##### Table of Contents

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United States

Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended March 25, 2006

or



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

For the transition period from  to

Commission File Number 333-128870



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Harry & David Holdings,
Inc.

(Exact name of registrant as specified in its charter)



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

(541) 864-2362

(Registrants telephone number including area code)

None

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



---

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

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

Large
accelerated ̈Accelerated filer ̈Non-accelerated filer  x



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

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



|                             |  |                              
|---------------------------- |  | -----------------------------
|Class                        |  | Outstanding as of May 9, 2006
|Common stock $0.01 par value |  | 1,014,888                    



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##### Table of Contents

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |         |  |                                                                                                             |  |     
|----------------------------- |  | ------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                                             |  | Page
|Part I.
Financial Information |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Condensed Consolidated (unaudited) Financial Statements                                                     |  | 3   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Balance Sheets  as of March 26, 2005, June 25, 2005 and March 25, 2006              |  | 3   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Operations  Thirteen weeks ended March 26, 2005 and March 25, 2006    |  | 4   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Operations  Thirty-nine weeks ended March 26, 2005 and March 25, 2006 |  | 5   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows  Thirty-nine weeks ended March 26, 2005 and March 25, 2006 |  | 6   
|                              |  |         | 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 7   
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 26  
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                  |  | 36  
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                                                     |  | 36  
|                              | 
|Part II.
Other Information    |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Legal Proceedings                                                                                           |  | 38  
|                              |  |         | 
|                              |  | Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                 |  | 38  
|                              |  |         | 
|                              |  | Item 3. |  | Defaults Upon Senior Securities                                                                             |  | 38  
|                              |  |         | 
|                              |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                         |  | 38  
|                              |  |         | 
|                              |  | Item 5. |  | Other Information                                                                                           |  | 38  
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits                                                                                                    |  | 38  
|                              | 
|Signatures                    |  | 39     



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share Data)



|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ------------- | - | ------- | ------------------------ |  | - | ------- | -
|                                                                                                                                                                                                |  | March 26, 2005 Unaudited |         | June 25, 2005 |   |         | March 25, 2006 Unaudited | 
|Assets                                                                                                                                                                                          |  |                          |         |               |   |         |                          |  |   |         |  
|                                                                                                                                                                                                |  |                          |        
|Current assets:                                                                                                                                                                                 |  |                          |         |               |   |         |                          |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                       |  | $                        | 67,885  |               | $ | 24,854  |                          |  | $ | 54,749  |  
|Trade accounts receivable, net                                                                                                                                                                  |  |                          | 20,797  |               |   | 8,434   |                          |  |   | 19,352  |  
|Other receivables                                                                                                                                                                               |  |                          | 1,988   |               |   | 2,025   |                          |  |   | 5,215   |  
|Inventories, net                                                                                                                                                                                |  |                          | 57,057  |               |   | 68,660  |                          |  |   | 65,979  |  
|Prepaid catalog expenses                                                                                                                                                                        |  |                          | 6,602   |               |   | 3,811   |                          |  |   | 6,029   |  
|Income taxes receivable                                                                                                                                                                         |  |                          | 4,367   |               |   | 247     |                          |  |   | 216     |  
|Other current assets                                                                                                                                                                            |  |                          | 7,218   |               |   | 6,220   |                          |  |   | 9,577   |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total current assets                                                                                                                                                                            |  |                          | 165,914 |               |   | 114,251 |                          |  |   | 161,117 |  
|                                                                                                                                                                                                |  |                          |        
|Property, plant, and equipment, net                                                                                                                                                             |  |                          | 164,138 |               |   | 165,006 |                          |  |   | 163,025 |  
|Software, net                                                                                                                                                                                   |  |                          | 11,738  |               |   | 11,705  |                          |  |   | 9,813   |  
|Intangibles, net                                                                                                                                                                                |  |                          | 35,678  |               |   | 35,084  |                          |  |   | 33,524  |  
|Deferred financing costs, net                                                                                                                                                                   |  |                          | 14,854  |               |   | 14,269  |                          |  |   | 15,432  |  
|Deferred income taxes                                                                                                                                                                           |  |                          | 7,082   |               |   | 5,869   |                          |  |   | 14,387  |  
|Other assets                                                                                                                                                                                    |  |                          | 596     |               |   | 628     |                          |  |   | 536     |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total assets                                                                                                                                                                                    |  | $                        | 400,000 |               | $ | 346,812 |                          |  | $ | 397,834 |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Liabilities and stockholders equity (deficit)                                                                                                                                                  |  |                          |         |               |   |         |                          |  |   |         |  
|Current liabilities:                                                                                                                                                                            |  |                          |         |               |   |         |                          |  |   |         |  
|Accounts payable                                                                                                                                                                                |  | $                        | 30,308  |               | $ | 18,759  |                          |  | $ | 29,424  |  
|Accrued payroll and benefits                                                                                                                                                                    |  |                          | 18,500  |               |   | 15,943  |                          |  |   | 15,068  |  
|Deferred revenue                                                                                                                                                                                |  |                          | 22,216  |               |   | 15,002  |                          |  |   | 25,223  |  
|Deferred income taxes                                                                                                                                                                           |  |                          | 37,207  |               |   | 24,127  |                          |  |   | 41,357  |  
|Accrued interest                                                                                                                                                                                |  |                          | 1,840   |               |   | 5,940   |                          |  |   | 1,799   |  
|Accrued restructuring costs                                                                                                                                                                     |  |                          | 3,856   |               |   | 2,224   |                          |  |   | 584     |  
|Other accrued liabilities                                                                                                                                                                       |  |                          | 7,011   |               |   | 6,996   |                          |  |   | 11,035  |  
|Notes payable                                                                                                                                                                                   |  |                          |        |               |   | 268     |                          |  |   |        |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total current liabilities                                                                                                                                                                       |  |                          | 120,938 |               |   | 89,259  |                          |  |   | 124,490 |  
|                                                                                                                                                                                                |  |                          |        
|Long-term debt                                                                                                                                                                                  |  |                          | 245,000 |               |   | 245,000 |                          |  |   | 245,000 |  
|Accrued pension liability                                                                                                                                                                       |  |                          | 29,741  |               |   | 30,982  |                          |  |   | 34,490  |  
|Other long-term liabilities                                                                                                                                                                     |  |                          | 1,345   |               |   | 1,798   |                          |  |   | 2,867   |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total liabilities                                                                                                                                                                               |  |                          | 397,024 |               |   | 367,039 |                          |  |   | 406,847 |  
|                                                                                                                                                                                                |  |                          |        
|Commitments and contingencies                                                                                                                                                                   |  |                          |        |               |   |        |                          |  |   |        |  
|                                                                                                                                                                                                |  |                          |        
|Stockholders equity (deficit):                                                                                                                                                                 |  |                          |         |               |   |         |                          |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,000,000, 1,000,000 and 1,014,888 shares at
March 26, 2005, June 25, 2005 and March 25, 2006, respectively |  |                          | 10      |               |   | 10      |                          |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                                      |  |                          | 1,131   |               |   | 1,864   |                          |  |   | 3,433   |  
|Retained earnings (accumulated deficit)                                                                                                                                                         |  |                          | 1,835   |               |   | (22,101 | )                        |  |   | (12,456 | )
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                            |  |                          | 2,976   |               |   | (20,227 | )                        |  |   | (9,013  | )
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                            |  | $                        | 400,000 |               | $ | 346,812 |                          |  | $ | 397,834 |  
|                                                                                                                                                                                                |  |                          |         |               |   |         |                          |  |   |         |  

See accompanying notes.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)



|                                                        |  |                      |           |   |               |   |           |  
|------------------------------------------------------- |  | -------------------- | --------- | - | ------------- | - | --------- | -
|                                                        |  | Thirteen weeks ended |          
|                                                        |  | March 26,2005        |           |   | March 25,2006 |  
|Net sales                                               |  | $                    | 103,660   |   |               | $ | 94,583    |  
|                                                        |  |                     
|Costs and expenses:                                     |  |                      |           |   |               |   |           |  
|Cost of goods sold                                      |  |                      | 69,596    |   |               |   | 72,445    |  
|Selling, general and administrative                     |  |                      | 50,469    |   |               |   | 46,833    |  
|Selling, general and administrative  related party     |  |                      | 250       |   |               |   | 250       |  
|                                                        |  |                      |           |   |               |   |           |  
|                                                        |  |                      | 120,315   |   |               |   | 119,528   |  
|                                                        |  |                      |           |   |               |   |           |  
|Operating loss                                          |  |                      | (16,655   | ) |               |   | (24,945   | )
|                                                        |  |                     
|Other (income) expense:                                 |  |                      |           |   |               |   |           |  
|Interest income                                         |  |                      | (553      | ) |               |   | (1,027    | )
|Interest expense                                        |  |                      | 19,159    |   |               |   | 6,722     |  
|Other (income) expense                                  |  |                      | 33        |   |               |   | (1,714    | )
|                                                        |  |                      |           |   |               |   |           |  
|                                                        |  |                      | 18,639    |   |               |   | 3,981     |  
|                                                        |  |                      |           |   |               |   |           |  
|Loss before income taxes                                |  |                      | (35,294   | ) |               |   | (28,926   | )
|Benefit for income taxes                                |  |                      | (7,186    | ) |               |   | (9,380    | )
|                                                        |  |                      |           |   |               |   |           |  
|Net loss                                                |  | $                    | (28,108   | ) |               | $ | (19,546   | )
|                                                        |  |                      |           |   |               |   |           |  
|Loss per share:                                         |  |                      |           |   |               |   |           |  
|Basic and diluted                                       |  | $                    | (28.11    | ) |               | $ | (19.26    | )
|                                                        |  |                      |           |   |               |   |           |  
|Weighted-average shares used in per share calculations: |  |                      |           |   |               |   |           |  
|Basic and diluted                                       |  |                      | 1,000,000 |   |               |   | 1,014,888 |  
|                                                        |  |                      |           |   |               |   |           |  

See accompanying notes.



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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)



|                                                        |  |                         |           |   |               |   |           |  
|------------------------------------------------------- |  | ----------------------- | --------- | - | ------------- | - | --------- | -
|                                                        |  | Thirty-nine weeks ended |          
|                                                        |  | March 26,2005           |           |   | March 25,2006 |  
|Net sales                                               |  | $                       | 492,308   |   |               | $ | 514,698   |  
|                                                        |  |                        
|Costs and expenses:                                     |  |                         |           |   |               |   |           |  
|Cost of goods sold                                      |  |                         | 267,965   |   |               |   | 300,412   |  
|Selling, general and administrative                     |  |                         | 169,627   |   |               |   | 172,898   |  
|Selling, general and administrative  related party     |  |                         | 844       |   |               |   | 750       |  
|                                                        |  |                         |           |   |               |   |           |  
|                                                        |  |                         | 438,436   |   |               |   | 474,060   |  
|                                                        |  |                         |           |   |               |   |           |  
|Operating income                                        |  |                         | 53,872    |   |               |   | 40,638    |  
|                                                        |  |                        
|Other (income) expense:                                 |  |                         |           |   |               |   |           |  
|Interest income                                         |  |                         | (598      | ) |               |   | (1,285    | )
|Interest expense                                        |  |                         | 29,142    |   |               |   | 20,279    |  
|Other (income) expense                                  |  |                         | (269      | ) |               |   | 466       |  
|                                                        |  |                         |           |   |               |   |           |  
|                                                        |  |                         | 28,275    |   |               |   | 19,460    |  
|                                                        |  |                         |           |   |               |   |           |  
|Income before income taxes                              |  |                         | 25,597    |   |               |   | 21,178    |  
|Provision for income taxes                              |  |                         | 4,775     |   |               |   | 8,933     |  
|                                                        |  |                         |           |   |               |   |           |  
|Net income                                              |  | $                       | 20,822    |   |               | $ | 12,245    |  
|                                                        |  |                         |           |   |               |   |           |  
|Earnings per share:                                     |  |                         |           |   |               |   |           |  
|Basic and diluted                                       |  | $                       | 20.82     |   |               | $ | 12.10     |  
|                                                        |  |                         |           |   |               |   |           |  
|Weighted-average shares used in per share calculations: |  |                         |           |   |               |   |           |  
|Basic and diluted                                       |  |                         | 1,000,000 |   |               |   | 1,012,171 |  
|                                                        |  |                         |           |   |               |   |           |  

See accompanying notes.



5



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                  |  |                         |          |   |               |   |          |  
|--------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ------------- | - | -------- | -
|                                                                                  |  | Thirty-nine weeks ended |         
|                                                                                  |  | March 26,2005           |          |   | March 25,2006 |  
|Operating activities                                                              |  |                         |          |   |               |   |          |  
|Net income                                                                        |  | $                       | 20,822   |   |               | $ | 12,245   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                         |          |   |               |   |          |  
|Depreciation                                                                      |  |                         | 8,017    |   |               |   | 10,454   |  
|Amortization                                                                      |  |                         | 3,715    |   |               |   | 4,038    |  
|Stock option compensation expense                                                 |  |                         |         |   |               |   | 339      |  
|Amortization of deferred financing costs                                          |  |                         | 2,357    |   |               |   | 1,823    |  
|Write-off of deferred financing costs                                             |  |                         | 7,956    |   |               |   |         |  
|Write-off of deferred IPO costs                                                   |  |                         |         |   |               |   | 2,180    |  
|Loss on disposal of property, plant, equipment, and software                      |  |                         | 208      |   |               |   | 704      |  
|Deferred income taxes                                                             |  |                         | 32,524   |   |               |   | 8,712    |  
|Changes in operating assets and liabilities:                                      |  |                         |          |   |               |   |          |  
|Accounts receivable                                                               |  |                         | (6,189   | ) |               |   | (14,108  | )
|Inventories                                                                       |  |                         | 7,525    |   |               |   | 2,681    |  
|Prepaid catalog and other assets                                                  |  |                         | (26,118  | ) |               |   | (7,335   | )
|Accounts payable and accrued liabilities                                          |  |                         | 12,209   |   |               |   | 12,626   |  
|Deferred revenue                                                                  |  |                         | 7,856    |   |               |   | 10,221   |  
|                                                                                  |  |                         |          |   |               |   |          |  
|Net cash provided by operating activities                                         |  |                         | 70,882   |   |               |   | 44,580   |  
|                                                                                  |  |                        
|Investing activities                                                              |  |                         |          |   |               |   |          |  
|Acquisition of property, plant, equipment, and software                           |  |                         | (10,404  | ) |               |   | (10,085  | )
|Proceeds from the sale of property, plant, and equipment                          |  |                         | 29       |   |               |   | 24       |  
|                                                                                  |  |                         |          |   |               |   |          |  
|Net cash used in investing activities                                             |  |                         | (10,375  | ) |               |   | (10,061  | )
|                                                                                  |  |                        
|Financing activities                                                              |  |                         |          |   |               |   |          |  
|Borrowings of long-term debt                                                      |  |                         | 245,000  |   |               |   |         |  
|Repayments of long-term debt                                                      |  |                         | (155,000 | ) |               |   |         |  
|Borrowings of revolving debt                                                      |  |                         | 90,000   |   |               |   | 104,000  |  
|Repayments of revolving debt                                                      |  |                         | (90,000  | ) |               |   | (104,000 | )
|Payments of notes payable                                                         |  |                         | (13,900  | ) |               |   | (268     | )
|Payments for deferred financing costs                                             |  |                         | (9,490   | ) |               |   | (2,986   | )
|Proceeds from exercise of stock options                                           |  |                         |         |   |               |   | 1,230    |  
|Dividends paid                                                                    |  |                         |         |   |               |   | (2,600   | )
|Return of capital to stockholders                                                 |  |                         | (82,600  | ) |               |   |         |  
|Stockholder note                                                                  |  |                         | (261     | ) |               |   |         |  
|                                                                                  |  |                         |          |   |               |   |          |  
|Net cash used in financing activities                                             |  |                         | (16,251  | ) |               |   | (4,624   | )
|                                                                                  |  |                         |          |   |               |   |          |  
|Increase in cash and cash equivalents                                             |  |                         | 44,256   |   |               |   | 29,895   |  
|Cash and cash equivalents, beginning of period                                    |  |                         | 23,629   |   |               |   | 24,854   |  
|                                                                                  |  |                         |          |   |               |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                       | 67,885   |   |               | $ | 54,749   |  
|                                                                                  |  |                         |          |   |               |   |          |  

See accompanying notes.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



1. BUSINESS

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

2. BASIS OF PRESENTATION

These financial statements include the consolidated results of the Company and its wholly owned subsidiaries. The Condensed Consolidated Balance Sheets as of March 26, 2005 and March 25, 2006, the Condensed Consolidated Statements
of Operations for the thirteen and thirty-nine week periods ended March 26, 2005 and March 25, 2006, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended March 26, 2005 and March 25, 2006
have been prepared from the Companys unaudited Condensed Consolidated Financial Statements. In managements opinion, the Condensed Consolidated Financial Statements include all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine week periods then ended. Significant intercompany balances and transactions have been eliminated in
consolidation. The Condensed Consolidated Balance Sheet at June 25, 2005 presented in this report has been derived from the Companys audited balance sheet not included in this report.

The results of operations for the interim periods shown are not necessarily indicative of results to be expected for the full fiscal year. In the second quarter of each
fiscal year, the Company typically realizes its highest sales of the fiscal year as it includes the most significant holidays that drive the largest portion of the gift-giving component of the Companys sales. It is also the period where the
Company incurs significant cost of goods sold in connection with the increased sales. Sales in the third quarter can also be impacted by the timing of Easter each year as either a third or fourth quarter holiday. The Companys fiscal year ends
on the last Saturday in June, based on a fifty-two/fifty-three-week year. Fiscal years ending June 24, 2006 and June 25, 2005 both contain 52 weeks.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the United States for comparable annual financial statements. Certain notes and other information have
been condensed or omitted from the interim condensed consolidated financial statements presented in this Quarterly Report. For further information, refer to the consolidated financial statements and the notes thereto for the year ended June 25,
2005, which are included in Harry & David Operations Corp.s Registration Statement on Form S-4 (Registration No. 333-128870), as amended, filed with the Securities and Exchange Commission (SEC) and declared effective on
November 4, 2005 (the Registration Statement).

Certain reclassifications have been made to the March 26, 2005 financial statements to conform to
the March 25, 2006 presentation. Such reclassifications had no effect on net income as originally reported. In addition, the Company re-allocated the tax provision among quarters in fiscal 2005. There was no effect on full year net income as a
result of this re-allocation, however, net income for the fiscal quarter ended March 26, 2005 has changed from what was previously reported.

3.
NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Rental Costs Incurred during a Construction Period: On October 6, 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. 13-1, Accounting for Rental Costs Incurred during a Construction Period (FSP 13-1), which requires that rental costs associated with ground or building operating leases
that are incurred during a construction period be recognized as rental expense. FSP 13-1 is effective for the first reporting period beginning after December 15, 2005. The Company has historically expensed rental costs incurred during a
construction period; therefore, the adoption of this guidance will not have an impact on the Companys net earnings, cash flows or financial position.



7



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)

Accounting for Conditional Asset Retirement Obligations:In March 2005, the FASB issued Financial Accounting Standards Board Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement
Obligations (FIN-47). This interpretation clarifies the term conditional asset retirement obligation as used in SFAS 143, Accounting for Asset Retirement Obligations, and is effective no later than the end of fiscal years ending
after December 15, 2005. The Company does not expect the adoption of FIN-47 to have a material effect on its consolidated financial statements.

American Jobs Creation Act: In the interim financial reporting period ended December 24, 2005, the Company indicated that it was evaluating the impact of the American Jobs Creation Act of 2004 in the context of a special
deduction associated with the taxable income of companies with U.S. manufacturing activities. The Act provides that this deduction is effective with the Companys tax year ending November 2006, which ends within the Companys fiscal year
ending June 2007. The benefit of such provisions will be phased-in during tax years November 2006 through November 2011. The Company is still in the process of determining the amount of benefit that will be recognized.

Accounting and Presentation for Sales Taxes:On February 28, 2006, consensus was reached on the Emerging Issues Task Force (EITF) Issue No. 06-3, How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)(EITF 06-3).EITF 06-3 provides that for taxes assessed by various
governmental authorities such as sales and excise taxes, a company may adopt a policy of presenting taxes either gross within revenue or net. If sales and excise taxes are significant, a company is required to disclose its accounting policy for
presenting taxes and the amounts of any such taxes that are recognized on a gross basis. The Company presents sales taxes on a net basis.

4.
INVENTORIES

Inventories consist of the following:



|                                                   |  |                |        |               |   |                |  |   |       
|-------------------------------------------------- |  | -------------- | ------ | ------------- | - | -------------- |  | - | ------
|                                                   |  | March 26, 2005 |        | June 25. 2005 |   | March 25, 2006
|Finished goods                                     |  | $              | 21,492 |               | $ | 20,225         |  | $ | 20,436
|Materials, packaging supplies, and work-in process |  |                | 22,143 |               |   | 29,076         |  |   | 31,027
|Growing crops                                      |  |                | 13,422 |               |   | 19,359         |  |   | 14,516
|                                                   |  |                |        |               |   |                |  |   |       
|Total                                              |  | $              | 57,057 |               | $ | 68,660         |  | $ | 65,979
|                                                   |  |                |        |               |   |                |  |   |       

During the 13-week period ended March 25, 2006, the Company recorded a $1,718 reserve to cover slow-moving
Jackson & Perkins rose inventory.

5. INCOME TAXES

At the end of each interim financial reporting period, the Company determines an estimate of the effective income tax rate expected to be applicable for the fiscal year. This estimate is used in providing for income taxes on a year-to-date
basis and may change in subsequent periods. The effective tax rate for fiscal 2005 was 27.15%, and the rate for fiscal 2006 is estimated to be 10.38%. The difference in the Companys effective tax rate from the federal statutory rate is
principally attributable to estimated state taxes in the current year and adjustments to the valuation allowance on attributes associated with state taxes for prior periods. The provision for income taxes for the thirteen weeks ended March 26,
2005 was a benefit of $7,186, reflecting an effective tax rate of 20.36%, as compared to a benefit of $9,380 in the thirteen weeks ended March 25, 2006, reflecting an effective tax rate of 32.43%. The tax provision for the thirty-nine weeks
ended March 26, 2005 was an expense of $4,775, reflecting an effective tax rate of 18.66% compared to an expense of $8,933 for the thirty-nine weeks ended March 25, 2006, reflecting an effective tax rate of 42.18%. The rates for the
current fiscal year and interim periods vary from the similar periods in fiscal 2005 principally as a result of changes in utilization of state net operating losses, an increase in the valuation allowance of $3,121 with respect to the state net
operating losses, and a change in the estimated results for the year.

6. ACCRUED RESTRUCTURING COSTS

On June 17, 2004, the Company purchased all of the outstanding shares of common stock of Harry & David Operations Corp. from Yamanouchi Consumer Inc.
(YCI), (the Acquisition). In accordance with EITF Issue No. 95-3, Recognition of



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



6. ACCRUED RESTRUCTURING COSTS (Continued)

Liabilities in Connection with a Purchase Business Combination, the Company recorded a liability for restructuring costs associated with the Acquisition. The restructuring liability consisted of $7,304 in
estimated costs to implement managements plan for a reduction in force that began in August 2004. Additionally, the restructuring liability consisted of $3,173 in estimated costs to implement managements plan to close 19 underperforming
Harry and David retail stores. These stores were identified for closure by the new ownership team based on historical and pro forma operating results. As of March 25, 2006, the Company has closed 17 of these stores. Management anticipates that
all of the planned restructuring activities will be completed by the end of fiscal 2006. The following table summarizes the Companys accrued restructuring costs.



|                        |  |                                        |        |               |   |        |                |  |   |      
|----------------------- |  | -------------------------------------- | ------ | ------------- | - | ------ | -------------- |  | - | -----
|                        |  | Thirty-nine weeks ended March 26, 2005
|                        |  | June 17, 2004                          |        | Cash Payments |   |        | March 26, 2005
|Reduction in force      |  | $                                      | 7,304  |               | $ | (5,466 | )              |  | $ | 1,838
|Store closures          |  |                                        | 2,873  |               |   | (1,155 | )              |  |   | 1,718
|Store closure severance |  |                                        | 300    |               |   |       |                |  |   | 300  
|                        |  |                                        |        |               |   |        |                |  |   |      
|Total                   |  | $                                      | 10,477 |               | $ | (6,621 | )              |  | $ | 3,856
|                        |  |                                        |        |               |   |        |                |  |   |      



|                        |  |                                        |       |                           |   |                      |                      |  |   |                |   |  |   |     |  |   |       |  |   |      
|----------------------- |  | -------------------------------------- | ----- | ------------------------- | - | -------------------- | -------------------- |  | - | -------------- | - |  | - | --- |  | - | ----- |  | - | -----
|                        |  | Thirty-nine weeks ended March 25, 2006 |       | Total CashPaymentsto Date |   | Total Expected Costs
|                        |  | June 25, 2005                          |       | Cash Payments             |   |                      | Non-Cash Adjustments |  |   | March 25, 2006 |   | 
|Reduction in force      |  | $                                      | 869   |                           | $ | (788                 | )                    |  | $ | (81            | ) |  | $ |    |  | $ | 7,040 |  | $ | 7,040
|Store closures          |  |                                        | 1,205 |                           |   | (465                 | )                    |  |   | (199           | ) |  |   | 541 |  |   | 1,991 |  |   | 2,532
|Store closure severance |  |                                        | 150   |                           |   | (31                  | )                    |  |   | (76            | ) |  |   | 43  |  |   | 181   |  |   | 224  
|                        |  |                                        |       |                           |   |                      |                      |  |   |                |   |  |   |     |  |   |       |  |   |      
|Total                   |  | $                                      | 2,224 |                           | $ | (1,284               | )                    |  | $ | (356           | ) |  | $ | 584 |  | $ | 9,212 |  | $ | 9,796
|                        |  |                                        |       |                           |   |                      |                      |  |   |                |   |  |   |     |  |   |       |  |   |      

Of the $356 non-cash adjustment, $81 represents the unutilized portion of the reserve for reduction in force, and
$275 represents cost savings from store closure and related severance costs that were lower than anticipated. This non-cash adjustment was included in selling, general and administrative expense on the Companys Condensed Consolidated
Statements of Operations.

7. BORROWING ARRANGEMENTS

Revolving Credit Facilities

On June 17, 2004, the Company entered into a revolving credit agreement with a group of lenders that
provided for $150,000 of revolving credit secured by the assets of the Company. In conjunction with a refinancing on February 25, 2005, this agreement was amended to reduce the revolving credit to $125,000. In connection with the issuance of
this facility, the Company incurred debt issuance fees of $7,812, which were recorded as deferred financing costs within long-term assets. As a result of the modification to the agreement in February 2005, the Company charged $1,098 of financing
fees to interest expense, proportional to the decrease in borrowing capacity of the old arrangement and at March 26, 2005 and March 25, 2006, $5,485 and $4,390 remained in deferred financing costs within long-term assets, respectively.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



7. BORROWING ARRANGEMENTS (Continued)

Revolving Credit Facilities (Continued)

During the thirty-nine weeks ended March 26, 2005 and March 25,
2006 the Company borrowed and repaid $90,000 and $104,000 under this facility, respectively. Interest on the borrowings was payable at a base rate or Eurocurrency rate, plus an applicable margin and fees.

On March 20, 2006, the Company replaced its existing credit facility with a new revolving credit agreement (the Credit Agreement) with a group of
lenders that provides for $125,000 of revolving credit secured by the assets of the Company. The Credit Agreement has a maturity date of March 20, 2011. Interest on the borrowings under the Credit Agreement is payable at a base rate or
Eurocurrency rate plus an applicable margin and fees. Borrowings under the Credit Agreement may be used for the Companys general corporate purposes, including capital expenditures, subject to certain limitations. The terms of the Credit
Agreement include customary representations and warranties, affirmative and negative covenants and events of default. At March 25, 2006, the Company was in compliance with all of its covenants under the Credit Agreement.

The Company has accounted for the new Credit Agreement pursuant to EITF Issue No. 98-14, Debtors Accounting for Changes in Lines-of-Credit or
Revolving-Debt Agreements, and accordingly has continued to defer $4,390 of unamortized deferred financing costs associated with the old credit agreement at March 25, 2006. Such deferred costs will be amortized over the term of the Credit
Agreement. In connection with the issuance of this facility, the Company incurred additional debt issuance fees of $1,817, which are recorded as deferred financing costs within long-term assets. The costs are amortized over the remaining life of the
credit agreement and as of March 25, 2006, $1,813 of these costs remained in deferred financing costs within long-term assets.

At March 25, 2006
there were letters of credit in the amount of $4,000 outstanding and $121,000 available for borrowings to the extent of the Companys current available borrowing base.

Long-Term Debt

In February 2005, the Company issued $70,000 in Senior Floating Rate Notes due March 1, 2012,
and $175,000 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at
7.93% and 9.82% at March 26, 2005 and March 25, 2006, respectively. The $175,000 of Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments commencing on December 1, 2005. The Company
incurred $9,490 in deferred financing fees in connection with this note offering that have been recorded in deferred financing costs within long-term assets.

The Company used a portion of the proceeds from the February offering to pay off a term loan of $155,000 and, in connection with this payment, charged the remaining financing fees of $6,858 and an associated breakage fee of $4,650 to
interest expense during the 13-week period ended March 26, 2005.

On December 16, 2005, the Company completed the public exchange offer for the
Senior Notes. The Company incurred costs in connection with this exchange offer in the amount of $1,169 that are recorded as deferred financing costs in addition to the original fees in long-term assets. The costs are amortized over the remaining
life of the associated Senior Notes and as of March 26, 2005 and March 25, 2006, $9,369 and $9,229, respectively, remained on the balance sheet for all associated fees.

These Senior Notes represent the senior unsecured obligations of Harry & David Operations Corp., a wholly owned subsidiary of Harry & David Holdings, Inc., and are guaranteed on a senior unsecured
basis by Harry & David Holdings, Inc. and all of the Companys subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness,
asset dispositions, acquisitions, investments,



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



7. BORROWING ARRANGEMENTS (Continued)

Long-Term Debt (Continued)

dividends and other restricted payments, liens and transactions with affiliates. The
Company was in compliance with all of its covenants at March 25, 2006.

Interest Expense

The components of interest expense are as follows:



|                                         |  |                      |        |   |                         |   |       |               |  |   |               |   |  |   |        |  
|---------------------------------------- |  | -------------------- | ------ | - | ----------------------- | - | ----- | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                         |  | Thirteen weeks ended |        |   | Thirty-nine weeks ended |  
|                                         |  | March 26,2005        |        |   | March 25,2006           |   |       | March 26,2005 |  |   | March 25,2006 |  
|Interest expense on debt                 |  | $                    | 4,870  |   |                         | $ | 5,877 |               |  | $ | 13,507        |   |  | $ | 18,094 |  
|Amortization of deferred financing costs |  |                      | 1,403  |   |                         |   | 657   |               |  |   | 2,357         |   |  |   | 1,823  |  
|Write-off of deferred financing costs    |  |                      | 7,956  |   |                         |   |      |               |  |   | 7,956         |   |  |   |       |  
|Breakage fees                            |  |                      | 4,650  |   |                         |   |      |               |  |   | 4,650         |   |  |   |       |  
|Commitment fees                          |  |                      | 286    |   |                         |   | 222   |               |  |   | 717           |   |  |   | 576    |  
|                                         |  |                      |        |   |                         |   |       |               |  |   |               |   |  |   |        |  
|Total interest costs                     |  |                      | 19,165 |   |                         |   | 6,756 |               |  |   | 29,187        |   |  |   | 20,493 |  
|Less amounts capitalized                 |  |                      | (6     | ) |                         |   | (34   | )             |  |   | (45           | ) |  |   | (214   | )
|                                         |  |                      |        |   |                         |   |       |               |  |   |               |   |  |   |        |  
|Net interest expense                     |  | $                    | 19,159 |   |                         | $ | 6,722 |               |  | $ | 29,142        |   |  | $ | 20,279 |  
|                                         |  |                      |        |   |                         |   |       |               |  |   |               |   |  |   |        |  

8. STOCK OPTION PLAN

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



|                         |  |                                                                       |           |  
|------------------------ |  | --------------------------------------------------------------------- | --------- | -
|                         |  | Thirteen and Thirty-nineweeks
ended March 26, 2005 and March 25, 2006 |          
|Expected volatility      |  |                                                                       | 44.97     | %
|Expected dividends       |  | $                                                                     | 0         |  
|Expected term (in years) |  |                                                                       | 4.3 years |  
|Risk-free rate           |  |                                                                       | 4.12      | %



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



8. STOCK OPTION PLAN (Continued)

A summary of option activity under the Plan for the thirty-nine weeks ended March 25, 2006 is presented below:

Thirty-nine weeks ended March 25, 2006



|                              |  |               |   |  |                                 |       |                                              |           
|----------------------------- |  | ------------- | - |  | ------------------------------- | ----- | -------------------------------------------- | ----------
|Options                       |  | Option Shares |   |  | Weighted- AverageExercise Price |       | Weighted- Average Remaining Contractual Term
|Outstanding at June 25, 2005  |  | 83,581        |   |  | $                               | 82.60 |                                              | 9.0 years 
|Granted                       |  |              |   |  |                                 |      |                                              |          
|Exercised                     |  | (14,888       | ) |  |                                 | 82.60 |                                              |          
|Forfeited                     |  | (275          | ) |  |                                 | 82.60 |                                              |          
|                              |  |               |   |  |                                 |       |                                              |           
|Outstanding at March 25, 2006 |  | 68,418        |   |  | $                               | 82.60 |                                              | 8.25 years
|                              |  |               |   |  |                                 |       |                                              |           

There was no activity in the thirteen weeks ended March 25, 2006. Of the 68,418 options outstanding at
March 25, 2006, 1,773 were fully vested and exercisable. The weighted average remaining contractual term of vested options was 8.25 years. The total value of all options outstanding at March 25, 2006 was $2,055.

A summary of the status of the Companys nonvested option shares as of March 25, 2006, and changes during the thirty-nine weeks ended March 25, 2006 is
presented below:



|                              |  |              |   |  |                                                   |      
|----------------------------- |  | ------------ | - |  | ------------------------------------------------- | -----
|Nonvested Option Shares       |  | OptionShares |   |  | Weighted- Average Grant-Date Fair Valueof Options
|Outstanding at June 25, 2005  |  | 66,865       |   |  | $                                                 | 30.04
|Granted options               |  |             |   |  |                                                   |     
|Vested                        |  |             |   |  |                                                   |     
|Forfeited                     |  | (220         | ) |  |                                                   | 30.04
|                              |  |              |   |  |                                                   |      
|Outstanding at March 25, 2006 |  | 66,645       |   |  | $                                                 | 30.04
|                              |  |              |   |  |                                                   |      

The Company did not recognize any compensation expense for the thirteen and thirty-nine week periods ended
March 26, 2005. For the thirteen and thirty-nine week periods ended March 25, 2006, the Company recognized $113 and $339 of stock compensation expense, respectively. The total tax benefit recognized for these periods was $45 and $135,
respectively. As of March 26, 2005 and March 25, 2006, there remained a total of $2,511 and $1,419 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan,
respectively. That cost is recognized over a weighted-average period of 3.25 years. An assumption of a ten percent forfeiture rate is utilized when arriving at the amount of stock compensation expense recognized.

9. BENEFIT PROGRAMS

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



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



9. BENEFIT PROGRAMS (Continued)



|                               |  |                      |       |   |                         |   |       |               |  |   |               |   |  |   |        |  
|------------------------------ |  | -------------------- | ----- | - | ----------------------- | - | ----- | ------------- |  | - | ------------- | - |  | - | ------ | -
|                               |  | Thirteen weeks ended |       |   | Thirty-nine weeks ended |  
|                               |  | March 26,2005        |       |   | March 25,2006           |   |       | March 26,2005 |  |   | March 25,2006 |  
|Service cost                   |  | $                    | 1,026 |   |                         | $ | 1,140 |               |  | $ | 3,018         |   |  | $ | 3,420  |  
|Interest cost                  |  |                      | 999   |   |                         |   | 926   |               |  |   | 2,940         |   |  |   | 2,777  |  
|Expected return on plan assets |  |                      | (788  | ) |                         |   | (688  | )             |  |   | (2,319        | ) |  |   | (2,064 | )
|Settlement gain                |  |                      |      |   |                         |   | 2     |               |  |   |              |   |  |   | 7      |  
|                               |  |                      |       |   |                         |   |       |               |  |   |               |   |  |   |        |  
|Net periodic benefit expense   |  | $                    | 1,237 |   |                         | $ | 1,380 |               |  | $ | 3,639         |   |  | $ | 4,140  |  
|                               |  |                      |       |   |                         |   |       |               |  |   |               |   |  |   |        |  

During the thirteen and thirty-nine weeks ended March 26, 2005, the Company made a $1,492 and $2,140
contribution to its defined benefit plans, respectively. During the thirteen and thirty-nine weeks ended March 25, 2006, the Company made a $279 and $633 contribution to its defined benefit plans, respectively.

10. EARNINGS (LOSS) PER SHARE

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



|                                            |  |                      |           |   |                         |   |           |                |  |                |           |  |   |          
|------------------------------------------- |  | -------------------- | --------- | - | ----------------------- | - | --------- | -------------- |  | -------------- | --------- |  | - | ---------
|                                            |  | Thirteen weeks ended |           |   | Thirty-nine weeks ended
|                                            |  | March 26, 2005       |           |   | March 25, 2006          |   |           | March 26, 2005 |  | March 25, 2006
|Net income (loss)                           |  | $                    | (28,108   | ) |                         | $ | (19,546   | )              |  | $              | 20,822    |  | $ | 12,245   
|                                            |  |                      |           |   |                         |   |           |                |  |                |           |  |   |          
|Weighted average common shares outstanding  |  |                      | 1,000,000 |   |                         |   | 1,014,888 |                |  |                | 1,000,000 |  |   | 1,012,171
|                                            |  |                      |           |   |                         |   |           |                |  |                |           |  |   |          
|Basic and diluted earnings (loss) per share |  | $                    | (28.11    | ) |                         | $ | (19.26    | )              |  | $              | 20.82     |  | $ | 12.10    
|                                            |  |                      |           |   |                         |   |           |                |  |                |           |  |   |          

Options with an exercise price greater than or equal to the estimated fair market value per common share were
83,581 and 68,418 for the thirteen weeks and 83,581 and 70,323 for the thirty-nine weeks ended March 26, 2005 and March 25, 2006, respectively, and were not included in the computation of diluted earnings per share, as their inclusion
would be anti-dilutive.

11. INTANGIBLES

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

The customer mailing lists and favorable lease agreements are being amortized using the straight-line method over their estimated useful lives. The aggregate
amortization expense was $493 and $500 for the thirteen week periods ended March 26, 2005 and March 25, 2006, respectively, and $1,680 and $1,654 for the thirty-nine week periods ended March 26, 2005 and March 25, 2006,
respectively, and is included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



11. INTANGIBLES (Continued)

The following is a summary of intangible assets:



|                                          |  |                       |        |                          |   |        |                   |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|----------------------------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ----------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- | - | ------ | - |  | - | ------
|                                          |  | March 26, 2005        |        | March 25, 2006          
|                                          |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | NetCarryingAmount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|Trade names and trademarks                |  | $                     | 28,765 |                          | $ |       |                   |  | $                     | 28,765 |                          | $ | 28,765 |                     | $ |       |   |  | $ | 28,765
|Harry and David customer and rental lists |  |                       | 6,805  |                          |   | (1,478 | )                 |  |                       | 5,327  |                          |   | 6,805  |                     |   | (3,336 | ) |  |   | 3,469 
|Favorable lease agreements                |  |                       | 1,877  |                          |   | (291   | )                 |  |                       | 1,586  |                          |   | 1,971  |                     |   | (681   | ) |  |   | 1,290 
|                                          |  |                       |        |                          |   |        |                   |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|                                          |  | $                     | 37,447 |                          | $ | (1,769 | )                 |  | $                     | 35,678 |                          | $ | 37,541 |                     | $ | (4,017 | ) |  | $ | 33,524
|                                          |  |                       |        |                          |   |        |                   |  |                       |        |                          |   |        |                     |   |        |   |  |   |       

Amortization expense for fiscal 2006 is projected to be $2,212. The estimated amortization expense for each of the
next five years is as follows:



|                 |  |   |      
|---------------- |  | - | -----
|Fiscal year 2007 |  | $ | 1,935
|Fiscal year 2008 |  |   | 1,725
|Fiscal year 2009 |  |   | 244  
|Fiscal year 2010 |  |   | 171  
|Fiscal year 2011 |  |   | 126  

12. COMMITMENTS AND CONTINGENCIES

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

On
January 9, 2006, the Company reached a settlement with an insurance company on a claim arising out of inventory losses that occurred in 2001. The gross settlement of $3,500 was paid on January 26, 2006 and, in accordance with the agreement
between the Company and YCI, the Company paid 43% of the gross proceeds, or $1,505, to YCI. The net proceeds to the Company of $1,995 were offset by $275 in related legal expenses and other fees and recorded in other income in the
Companys results of operations for the thirteen and thirty-nine week periods ended March 25, 2006.

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

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



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



12. COMMITMENTS AND CONTINGENCIES (Continued)

Total rental expense for all operating leases was as follows:



|                        |  |                      |       |                         |   |                |  |                |        |  |   |       
|----------------------- |  | -------------------- | ----- | ----------------------- | - | -------------- |  | -------------- | ------ |  | - | ------
|                        |  | Thirteen weeks ended |       | Thirty-nine weeks ended
|                        |  | March 26, 2005       |       | March 25, 2006          |   | March 26, 2005 |  | March 25, 2006
|Minimum rent expense    |  | $                    | 6,190 |                         | $ | 5,361          |  | $              | 20,424 |  | $ | 18,823
|Contingent rent expense |  |                      | 92    |                         |   | 45             |  |                | 146    |  |   | 183   
|                        |  |                      |       |                         |   |                |  |                |        |  |   |       
|Total rent expense      |  | $                    | 6,282 |                         | $ | 5,406          |  | $              | 20,570 |  | $ | 19,006
|                        |  |                      |       |                         |   |                |  |                |        |  |   |       

In connection with the Acquisition, the Company entered into an agreement with its shareholders, Wasserstein and
Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. To the extent the management fees are not paid in any year,
they will be accrued. During each of the thirteen week periods ended March 26, 2005 and March 25, 2006, the Company paid $250, and during the thirty-nine week periods ended March 26, 2005 and March 25, 2006, the Company paid $844
and $750, respectively, 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.

Some agricultural lands owned by the Company receive water supplied by facilities improved, owned and/or operated by the United States government acting through the
Bureau of Reclamation (BOR), which required certain owners or stockholders to file annual forms with the BOR. In southern Oregon, the three irrigation districts were improved by the BOR projects and have contracts with the Bureau for repayment of
the cost for the irrigation projects. Once the repayment obligation has been satisfied there is no more reporting obligation for those lands. In December 2005, federal legislation was passed and signed by President Bush that allows a land owner
in southern Oregon to pay off the BOR repayment obligation for its land early. The Company has paid the obligations for all lands owned or leased in southern Oregon. The Company has also elected to irrigate its land in California from wells instead
of using BOR water. By so doing, the Company currently has no reporting obligation with the BOR.

On February 18, 2005, the Company established a
liquidity event award plan for each member of its senior management team who had received stock options under the 2004 Stock Option Plan (see Note 8) as of that date. The aggregate amount of all potential awards to senior management is equal to
$6,197, or 7.5% of the portion of the proceeds from the sale of notes that was 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 will vest on June 17, 2006, and 5%
will vest quarterly thereafter, in each case, so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their
awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity sponsors exceeds a certain level;
(iii) the Company has available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will be payable in cash or, in some
circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of March 25, 2006, the Company has concluded that it is not
obligated to accrue a liability or recognize any expense for the thirteen or thirty-nine week period then ended.

13. SEGMENT REPORTING

The Company has three reportable segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins. The Harry and David Direct
Marketing segment markets premium gift-quality fruit, gourmet food products and gifts under the Harry and David® brand through the Harry and David catalog, Internet (harryanddavid.com), business-to-business and consumer telemarketing operations. The Harry and David Stores segment sells similar
products through retail locations (outlet stores, specialty stores and a Country Village store). The Jackson & Perkins segment markets horticultural products and gifts through the Jackson & Perkins catalog, Internet
(jacksonandperkins.com), consumer telemarketing and wholesale operations. These reportable segments are strategic business units that offer similar products. They are managed separately



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



13. SEGMENT REPORTING (Continued)

because the business units utilize distinct marketing strategies. Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and capital
investment requirements. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting polices. Transactions between reportable segments are generally recorded at cost. Other
assets include corporate cash and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, deferred income taxes, third-party and intercompany debt and other corporate long-lived assets,
including manufacturing facilities. Business units not required to be disclosed separately for segment reporting purposes are grouped in Other and include Harry and David wholesale, commercial sales of non-gift-quality fruit and business
units that support the Companys operations, including orchards, product supply, distribution, customer operations, facilities, information technology services and administrative and marketing support functions.



|                                       |  |                                  |          |   |                        |   |         |                   |  |   |        |   |  |       |         |   |  |   |         |  
|-------------------------------------- |  | -------------------------------- | -------- | - | ---------------------- | - | ------- | ----------------- |  | - | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|Dollars in thousands                   |  | Harry and David Direct Marketing |          |   | Harry and David Stores |   |         | Jackson & Perkins |  |   | Other  |   |  | Total |        
|Thirteen weeks ended March 26, 2005    |  |                                  |          |   |                        |   |         |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                     |  | $                                | 49,796   |   |                        | $ | 22,850  |                   |  | $ | 28,960 |   |  | $     | 2,054   |   |  | $ | 103,660 |  
|Net intersegment sales                 |  |                                  | (20,180  | ) |                        |   | (5,673  | )                 |  |   | (2,002 | ) |  |       | 27,855  |   |  |   |        |  
|Operating income (loss)                |  |                                  | (11,240  | ) |                        |   | (7,175  | )                 |  |   | 2,396  |   |  |       | (636    | ) |  |   | (16,655 | )
|Net interest (expense) income          |  |                                  | (1       | ) |                        |   | 1       |                   |  |   |       |   |  |       | (18,606 | ) |  |   | (18,606 | )
|Pretax income (loss)                   |  |                                  | (11,273  | ) |                        |   | (7,175  | )                 |  |   | 2,396  |   |  |       | (19,242 | ) |  |   | (35,294 | )
|Net income (loss)                      |  |                                  | (43,710  | ) |                        |   | (11,422 | )                 |  |   | 6      |   |  |       | 27,018  |   |  |   | (28,108 | )
|Total assets                           |  |                                  | 38,528   |   |                        |   | 33,684  |                   |  |   | 59,417 |   |  |       | 268,371 |   |  |   | 400,000 |  
|                                       |  |                                  |          |   |                       
|Thirteen weeks ended March 25, 2006    |  |                                  |          |   |                        |   |         |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                     |  | $                                | 45,468   |   |                        | $ | 21,449  |                   |  | $ | 23,497 |   |  | $     | 4,169   |   |  | $ | 94,583  |  
|Net intersegment sales                 |  |                                  | (20,147  | ) |                        |   | (5,565  | )                 |  |   | (1,082 | ) |  |       | 26,794  |   |  |   |        |  
|Operating loss                         |  |                                  | (12,791  | ) |                        |   | (7,654  | )                 |  |   | (4,392 | ) |  |       | (108    | ) |  |   | (24,945 | )
|Net interest expense                   |  |                                  |         |   |                        |   |        |                   |  |   |       |   |  |       | (5,695  | ) |  |   | (5,695  | )
|Pretax loss                            |  |                                  | (11,409  | ) |                        |   | (7,401  | )                 |  |   | (4,335 | ) |  |       | (5,781  | ) |  |   | (28,926 | )
|Net loss                               |  |                                  | (9,902   | ) |                        |   | (4,879  | )                 |  |   | (2,259 | ) |  |       | (2,506  | ) |  |   | (19,546 | )
|Total assets                           |  |                                  | 52,032   |   |                        |   | 37,134  |                   |  |   | 63,226 |   |  |       | 245,442 |   |  |   | 397,834 |  
|                                       |  |                                  |          |   |                       
|Thirty-nine weeks ended March 26, 2005 |  |                                  |          |   |                        |   |         |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                     |  | $                                | 314,719  |   |                        | $ | 110,192 |                   |  | $ | 57,636 |   |  | $     | 9,761   |   |  | $ | 492,308 |  
|Net intersegment sales                 |  |                                  | (112,416 | ) |                        |   | (25,145 | )                 |  |   | (6,233 | ) |  |       | 143,794 |   |  |   |        |  
|Operating income (loss)                |  |                                  | 53,440   |   |                        |   | 3,215   |                   |  |   | (1,319 | ) |  |       | (1,464  | ) |  |   | 53,872  |  
|Net interest (expense) income          |  |                                  | (1       | ) |                        |   | 2       |                   |  |   |       |   |  |       | (28,545 | ) |  |   | (28,544 | )
|Pretax income (loss)                   |  |                                  | 53,440   |   |                        |   | 3,206   |                   |  |   | (1,319 | ) |  |       | (29,730 | ) |  |   | 25,597  |  
|Net income (loss)                      |  |                                  | 30,895   |   |                        |   | 1,504   |                   |  |   | (887   | ) |  |       | (10,690 | ) |  |   | 20,822  |  
|Total assets                           |  |                                  | 38,528   |   |                        |   | 33,684  |                   |  |   | 59,417 |   |  |       | 268,371 |   |  |   | 400,000 |  
|                                       |  |                                  |          |   |                       
|Thirty-nine weeks ended March 25, 2006 |  |                                  |          |   |                        |   |         |                   |  |   |        |   |  |       |         |   |  |   |         |  
|Net external sales                     |  | $                                | 329,419  |   |                        | $ | 109,677 |                   |  | $ | 55,197 |   |  | $     | 20,405  |   |  | $ | 514,698 |  
|Net intersegment sales                 |  |                                  | (126,784 | ) |                        |   | (24,366 | )                 |  |   | (4,713 | ) |  |       | 155,863 |   |  |   |        |  
|Operating income (loss)                |  |                                  | 43,977   |   |                        |   | 2,998   |                   |  |   | (8,786 | ) |  |       | 2,449   |   |  |   | 40,638  |  
|Net interest (expense) income          |  |                                  |         |   |                        |   | 7       |                   |  |   |       |   |  |       | (19,001 | ) |  |   | (18,994 | )
|Pretax income (loss)                   |  |                                  | 45,359   |   |                        |   | 3,258   |                   |  |   | (8,729 | ) |  |       | (18,710 | ) |  |   | 21,178  |  
|Net income (loss)                      |  |                                  | 25,183   |   |                        |   | 1,884   |                   |  |   | (5,047 | ) |  |       | (9,775  | ) |  |   | 12,245  |  
|Total assets                           |  |                                  | 52,032   |   |                        |   | 37,134  |                   |  |   | 63,226 |   |  |       | 245,442 |   |  |   | 397,834 |  



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Harry & David Operations Corp. issued $70,000 of Senior Floating Rate Notes due 2012 and $175,000 of Senior Fixed Rate Notes due 2013 (collectively, the Senior Notes) in February 2005 (see Note 7). In
connection with Harry & David Operations Corp.s completed exchange of the Senior Notes for an equal principal amount of such notes registered under the Securities Act of 1933, the following consolidating financial information
presents, in separate columns, financial information for (i) the Company (on a parent only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry & David Operations Corp. (the subsidiary
issuer), (iii) Harry & David Holdings, Inc. (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the
Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of March 26, 2005 and March 25, 2006 and for the thirteen and thirty-nine week periods ended March 26, 2005 and March 25,
2006. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Company and each of its existing and future domestic restricted subsidiaries, which are 100% owned, directly or indirectly, by the Company within the
meaning of Rule 3-10 of Regulation S-X. There are no non-guarantor subsidiaries. The Senior Notes place certain restrictions on the payment of dividends, other payments or distributions by the Company and between the guarantors. The Company has not
presented separate financial information for each of the subsidiary guarantors because the Companys management believes that such financial information would not provide investors with any additional information that would be material in
evaluating the sufficiency of the guarantees.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of March 26, 2005



|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|---------------------------------------------------- |  | ------------------------------------------ | -------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | -------
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |          |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated
|Assets                                               |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current assets:                                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Cash and cash equivalents                            |  | $                                          | 1,405    |   |                                | $ | 14,818   |                        |  | $ | 51,662                           |   |  | $            |         |   |  | $ | 67,885 
|Trade accounts and other receivable, net             |  |                                            |         |   |                                |   |         |                        |  |   | 20,797                           |   |  |              |         |   |  |   | 20,797 
|Other receivables                                    |  |                                            |         |   |                                |   | 35       |                        |  |   | 1,953                            |   |  |              |         |   |  |   | 1,988  
|Inventories, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 57,057                           |   |  |              |         |   |  |   | 57,057 
|Prepaid catalog expenses                             |  |                                            |         |   |                                |   |         |                        |  |   | 6,602                            |   |  |              |         |   |  |   | 6,602  
|Income taxes receivable                              |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 4,367    |   |  |   | 4,367  
|Other current assets                                 |  |                                            |         |   |                                |   | 1,257    |                        |  |   | 5,717                            |   |  |              | 244      |   |  |   | 7,218  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current assets                                 |  |                                            | 1,405    |   |                                |   | 16,110   |                        |  |   | 143,788                          |   |  |              | 4,611    |   |  |   | 165,914
|                                                     |  |                                            |          |   |                               
|Property, plant, and equipment, net                  |  |                                            |         |   |                                |   | 11,788   |                        |  |   | 152,350                          |   |  |              |         |   |  |   | 164,138
|Software, net                                        |  |                                            |         |   |                                |   | 11,081   |                        |  |   | 657                              |   |  |              |         |   |  |   | 11,738 
|Intangibles, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 35,678                           |   |  |              |         |   |  |   | 35,678 
|Investment in subsidiaries                           |  |                                            | 84,005   |   |                                |   | 158,578  |                        |  |   |                                 |   |  |              | (242,583 | ) |  |   |       
|Deferred financing costs, net                        |  |                                            | (2,326   | ) |                                |   | 17,180   |                        |  |   |                                 |   |  |              |         |   |  |   | 14,854 
|Deferred income taxes                                |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 7,082    |   |  |   | 7,082  
|Other assets                                         |  |                                            |         |   |                                |   | 247      |                        |  |   | 349                              |   |  |              |         |   |  |   | 596    
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total assets                                         |  | $                                          | 83,084   |   |                                | $ | 214,984  |                        |  | $ | 332,822                          |   |  | $            | (230,890 | ) |  | $ | 400,000
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Liabilities and stockholders equity (deficit)       |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Current liabilities:                                 |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Accounts payable                                     |  | $                                          | (1,072   | ) |                                | $ | 11,207   |                        |  | $ | 20,173                           |   |  | $            |         |   |  | $ | 30,308 
|Accrued payroll and benefits                         |  |                                            |         |   |                                |   | 3,561    |                        |  |   | 14,939                           |   |  |              |         |   |  |   | 18,500 
|Income taxes payable                                 |  |                                            |         |   |                                |   | (4,313   | )                      |  |   | (298                             | ) |  |              | 4,611    |   |  |   |       
|Deferred revenue                                     |  |                                            |         |   |                                |   |         |                        |  |   | 22,216                           |   |  |              |         |   |  |   | 22,216 
|Deferred income taxes                                |  |                                            |         |   |                                |   | (3,783   | )                      |  |   | 40,990                           |   |  |              |         |   |  |   | 37,207 
|Accrued interest                                     |  |                                            |         |   |                                |   | 1,840    |                        |  |   |                                 |   |  |              |         |   |  |   | 1,840  
|Accrued restructuring costs                          |  |                                            |         |   |                                |   | 2,268    |                        |  |   | 1,588                            |   |  |              |         |   |  |   | 3,856  
|Other accrued liabilities                            |  |                                            |         |   |                                |   | (25      | )                      |  |   | 7,036                            |   |  |              |         |   |  |   | 7,011  
|Notes payable                                        |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              |         |   |  |   |       
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total current liabilities                            |  |                                            | (1,072   | ) |                                |   | 10,755   |                        |  |   | 106,644                          |   |  |              | 4,611    |   |  |   | 120,938
|                                                     |  |                                            |          |   |                               
|Long-term debt                                       |  |                                            |         |   |                                |   | 245,000  |                        |  |   |                                 |   |  |              |         |   |  |   | 245,000
|Accrued pension liability                            |  |                                            |         |   |                                |   |         |                        |  |   | 29,741                           |   |  |              |         |   |  |   | 29,741 
|Deferred income taxes                                |  |                                            |         |   |                                |   | (18,452  | )                      |  |   | 11,370                           |   |  |              | 7,082    |   |  |   |       
|Intercompany debt                                    |  |                                            | 185,155  |   |                                |   | (248,724 | )                      |  |   | 63,569                           |   |  |              |         |   |  |   |       
|Other long-term liabilities                          |  |                                            |         |   |                                |   |         |                        |  |   | 1,345                            |   |  |              |         |   |  |   | 1,345  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities                                    |  |                                            | 184,083  |   |                                |   | (11,421  | )                      |  |   | 212,669                          |   |  |              | 11,693   |   |  |   | 397,024
|                                                     |  |                                            |          |   |                               
|Stockholders equity (deficit):                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Common stock                                         |  |                                            |         |   |                                |   | 11       |                        |  |   | 2                                |   |  |              | (3       | ) |  |   | 10     
|Additional paid-in capital                           |  |                                            | (82,600  | ) |                                |   | 220,792  |                        |  |   | 105,519                          |   |  |              | (242,580 | ) |  |   | 1,131  
|Retained earnings (accumulated deficit)              |  |                                            | (18,429  | ) |                                |   | 5,632    |                        |  |   | 14,632                           |   |  |              |         |   |  |   | 1,835  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total stockholders equity (deficit)                 |  |                                            | (101,029 | ) |                                |   | 226,435  |                        |  |   | 120,153                          |   |  |              | (242,583 | ) |  |   | 2,976  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        
|Total liabilities and stockholders equity (deficit) |  | $                                          | 83,054   |   |                                | $ | 215,014  |                        |  | $ | 332,822                          |   |  | $            | (230,890 | ) |  | $ | 400,000
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |        



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of March 25, 2006



|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------------------ | -------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only) |          |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Assets                                               |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                          | 46       |   |                                | $ | 8,715    |                        |  | $ | 45,988                           |   |  | $            |         |   |  | $ | 54,749  |  
|Trade accounts and other receivable, net             |  |                                            |         |   |                                |   | (8       | )                      |  |   | 19,360                           |   |  |              |         |   |  |   | 19,352  |  
|Other receivables                                    |  |                                            | 165      |   |                                |   | (14,564  | )                      |  |   | 19,614                           |   |  |              |         |   |  |   | 5,215   |  
|Inventories, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 65,979                           |   |  |              |         |   |  |   | 65,979  |  
|Prepaid catalog expenses                             |  |                                            |         |   |                                |   |         |                        |  |   | 6,029                            |   |  |              |         |   |  |   | 6,029   |  
|Income taxes receivable                              |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 216      |   |  |   | 216     |  
|Other current assets                                 |  |                                            |         |   |                                |   | 2,621    |                        |  |   | 6,827                            |   |  |              | 129      |   |  |   | 9,577   |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                            | 211      |   |                                |   | (3,236   | )                      |  |   | 163,797                          |   |  |              | 345      |   |  |   | 161,117 |  
|                                                     |  |                                            |          |   |                               
|Property, plant, and equipment, net                  |  |                                            |         |   |                                |   | 15,556   |                        |  |   | 147,469                          |   |  |              |         |   |  |   | 163,025 |  
|Software, net                                        |  |                                            |         |   |                                |   | 9,000    |                        |  |   | 813                              |   |  |              |         |   |  |   | 9,813   |  
|Intangibles, net                                     |  |                                            |         |   |                                |   |         |                        |  |   | 33,524                           |   |  |              |         |   |  |   | 33,524  |  
|Investment in subsidiaries                           |  |                                            | 84,005   |   |                                |   | 158,578  |                        |  |   |                                 |   |  |              | (242,583 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                            |         |   |                                |   | 15,432   |                        |  |   |                                 |   |  |              |         |   |  |   | 15,432  |  
|Deferred income taxes                                |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              | 14,387   |   |  |   | 14,387  |  
|Other assets                                         |  |                                            |         |   |                                |   | 291      |                        |  |   | 245                              |   |  |              |         |   |  |   | 536     |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                          | 84,216   |   |                                | $ | 195,621  |                        |  | $ | 345,848                          |   |  | $            | (227,851 | ) |  | $ | 397,834 |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                          |         |   |                                | $ | 6,643    |                        |  | $ | 22,781                           |   |  | $            |         |   |  | $ | 29,424  |  
|Accrued payroll and benefits                         |  |                                            | 88       |   |                                |   | 3,694    |                        |  |   | 11,286                           |   |  |              |         |   |  |   | 15,068  |  
|Income taxes payable                                 |  |                                            | (11      | ) |                                |   | (67      | )                      |  |   | (267                             | ) |  |              | 345      |   |  |   |        |  
|Deferred revenue                                     |  |                                            |         |   |                                |   |         |                        |  |   | 25,223                           |   |  |              |         |   |  |   | 25,223  |  
|Deferred income taxes                                |  |                                            | (204     | ) |                                |   | (5,333   | )                      |  |   | 46,894                           |   |  |              |         |   |  |   | 41,357  |  
|Accrued interest                                     |  |                                            |         |   |                                |   | 1,799    |                        |  |   |                                 |   |  |              |         |   |  |   | 1,799   |  
|Accrued restructuring costs                          |  |                                            |         |   |                                |   |         |                        |  |   | 584                              |   |  |              |         |   |  |   | 584     |  
|Other accrued liabilities                            |  |                                            |         |   |                                |   | 1,901    |                        |  |   | 9,134                            |   |  |              |         |   |  |   | 11,035  |  
|Notes payable                                        |  |                                            |         |   |                                |   |         |                        |  |   |                                 |   |  |              |         |   |  |   |        |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                            | (127     | ) |                                |   | 8,637    |                        |  |   | 115,635                          |   |  |              | 345      |   |  |   | 124,490 |  
|                                                     |  |                                            |          |   |                               
|Long-term debt                                       |  |                                            |         |   |                                |   | 245,000  |                        |  |   |                                 |   |  |              |         |   |  |   | 245,000 |  
|Accrued pension liability                            |  |                                            |         |   |                                |   |         |                        |  |   | 34,490                           |   |  |              |         |   |  |   | 34,490  |  
|Deferred income taxes                                |  |                                            | (699     | ) |                                |   | (2,634   | )                      |  |   | (11,054                          | ) |  |              | 14,387   |   |  |   |        |  
|Intercompany debt                                    |  |                                            | 185,384  |   |                                |   | (258,901 | )                      |  |   | 73,517                           |   |  |              |         |   |  |   |        |  
|Other long-term liabilities                          |  |                                            |         |   |                                |   |         |                        |  |   | 2,867                            |   |  |              |         |   |  |   | 2,867   |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                            | 184,558  |   |                                |   | (7,898   | )                      |  |   | 215,455                          |   |  |              | 14,732   |   |  |   | 406,847 |  
|                                                     |  |                                            |          |   |                               
|Stockholders equity (deficit):                      |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                            |         |   |                                |   | 11       |                        |  |   | 2                                |   |  |              | (3       | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                            | (80,529  | ) |                                |   | 221,024  |                        |  |   | 105,518                          |   |  |              | (242,580 | ) |  |   | 3,433   |  
|Retained earnings (accumulated deficit)              |  |                                            | (19,813  | ) |                                |   | (17,516  | )                      |  |   | 24,873                           |   |  |              |         |   |  |   | (12,456 | )
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                            | (100,342 | ) |                                |   | 203,519  |                        |  |   | 130,393                          |   |  |              | (242,583 | ) |  |   | (9,013  | )
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                          | 84,216   |   |                                | $ | 195,621  |                        |  | $ | 345,848                          |   |  | $            | (227,851 | ) |  | $ | 397,834 |  
|                                                     |  |                                            |          |   |                                |   |          |                        |  |   |                                  |   |  |              |          |   |  |   |         |  



19



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 26, 2005



|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------------------------------ | ---- | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                 |  | Harry & David Holdings, Inc. (Parent-Only) |      |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                        |  | $                                          |     |   |                                | $ |        |                        |  | $ | 143,313                          |   |  | $            | (39,653 | ) |  | $ | 103,660 |  
|                                                 |  |                                            |      |   |                               
|Costs and expenses:                              |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cost of goods sold                               |  |                                            |     |   |                                |   |        |                        |  |   | 109,249                          |   |  |              | (39,653 | ) |  |   | 69,596  |  
|Selling, general and administrative              |  |                                            |     |   |                                |   | 331     |                        |  |   | 50,388                           |   |  |              |        |   |  |   | 50,719  |  
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            |     |   |                                |   | 331     |                        |  |   | 159,637                          |   |  |              | (39,653 | ) |  |   | 120,315 |  
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating loss                                   |  |                                            |     |   |                                |   | (331    | )                      |  |   | (16,324                          | ) |  |              |        |   |  |   | (16,655 | )
|                                                 |  |                                            |      |   |                               
|Other (income) expense:                          |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                  |  |                                            |     |   |                                |   | (9      | )                      |  |   | (544                             | ) |  |              |        |   |  |   | (553    | )
|Interest expense                                 |  |                                            | 249  |   |                                |   | 18,915  |                        |  |   | (5                               | ) |  |              |        |   |  |   | 19,159  |  
|Other (income) expense                           |  |                                            |     |   |                                |   | 1       |                        |  |   | 32                               |   |  |              |        |   |  |   | 33      |  
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            | 249  |   |                                |   | 18,907  |                        |  |   | (517                             | ) |  |              |        |   |  |   | 18,639  |  
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Loss before provision (benefit) for income taxes |  |                                            | (249 | ) |                                |   | (19,238 | )                      |  |   | (15,807                          | ) |  |              |        |   |  |   | (35,294 | )
|Provision (benefit) for income taxes             |  |                                            | 86   |   |                                |   | (44,642 | )                      |  |   | 37,370                           |   |  |              |        |   |  |   | (7,186  | )
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net income (loss)                                |  | $                                          | (335 | ) |                                | $ | 25,404  |                        |  | $ | (53,177                          | ) |  | $            |        |   |  | $ | (28,108 | )
|                                                 |  |                                            |      |   |                                |   |         |                        |  |   |                                  |   |  |              |         |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 25, 2006



|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------------------------------ | -- | - | ------------------------------ | - | ------ | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                 |  | Harry & David Holdings, Inc. (Parent-Only) |    |   | Harry & David Operations Corp. |   |        | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |        
|Net sales                                        |  | $                                          |   |   |                                | $ |       |                        |  | $ | 131,911                          |   |  | $            | (37,328 | ) |  | $ | 94,583  |  
|                                                 |  |                                            |    |   |                               
|Costs and expenses:                              |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Cost of goods sold                               |  |                                            |   |   |                                |   |       |                        |  |   | 109,773                          |   |  |              | (37,328 | ) |  |   | 72,445  |  
|Selling, general and administrative              |  |                                            |   |   |                                |   |       |                        |  |   | 47,083                           |   |  |              |        |   |  |   | 47,083  |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            |   |   |                                |   |       |                        |  |   | 156,856                          |   |  |              | (37,328 | ) |  |   | 119,528 |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Operating loss                                   |  |                                            |   |   |                                |   |       |                        |  |   | (24,945                          | ) |  |              |        |   |  |   | (24,945 | )
|                                                 |  |                                            |    |   |                               
|Other (income) expense:                          |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Interest income                                  |  |                                            |   |   |                                |   |       |                        |  |   | (1,027                           | ) |  |              |        |   |  |   | (1,027  | )
|Interest expense                                 |  |                                            |   |   |                                |   | 6,711  |                        |  |   | 11                               |   |  |              |        |   |  |   | 6,722   |  
|Other (income) expense                           |  |                                            |   |   |                                |   |       |                        |  |   | (1,714                           | ) |  |              |        |   |  |   | (1,714  | )
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|                                                 |  |                                            |   |   |                                |   | 6,711  |                        |  |   | (2,730                           | ) |  |              |        |   |  |   | 3,981   |  
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Loss before provision (benefit) for income taxes |  |                                            |   |   |                                |   | (6,711 | )                      |  |   | (22,215                          | ) |  |              |        |   |  |   | (28,926 | )
|Provision (benefit) for income taxes             |  |                                            | 1  |   |                                |   | (3,717 | )                      |  |   | (5,664                           | ) |  |              |        |   |  |   | (9,380  | )
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  
|Net loss                                         |  | $                                          | (1 | ) |                                | $ | (2,994 | )                      |  | $ | (16,551                          | ) |  | $            |        |   |  | $ | (19,546 | )
|                                                 |  |                                            |    |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   |         |  



20



---

##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations

For the Thirty-Nine Weeks Ended March 26, 2005



|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                          |  | Harry & David Holdings, Inc. (Parent-Only) |        |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net sales                                                 |  | $                                          |       |   |                                | $ |        |                        |  | $ | 651,903                          |   |  | $            | (159,595 | ) |  | $ | 492,308 |  
|                                                          |  |                                            |        |   |                               
|Costs and expenses:                                       |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cost of goods sold                                        |  |                                            |       |   |                                |   |        |                        |  |   | 427,560                          |   |  |              | (159,595 | ) |  |   | 267,965 |  
|Selling, general and administrative                       |  |                                            |       |   |                                |   | 1,863   |                        |  |   | 168,608                          |   |  |              |         |   |  |   | 170,471 |  
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                          |  |                                            |       |   |                                |   | 1,863   |                        |  |   | 596,168                          |   |  |              | (159,595 | ) |  |   | 438,436 |  
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income (loss)                                   |  |                                            |       |   |                                |   | (1,863  | )                      |  |   | 55,735                           |   |  |              |         |   |  |   | 53,872  |  
|                                                          |  |                                            |        |   |                               
|Other (income) expense:                                   |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                           |  |                                            |       |   |                                |   | (22     | )                      |  |   | (576                             | ) |  |              |         |   |  |   | (598    | )
|Interest expense                                          |  |                                            | 1,291  |   |                                |   | 27,294  |                        |  |   | 557                              |   |  |              |         |   |  |   | 29,142  |  
|Other (income) expense                                    |  |                                            |       |   |                                |   | (279    | )                      |  |   | 10                               |   |  |              |         |   |  |   | (269    | )
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                          |  |                                            | 1,291  |   |                                |   | 26,993  |                        |  |   | (9                               | ) |  |              |         |   |  |   | 28,275  |  
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes |  |                                            | (1,291 | ) |                                |   | (28,856 | )                      |  |   | 55,744                           |   |  |              |         |   |  |   | 25,597  |  
|Provision (benefit) for income taxes                      |  |                                            | (515   | ) |                                |   | (18,150 | )                      |  |   | 23,440                           |   |  |              |         |   |  |   | 4,775   |  
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss)                                         |  | $                                          | (776   | ) |                                | $ | (10,706 | )                      |  | $ | 32,304                           |   |  | $            |         |   |  | $ | 20,822  |  
|                                                          |  |                                            |        |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirty-Nine Weeks Ended March 25, 2006



|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------------------------ | --- | - | ------------------------------ | - | ------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                          |  | Harry & David Holdings, Inc. (Parent-Only) |     |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |         
|Net sales                                                 |  | $                                          |    |   |                                | $ |        |                        |  | $ | 684,740                          |   |  | $            | (170,042 | ) |  | $ | 514,698 |  
|                                                          |  |                                            |     |   |                               
|Costs and expenses:                                       |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Cost of goods sold                                        |  |                                            |    |   |                                |   |        |                        |  |   | 470,454                          |   |  |              | (170,042 | ) |  |   | 300,412 |  
|Selling, general and administrative                       |  |                                            |    |   |                                |   |        |                        |  |   | 173,648                          |   |  |              |         |   |  |   | 173,648 |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                          |  |                                            |    |   |                                |   |        |                        |  |   | 644,102                          |   |  |              | (170,042 | ) |  |   | 474,060 |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Operating income                                          |  |                                            |    |   |                                |   |        |                        |  |   | 40,638                           |   |  |              |         |   |  |   | 40,638  |  
|                                                          |  |                                            |     |   |                               
|Other (income) expense:                                   |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Interest income                                           |  |                                            | (12 | ) |                                |   |        |                        |  |   | (1,273                           | ) |  |              |         |   |  |   | (1,285  | )
|Interest expense                                          |  |                                            |    |   |                                |   | 20,263  |                        |  |   | 16                               |   |  |              |         |   |  |   | 20,279  |  
|Other (income) expense                                    |  |                                            |    |   |                                |   | 2,180   |                        |  |   | (1,714                           | ) |  |              |         |   |  |   | 466     |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|                                                          |  |                                            | (12 | ) |                                |   | 22,443  |                        |  |   | (2,971                           | ) |  |              |         |   |  |   | 19,460  |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Income (loss) before provision (benefit) for income taxes |  |                                            | 12  |   |                                |   | (22,443 | )                      |  |   | 43,609                           |   |  |              |         |   |  |   | 21,178  |  
|Provision (benefit) for income taxes                      |  |                                            | 5   |   |                                |   | (9,467  | )                      |  |   | 18,395                           |   |  |              |         |   |  |   | 8,933   |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  
|Net income (loss)                                         |  | $                                          | 7   |   |                                | $ | (12,976 | )                      |  | $ | 25,214                           |   |  | $            |         |   |  | $ | 12,245  |  
|                                                          |  |                                            |     |   |                                |   |         |                        |  |   |                                  |   |  |              |          |   |  |   |         |  



21



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended March 26, 2005



|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | ------ | - |  | - | -------- | -
|                                                                                            |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |       
|Operating activities                                                                        |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Net income (loss)                                                                           |  | $                                          | (776    | ) |                                | $ | (10,706  | )                      |  | $ | 32,304                           |   |  | $            |       |   |  | $ | 20,822   |  
|                                                                                            |  |                                            |         |   |                               
|Adjustments to reconcile net income (loss) to net cash provided by in operating activities: |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Depreciation                                                                                |  |                                            |        |   |                                |   | 1,215    |                        |  |   | 6,802                            |   |  |              |       |   |  |   | 8,017    |  
|Amortization                                                                                |  |                                            |        |   |                                |   | 2,222    |                        |  |   | 1,493                            |   |  |              |       |   |  |   | 3,715    |  
|Amortization of deferred financing costs                                                    |  |                                            | 954     |   |                                |   | 1,403    |                        |  |   |                                 |   |  |              |       |   |  |   | 2,357    |  
|Write-off of deferred financing costs                                                       |  |                                            |        |   |                                |   | 7,956    |                        |  |   |                                 |   |  |              |       |   |  |   | 7,956    |  
|Write-off of deferred IPO costs                                                             |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              |       |   |  |   |         |  
|Loss on disposal of property, plant, equipment and software                                 |  |                                            |        |   |                                |   | 14       |                        |  |   | 194                              |   |  |              |       |   |  |   | 208      |  
|Deferred income taxes                                                                       |  |                                            | 557     |   |                                |   | (20,393  | )                      |  |   | 52,360                           |   |  |              |       |   |  |   | 32,524   |  
|Changes in operating assets and liabilities:                                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Accounts receivable                                                                         |  |                                            | 1,405   |   |                                |   | 670      |                        |  |   | (8,240                           | ) |  |              | (24    | ) |  |   | (6,189   | )
|Inventories                                                                                 |  |                                            |        |   |                                |   |         |                        |  |   | 7,525                            |   |  |              |       |   |  |   | 7,525    |  
|Prepaid catalog and other assets                                                            |  |                                            | (17,580 | ) |                                |   | 332      |                        |  |   | (4,285                           | ) |  |              | (4,585 | ) |  |   | (26,118  | )
|Accounts payable and accrued liabilities                                                    |  |                                            | 15,986  |   |                                |   | 38,687   |                        |  |   | (47,073                          | ) |  |              | 4,609  |   |  |   | 12,209   |  
|Deferred revenue                                                                            |  |                                            |        |   |                                |   |         |                        |  |   | 7,856                            |   |  |              |       |   |  |   | 7,856    |  
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Net cash provided by operating activities                                                   |  |                                            | 546     |   |                                |   | 21,400   |                        |  |   | 48,936                           |   |  |              |       |   |  |   | 70,882   |  
|                                                                                            |  |                                            |         |   |                               
|Investing activities                                                                        |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Acquisition of property, plant, equipment, and software                                     |  |                                            |        |   |                                |   | (6,133   | )                      |  |   | (4,271                           | ) |  |              |       |   |  |   | (10,404  | )
|Proceeds from the sale of property, plant, and equipment                                    |  |                                            |        |   |                                |   | 11       |                        |  |   | 18                               |   |  |              |       |   |  |   | 29       |  
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Net cash used in investing activities                                                       |  |                                            |        |   |                                |   | (6,122   | )                      |  |   | (4,253                           | ) |  |              |       |   |  |   | (10,375  | )
|                                                                                            |  |                                            |         |   |                               
|Financing activities                                                                        |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Borrowings of long-term debt                                                                |  |                                            |        |   |                                |   | 245,000  |                        |  |   |                                 |   |  |              |       |   |  |   | 245,000  |  
|Repayment of long-term debt                                                                 |  |                                            |        |   |                                |   | (155,000 | )                      |  |   |                                 |   |  |              |       |   |  |   | (155,000 | )
|Borrowings of revolving debt                                                                |  |                                            |        |   |                                |   | 90,000   |                        |  |   |                                 |   |  |              |       |   |  |   | 90,000   |  
|Repayments of revolving debt                                                                |  |                                            |        |   |                                |   | (90,000  | )                      |  |   |                                 |   |  |              |       |   |  |   | (90,000  | )
|Payments of notes payable                                                                   |  |                                            | (13,900 | ) |                                |   |         |                        |  |   |                                 |   |  |              |       |   |  |   | (13,900  | )
|Payments for deferred financing costs                                                       |  |                                            |        |   |                                |   | (9,490   | )                      |  |   |                                 |   |  |              |       |   |  |   | (9,490   | )
|Net (payments) receipts on intercompany debt                                                |  |                                            | 97,359  |   |                                |   | (101,934 | )                      |  |   | 4,575                            |   |  |              |       |   |  |   |         |  
|Dividends paid                                                                              |  |                                            |        |   |                                |   |         |                        |  |   |                                 |   |  |              |       |   |  |   |         |  
|Return of capital to stockholders                                                           |  |                                            | (82,600 | ) |                                |   |         |                        |  |   |                                 |   |  |              |       |   |  |   | (82,600  | )
|Stockholder note                                                                            |  |                                            |        |   |                                |   | (261     | )                      |  |   |                                 |   |  |              |       |   |  |   | (261     | )
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Net cash provided by (used in) financing activities                                         |  |                                            | 859     |   |                                |   | (21,685  | )                      |  |   | 4,575                            |   |  |              |       |   |  |   | (16,251  | )
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                            |  |                                            | 1,405   |   |                                |   | (6,407   | )                      |  |   | 49,258                           |   |  |              |       |   |  |   | 44,256   |  
|Cash and cash equivalents, beginning of period                                              |  |                                            |        |   |                                |   | 21,225   |                        |  |   | 2,404                            |   |  |              |       |   |  |   | 23,629   |  
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  
|Cash and cash equivalents, end of period                                                    |  | $                                          | 1,405   |   |                                | $ | 14,818   |                        |  | $ | 51,662                           |   |  | $            |       |   |  | $ | 67,885   |  
|                                                                                            |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |  |              |        |   |  |   |          |  



22



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended March 25, 2006



|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------ | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - |  | ------------ | --- | - |  | - | -------- | -
|                                                                                                   |  | Harry & David Holdings, Inc. (Parent-Only) |        |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   |  | Consolidated |    
|Operating activities                                                                               |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net income (loss)                                                                                  |  | $                                          | 7      |   |                                | $ | (12,976  | )                      |  | $ | 25,214                           |   |  | $            |    |   |  | $ | 12,245   |  
|                                                                                                   |  |                                            |        |   |                               
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Depreciation                                                                                       |  |                                            |       |   |                                |   | 2,182    |                        |  |   | 8,272                            |   |  |              |    |   |  |   | 10,454   |  
|Amortization                                                                                       |  |                                            |       |   |                                |   | 2,477    |                        |  |   | 1,561                            |   |  |              |    |   |  |   | 4,038    |  
|Stock option compensation expense                                                                  |  |                                            | 339    |   |                                |   |         |                        |  |   |                                 |   |  |              |    |   |  |   | 339      |  
|Amortization of deferred financing costs                                                           |  |                                            |       |   |                                |   | 1,823    |                        |  |   |                                 |   |  |              |    |   |  |   | 1,823    |  
|Write-off of deferred financing costs                                                              |  |                                            | (3,214 | ) |                                |   | 3,214    |                        |  |   |                                 |   |  |              |    |   |  |   |         |  
|Write-off of deferred IPO costs                                                                    |  |                                            |       |   |                                |   | 2,180    |                        |  |   |                                 |   |  |              |    |   |  |   | 2,180    |  
|Loss on disposal of property, plant, equipment and software                                        |  |                                            |       |   |                                |   | 390      |                        |  |   | 391                              |   |  |              | (77 | ) |  |   | 704      |  
|Deferred income taxes                                                                              |  |                                            | 4,790  |   |                                |   | 9,714    |                        |  |   | (5,792                           | ) |  |              |    |   |  |   | 8,712    |  
|Changes in operating assets and liabilities:                                                       |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Accounts receivable                                                                                |  |                                            |       |   |                                |   | (880     | )                      |  |   | (13,228                          | ) |  |              |    |   |  |   | (14,108  | )
|Inventories                                                                                        |  |                                            |       |   |                                |   |         |                        |  |   | 2,681                            |   |  |              |    |   |  |   | 2,681    |  
|Prepaid catalog and other assets                                                                   |  |                                            |       |   |                                |   | (3,090   | )                      |  |   | (4,147                           | ) |  |              | (98 | ) |  |   | (7,335   | )
|Accounts payable and accrued liabilities                                                           |  |                                            | (2,083 | ) |                                |   | (3,372   | )                      |  |   | 17,983                           |   |  |              | 98  |   |  |   | 12,626   |  
|Deferred revenue                                                                                   |  |                                            |       |   |                                |   |         |                        |  |   | 10,221                           |   |  |              |    |   |  |   | 10,221   |  
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash provided by (used in) operating activities                                                |  |                                            | (161   | ) |                                |   | 1,662    |                        |  |   | 43,156                           |   |  |              | (77 | ) |  |   | 44,580   |  
|                                                                                                   |  |                                            |        |   |                               
|Investing activities                                                                               |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Acquisition of property, plant, equipment, and software                                            |  |                                            |       |   |                                |   | (4,918   | )                      |  |   | (5,244                           | ) |  |              | 77  |   |  |   | (10,085  | )
|Proceeds from the sale of property, plant, and equipment                                           |  |                                            |       |   |                                |   |         |                        |  |   | 24                               |   |  |              |    |   |  |   | 24       |  
|Transfer of property, plant and equipment                                                          |  |                                            |       |   |                                |   | (321     | )                      |  |   | 321                              |   |  |              |    |   |  |   |         |  
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash used in investing activities                                                              |  |                                            |       |   |                                |   | (5,239   | )                      |  |   | (4,899                           | ) |  |              | 77  |   |  |   | (10,061  | )
|                                                                                                   |  |                                            |        |   |                               
|Financing activities                                                                               |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Borrowings of revolving debt                                                                       |  |                                            |       |   |                                |   | 104,000  |                        |  |   |                                 |   |  |              |    |   |  |   | 104,000  |  
|Repayments of revolving debt                                                                       |  |                                            |       |   |                                |   | (104,000 | )                      |  |   |                                 |   |  |              |    |   |  |   | (104,000 | )
|Repayments of notes payable                                                                        |  |                                            |       |   |                                |   | (268     | )                      |  |   |                                 |   |  |              |    |   |  |   | (268     | )
|Payments for deferred financing costs                                                              |  |                                            |       |   |                                |   | (2,986   | )                      |  |   |                                 |   |  |              |    |   |  |   | (2,986   | )
|Net (payments) receipts on intercompany debt                                                       |  |                                            | 172    |   |                                |   | 1,815    |                        |  |   | (1,987                           | ) |  |              |    |   |  |   |         |  
|Proceeds from exercise of stock options                                                            |  |                                            | 1,230  |   |                                |   |         |                        |  |   |                                 |   |  |              |    |   |  |   | 1,230    |  
|Dividends paid                                                                                     |  |                                            | (2,600 | ) |                                |   |         |                        |  |   |                                 |   |  |              |    |   |  |   | (2,600   | )
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Net cash used in financing activities                                                              |  |                                            | (1,198 | ) |                                |   | (1,439   | )                      |  |   | (1,987                           | ) |  |              |    |   |  |   | (4,624   | )
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                                   |  |                                            | (1,359 | ) |                                |   | (5,016   | )                      |  |   | 36,270                           |   |  |              |    |   |  |   | 29,895   |  
|Cash and cash equivalents, beginning of period                                                     |  |                                            | 1,405  |   |                                |   | 13,731   |                        |  |   | 9,718                            |   |  |              |    |   |  |   | 24,854   |  
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Cash and cash equivalents, end of period                                                           |  | $                                          | 46     |   |                                | $ | 8,715    |                        |  | $ | 45,988                           |   |  | $            |    |   |  | $ | 54,749   |  
|                                                                                                   |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  



23



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



15. STOCKHOLDERS EQUITY (DEFICIT)



|                                  |  |              |  |                            |    |  |                 |         |   |                  |   |      |       |  |   |         |   |  |   |         |  
|--------------------------------- |  | ------------ |  | -------------------------- | -- |  | --------------- | ------- | - | ---------------- | - | ---- | ----- |  | - | ------- | - |  | - | ------- | -
|                                  |  | Common Stock |  | Additional Paid-In Capital |    |  | StockholderNote |         |   | RetainedEarnings |   |      | Total | 
|                                  |  | Shares       |  | Value                      |    |  |                 |        
|Balance at December 25, 2004      |  | 1,000,000    |  | $                          | 10 |  | $               | 83,992  |   |                  | $ |     |       |  | $ | 32,202  |   |  | $ | 116,204 |  
|Exercise of common stock options  |  |             |  |                            |   |  |                 |        |   |                  |   |     |       |  |   |        |   |  |   |        |  
|Stock compensation                |  |             |  |                            |   |  |                 |        |   |                  |   |     |       |  |   |        |   |  |   |        |  
|Return of capital to stockholders |  |             |  |                            |   |  |                 | (82,600 | ) |                  |   |     |       |  |   |        |   |  |   |        |  
|Assignment of NOL                 |  |              |  |                            |    |  |                 |        |   |                  |   |     |       |  |   | (2,259  | ) |  |   | (2,259  | )
|Dividends paid                    |  |              |  |                            |    |  |                 |        |   |                  |   |     |       |  |   |        |   |  |   |        |  
|Stockholder note                  |  |              |  |                            |    |  |                 |        |   |                  |   | (261 | )     |  |   |        |   |  |   | (261    | )
|Net loss and comprehensive loss   |  |             |  |                            |   |  |                 |        |   |                  |   |     |       |  |   | (28,108 | ) |  |   | (28,108 | )
|                                  |  |              |  |                            |    |  |                 |         |   |                  |   |      |       |  |   |         |   |  |   |         |  
|Balance at March 26, 2005         |  | 1,000,000    |  | $                          | 10 |  | $               | 1,392   |   |                  | $ | (261 | )     |  | $ | 1,835   |   |  | $ | 2,976   |  
|                                  |  |              |  |                            |    |  |                 |         |   |                  |   |      |       |  |   |         |   |  |   |         |  



|                                    |  |              |  |                            |    |  |                 |         |   |                                       |   |      |       |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------------ |  | -------------------------- | -- |  | --------------- | ------- | - | ------------------------------------- | - | ---- | ----- |  | - | ------- | - |  | - | ------- | -
|                                    |  | Common Stock |  | Additional Paid-In Capital |    |  | StockholderNote |         |   | RetainedEarnings(Accumulated Deficit) |   |      | Total | 
|                                    |  | Shares       |  | Value                      |    |  |                 |        
|Balance at June 26, 2004            |  | 1,000,000    |  | $                          | 10 |  | $               | 83,992  |   |                                       | $ |     |       |  | $ | (1,378  | ) |  | $ | 82,624  |  
|Exercise of common stock options    |  |             |  |                            |   |  |                 |        |   |                                       |   |     |       |  |   |        |   |  |   |        |  
|Stock compensation                  |  |             |  |                            |   |  |                 |        |   |                                       |   |     |       |  |   |        |   |  |   |        |  
|Return of capital to stockholders   |  |             |  |                            |   |  |                 | (82,600 | ) |                                       |   |     |       |  |   |        |   |  |   | (82,600 | )
|Assignment of NOL                   |  |              |  |                            |    |  |                 |        |   |                                       |   |     |       |  |   | (17,609 | ) |  |   | (17,609 | )
|Dividends paid                      |  |              |  |                            |    |  |                 |        |   |                                       |   |     |       |  |   |        |   |  |   |        |  
|Stockholder note                    |  |              |  |                            |    |  |                 |        |   |                                       |   | (261 | )     |  |   |        |   |  |   | (261    | )
|Net income and comprehensive income |  |             |  |                            |   |  |                 |        |   |                                       |   |     |       |  |   | 20,822  |   |  |   | 20,822  |  
|                                    |  |              |  |                            |    |  |                 |         |   |                                       |   |      |       |  |   |         |   |  |   |         |  
|Balance at March 26, 2005           |  | 1,000,000    |  | $                          | 10 |  | $               | 1,392   |   |                                       | $ | (261 | )     |  | $ | 1,835   |   |  | $ | 2,976   |  
|                                    |  |              |  |                            |    |  |                 |         |   |                                       |   |      |       |  |   |         |   |  |   |         |  



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



15. STOCKHOLDERS EQUITY (DEFICIT) (Continued)



|                                    |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|----------------------------------- |  | ------------ |  | -------------------------- | -- | ------------------------------------- | - | ----- | ----- | - | ------- | - |  | - | ------- | -
|                                    |  | Common Stock |  | Additional Paid-In Capital |    | RetainedEarnings(Accumulated Deficit) |   |       | Total |  
|                                    |  | Shares       |  | Value                      |    |                                       |  
|Balance at December 24, 2005        |  | 1,014,888    |  | $                          | 10 |                                       | $ | 3,320 |       | $ | 7,090   |   |  | $ | 10,420  |  
|Exercise of common stock options    |  |             |  |                            |   |                                       |   |      |       |   |        |   |  |   |        |  
|Stock compensation expense          |  |             |  |                            |   |                                       |   | 113   |       |   |        |   |  |   | 113     |  
|Dividends paid                      |  |             |  |                            |   |                                       |   |      |       |   |        |   |  |   |        |  
|Net loss and comprehensive loss     |  |             |  |                            |   |                                       |   |      |       |   | (19,546 | ) |  |   | (19,546 | )
|                                    |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|Balance at March 25, 2006           |  | 1,014,888    |  | $                          | 10 |                                       | $ | 3,433 |       | $ | (12,456 | ) |  | $ | (9,013  | )
|                                    |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|                                    |  |              |  |                           
|                                    |  | Common Stock |  | Additional Paid-In Capital |    | Accumulated Deficit                   |   |       | Total |  
|                                    |  | Shares       |  | Value                      |    |                                       |  
|Balance at June 25, 2005            |  | 1,000,000    |  | $                          | 10 |                                       | $ | 1,864 |       | $ | (22,101 | ) |  | $ | (20,227 | )
|Exercise of common stock options    |  | 14,888       |  |                            |   |                                       |   | 1,230 |       |   |        |   |  |   | 1,230   |  
|Stock compensation expense          |  |             |  |                            |   |                                       |   | 339   |       |   |        |   |  |   | 339     |  
|Dividends paid                      |  |             |  |                            |   |                                       |   |      |       |   | (2,600  | ) |  |   | (2,600  | )
|Net income and comprehensive income |  |             |  |                            |   |                                       |   |      |       |   | 12,245  |   |  |   | 12,245  |  
|                                    |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  
|Balance at March 25, 2006           |  | 1,014,888    |  | $                          | 10 |                                       | $ | 3,433 |       | $ | (12,456 | ) |  | $ | (9,013  | )
|                                    |  |              |  |                            |    |                                       |   |       |       |   |         |   |  |   |         |  

The Companys comprehensive income and net income were the same for the thirteen and thirty-nine week periods
ended March 26, 2005 and March 25, 2006.



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##### Table of Contents

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

FORWARD-LOOKING
STATEMENTS

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

The following information describes certain significant risks and uncertainties inherent in our business. You should carefully
consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks or uncertainties actually occur, our business, financial condition or operating results could
differ materially from the plans, projections, and other forward-looking statements included in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report
and in other public filings.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:



| |  |  | market demand for branded gift-quality fruit and gourmet food products and gifts as well as premium rose plants and horticultural products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our production capabilities;
| | - |  | ----------------------------



| |  |  | our relationships with, and other conditions affecting, our customers;
| | - |  | ----------------------------------------------------------------------



| |  |  | our plans and objectives for future operations and expansion or consolidation;
| | - |  | ------------------------------------------------------------------------------



| |  |  | unexpected maintenance and equipment failure;
| | - |  | ---------------------------------------------



| |  |  | future economic or capital market conditions;
| | - |  | ---------------------------------------------



| |  |  | environmental laws and regulations, including those directly affecting our plant and food production;
| | - |  | -----------------------------------------------------------------------------------------------------



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



| |  |  | employee benefits costs;
| | - |  | ------------------------



| |  |  | future legislation and changes in regulations or governmental policies or changes in interpretations thereof;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our liquidity, results of operations and financial condition; and
| | - |  | -----------------------------------------------------------------



| |  |  | the other risks described under Risk Factors in the Registration Statement on Form S-4 on file with the SEC.
| | - |  | --------------------------------------------------------------------------------------------------------------

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

OVERVIEW

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

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



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Net sales consist of direct-to-customer sales, wholesale sales and retail sales. Direct-to-customer sales include sales
of merchandise to customers through catalogs and the Internet, as well as delivery income. Sales to wholesale customers consist of sales to select retailers. Retail sales include sales of merchandise to customers at our retail stores. Delivery
income consists of revenues received from customers for delivery of merchandise. Sales are net of sales returns, adjustments and other discounts.

Net
sales are derived primarily from our three operating segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins, as follows:



| |  |  | Harry and David Direct Marketing net sales are generated by sales of Harry and David merchandise through our catalog, Internet, business-to-business and consumer telemarketing
operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Harry and David Stores net sales are generated by sales of Harry and David merchandise at our stores; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Jackson & Perkins net sales are generated by sales of Jackson & Perkins merchandise through our catalog, Internet, consumer telemarketing and wholesale operations.
Net sales also includes royalty income generated from the licensing of our patented products and the licensing of patented products of our licensors and sales of rotational farm crops grown at our Wasco, California facilities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We derive other net sales from sales of Harry and David merchandise through the wholesale channel and commercial sales of non-gift-quality
fruit.

During fiscal 2006, we have enhanced an existing proprietary database by extracting additional data from our order entry/customer service system,
which enables us to track customer feedback, merchandising issues and other core operations metrics. These improvements also provide us with timely information and this allows us to react quickly to customer and merchandising issues to reduce
cancellations, returns and replacements. Our new primary carrier agreement, negotiated in the first quarter of fiscal 2006, resulted in positive delivery service efficiencies and fewer customer service complaints. Examples of these delivery
efficiencies include increased support for last-minute order volumes, improved delivery service and enhanced package tracking.

We believe that several
long-term economic and industry trends and factors that can impact our business, results of operations, liquidity and financial condition include:



| |  |  | Rising fuel and energy prices. Fuel and energy costs are a significant component of our production and delivery costs. Our fuel and energy costs have, and are expected to,
fluctuate significantly. Our energy and fuel costs increased steadily in fiscal 2005 and in the first three quarters of fiscal 2006 and may continue to rise in the near-term. Rising fuel costs may also reduce consumers discretionary spending,
which may adversely affect our sales.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Postal rate increases. In January 2006, U.S. Postal rates rose an average of 5.4% for mail and parcels. This increase, as well as future increases, will affect advertising
costs for our catalogs and delivery rates for our customers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Catastrophic weather events. Catastrophic weather events in the United States, such as Hurricane Katrina, can impact demand from our customers or the delivery of catalogs or
products to our customers and stores.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increasing labor and medical costs. Increased labor and medical costs can not only affect the costs of our manufactured products but also affect our access to adequate labor.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Availability of seasonal workforce.We require a large number of seasonal workers to meet the product demand during our peak season.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

Our substantial leverage can impact our business, results of operations, liquidity and financial condition, which could:



| |  |  | increase our sensitivity to interest rate fluctuations;
| | - |  | -------------------------------------------------------



| |  |  | limit our ability to obtain additional financing to fund working capital, capital expenditures and other general corporate requirements, or to carry out other aspects of our
business plan;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require us to dedicate a substantial portion of our cash flows from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of that cash
flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | cause our suppliers to institute more onerous payment terms generally or require us to purchase letters of credit for this purpose;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | limit our ability to enter into new store leases or renew existing store leases;
| | - |  | --------------------------------------------------------------------------------



| |  |  | make us more sensitive to any future reduction in our long-term credit rating, which could result in reduced access to the capital markets and higher interest costs on future
financings;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lead us to have less favorable credit terms, which would increase the amount of working capital necessary to conduct our business; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt.
| | - |  | ---------------------------------------------------------------------------------------

Additionally, our revolving credit facility contains financial covenants and the indenture governing our Senior Notes and the credit facility contains other restrictive covenants that may limit our ability to engage
in activities that may be in our long-term interests such as selling assets, strategic acquisitions, paying dividends and borrowing additional funds. Our failure to comply with those covenants could result in an event of default which, if not cured
or waived, could result in the acceleration of all of our debt which could leave us unable to meet some or all of our obligations. See Note 7 to our Condensed Consolidated Financial Statements included elsewhere in this report.

RESULTS OF OPERATIONS

NET SALES

The following table summarizes our consolidated net sales and net sales by operating segment for the periods indicated (dollars in thousands).



|                                 |  |                      |         |            |                         |   |                |   |            |  |       |                |  |            |         |  |                |   |            |   |         |  |       |  
|-------------------------------- |  | -------------------- | ------- | ---------- | ----------------------- | - | -------------- | - | ---------- |  | ----- | -------------- |  | ---------- | ------- |  | -------------- | - | ---------- | - | ------- |  | ----- | -
|                                 |  | Thirteen Weeks Ended |         |            | Thirty-nine Weeks Ended |  
|                                 |  | March 26, 2005       |         | Percentage |                         |   | March 25, 2006 |   | Percentage |  |       | March 26, 2005 |  | Percentage |         |  | March 25, 2006 |   | Percentage |  
|Harry and David Direct Marketing |  | $                    | 49,796  |            | 48.0                    | % |                | $ | 45,468     |  | 48.1  | %              |  | $          | 314,719 |  | 63.9           | % |            | $ | 329,419 |  | 64.0  | %
|Harry and David Stores           |  |                      | 22,850  |            | 22.1                    | % |                |   | 21,449     |  | 22.7  | %              |  |            | 110,192 |  | 22.4           | % |            |   | 109,677 |  | 21.3  | %
|Jackson & Perkins                |  |                      | 28,960  |            | 27.9                    | % |                |   | 23,497     |  | 24.8  | %              |  |            | 57,636  |  | 11.7           | % |            |   | 55,197  |  | 10.7  | %
|Other                            |  |                      | 2,054   |            | 2.0                     | % |                |   | 4,169      |  | 4.4   | %              |  |            | 9,761   |  | 2.0            | % |            |   | 20,405  |  | 4.0   | %
|                                 |  |                      |         |            |                         |   |                |   |            |  |       |                |  |            |         |  |                |   |            |   |         |  |       |  
|Total Net Sales                  |  | $                    | 103,660 |            | 100.0                   | % |                | $ | 94,583     |  | 100.0 | %              |  | $          | 492,308 |  | 100.0          | % |            | $ | 514,698 |  | 100.0 | %
|                                 |  |                      |         |            |                         |   |                |   |            |  |       |                |  |            |         |  |                |   |            |   |         |  |       |  

Consolidated net sales of $94.6 million for the thirteen week period ended March 25, 2006 decreased $9.1
million, or 8.8%, over the thirteen week period ended March 26, 2005. The net sales decrease was primarily the result of the shift in the Easter holiday from the third quarter in fiscal 2005 to the fourth quarter in fiscal 2006 as well as later
shipments of our Fruit-of-the-Month Club® gifts
into the fourth quarter in fiscal 2006. In addition, Jackson & Perkins sales were lower due to fewer rose orders in the direct marketing division than the prior period and reduced wholesale demand, partially offset by the timing of royalty
income recognition. The sales growth in the Other category was primarily driven by Harry and David wholesale, which grew due to increased demand for our products from existing and new customers.

We received approximately 0.4 million telephone, mail, fax and Internet orders during the three months ended March 25, 2006, a decrease of 10.2% over the prior
year period. During the three months ended March 25, 2006, we shipped approximately 2.5 million packages, a decrease of 4.5% over the prior year period.

Consolidated net sales of $514.7 million for the thirty-nine week period ended March 25, 2006 increased $22.4 million, or 4.6%, over the thirty-nine week period ended March 26, 2005. The drivers of the increase in the thirty-nine
week period results were primarily due to increased sales in the holiday season of our second quarter of fiscal 2006.

Harry and David Direct Marketing

Harry and David Direct Marketings segment net sales, which include catalog, Internet, business-to-business and outbound telemarketing sales, as
well as delivery income, decreased $4.3 million, or 8.6%, to $45.5 million in the thirteen week period ended March 25, 2006, from $49.8 million in the thirteen week period ended March 26, 2005. The decrease was primarily due to the shift
in the Easter holiday from the third quarter in fiscal 2005 to the fourth quarter in fiscal 2006 as well as later shipments of our Fruit-of-the-Month Club® gifts into the fourth quarter in fiscal 2006.

Harry and David Direct Marketings segment net sales increased $14.7 million, or 4.7%, to $329.4 million in the thirty-nine week period ended March 25, 2006 from $314.7 million in the thirty-nine week period ended March 26,
2005. The drivers of the increase in the thirty-nine week period results are primarily attributable to the higher holiday season sales in our second quarter in fiscal 2006.

Harry and David Stores

Harry and David Stores segment net sales decreased $1.5 million, or 6.6%, to $21.4
million in the thirteen week period ended March 25, 2006, from $22.9 million in the thirteen week period ended March 26, 2005. Net sales decreased due to the



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closure of 12 stores, resulting in 129 stores in operation compared to 141 stores in operation during the same quarter
last year. We are substantially complete with our store closure plan. Even without the Easter holiday sales (which will occur in the fourth quarter in fiscal 2006), sales for comparable stores were up 0.2% for the thirteen week period ended
March 25, 2006. March 2006 marks the twenty-eighth consecutive month of positive comparable store sales, after adjusting for the shift in the Easter holiday in fiscal 2005. 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.

Harry and David Stores net sales decreased $0.5 million, or 0.5%, to $109.7 million in the
thirty-nine week period ended March 25, 2006 from $110.2 million in the thirty-nine week period ended March 26, 2005. The drivers of the decrease in the thirty-nine week period results are primarily the same as those for the thirteen week
period, offset by stronger second quarter performance in fiscal year 2006 than fiscal year 2005.

Jackson & Perkins

Jackson & Perkins segment net sales decreased $5.5 million, or 19.0%, to $23.5 million in the thirteen week period ended March 25, 2006 from $29.0
million in the thirteen week period ended March 26, 2005. Within this segment, Jackson & Perkins direct marketing net sales decreased $3.3 million, or 31.0% for the quarter. This decrease was primarily the result of a decision to
consolidate Jackson & Perkins product categories into one catalog and shift catalog circulation to later in the planting season. The expected benefits of this shift were to improve operating efficiencies and offer the customer more
selection by cross-promoting products. While advertising expenses decreased and the average order size increased, these marketing initiatives resulted in fewer than expected orders in the Spring catalogs, primarily related to rose orders. Sales were
also negatively impacted to some extent by the shift in the Easter holiday. In addition, sales in our non-plant product lines (i.e. outdoor furniture and decorative items) were lower than expected. We believe that the remaining decrease in the
segment was primarily driven by lower wholesale demand as a result of weak industry sales, partly due to poor weather in the Spring selling season and retailers reduced orders to adjust for higher on-hand inventory. This was partially offset
by the favorable timing of royalty income recognition.

Jackson & Perkins net sales decreased $2.4 million, or 4.2%, to $55.2 million in the
thirty-nine week period ended March 25, 2006 from $57.6 million in the thirty-nine week period ended March 26, 2005. The drivers of the decrease in the thirty-nine week period results are primarily the same as those for the thirteen week
period.

Other

Other category net sales increased $2.1
million, or 100.0%, to $4.2 million in the thirteen week period ended March 25, 2006 from $2.1 million in the thirteen week period ended March 26, 2005. Harry and David wholesale net sales of $3.6 million for the thirteen week period ended
March 25, 2006 was the primary driver of this increase due to increased demand for our products from existing and new customers.

Other category net
sales increased $10.6 million, or 108.2%, to $20.4 million in the thirty-nine week period ended March 25, 2006 from $9.8 million in the thirty-nine week period ended March 26, 2005. Harry and David wholesale net sales of $18.8 million for
the thirty-nine week period ended March 25, 2006 drove $10.3 million of this increase. The drivers of the thirty-nine week period results are primarily the same as those for the thirteen week period.

COST OF GOODS SOLD

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

(Dollars in thousands)



|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | ----------- | ----------------------- | - | -------------- | - | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | -------------- | - | ----------- | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |             | Thirty-nine Weeks Ended |  
|                                 |  | March 26, 2005       |        | % Net Sales |                         |   | March 25, 2006 |   | % Net Sales |  |      | March 26, 2005 |  | % Net Sales |         |  | March 25, 2006 |   | % Net Sales |  
|Harry and David Direct Marketing |  | $                    | 35,213 |             | 70.7                    | % |                | $ | 34,197      |  | 75.2 | %              |  | $           | 165,591 |  | 52.6           | % |             | $ | 184,295 |  | 55.9 | %
|Harry and David Stores           |  |                      | 13,071 |             | 57.2                    | % |                |   | 13,557      |  | 63.2 | %              |  |             | 55,656  |  | 50.5           | % |             |   | 56,852  |  | 51.8 | %
|Jackson & Perkins                |  |                      | 19,442 |             | 67.1                    | % |                |   | 20,934      |  | 89.1 | %              |  |             | 39,247  |  | 68.1           | % |             |   | 43,305  |  | 78.5 | %
|Other                            |  |                      | 1,870  |             | 91.0                    | % |                |   | 3,757       |  | 90.1 | %              |  |             | 7,471   |  | 76.5           | % |             |   | 15,960  |  | 78.2 | %
|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  
|Total                            |  | $                    | 69,596 |             | 67.1                    | % |                | $ | 72,445      |  | 76.6 | %              |  | $           | 267,965 |  | 54.4           | % |             | $ | 300,412 |  | 58.4 | %
|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  

Cost of goods sold includes cost of goods, occupancy expenses for manufacturing and distribution facilities,
warehouse and fulfillment costs and product delivery costs. Cost of goods consists of manufacturing costs, costs of externally purchased merchandise, inbound freight expenses, freight to other production/fulfillment locations, freight to stores, and
other



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inventory-related costs such as shrinkage, markdowns and surplus write-offs. Occupancy expenses consist of depreciation,
rent, utilities and other general occupancy costs. Warehouse and fulfillment costs consist of labor, storage and equipment expenses and other costs related to inventory positioning, shipment planning, receiving, picking, packing and shipping product
to the end customer, stores and production/fulfillment locations. Product delivery costs consist of third-party delivery services to customers.

Cost of
goods sold increased $2.8 million, or 4.0%, to $72.4 million in the thirteen week period ended March 25, 2006 from $69.6 million in the thirteen week period ended March 26, 2005. Cost of goods sold as a percentage of consolidated net sales
was 76.6% in the thirteen week period ended March 25, 2006 compared to 67.1% in the thirteen week period ended March 26, 2005. The increase was primarily due to a $2.4 million increase in rose inventory reserves in Jackson &
Perkins based on weaker-than-anticipated sales demand. Our Harry and David Direct Marketing segment experienced higher holiday gift card promotional expenses, unfavorable timing of this fiscal years vendor rebates and end-of-season pear crop
yield adjustments. On orders taken before we increased prices, we also incurred increased standard costs for our products over the prior year as well as nominally higher fixed costs compared to the prior fiscal year.

Cost of goods sold increased $32.4 million, or 12.1%, to $300.4 million in the thirty-nine week period ended March 25, 2006 from $267.9 million in the thirty-nine
week period ended March 26, 2005. Cost of goods sold as a percentage of consolidated net sales was 58.4% in the thirty-nine week period ended March 25, 2006 as compared to 54.4% in the thirty-nine week period ended March 26, 2005.
Additional increases also included higher raw material costs for some of our products and product design changes, lower percentage of gift-grade fruit production, higher delivery costs, and increased rose inventory reserves in fiscal 2006 compared
to fiscal 2005. Furthermore, higher product markdowns and delivery discounts along with relatively flat selling prices combined to increase the cost of goods sold as a percentage of net sales compared to the same period in the prior year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

The following table summarizes our consolidated selling, general, and administrative expenses and selling, general, and administrative expenses by operating segment for the periods indicated.

(Dollars in thousands)



|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | ----------- | ----------------------- | - | -------------- | - | ----------- |  | ---- | -------------- |  | ----------- | ------- |  | -------------- | - | ----------- | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |             | Thirty-nine Weeks Ended |  
|                                 |  | March 26, 2005       |        | % Net Sales |                         |   | March 25, 2006 |   | % Net Sales |  |      | March 26, 2005 |  | % Net Sales |         |  | March 25, 2006 |   | % Net Sales |  
|Harry and David Direct Marketing |  | $                    | 25,825 |             | 51.9                    | % |                | $ | 24,062      |  | 52.9 | %              |  | $           | 95,689  |  | 30.4           | % |             | $ | 101,148 |  | 30.7 | %
|Harry and David Stores           |  |                      | 16,954 |             | 74.2                    | % |                |   | 15,547      |  | 72.5 | %              |  |             | 51,321  |  | 46.6           | % |             |   | 49,827  |  | 45.4 | %
|Jackson & Perkins                |  |                      | 7,121  |             | 24.6                    | % |                |   | 6,954       |  | 29.6 | %              |  |             | 19,707  |  | 34.2           | % |             |   | 20,677  |  | 37.5 | %
|Other                            |  |                      | 819    |             | 39.9                    | % |                |   | 520         |  | 12.5 | %              |  |             | 3,754   |  | 38.5           | % |             |   | 1,996   |  | 9.8  | %
|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  
|Total                            |  | $                    | 50,719 |             | 48.9                    | % |                | $ | 47,083      |  | 49.8 | %              |  | $           | 170,471 |  | 34.6           | % |             | $ | 173,648 |  | 33.7 | %
|                                 |  |                      |        |             |                         |   |                |   |             |  |      |                |  |             |         |  |                |   |             |   |         |  |      |  

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

Selling, general and administrative expenses decreased $3.6
million to $47.1 million in the thirteen week period ended March 25, 2006 compared to $50.7 million in the thirteen week period ended March 26, 2005, although as a percentage of consolidated net sales, selling, general and administrative
expenses increased to 49.8% from 48.9% as a percentage of consolidated net sales in the third quarter of fiscal 2005. The decreased spending over the prior period was primarily related to a shift in our Easter advertising expenses to our fourth
quarter in fiscal 2006 and lower lease and rental expenses due to fewer open stores and reduced lease expenses on IT equipment. Payroll expenses decreased $1.4 million to $26.2 million in the thirteen week period ended March 25, 2006 compared
to $27.6 million in the thirteen week period ended March 26, 2005; however, payroll expenses as a percentage of consolidated net sales increased to 27.7% in the thirteen week period ended March 25, 2006 from 26.6% in the thirteen week
period ended March 26, 2005.

Selling, general and administrative expenses increased $3.1 million to $173.6 million in the thirty-nine week period
ended March 25, 2006 compared to $170.5 million in the thirty-nine week period ended March 26, 2005. Selling, general and administrative expense as a percentage of consolidated net sales was 33.7% in the thirty-nine week period ended
March 25, 2006, as compared to 34.6% in the thirty-nine week period ended March 26, 2005. The increased spending was primarily related to higher advertising expenditures to drive new customer acquisition during the second quarter holiday
season.



30



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##### Table of Contents

Increased paper and printing prices further impacted advertising expense. We also experienced higher depreciation
expenses due to new equipment additions and fewer retirements. Payroll expenses decreased $1.0 million to $80.0 million in the thirty-nine week period ended March 25, 2006 compared to $81.0 million in the thirty-nine week period ended
March 26, 2005. Payroll expenses as a percentage of consolidated net sales decreased to 15.5% in the thirty-nine week period ended March 25, 2006 from 16.5% in the thirty-nine week period ended March 26, 2005. Reduced lease and rental
expenses related to fewer open stores and a reduced lease expense on IT equipment partially offset the unfavorable variances.

OTHER (INCOME) EXPENSE

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

(Dollars in thousands)



|                                 |  |                      |        |             |                         |   |                |   |        |             |  |       |                |  |             |        |  |                |   |  |             |        |   |  |       |   
|-------------------------------- |  | -------------------- | ------ | ----------- | ----------------------- | - | -------------- | - | ------ | ----------- |  | ----- | -------------- |  | ----------- | ------ |  | -------------- | - |  | ----------- | ------ | - |  | ----- | --
|                                 |  | Thirteen Weeks Ended |        |             | Thirty-nine Weeks Ended |  
|                                 |  | March 26, 2005       |        | % Net Sales |                         |   | March 25, 2006 |   |        | % Net Sales |  |       | March 26, 2005 |  | % Net Sales |        |  | March 25, 2006 |   |  | % Net Sales |       
|Harry and David Direct Marketing |  | $                    | 32     |             |                        |   |                | $ | (1,383 | )           |  | (3.0  | )%             |  | $           |       |  |               |   |  | $           | (1,383 | ) |  | (0.4  | )%
|Harry and David Stores           |  |                      |       |             |                        |   |                |   | (254   | )           |  | (1.2  | )%             |  |             | 9      |  |               |   |  |             | (260   | ) |  | (0.2  | )%
|Jackson & Perkins                |  |                      |       |             |                        |   |                |   | (56    | )           |  | (0.2  | )%             |  |             |       |  |               |   |  |             | (56    | ) |  | (0.1  | )%
|Other                            |  |                      | 18,607 |             | 905.9                   | % |                |   | 5,674  |             |  | 136.1 | %              |  |             | 28,266 |  | 289.6          | % |  |             | 21,159 |   |  | 103.7 | % 
|                                 |  |                      |        |             |                         |   |                |   |        |             |  |       |                |  |             |        |  |                |   |  |             |        |   |  |       |   
|Total                            |  | $                    | 18,639 |             | 18.0                    | % |                | $ | 3,981  |             |  | 4.2   | %              |  | $           | 28,275 |  | 5.7            | % |  | $           | 19,460 |   |  | 3.8   | % 
|                                 |  |                      |        |             |                         |   |                |   |        |             |  |       |                |  |             |        |  |                |   |  |             |        |   |  |       |   

Other expense decreased by $14.6 million to $4.0 million in the thirteen week period ended March 25, 2006
from $18.6 million in the thirteen week period ended March 26, 2005. The decrease was due to a $12.6 million charge in the prior years period comprised of the write-off of financing fees and a one-time breakage fee associated with early
payment of our prior term loan. In addition, we recognized $1.7 million in net proceeds from an insurance settlement in the first quarter of fiscal 2006.

Other expense decreased by $8.8 million to $19.5 million in the thirty-nine week period ended March 25, 2006 from $28.3 million in the thirty-nine week period ended March 26, 2005. The drivers of the thirty-nine week period
results include the same as those for the thirteen week period, partially offset by $2.2 million of legal, accounting and other professional fees related to a planned initial public offering (IPO) of our common stock which were expensed in the
second quarter of fiscal 2006. In addition to the expensed IPO costs, the other factors offsetting the decrease were increased interest expense as a result of a higher level of debt including $245.0 million in fixed and floating rate bonds and
$104.0 million in peak revolver borrowings in fiscal 2006 compared to debt outstanding in fiscal 2005 of a $155.0 million term loan, a $13.9 million bridge loan and $90.0 million in peak revolver borrowings.

INCOME TAXES

The provision for income taxes for the thirteen
weeks ended March 26, 2005 was a benefit of $7.2 million, reflecting an effective tax rate of 20.4%, as compared to a benefit of $9.4 million in the thirteen weeks ended March 25, 2006, reflecting an effective tax rate of 32.4%. The tax
provision for the thirty-nine weeks ended March 26, 2005 was $4.8 million, reflecting an effective tax rate of 18.7%, compared to an expense of $8.9 million in the thirty-nine weeks ended March 26, 2006, reflecting an effective tax rate of
42.2%. The effective tax rate for fiscal 2005 was 27.2%, and the rate for fiscal 2006 is estimated to be 10.4%. The rates for the current fiscal year and interim period vary from the similar period in fiscal 2005 principally as a result of changes
in utilization of state net operating losses (which resulted in an increase in the valuation allowance of $3.1 million with respect to the state net operating losses in the third quarter of fiscal 2006), and a change in the estimated results for the
year.

EBITDA

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



|                                                            |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |       
|----------------------------------------------------------- |  | -------------------- | ------- | - | ---------------------- | - | ------- | ------------- |  | - | ------------- | - |  | - | ------
|                                                            |  | Thirteen weeks ended |         |   | Thirty-nine weeksended
|                                                            |  | March 26,2005        |         |   | March 25,2006          |   |         | March 26,2005 |  |   | March 25,2006
|Net cash provided by (used in) operating activities         |  | $                    | (64,171 | ) |                        | $ | (87,365 | )             |  | $ | 70,882        |   |  | $ | 44,580
|Stock option compensation expense                           |  |                      |        |   |                        |   | 113     |               |  |   |              |   |  |   | 339   
|Changes in operating assets and liabilities                 |  |                      | (29,585 | ) |                        |   | (63,983 | )             |  |   | (4,717        | ) |  |   | 4,085 
|Write-off of deferred IPO costs                             |  |                      |        |   |                        |   |        |               |  |   |              |   |  |   | 2,180 
|Loss on disposal of property, plant, equipment and software |  |                      | 158     |   |                        |   | 400     |               |  |   | 208           |   |  |   | 704   
|Deferred income taxes                                       |  |                      | (19,731 | ) |                        |   | (9,640  | )             |  |   | 32,524        |   |  |   | 8,712 
|Write-off of deferred financing costs                       |  |                      | 7,956   |   |                        |   |        |               |  |   | 7,956         |   |  |   |      
|Amortization of deferred financing costs                    |  |                      | 1,403   |   |                        |   | 657     |               |  |   | 2,357         |   |  |   | 1,823 
|Depreciation and amortization                               |  |                      | 3,736   |   |                        |   | 4,634   |               |  |   | 11,732        |   |  |   | 14,492
|                                                            |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |       
|Net income (loss)                                           |  | $                    | (28,108 | ) |                        | $ | (19,546 | )             |  | $ | 20,822        |   |  | $ | 12,245
|Interest expense, net                                       |  |                      | 18,606  |   |                        |   | 5,695   |               |  |   | 28,544        |   |  |   | 18,994
|Provision (benefit) for income taxes                        |  |                      | (7,186  | ) |                        |   | (9,380  | )             |  |   | 4,775         |   |  |   | 8,933 
|Depreciation and amortization                               |  |                      | 3,736   |   |                        |   | 4,634   |               |  |   | 11,732        |   |  |   | 14,492
|                                                            |  |                      |         |   |                        |   |         |               |  |   |               |   |  |   |       
|EBITDA                                                      |  | $                    | (12,952 | ) |                        | $ | (18,597 | )             |  | $ | 65,873        |   |  | $ | 54,664



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##### Table of Contents

In the thirteen week period ended March 26, 2005, net income and EBITDA included:



| |  |  | $0.9 million of losses related to closed stores;
| | - |  | ------------------------------------------------



| |  |  | $0.3 million of restructuring charges relating to a reduction in force implemented beginning in August 2004 instead of at the beginning of our prior fiscal year in April 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.3 million of one-time consulting fees associated with evaluating the Harry and David®brand strategy and information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.3 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.4 million related to impairment charges from a lower rose crop harvest yield associated with a new growing technique;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



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



| |  |  | $0.1 million of incremental employee executive recruiting and relocation charges.
| | - |  | ---------------------------------------------------------------------------------

In the thirteen week period ended March 25, 2006, net income and EBITDA included:



| |  |  | $0.3 million of losses related to closed stores;
| | - |  | ------------------------------------------------



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



| |  |  | $0.1 million of charges related to the grant of stock options;
| | - |  | --------------------------------------------------------------



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



| |  |  | $0.2 million of incremental employee executive recruiting and relocation charges; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | $1.7 million net proceeds from an insurance settlement.
| | - |  | -------------------------------------------------------

In the thirty-nine week period ended March 26, 2005, net income and EBITDA included:



| |  |  | $0.5 million of losses related to closed stores;
| | - |  | ------------------------------------------------



| |  |  | $1.2 million of restructuring charges relating to a reduction in force implemented beginning in August 2004 instead of at the beginning of our prior fiscal year in April 2004;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.5 million of one-time consulting fees associated with evaluating the Harry and David®brand strategy and information technology strategy projects and, to a lesser extent, employee executive recruiting charges;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.4 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of rental income due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.3 million of other income related to the collection of a note receivable written off during fiscal 2002;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | $0.9 million related to impairment charges from a lower rose crop harvest yield associated with a new growing technique;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.8 million of fees paid to Wasserstein and Highfields under the management agreement; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | $0.1 million of incremental employee executive recruiting and relocation charges.
| | - |  | ---------------------------------------------------------------------------------



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##### Table of Contents

In the thirty-nine week period ended March 25, 2006, net income and EBITDA
included:



| |  |  | $0.1 million of income related to closed stores;
| | - |  | ------------------------------------------------



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



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



| |  |  | $0.2 million of purchase accounting adjustments reflecting a one-time non-cash charge incurred primarily due to a step-up in store leaseholds and inventory value associated with the
purchase accounting in connection with our acquisition of Harry & David Operations Corp. on June 17, 2004;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.1 million of rental income due to a change in accounting treatment;
| | - |  | ----------------------------------------------------------------------



| |  |  | $0.3 million of charges related to the grant of stock options;
| | - |  | --------------------------------------------------------------



| |  |  | $0.8 million of fees paid to Wasserstein and Highfields under the management agreement;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | $0.8 million of incremental employee executive recruiting and relocation charges;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | $2.2 million of deferred IPO costs that were written off; and
| | - |  | -------------------------------------------------------------



| |  |  | $1.7 million net proceeds from an insurance settlement.
| | - |  | -------------------------------------------------------

LIQUIDITY AND
CAPITAL RESOURCES

Our primary liquidity and capital resource needs are to service our debt, finance working capital and make capital expenditures and
investments. At March 25, 2006, our primary sources of liquidity were cash and cash equivalents of $54.7 million and our unused borrowings under our revolving credit facility of $121.0 million to the extent of our current available borrowing
base. We rely heavily on our revolving credit facility to finance operations leading up to the December holiday selling season. There were no borrowings and $4.0 million in the form of stand-by letters of credit outstanding under the revolving
credit facility at March 25, 2006. Borrowings on our prior facility peaked at $104.0 million on November 23, 2005 and were fully paid on December 13, 2005. Generally, cash from operations is the highest in our second fiscal quarter
because of the holiday selling season and the seasonality of our business.

On March 20, 2006, we executed a new senior secured revolving credit
agreement (the Credit Agreement) with a group of lenders that provides for $125.0 million of revolving credit secured by our assets. Up to a maximum of $10.0 million under the Credit Agreement may be used for the issuance of letters of
credit. The Credit Agreement replaces the prior $125.0 million amended and restated credit facility, dated February 25, 2005, which was scheduled to expire February 25, 2010. Compared to the prior agreement, the new Credit Agreement
provides, among other things, improved interest rates on borrowings, a lower commitment fee and fewer financial covenants. The Credit Agreement has a maturity date of March 20, 2011. Interest on the borrowings under the Credit Agreement is
payable at a base rate or Eurocurrency rate plus an applicable margin and fees. Borrowings under the Credit Agreement may be used for general corporate purposes of the borrowers and their subsidiaries, including capital expenditures, subject to
certain limitations. The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. In addition, the new Credit Agreement modifies the borrowing base calculation set
forth under the old facility.

At March 25, 2006, we were in compliance with all of our covenants under the Credit Agreement and all of our covenants
under the indenture governing our Senior Notes.

Cash Flows Provided by Operating Activities

Cash provided by operating activities totaled $44.6 million in the first three quarters of fiscal 2006 compared to $70.9 million in the first three quarters of fiscal
2005. The $26.3 million decrease was primarily attributable to the following:



| |  |  | $11.6 million lower net income;
| | - |  | -------------------------------



| |  |  | $7.9 million increase in accounts receivable primarily due to increased sales from Harry and David Wholesale;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | $4.8 million increase in inventory spending; and
| | - |  | ------------------------------------------------



| |  |  | $2.0 million of other.
| | - |  | ----------------------

Cash Flows Used in Investment Activities

Cash used for investment activities totaled $10.1 million in the first three quarters of fiscal 2006 compared to $10.4 million in the first three
quarters of fiscal 2005. Capital expenditures in fiscal 2006 primarily included investment in IT systems, including an e-commerce system, refurbishment of stores, installation of a delivery management system, and manufacturing upgrades.

We currently expect our capital expenditures to be approximately $20.0 million for fiscal 2006, primarily for e-commerce upgrades, fulfillment and transportation
system upgrades, increases in manufacturing capacity and infrastructure improvements in information technology and stores. However, our capital expenditures may be different than currently anticipated depending upon the size and nature of new
business opportunities and actual cash flows generated by our operations.



33



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##### Table of Contents

Cash Flows Used in Financing Activities

Cash used in financing activities totaled $4.6 million for the first three quarters of fiscal 2006. The primary uses of cash were for (i) payment of fees associated with the exchange offer relating to
our Senior Notes and our new revolving credit agreement which totaled $3.0 million and (ii) a $2.6 million dividend paid to shareholders, which was partially offset by cash provided by stock option proceeds of $1.2 million.

Cash used in financing activities totaled $16.3 million for the first three quarters of fiscal 2005 and were directly related to the issuance of the Senior Notes in
February 2005. The cash provided by the net borrowings of long term debt was $90.0 million and was offset by payments of notes of $13.9 million, payments for financing costs associated with the debt of $9.5 million, and $82.6
million in dividends paid out of proceeds.

We currently believe that our available cash, cash equivalents, cash flow from operations and borrowings
available under the revolving credit facility will be sufficient to service our debt and to finance our operations and expected capital requirements for the next twelve months.

Seasonality

Historically, our business has been subject to substantial seasonal variations in demand and 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 the Registration Statement on Form S-4. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experiences and various other
factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

NON-GAAP FINANCIAL
MEASURE: EBITDA

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

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

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

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



34



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##### Table of Contents

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



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



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



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



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



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

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

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

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

As a performance measure, we also use return on capital employed to assist us in making budgeting decisions related to how debt and equity capital is being employed and how it will be employed in the future. Historical measures of return on
capital employed, which include the use of EBITDA, are used in estimating and predicting future return on capital trends. Combined with other GAAP financial measures, historical return on capital information helps us make decisions about how to
employ capital effectively going forward.

However, because EBITDA does not take into account certain of these non-cash items, which do affect our
operations and performance, EBITDA has inherent limitations as an operating measure. These limitations include:



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



| |  |  | 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.



35



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

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

Interest Rate Risk

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

Commodity Risk

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

ITEM 4. CONTROLS AND PROCEDURES

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

We have carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The
evaluation examined those disclosure controls and procedures as of March 25, 2006. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of March 25, 2006, our
disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and are therefore not required to make an assessment of the
effectiveness of our internal controls over financial reporting. Further, Ernst & Young LLP has not been engaged nor have they expressed an opinion on the effectiveness of our internal control over financial reporting. However, in
connection with our fiscal 2005 financial statement audit, Ernst & Young LLP, our independent registered public accounting firm, informed us that they have identified certain deficiencies in the design and operation of our internal
controls. These deficiencies represent significant deficiencies and may represent material weaknesses as defined in Auditing Standard No. 2 of the Public Company Accounting Oversight Board (United States), or PCAOB. A
material weakness is defined by the PCAOB as a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not
be prevented or detected. A control deficiency exists when the design or operations of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely
basis.

The internal control deficiencies identified at the end of fiscal 2005 related to our financial closing process and our information technology
general controls environment. We are taking remedial measures to improve the effectiveness of our internal controls, and management believes that these efforts will not only address the internal control deficiencies described above, but also improve
the effectiveness of our disclosure and internal controls in the future. Specifically, we are and will be:



| |  |  | strengthening our internal staffing and technical expertise in financial, tax and SEC accounting and reporting to accommodate our new status as a stand-alone public company; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | engaging an outside compliance consulting firm to advise us on improving our internal controls in selected areas.
| | - |  | -----------------------------------------------------------------------------------------------------------------

The process and control improvements described above, which are still in the process of being implemented, are the only changes in our internal controls during the
thirteen weeks ended March 25, 2006, that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures. We plan to continue to assess our internal controls and procedures and will take further
action as necessary or appropriate to address any other matters we identify, including to effect compliance with Section 404 of the Sarbanes-Oxley Act when we are required to make an assessment of our internal controls under Section 404
for fiscal 2008.



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



|10.1 | Credit Agreement among Harry & David Operations Corp., as Borrower, Harry & David Holdings, Inc. and certain subsidiaries of Holdings, as Guarantors, certain
lenders party thereto, UBS Securities LLC, as Lead Arranger, UBS Loan Finance LLC, as a lender and as Swingline Lender, UBS AG, Stamford Branch, as Issuing Bank, as the Administrative Collateral Agent and as Administrative Agent for the lenders and
GMAC Commercial Finance LLC, as Collateral Agent (Filed as Exhibit 10.1 to Harry & David Holdings, Inc.s Form 8-K dated March 22, 2006 (File No. 333-128870) and incorporated herein by reference)
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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


May 9, 2006



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