 65,888 respectively. The basic and diluted net loss per share is as follows (in thousands except share and per share data):



|                                                        |  |                                      |           |   |                                      |   |           |  
|------------------------------------------------------- |  | ------------------------------------ | --------- | - | ------------------------------------ | - | --------- | -
|                                                        |  | Thirteenweeks endedSeptember 27,2008 |           |   | Thirteenweeks endedSeptember 29,2007 |  
|Net loss from continuing operations                     |  | $                                    | (15,350   | ) |                                      | $ | (15,995   | )
|Net income (loss) from discontinued operations          |  |                                      | 125       |   |                                      |   | (159      | )
|                                                        |  |                                      |           |   |                                      |   |           |  
|Net loss                                                |  | $                                    | (15,225   | ) |                                      | $ | (16,154   | )
|                                                        |  |                                      |           |   |                                      |   |           |  
|Income (loss) per share  basic and diluted:            |  |                                      |           |   |                                      |   |           |  
|Continuing operations                                   |  |                                      | (14.86    | ) |                                      |   | (15.50    | )
|Discontinued operations                                 |  |                                      | 0.12      |   |                                      |   | (0.15     | )
|                                                        |  |                                      |           |   |                                      |   |           |  
|Total net loss per share                                |  | $                                    | (14.73    | ) |                                      | $ | (15.65    | )
|                                                        |  |                                      |           |   |                                      |   |           |  
|Weighted-average shares used in per share calculations: |  |                                      |           |   |                                      |   |           |  
|Basic and diluted                                       |  |                                      | 1,033,295 |   |                                      |   | 1,032,260 |  
|                                                        |  |                                      |           |   |                                      |   |           |  

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



|                                          |  |                                      |      |   |                                      |   |      |  
|----------------------------------------- |  | ------------------------------------ | ---- | - | ------------------------------------ | - | ---- | -
|                                          |  | Thirteenweeks endedSeptember 27,2008 |      |   | Thirteenweeks endedSeptember 29,2007 |  
|Service cost                              |  | $                                    |     |   |                                      | $ |     |  
|Interest cost                             |  |                                      | 754  |   |                                      |   | 753  |  
|Expected return on plan assets            |  |                                      | (590 | ) |                                      |   | (766 | )
|Amortization of deferred actuarial losses |  |                                      | 48   |   |                                      |   |     |  
|                                          |  |                                      |      |   |                                      |   |      |  
|Net periodic pension (benefit) expense    |  | $                                    | 212  |   |                                      | $ | (13  | )
|                                          |  |                                      |      |   |                                      |   |      |  

During the thirteen weeks ended September 27, 2008 and September 29, 2007, the Company contributed
$1,476 and $2,462 to its defined benefit pension plans, respectively.

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

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.



14



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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:



|                        |  |                                      |       |                                      |   |      
|----------------------- |  | ------------------------------------ | ----- | ------------------------------------ | - | -----
|                        |  | Thirteenweeks endedSeptember 27,2008 |       | Thirteenweeks endedSeptember 29,2007
|Minimum rent expense    |  | $                                    | 5,578 |                                      | $ | 5,418
|Contingent rent expense |  |                                      | 52    |                                      |   | 57   
|                        |  |                                      |       |                                      |   |      
|Total rent expense      |  | $                                    | 5,630 |                                      | $ | 5,475
|                        |  |                                      |       |                                      |   |      

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 September 27, 2008, 85% of the award was vested, representing $5,194, which also reflects
forfeitures. As of September 27, 2008, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program for the thirteen weeks then ended.

The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The
Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During the thirteen weeks ended September 27, 2008
and September 29, 2007 the Company paid $250 in each period in such management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and administrative expenses  related
party.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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® and Wolfermans® merchandise at various retail locations (outlet
stores, specialty stores, and a Country Village Store). As of September 27, 2008, the Company operated 144 Harry and David stores and two Cushmans seasonal stores. The Wholesale segment generates net sales by selling Harry and David® brand and Wolfermans® brand wholesale products to national retailers. Business units not disclosed separately for segment
reporting purposes are grouped in the Other segment and include commercial sales of surplus, non-gift quality fruit grown in the Companys orchards surrounding Medford, Oregon, and business units that support the Companys
operations, including orchards, product supply, distribution, customer operations, facilities, information technology services, and administrative and marketing support functions.

Net intersegment sales were $16,065 and $38,261 for the thirteen weeks ended September 27, 2008 and September 29, 2007, 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 September 27, 2008                       |  |                 |         |   |        |   |        |           |  |       |        |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 23,107  |   |        | $ | 23,050 |           |  | $     | 6,101  |  | $                         | 349     |   |  | $ | 52,607  |  
|Depreciation and amortization expense (1)                     |  |                 | 266     |   |        |   | 922    |           |  |       |       |  |                           | 3,895   |   |  |   | 5,083   |  
|Operating income (loss) from continuing operations            |  |                 | (16,087 | ) |        |   | (6,287 | )         |  |       | 668    |  |                           |        |   |  |   | (21,706 | )
|Net interest expense from continuing operations               |  |                 |        |   |        |   |       |           |  |       |       |  |                           | 5,737   |   |  |   | 5,737   |  
|Income (loss) from continuing operations, before income taxes |  |                 | (13,660 | ) |        |   | (5,970 | )         |  |       | 768    |  |                           | (5,752  | ) |  |   | (24,614 | )
|Capital expenditures (2)                                      |  |                 | (2      | ) |        |   | (452   | )         |  |       |       |  |                           | (1,290  | ) |  |   | (1,744  | )
|Total assets                                                  |  |                 | 88,201  |   |        |   | 40,275 |           |  |       | 12,827 |  |                           | 257,616 |   |  |   | 398,919 |  
|Thirteen weeks ended September 29, 2007                       |  |                 |         |   |        |   |        |           |  |       |        |  |                           |         |   |  |   |         |  
|Net external sales                                            |  | $               | 22,827  |   |        | $ | 24,609 |           |  | $     | 7,685  |  | $                         | 333     |   |  | $ | 55,454  |  
|Depreciation and amortization expense (1)                     |  |                 | 367     |   |        |   | 877    |           |  |       |       |  |                           | 3,425   |   |  |   | 4,669   |  
|Operating income (loss) from continuing operations            |  |                 | (14,662 | ) |        |   | (6,272 | )         |  |       | 1,751  |  |                           |        |   |  |   | (19,183 | )
|Net interest expense from continuing operations               |  |                 |        |   |        |   |       |           |  |       |       |  |                           | 6,001   |   |  |   | 6,001   |  
|Income (loss) from continuing operations, before income taxes |  |                 | (14,859 | ) |        |   | (6,316 | )         |  |       | 1,748  |  |                           | (5,923  | ) |  |   | (25,350 | )
|Capital expenditures (2)                                      |  |                 |        |   |        |   | (1,915 | )         |  |       |       |  |                           | (4,251  | ) |  |   | (6,166  | )
|Total assets                                                  |  |                 | 56,111  |   |        |   | 43,721 |           |  |       | 14,502 |  |                           | 243,384 |   |  |   | 357,718 |  



|(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.
|--- | -----------------------------------------------------------------------------------



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



NOTE 14CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Companys wholly-owned subsidiary, Harry and David, has outstanding $68,000 of Senior Floating Rate Notes due 2012 and $156,800 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 September 27, 2008, and June 28, 2008, and for
the thirteen weeks ended September 27, 2008 and September 29, 2007, 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 the Company and between the guarantors.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



NOTE 14CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of September 27, 2008



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | GuarantorSubsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                        | 1,557   |   |                 | $ | 12,255   |                       |  | $ | 14,138                           |   |  | $            |         |   |  | $ | 27,950  |  
|Trade accounts receivable, net                       |  |                                          |        |   |                 |   | 6,359    |                       |  |   | 123                              |   |  |              |         |   |  |   | 6,482   |  
|Other receivables                                    |  |                                          |        |   |                 |   | 949      |                       |  |   | 2,080                            |   |  |              |         |   |  |   | 3,029   |  
|Inventories, net                                     |  |                                          |        |   |                 |   | 36,775   |                       |  |   | 63,929                           |   |  |              |         |   |  |   | 100,704 |  
|Deferred catalog expenses                            |  |                                          |        |   |                 |   | 18,214   |                       |  |   |                                 |   |  |              |         |   |  |   | 18,214  |  
|Deferred income taxes                                |  |                                          | 3,861   |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 3,861   |  
|Other current assets                                 |  |                                          |        |   |                 |   | 5,777    |                       |  |   | 4,865                            |   |  |              |         |   |  |   | 10,642  |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                          | 5,418   |   |                 |   | 80,329   |                       |  |   | 85,135                           |   |  |              |         |   |  |   | 170,882 |  
|Fixed assets, net                                    |  |                                          |        |   |                 |   | 15,107   |                       |  |   | 144,297                          |   |  |              |         |   |  |   | 159,404 |  
|Goodwill                                             |  |                                          |        |   |                 |   | 9,006    |                       |  |   |                                 |   |  |              |         |   |  |   | 9,006   |  
|Intangibles, net                                     |  |                                          |        |   |                 |   | 47,984   |                       |  |   |                                 |   |  |              |         |   |  |   | 47,984  |  
|Investment in subsidiaries                           |  |                                          | 170,691 |   |                 |   | (72,573  | )                     |  |   |                                 |   |  |              | (98,118  | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                          |        |   |                 |   | 8,372    |                       |  |   |                                 |   |  |              |         |   |  |   | 8,372   |  
|Other assets                                         |  |                                          | 2,328   |   |                 |   | 358      |                       |  |   | 585                              |   |  |              |         |   |  |   | 3,271   |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                        | 178,437 |   |                 | $ | 88,583   |                       |  | $ | 230,017                          |   |  | $            | (98,118  | ) |  | $ | 398,919 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                     |  |                                          |         |   |                
|Liabilities and stockholders equity (deficit)       |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                        |        |   |                 | $ | 18,213   |                       |  | $ | 15,054                           |   |  | $            |         |   |  | $ | 33,267  |  
|Accrued payroll and benefits                         |  |                                          |        |   |                 |   | 6,711    |                       |  |   | 7,500                            |   |  |              |         |   |  |   | 14,211  |  
|Income taxes payable                                 |  |                                          | 8,639   |   |                 |   | (12      | )                     |  |   |                                 |   |  |              |         |   |  |   | 8,627   |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 7,917    |                       |  |   |                                 |   |  |              |         |   |  |   | 7,917   |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 1,814    |                       |  |   |                                 |   |  |              |         |   |  |   | 1,814   |  
|Other accrued liabilities                            |  |                                          | (24     | ) |                 |   | 5,771    |                       |  |   | 2,198                            |   |  |              |         |   |  |   | 7,945   |  
|Current portion of capital lease obligations         |  |                                          |        |   |                 |   | 633      |                       |  |   |                                 |   |  |              |         |   |  |   | 633     |  
|Revolving credit facility                            |  |                                          |        |   |                 |   | 73,000   |                       |  |   |                                 |   |  |              |         |   |  |   | 73,000  |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                          | 8,615   |   |                 |   | 114,047  |                       |  |   | 24,752                           |   |  |              |         |   |  |   | 147,414 |  
|Long-term debt and capital lease obligations         |  |                                          |        |   |                 |   | 225,256  |                       |  |   |                                 |   |  |              |         |   |  |   | 225,256 |  
|Deferred income taxes                                |  |                                          | 10,485  |   |                 |   |         |                       |  |   |                                 |   |  |              |         |   |  |   | 10,485  |  
|Accrued pension liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 16,182                           |   |  |              |         |   |  |   | 16,182  |  
|Other long-term liabilities                          |  |                                          | 4,816   |   |                 |   | 4,412    |                       |  |   | 1,279                            |   |  |              |         |   |  |   | 10,507  |  
|Intercompany debt                                    |  |                                          | 165,446 |   |                 |   | (425,823 | )                     |  |   | 260,377                          |   |  |              |         |   |  |   |        |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                          | 189,362 |   |                 |   | (82,108  | )                     |  |   | 302,590                          |   |  |              |         |   |  |   | 409,844 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                          | 10      |   |                 |   | 1        |                       |  |   |                                 |   |  |              | (1       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                          | 6,310   |   |                 |   | 232,518  |                       |  |   | 53,785                           |   |  |              | (286,303 | ) |  |   | 6,310   |  
|Accumulated other comprehensive loss, net of taxes   |  |                                          | (3,529  | ) |                 |   |         |                       |  |   | (3,510                           | ) |  |              | 3,510    |   |  |   | (3,529  | )
|Retained earnings (accumulated deficit)              |  |                                          | (13,716 | ) |                 |   | (61,828  | )                     |  |   | (122,848                         | ) |  |              | 184,676  |   |  |   | (13,716 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                          | (10,925 | ) |                 |   | 170,691  |                       |  |   | (72,573                          | ) |  |              | (98,118  | ) |  |   | (10,925 | )
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                        | 178,437 |   |                 | $ | 88,583   |                       |  | $ | 230,017                          |   |  | $            | (98,118  | ) |  | $ | 398,919 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Balance Sheet

As of June 28, 2008



|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ---------------------------------------- | ------- | - | --------------- | - | -------- | --------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |          | 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  |  
|Income taxes payable                                 |  |                                          | 23,622  |   |                 |   | (12      | )                     |  |   |                                 |   |  |              |         |   |  |   | 23,610  |  
|Deferred revenue                                     |  |                                          |        |   |                 |   | 13,667   |                       |  |   |                                 |   |  |              |         |   |  |   | 13,667  |  
|Accrued interest                                     |  |                                          |        |   |                 |   | 5,523    |                       |  |   |                                 |   |  |              |         |   |  |   | 5,523   |  
|Other accrued liabilities                            |  |                                          | (34     | ) |                 |   | 5,577    |                       |  |   | 2,389                            |   |  |              |         |   |  |   | 7,932   |  
|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 liability                            |  |                                          |        |   |                 |   |         |                       |  |   | 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 |  
|                                                     |  |                                          |         |   |                 |   |          |                       |  |   |                                  |   |  |              |          |   |  |   |         |  



19



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended September 27, 2008



|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                 | $ | 52,326  |                       |  | $ | 16,346                            |   |  | $            | (16,065 | ) |  | $ | 52,607  |  
|Cost of goods sold                                           |  |                                          |        |   |                 |   | 36,113  |                       |  |   | 16,351                            |   |  |              | (16,065 | ) |  |   | 36,399  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                 |   | 16,213  |                       |  |   | (5                                | ) |  |              |        |   |  |   | 16,208  |  
|Selling, general and administrative                          |  |                                          |        |   |                 |   | 37,919  |                       |  |   | (5                                | ) |  |              |        |   |  |   | 37,914  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Operating loss                                               |  |                                          |        |   |                 |   | (21,706 | )                     |  |   |                                  |   |  |              |        |   |  |   | (21,706 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          |        |   |                 |   |        |                       |  |   | (184                              | ) |  |              |        |   |  |   | (184    | )
|Interest expense                                             |  |                                          |        |   |                 |   | 5,861   |                       |  |   | 60                                |   |  |              |        |   |  |   | 5,921   |  
|Other (income) expense, net                                  |  |                                          | 15      |   |                 |   | (1      | )                     |  |   |                                  |   |  |              |        |   |  |   | 14      |  
|Gain on debt repayment                                       |  |                                          |        |   |                 |   | (2,843  | )                     |  |   |                                  |   |  |              |        |   |  |   | (2,843  | )
|Equity in earnings of consolidated subsidiaries              |  |                                          | 24,398  |   |                 |   | (271    | )                     |  |   |                                  |   |  |              | (24,127 | ) |  |   |        |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | 24,413  |   |                 |   | 2,746   |                       |  |   | (124                              | ) |  |              | (24,127 | ) |  |   | 2,908   |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | (24,413 | ) |                 |   | (24,452 | )                     |  |   | 124                               |   |  |              | 24,127  |   |  |   | (24,614 | )
|Benefit for income taxes                                     |  |                                          | (9,264  | ) |                 |   |        |                       |  |   |                                  |   |  |              |        |   |  |   | (9,264  | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | (15,149 | ) |                 |   | (24,452 | )                     |  |   | 124                               |   |  |              | 24,127  |   |  |   | (15,350 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |        |   |                 |   |        |                       |  |   | 21                                |   |  |              |        |   |  |   | 21      |  
|Operating income from discontinued operations                |  |                                          |        |   |                 |   | 54      |                       |  |   | 126                               |   |  |              |        |   |  |   | 180     |  
|Provision for income taxes on discontinued operations        |  |                                          | 76      |   |                 |   |        |                       |  |   |                                  |   |  |              |        |   |  |   | 76      |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | (76     | ) |                 |   | 54      |                       |  |   | 147                               |   |  |              |        |   |  |   | 125     |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | (15,225 | ) |                 | $ | (24,398 | )                     |  | $ | 271                               |   |  | $            | 24,127  |   |  | $ | (15,225 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  



20



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended September 29, 2007



|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                             |  | Harry & DavidHoldings, Inc.(Parent-Only) |         |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |        
|Net sales                                                    |  | $                                        |        |   |                 | $ | 55,120  |                       |  | $ | 38,595                            |   |  | $            | (38,261 | ) |  | $ | 55,454  |  
|Cost of goods sold                                           |  |                                          |        |   |                 |   | 35,799  |                       |  |   | 38,597                            |   |  |              | (38,261 | ) |  |   | 36,135  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Gross profit                                                 |  |                                          |        |   |                 |   | 19,321  |                       |  |   | (2                                | ) |  |              |        |   |  |   | 19,319  |  
|Selling, general and administrative                          |  |                                          |        |   |                 |   | 38,531  |                       |  |   | (29                               | ) |  |              |        |   |  |   | 38,502  |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Operating income (loss)                                      |  |                                          |        |   |                 |   | (19,210 | )                     |  |   | 27                                |   |  |              |        |   |  |   | (19,183 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Other (income) expense:                                      |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Interest income                                              |  |                                          |        |   |                 |   | 35      |                       |  |   | (496                              | ) |  |              |        |   |  |   | (461    | )
|Interest expense                                             |  |                                          |        |   |                 |   | 6,462   |                       |  |   |                                  |   |  |              |        |   |  |   | 6,462   |  
|Other (income) expense, net                                  |  |                                          | (79     | ) |                 |   | 245     |                       |  |   |                                  |   |  |              |        |   |  |   | 166     |  
|Equity in earnings of consolidated subsidiaries              |  |                                          | 25,681  |   |                 |   | (204    | )                     |  |   |                                  |   |  |              | (25,477 | ) |  |   |        |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Total other (income) expense                                 |  |                                          | 25,602  |   |                 |   | 6,538   |                       |  |   | (496                              | ) |  |              | (25,477 | ) |  |   | 6,167   |  
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | (25,602 | ) |                 |   | (25,748 | )                     |  |   | 523                               |   |  |              | 25,477  |   |  |   | (25,350 | )
|Benefit for income taxes                                     |  |                                          | (9,355  | ) |                 |   |        |                       |  |   |                                  |   |  |              |        |   |  |   | (9,355  | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | (16,247 | ) |                 |   | (25,748 | )                     |  |   | 523                               |   |  |              | 25,477  |   |  |   | (15,995 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Discontinued operations:                                     |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Gain on sale of Jackson & Perkins                            |  |                                          |        |   |                 |   |        |                       |  |   | 18                                |   |  |              |        |   |  |   | 18      |  
|Operating income (loss) from discontinued operations         |  |                                          |        |   |                 |   | 67      |                       |  |   | (337                              | ) |  |              |        |   |  |   | (270    | )
|Benefit for income taxes on discontinued operations          |  |                                          | (93     | ) |                 |   |        |                       |  |   |                                  |   |  |              |        |   |  |   | (93     | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss) from discontinued operations               |  |                                          | 93      |   |                 |   | 67      |                       |  |   | (319                              | ) |  |              |        |   |  |   | (159    | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | (16,154 | ) |                 | $ | (25,681 | )                     |  | $ | 204                               |   |  | $            | 25,477  |   |  | $ | (16,154 | )
|                                                             |  |                                          |         |   |                 |   |         |                       |  |   |                                   |   |  |              |         |   |  |   |         |  



21



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Cash Flows

For the Thirteen Weeks Ended September 27, 2008



|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|------------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                        |  | Harry & DavidHoldings, Inc.(Parent-Only) |       |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations andReclassifications |   | Consolidated |  
|Operating activities                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) operating activities     |  | $                                        | 155   |   |                 | $ | (64,750 | )                     |  | $ | (18,343                           | ) |              | $ |  |  | $ | (82,938 | )
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                        |  |                                          |       |   |                
|Investing activities                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                             |  |                                          |      |   |                 |   | (451    | )                     |  |   | (1,293                            | ) |              |   |  |  |   | (1,744  | )
|Acquisition of business                                 |  |                                          |      |   |                 |   | (9,003  | )                     |  |   |                                  |   |              |   |  |  |   | (9,003  | )
|Proceeds from the sale of fixed assets                  |  |                                          |      |   |                 |   |        |                       |  |   | 10                                |   |              |   |  |  |   | 10      |  
|Proceeds from the sale of available-for-sale securities |  |                                          |      |   |                 |   |        |                       |  |   | 10,097                            |   |              |   |  |  |   | 10,097  |  
|Proceeds from the sale of held-to-maturity securities   |  |                                          |      |   |                 |   |        |                       |  |   | 5,000                             |   |              |   |  |  |   | 5,000   |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities     |  | $                                        |      |   |                 | $ | (9,454  | )                     |  | $ | 13,814                            |   |              | $ |  |  | $ | 4,360   |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                        |  |                                          |       |   |                
|Financing activities                                    |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                            |  |                                          |      |   |                 |   | 73,000  |                       |  |   |                                  |   |              |   |  |  |   | 73,000  |  
|Repayments of long-term debt                            |  |                                          |      |   |                 |   | (7,107  | )                     |  |   |                                  |   |              |   |  |  |   | (7,107  | )
|Repayments of capital lease obligations                 |  |                                          |      |   |                 |   | (157    | )                     |  |   |                                  |   |              |   |  |  |   | (157    | )
|Net (payments) receipts on intercompany debt            |  |                                          | (168  | ) |                 |   | 11,000  |                       |  |   | (10,832                           | ) |              |   |  |  |   |        |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities     |  | $                                        | (168  | ) |                 | $ | 76,736  |                       |  | $ | (10,832                           | ) |              | $ |  |  | $ | 65,736  |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents        |  |                                          | (13   | ) |                 |   | 2,532   |                       |  |   | (15,361                           | ) |              |   |  |  |   | (12,842 | )
|Cash and cash equivalents, beginning of period          |  |                                          | 1,570 |   |                 |   | 9,723   |                       |  |   | 29,499                            |   |              |   |  |  |   | 40,792  |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period                |  | $                                        | 1,557 |   |                 | $ | 12,255  |                       |  | $ | 14,138                            |   |              | $ |  |  | $ | 27,950  |  
|                                                        |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Condensed Consolidating Statement of Cash Flows

For the Thirteen Weeks Ended September 29, 2007



|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|----------------------------------------------------- |  | ---------------------------------------- | ----- | - | --------------- | - | ------- | --------------------- |  | - | --------------------------------- | - | ------------ | - | - |  | - | ------- | -
|                                                      |  | Harry & DavidHoldings, Inc.(Parent-Only) |       |   | Harry and David |   |         | GuarantorSubsidiaries |  |   | Eliminations andReclassifications |   | Consolidated |  
|Operating activities                                  |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash used in operating activities                 |  | $                                        | (121  | ) |                 | $ | (64,168 | )                     |  | $ | (21,311                           | ) |              | $ |  |  | $ | (85,600 | )
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                      |  |                                          |       |   |                
|Investing activities                                  |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Acquisition of fixed assets                           |  |                                          |      |   |                 |   | (3,615  | )                     |  |   | (2,551                            | ) |              |   |  |  |   | (6,166  | )
|Proceeds from the sale of business                    |  |                                          |      |   |                 |   |        |                       |  |   | 3,368                             |   |              |   |  |  |   | 3,368   |  
|Proceeds from the sale of fixed assets                |  |                                          |      |   |                 |   |        |                       |  |   | 21                                |   |              |   |  |  |   | 21      |  
|Proceeds from the sale of held-to-maturity securities |  |                                          |      |   |                 |   |        |                       |  |   | 24,978                            |   |              |   |  |  |   | 24,978  |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) investing activities   |  | $                                        |      |   |                 | $ | (3,615  | )                     |  | $ | 25,816                            |   |              | $ |  |  | $ | 22,201  |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|                                                      |  |                                          |       |   |                
|Financing activities                                  |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Borrowings of revolving debt                          |  |                                          |      |   |                 |   | 19,000  |                       |  |   |                                  |   |              |   |  |  |   | 19,000  |  
|Repayments of capital lease obligation                |  |                                          |      |   |                 |   | (1,366  | )                     |  |   |                                  |   |              |   |  |  |   | (1,366  | )
|Proceeds from exercise of stock options               |  |                                          | 16    |   |                 |   |        |                       |  |   |                                  |   |              |   |  |  |   | 16      |  
|Net (payments) receipts on intercompany debt          |  |                                          | 121   |   |                 |   | 43,491  |                       |  |   | (43,612                           | ) |              |   |  |  |   |        |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Net cash provided by (used in) financing activities   |  | $                                        | 137   |   |                 | $ | 61,125  |                       |  | $ | (43,612                           | ) |              | $ |  |  | $ | 17,650  |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents      |  |                                          | 16    |   |                 |   | (6,658  | )                     |  |   | (39,107                           | ) |              |   |  |  |   | (45,749 | )
|Cash and cash equivalents, beginning of period        |  |                                          | 1,480 |   |                 |   | 9,953   |                       |  |   | 37,975                            |   |              |   |  |  |   | 49,408  |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  
|Cash and cash equivalents, end of period              |  | $                                        | 1,496 |   |                 | $ | 3,295   |                       |  | $ | (1,132                            | ) |              | $ |  |  | $ | 3,659   |  
|                                                      |  |                                          |       |   |                 |   |         |                       |  |   |                                   |   |              |   |   |  |   |         |  



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##### Table of Contents

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements 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 and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual
results to differ materially from those matters expressed in or implied by these forward-looking statements. The risks, uncertainties and assumptions referred to above could cause our results to differ materially from the results expressed or
implied by such forward-looking statements.

Risk factors that may affect our results include the Risk Factors set forth in Harry and Davids Annual
Report on Form 10-K for the fiscal year ended June 28, 2008, 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.

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 $8,482, which includes a final working capital receivable of $521 due to us from the seller and $423 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.

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. For further information refer to the footnotes to our consolidated financial statements within Item 15 of our Form 10-K filed with Securities and Exchange Commission on
September 19, 2008.

Debt repurchases

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

Subsequent to September 27, 2008, we have purchased an additional
$26,438 of our outstanding notes in open market purchases. These repurchases resulted in a net gain of approximately $12,573, comprised of a $13,179 discount on the outstanding principal, partially offset by the write-off of $606 of unamortized
deferred financing costs. For further information on debt repayment activity see Note 8- Borrowing Arrangements in Part I. Financial Information in this Form 10-Q.



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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 September 27, 2008, we continue to provide certain 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.



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##### Table of Contents

MATTERS AFFECTING COMPARABILITY

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



|                 |  |                     |        |                 |                     |   |                   |   |                 |  |       |  
|---------------- |  | ------------------- | ------ | --------------- | ------------------- | - | ----------------- | - | --------------- |  | ----- | -
|                 |  | Thirteen weeksended |        |                 | Thirteen weeksended |  
|                 |  | September 27,2008   |        | Percentof Total |                     |   | September 29,2007 |   | Percentof Total | 
|Direct Marketing |  | $                   | 23,107 |                 | 43.9                | % |                   | $ | 22,827          |  | 41.2  | %
|Stores           |  |                     | 23,050 |                 | 43.8                | % |                   |   | 24,609          |  | 44.4  | %
|Wholesale        |  |                     | 6,101  |                 | 11.6                | % |                   |   | 7,685           |  | 13.8  | %
|Other            |  |                     | 349    |                 | 0.7                 | % |                   |   | 333             |  | 0.6   | %
|                 |  |                     |        |                 |                     |   |                   |   |                 |  |       |  
|Total net sales  |  | $                   | 52,607 |                 | 100.0               | % |                   | $ | 55,454          |  | 100.0 | %
|                 |  |                     |        |                 |                     |   |                   |   |                 |  |       |  

Net sales from continuing operations of $52,607 for the thirteen weeks ended September 27, 2008, decreased
$2,847, or 5.1%, from the thirteen weeks ended September 29, 2007. The decline in net sales was driven by lower volumes in our Stores and Wholesale segments partially offset by an increase in our Direct Marketing segment.

Direct Marketing

Net sales in our Direct Marketing segment increased $280, or 1.2%, from the first quarter of fiscal 2008 to the first quarter of fiscal 2009. The increase was attributable to the sales contribution of Wolfermans® products, partially offset by a decline in average selling prices in the Direct Marketing segment.

Stores

Our Stores segment net sales decreased $1,559, representing a 6.3% decline in total sales and a decline of 10.4% or approximately
$2,500, on a comparable store basis from the first quarter of fiscal 2008 to the first quarter of fiscal 2009. The decrease was driven by lower customer traffic and overall transaction volume, reflecting similar trends in the broader retail market.
The decrease was partially offset by a $1,400 contribution from our new (non-comparable) stores as well an increase in average selling prices.

As of
September 27, 2008, we had 144 stores in operation compared to 139 stores in operation during the same quarter last fiscal year. Not included in the store counts above are two seasonal Cushmans stores. A store becomes comparable in the
first fiscal month after it has been open for a full twelve fiscal months, at which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in
the same mall or retail complex, the store continues to be treated as a comparable store. However, when a store is closed for an extended period of time, it is no longer treated as a comparable store and is excluded from comparable sales comparisons
for that period.

Wholesale

Our Wholesale segment net
sales declined $1,584 or 20.6%, from the first quarter of fiscal 2008 to the first quarter of fiscal 2009. The decline in our Wholesale segment net sales in the first quarter of fiscal year 2009 was primarily due to lower volumes with certain large
wholesale customers. The lower volume was partially driven by the timing of certain customer shipments, which shifted to the second fiscal quarter.

Other

Other segment net sales, which primarily consist of commercial fruit products, increased $16, or 4.8% from the first quarter of
fiscal 2008 to the first quarter of fiscal 2009.

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).



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|                   |  |                     |        |   |                     |      |    |                   |   |        |                     |  |      |   
|------------------ |  | ------------------- | ------ | - | ------------------- | ---- | -- | ----------------- | - | ------ | ------------------- |  | ---- | --
|                   |  | Thirteen weeksended |        |   | Thirteen weeksended |     
|                   |  | September 27,2008   |        |   | Percentof Net Sales |      |    | September 29,2007 |   |        | Percentof Net Sales | 
|Direct Marketing   |  | $                   | 3,784  |   |                     | 16.4 | %  |                   | $ | 5,561  |                     |  | 24.4 | % 
|Stores             |  |                     | 10,755 |   |                     | 46.7 | %  |                   |   | 11,246 |                     |  | 45.7 | % 
|Wholesale          |  |                     | 1,678  |   |                     | 27.5 | %  |                   |   | 2,515  |                     |  | 32.7 | % 
|Other              |  |                     | (9     | ) |                     | (2.6 | )% |                   |   | (3     | )                   |  | (0.9 | )%
|                   |  |                     |        |   |                     |      |    |                   |   |        |                     |  |      |   
|Total gross profit |  | $                   | 16,208 |   |                     | 30.8 | %  |                   | $ | 19,319 |                     |  | 34.8 | % 
|                   |  |                     |        |   |                     |      |    |                   |   |        |                     |  |      |   

Gross profit from continuing operations decreased $3,111, or 16.1%, to $16,208 in the first quarter of fiscal
2009, from $19,319 in the first quarter of fiscal 2008. Consolidated gross profit as a percentage of consolidated net sales was 30.8% in the thirteen-week period ended September 27, 2008, and 34.8% in the thirteen-week period ended
September 29, 2007.

Direct Marketing

Our Direct
Marketing segment gross profit decreased $1,777, or 32.0%, with gross margin declining to 16.4% in the first quarter of fiscal 2009 from 24.4% in the first quarter of fiscal 2008. The gross profit and gross margin declines were primarily due to
higher markdowns, a combination of lower delivery and processing revenue, reflecting our new pricing strategy, coupled with higher delivery expense. Also contributing to the declines were higher material costs, higher fulfillment expense and
increased inventory reserves and freight costs and the effect of lower sales volume over our fixed costs.

Stores

Our Stores segment gross profit decreased $491, or 4.4%, with gross margin improving to 46.7% in the first quarter of fiscal 2009, 2008 from 45.7% in the first quarter of
fiscal 2008. The gross profit decline was primarily due to lower sales volume and increased freight costs as fuel surcharges increased. The 100 basis point improvement in gross margin was attributable to better inventory management, which resulted
in fewer markdowns.

Wholesale

Our Wholesale segment
gross profit decreased $837 or 33.3%, while gross margin declined to 27.5% in the first quarter of fiscal 2009 from 32.7% for the first quarter of fiscal 2008. The gross profit decline was attributable to lower sales volume and higher fulfillment
costs. The gross margin decline was driven by higher freight and fulfillment costs as well as higher inventory write-offs as compared to the first quarter of fiscal 2008.



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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 weeksended |        |   | Thirteen weeksended |     
|                                                   |  | September 27,2008   |        |   | Percentof NetSales  |      |    | September 29,2007 |   |        | Percentof NetSales | 
|Direct Marketing                                   |  | $                   | 19,871 |   |                     | 86.0 | %  |                   | $ | 20,223 |                    |  | 88.6 | % 
|Stores                                             |  |                     | 17,042 |   |                     | 73.9 | %  |                   |   | 17,518 |                    |  | 71.2 | % 
|Wholesale                                          |  |                     | 1,010  |   |                     | 16.6 | %  |                   |   | 763    |                    |  | 9.9  | % 
|Other                                              |  |                     | (9     | ) |                     | (2.6 | )% |                   |   | (2     | )                  |  | (0.6 | )%
|                                                   |  |                     |        |   |                     |      |    |                   |   |        |                    |  |      |   
|Total selling, general and administrative expenses |  | $                   | 37,914 |   |                     | 72.1 | %  |                   | $ | 38,502 |                    |  | 69.4 | % 
|                                                   |  |                     |        |   |                     |      |    |                   |   |        |                    |  |      |   

Selling, general and administrative expenses from continuing operations decreased $588, or 1.5% from
September 29, 2007 to September 27, 2008. The decrease in selling, general and administrative expenses was driven primarily by a combination of lower payroll and other personnel related expenses as well as a favorable vendor settlement.

Consolidated selling, general and administrative expenses as a percentage of consolidated net sales were 72.1% in the thirteen-week period ended
September 27, 2008, compared to 69.4% in the thirteen-week period ended September 29, 2007.

OTHER (INCOME) EXPENSE

For the thirteen-week period ended September 27, 2008 other expense was $2,908 compared to $6,167 in the thirteen-week period ended September 29, 2007. Other
expense for thirteen weeks ended September 27, 2008 was comprised of net interest expense of $5,737, partially offset by a $2,843 gain on debt repurchases, as previously described. For further details on our debt repayment activity see
Note 8  Borrowing Arrangements in Part I. of this Form 10-Q. The primary source of other expense for the thirteen weeks ended September 29, 2007 was net interest expense of $6,001.

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 September 27, 2008 increased $886 primarily due to the gain on debt repayment, which resulted in a $2,843 benefit to EBITDA in the first quarter of fiscal 2009, partially offset by our
lower operating performance, as described previously.



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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 32, Non-GAAP Financial Measure: EBITDA. The following table reconciles EBITDA from continuing operations to net cash used in operating activities, which we believe to
be the closest GAAP liquidity measure to EBITDA, and net income, which we believe to be the closest GAAP performance measure to EBITDA (dollars are in thousands).



|                                                                       |  |                                      |         |   |                                      |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------------------ | - | ------- | -
|                                                                       |  | Thirteenweeks endedSeptember 27,2008 |         |   | Thirteenweeks endedSeptember 29,2007 |  
|Net loss from continuing operations                                    |  | $                                    | (15,350 | ) |                                      | $ | (15,995 | )
|Interest expense, net from continuing operations                       |  |                                      | 5,737   |   |                                      |   | 6,001   |  
|Benefit for income taxes from continuing operations                    |  |                                      | (9,264  | ) |                                      |   | (9,355  | )
|Depreciation and amortization from continuing operations               |  |                                      | 5,083   |   |                                      |   | 4,669   |  
|                                                                       |  |                                      |         |   |                                      |   |         |  
|EBITDA from continuing operations                                      |  | $                                    | (13,794 | ) |                                      | $ | (14,680 | )
|Interest expense, net from continuing operations                       |  |                                      | (5,737  | ) |                                      |   | (6,001  | )
|Benefit for income taxes from continuing operations                    |  |                                      | 9,264   |   |                                      |   | 9,355   |  
|Amortization of deferred financing costs                               |  |                                      | 644     |   |                                      |   | 658     |  
|Stock option compensation expense                                      |  |                                      | 119     |   |                                      |   | 140     |  
|Loss (gain) on disposal of fixed assets                                |  |                                      | (5      | ) |                                      |   | 101     |  
|Gain on short-term investments                                         |  |                                      | (64     | ) |                                      |   | (162    | )
|Deferred income taxes                                                  |  |                                      | 5,704   |   |                                      |   | (9,725  | )
|Amortization of deferred pension loss, net of tax                      |  |                                      | 29      |   |                                      |   |        |  
|Gain on debt repayment                                                 |  |                                      | (2,843  | ) |                                      |   |        |  
|Changes in operating assets and liabilities from continuing operations |  |                                      | (76,745 | ) |                                      |   | (67,917 | )
|Net cash provided by operating activities from discontinued operations |  |                                      | 490     |   |                                      |   | 2,631   |  
|                                                                       |  |                                      |         |   |                                      |   |         |  
|Net cash used in operating activities                                  |  | $                                    | (82,938 | ) |                                      | $ | (85,600 | )
|                                                                       |  |                                      |         |   |                                      |   |         |  

In the thirteen-week period ended September 27, 2008, net loss and EBITDA from continuing operations
included:



| |  |  | $432 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



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



| |  |  | $94 of integration expenses related to our acquisitions;
| | - |  | --------------------------------------------------------



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



| |  |  | $5 gain on disposal of fixed assets;
| | - |  | ------------------------------------



| |  |  | $2,843 net gain on repayment of long-term debt;
| | - |  | -----------------------------------------------



| |  |  | $82 of expense associated with a leased facility identified for closure;
| | - |  | ------------------------------------------------------------------------



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



| |  |  | $316 of severance and re-organization payroll and benefits
| | - |  | ----------------------------------------------------------

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



| |  |  | $624 of consulting fees associated with certain corporate initiatives and information technology projects;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | $282 of costs associated with a legal settlement;
| | - |  | -------------------------------------------------



| |  |  | $101 loss on disposal of fixed assets;
| | - |  | --------------------------------------



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



| |  |  | $234 of severance and re-organization payroll and benefits.
| | - |  | -----------------------------------------------------------



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LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash Flows Used in Operating Activities from Continuing Operations

Cash used in operating activities from continuing operations totaled $83,428 in the thirteen-week period ended September 27, 2008, compared to $88,231 in the thirteen-week period ended September 29, 2007. The decrease in cash
usage was primarily attributable to a favorable contribution of working capital in the quarter.

Cash Flows Provided by Investing Activities from
Continuing Operations

Cash provided by investing activities from continuing operations totaled $4,360 in the thirteen-week period ended
September 27, 2008, compared to $18,833 in the thirteen week period ended September 29, 2007. Investing activities in the first thirteen weeks of 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 the first quarter of fiscal 2008 consisted primarily of proceeds from the sale of short-term investments, partially offset by capital expenditures.

Cash Flows Provided by Financing Activities from Continuing Operations

Cash provided by financing activities from continuing operations totaled $65,736 for the thirteen weeks ended September 27, 2008, compared to $17,650 in cash provided in the thirteen weeks ended
September 29, 2007. Financing activities were primarily comprised of borrowings on our revolving credit facility for both periods presented. We had increased borrowings in the first quarter of fiscal 2009 as a result of cash utilized to fund
our recent acquisitions and debt repurchases.

For the thirteen weeks ended September 27, 2008, our borrowings on our revolving credit facility were
partially offset by the repurchases of our Senior Notes.

Cash Flows from Discontinued Operations

Cash flows provided by operating activities from discontinued operations totaled $490 for thirteen weeks ended September 27, 2008 and $2,631 for the thirteen weeks
ended September 29, 2007. 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 $3,368 for the thirteen weeks ended September 29, 2007 and were primarily comprised of the proceeds received for
certain amounts due in connection with the sale of Jackson & Perkins in the fourth quarter of fiscal 2007. There were no such amounts in the first quarter of fiscal 2009.

The divested Jackson & Perkins business did not impact our cash flows from financing activities.



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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 September 27, 2008, we had approximately $73,000 in borrowings and $700 in letters of credit outstanding under the revolving credit facility.
The maximum available borrowings under the credit agreement are determined in accordance with our asset-based debt limitation formula. Total additional available borrowings at September 27, 2008, were approximately $22,946. 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.

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. 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. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could
accelerate all amounts outstanding to be immediately due and payable which could also trigger a similar right under other agreements, including our indenture.

At September 27, 2008, we were in compliance with all of our covenants under the Credit Agreement.

Long-term Debt

As of September 27, 2008, Harry and David, our wholly owned subsidiary, has outstanding $68,000 in Senior Floating Rate Notes due March 1, 2012, and
$156,800 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The $68,000 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 7.81% at September 27, 2008. The $156,800 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



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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. 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 September 27, 2008, 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.

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

Seasonality

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

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

CRITICAL ACCOUNTING POLICIES

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

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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



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

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

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



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



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



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



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



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

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



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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 September 27, 2008, a 1.0% change in the interest rate on our variable rate debt would result in a $1,930 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 September 27, 2008. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of September 27, 2008, 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
|-------- | ------------

There have been no material changes from the risk
factors disclosed under Risk Factors in our Annual Report on Form 10-K for the fiscal year ended June 28, 2008.



|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 Chief Administrative Officer


November 7, 2008



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