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United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2007

or



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

For the transition period from 
to

Commission File Number 333-128870

Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)



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



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

(541) 864-2362

(Registrants telephone number including area code)

None

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

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

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  þ

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

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, 2007
|Common stock $0.01 par value |  | 1,031,838                    



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##### Table of Contents

HARRY & DAVID HOLDINGS, INC. AND SUBSIDIARIES

INDEX



|                              |  |                                                                                                                                                                                        |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                                                        |  | Page
|                              | 
|Part I. Financial Information |  |                                                                                                                                                                                       
|                              |  |                                                                                                                                                                                       
|Item 1.                       |  | Condensed Consolidated Financial Statements                                                                                                                                            |  | 3   
|                              |  |                                                                                                                                                                                       
|                              |  | Condensed Consolidated Balance Sheets  as of March 31, 2007, June 24, 2006 and March 25, 2006                                                                                         |  | 3   
|                              |  |                                                                                                                                                                                       
|                              |  | Condensed Consolidated Statements of Operations  Thirteen Weeks ended March 31, 2007 and March 25, 2006, Forty Weeks ended March 31, 2007, and Thirty-Nine Weeks ended March 25, 2006 |  | 4   
|                              |  |                                                                                                                                                                                       
|                              |  | Condensed Consolidated Statements of Cash Flows  Forty Weeks ended March 31, 2007 and Thirty-nine Weeks ended March 25, 2006                                                          |  | 5   
|                              |  |                                                                                                                                                                                       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                   |  | 6   
|                              |  |                                                                                                                                                                                       
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                  |  | 24  
|                              |  |                                                                                                                                                                                       
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                                             |  | 41  
|                              |  |                                                                                                                                                                                       
|Item 4.                       |  | Controls and Procedures                                                                                                                                                                |  | 41  
|                              | 
|Part II. Other Information    |  |                                                                                                                                                                                       
|                              |  |                                                                                                                                                                                       
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                      |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 1A.                      |  | Risk Factors                                                                                                                                                                           |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                            |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                                                                                        |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                                                                                    |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 5.                       |  | Other Information                                                                                                                                                                      |  | 42  
|                              |  |                                                                                                                                                                                       
|Item 6.                       |  | Exhibits                                                                                                                                                                               |  | 42  



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 31, 2007 Unaudited |         | June 24, 2006 (As Restated) |   |         | March 25, 2006 (As Restated) Unaudited | 
|Assets                                                                                                                                                                                         |  |                          |         |                             |   |         |                                        |  |   |         |  
|Current assets:                                                                                                                                                                                |  |                          |         |                             |   |         |                                        |  |   |         |  
|Cash and cash equivalents                                                                                                                                                                      |  | $                        | 41,580  |                             | $ | 18,637  |                                        |  | $ | 48,741  |  
|Short-term investments                                                                                                                                                                         |  |                          | 37,363  |                             |   |        |                                        |  |   |        |  
|Trade accounts receivable, net                                                                                                                                                                 |  |                          | 5,328   |                             |   | 8,926   |                                        |  |   | 19,352  |  
|Other receivables                                                                                                                                                                              |  |                          | 1,208   |                             |   | 3,059   |                                        |  |   | 5,215   |  
|Inventories, net                                                                                                                                                                               |  |                          | 47,204  |                             |   | 74,117  |                                        |  |   | 65,979  |  
|Prepaid catalog expenses                                                                                                                                                                       |  |                          | 3,425   |                             |   | 3,066   |                                        |  |   | 6,029   |  
|Income taxes receivable                                                                                                                                                                        |  |                          |        |                             |   | 556     |                                        |  |   | 216     |  
|Other current assets                                                                                                                                                                           |  |                          | 9,000   |                             |   | 10,561  |                                        |  |   | 24,873  |  
|Assets held for sale                                                                                                                                                                           |  |                          | 41,455  |                             |   |        |                                        |  |   |        |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total current assets                                                                                                                                                                           |  |                          | 186,563 |                             |   | 118,922 |                                        |  |   | 170,405 |  
|Fixed assets, net                                                                                                                                                                              |  |                          | 158,151 |                             |   | 174,010 |                                        |  |   | 172,838 |  
|Intangibles, net                                                                                                                                                                               |  |                          | 31,210  |                             |   | 32,657  |                                        |  |   | 33,524  |  
|Deferred financing costs, net                                                                                                                                                                  |  |                          | 12,803  |                             |   | 14,813  |                                        |  |   | 15,432  |  
|Deferred income taxes                                                                                                                                                                          |  |                          | 1,484   |                             |   | 9,293   |                                        |  |   | 14,387  |  
|Other assets                                                                                                                                                                                   |  |                          | 721     |                             |   | 488     |                                        |  |   | 536     |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total assets                                                                                                                                                                                   |  | $                        | 390,932 |                             | $ | 350,183 |                                        |  | $ | 407,122 |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Liabilities and stockholders equity (deficit)                                                                                                                                                 |  |                          |         |                             |   |         |                                        |  |   |         |  
|Current liabilities:                                                                                                                                                                           |  |                          |         |                             |   |         |                                        |  |   |         |  
|Accounts payable                                                                                                                                                                               |  | $                        | 15,001  |                             | $ | 21,290  |                                        |  | $ | 23,416  |  
|Accrued payroll and benefits                                                                                                                                                                   |  |                          | 13,695  |                             |   | 14,895  |                                        |  |   | 15,068  |  
|Income taxes payable                                                                                                                                                                           |  |                          | 14      |                             |   |        |                                        |  |   |        |  
|Deferred revenue                                                                                                                                                                               |  |                          | 22,100  |                             |   | 17,188  |                                        |  |   | 25,223  |  
|Deferred income taxes                                                                                                                                                                          |  |                          | 43,485  |                             |   | 26,442  |                                        |  |   | 41,357  |  
|Accrued interest                                                                                                                                                                               |  |                          | 1,941   |                             |   | 5,604   |                                        |  |   | 1,799   |  
|Accrued restructuring costs                                                                                                                                                                    |  |                          |        |                             |   |        |                                        |  |   | 584     |  
|Other accrued liabilities                                                                                                                                                                      |  |                          | 7,547   |                             |   | 11,474  |                                        |  |   | 26,331  |  
|Capital lease obligation                                                                                                                                                                       |  |                          | 1,571   |                             |   |        |                                        |  |   |        |  
|Liabilities related to assets held for sale                                                                                                                                                    |  |                          | 8,228   |                             |   |        |                                        |  |   |        |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total current liabilities                                                                                                                                                                      |  |                          | 113,582 |                             |   | 96,893  |                                        |  |   | 133,778 |  
|Long-term debt                                                                                                                                                                                 |  |                          | 245,000 |                             |   | 245,000 |                                        |  |   | 245,000 |  
|Accrued pension liability                                                                                                                                                                      |  |                          | 18,128  |                             |   | 35,621  |                                        |  |   | 34,490  |  
|Other long-term liabilities                                                                                                                                                                    |  |                          | 3,403   |                             |   | 3,119   |                                        |  |   | 2,867   |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total liabilities                                                                                                                                                                              |  |                          | 380,113 |                             |   | 380,633 |                                        |  |   | 416,135 |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Commitments and contingencies                                                                                                                                                                  |  |                          |         |                             |   |         |                                        |  |   |         |  
|Stockholders equity (deficit)                                                                                                                                                                 |  |                          |         |                             |   |         |                                        |  |   |         |  
|Common stock, $0.01 par value, 1,500,000 shares authorized; 1,031,816, 1,019,929 and 1,014,888 shares issued and outstanding at March 31,
2007, June 24, 2006 and March 25, 2006, respectively |  |                          | 10      |                             |   | 10      |                                        |  |   | 10      |  
|Additional paid-in capital                                                                                                                                                                     |  |                          | 5,373   |                             |   | 3,954   |                                        |  |   | 3,433   |  
|Retained earnings (accumulated deficit)                                                                                                                                                        |  |                          | 5,436   |                             |   | (34,414 | )                                      |  |   | (12,456 | )
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total stockholders equity (deficit)                                                                                                                                                           |  |                          | 10,819  |                             |   | (30,450 | )                                      |  |   | (9,013  | )
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                     |  | $                        | 390,932 |                             | $ | 350,183 |                                        |  | $ | 407,122 |  
|                                                                                                                                                                                               |  |                          |         |                             |   |         |                                        |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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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 31, 2007 |           |   | Thirteen weeks ended March 25, 2006 |   |           | Forty weeks ended March 31, 2007 |  |   | Thirty-nine weeks ended March 25, 2006 |  
|Net sales                                           |  | $                                   | 98,187    |   |                                     | $ | 94,583    |                                  |  | $ | 553,237                                |   |  | $ | 514,698   |  
|Cost of goods sold                                  |  |                                     | 62,134    |   |                                     |   | 72,445    |                                  |  |   | 290,492                                |   |  |   | 300,412   |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Gross profit                                        |  |                                     | 36,053    |   |                                     |   | 22,138    |                                  |  |   | 262,745                                |   |  |   | 214,286   |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Costs and expenses:                                 |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Selling, general and administrative                 |  |                                     | 51,457    |   |                                     |   | 46,833    |                                  |  |   | 185,696                                |   |  |   | 172,898   |  
|Selling, general and administrative  related party |  |                                     | 250       |   |                                     |   | 250       |                                  |  |   | 750                                    |   |  |   | 750       |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|                                                    |  |                                     | 51,707    |   |                                     |   | 47,083    |                                  |  |   | 186,446                                |   |  |   | 173,648   |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Operating income (loss)                             |  |                                     | (15,654   | ) |                                     |   | (24,945   | )                                |  |   | 76,299                                 |   |  |   | 40,638    |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Other (income) expense:                             |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Interest income                                     |  |                                     | (1,205    | ) |                                     |   | (1,027    | )                                |  |   | (1,642                                 | ) |  |   | (1,285    | )
|Interest expense                                    |  |                                     | 6,504     |   |                                     |   | 6,722     |                                  |  |   | 21,634                                 |   |  |   | 20,279    |  
|Pension curtailment gain                            |  |                                     |          |   |                                     |   |          |                                  |  |   | (15,844                                | ) |  |   |          |  
|Loss on divestiture of business                     |  |                                     | 7,406     |   |                                     |   |          |                                  |  |   | 7,406                                  |   |  |   |          |  
|Other (income) expense                              |  |                                     | (270      | ) |                                     |   | (1,714    | )                                |  |   | (537                                   | ) |  |   | 466       |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|                                                    |  |                                     | 12,435    |   |                                     |   | 3,981     |                                  |  |   | 11,017                                 |   |  |   | 19,460    |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Income (loss) before income taxes                   |  |                                     | (28,089   | ) |                                     |   | (28,926   | )                                |  |   | 65,282                                 |   |  |   | 21,178    |  
|Income tax provision (benefit)                      |  |                                     | (11,253   | ) |                                     |   | (9,380    | )                                |  |   | 25,432                                 |   |  |   | 8,933     |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Net income (loss)                                   |  | $                                   | (16,836   | ) |                                     | $ | (19,546   | )                                |  | $ | 39,850                                 |   |  | $ | 12,245    |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Earnings (loss) per share:                          |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Basic and diluted                                   |  | $                                   | (16.32    | ) |                                     | $ | (19.26    | )                                |  | $ | 38.88                                  |   |  | $ | 12.10     |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Weighted-average shares outstanding:                |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  
|Basic and diluted                                   |  |                                     | 1,031,713 |   |                                     |   | 1,014,888 |                                  |  |   | 1,024,861                              |   |  |   | 1,012,171 |  
|                                                    |  |                                     |           |   |                                     |   |           |                                  |  |   |                                        |   |  |   |           |  

See accompanying notes to condensed consolidated financial statements.



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Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)



|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ---------------------------------------------------- | - | -------- | -
|                                                                                  |  | Forty weeks ended March 31, 2007 |          |   | Thirty-nine weeks ended March 25,
2006 (As Restated) |  
|Operating activities                                                              |  |                                  |          |   |                                                      |   |          |  
|Net income                                                                        |  | $                                | 39,850   |   |                                                      | $ | 12,245   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                  |          |   |                                                      |   |          |  
|Depreciation and amortization of fixed assets                                     |  |                                  | 13,301   |   |                                                      |   | 13,134   |  
|Amortization of intangible assets                                                 |  |                                  | 1,447    |   |                                                      |   | 1,654    |  
|Amortization of deferred financing costs                                          |  |                                  | 2,010    |   |                                                      |   | 1,823    |  
|Stock option compensation expense                                                 |  |                                  | 437      |   |                                                      |   | 339      |  
|Write-off of deferred IPO costs                                                   |  |                                  |         |   |                                                      |   | 2,180    |  
|Loss on disposal of fixed assets                                                  |  |                                  | 218      |   |                                                      |   | 704      |  
|Loss on divestiture of business                                                   |  |                                  | 7,406    |   |                                                      |   |         |  
|Realized and unrealized gain on short-term investments                            |  |                                  | (188     | ) |                                                      |   |         |  
|Pension curtailment gain                                                          |  |                                  | (15,844  | ) |                                                      |   |         |  
|Deferred income taxes                                                             |  |                                  | 24,852   |   |                                                      |   | 8,712    |  
|Changes in operating assets and liabilities:                                      |  |                                  |          |   |                                                      |   |          |  
|Accounts receivable & other receivables                                           |  |                                  | (9,800   | ) |                                                      |   | (14,108  | )
|Inventories                                                                       |  |                                  | 12,080   |   |                                                      |   | 2,681    |  
|Prepaid catalog and other assets                                                  |  |                                  | (1,279   | ) |                                                      |   | (22,666  | )
|Accounts payable and accrued liabilities                                          |  |                                  | (10,948  | ) |                                                      |   | 26,830   |  
|Deferred revenue                                                                  |  |                                  | 7,658    |   |                                                      |   | 10,221   |  
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Net cash provided by operating activities                                         |  |                                  | 71,200   |   |                                                      |   | 43,749   |  
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Investing activities                                                              |  |                                  |          |   |                                                      |   |          |  
|Acquisition of fixed assets                                                       |  |                                  | (11,567  | ) |                                                      |   | (10,085  | )
|Proceeds from the sale of fixed assets                                            |  |                                  | 76       |   |                                                      |   | 24       |  
|Purchases of short-term investments                                               |  |                                  | (37,175  | ) |                                                      |   |         |  
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Net cash used in investing activities                                             |  |                                  | (48,666  | ) |                                                      |   | (10,061  | )
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Financing activities                                                              |  |                                  |          |   |                                                      |   |          |  
|Borrowings of revolving debt                                                      |  |                                  | 108,500  |   |                                                      |   | 104,000  |  
|Repayments of revolving debt                                                      |  |                                  | (108,500 | ) |                                                      |   | (104,000 | )
|Repayments of notes payable                                                       |  |                                  |         |   |                                                      |   | (268     | )
|Repayments of capital lease obligation                                            |  |                                  | (573     | ) |                                                      |   |         |  
|Payments for deferred financing costs                                             |  |                                  |         |   |                                                      |   | (2,986   | )
|Proceeds from exercise of stock options                                           |  |                                  | 982      |   |                                                      |   | 1,230    |  
|Dividend                                                                          |  |                                  |         |   |                                                      |   | (2,600   | )
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Net cash provided by (used in) financing activities                               |  |                                  | 409      |   |                                                      |   | (4,624   | )
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Increase in cash and cash equivalents                                             |  |                                  | 22,943   |   |                                                      |   | 29,064   |  
|Cash and cash equivalents, beginning of period                                    |  |                                  | 18,637   |   |                                                      |   | 19,677   |  
|                                                                                  |  |                                  |          |   |                                                      |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                                | 41,580   |   |                                                      | $ | 48,741   |  
|                                                                                  |  |                                  |          |   |                                                      |   |          |  

See accompanying notes to condensed consolidated financial statements.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

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 31, 2007 and March 25, 2006, the Condensed Consolidated Statements
of Operations for the thirteen-week periods ended March 31, 2007 and March 25, 2006, the Condensed Consolidated Statements of Operations for the forty-week period ended March 31, 2007 and the thirty-nine week period ended
March 25, 2006, and the Condensed Consolidated Statements of Cash Flows for the forty-week period ended March 31, 2007 and the thirty-nine week period ended 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 those typically recurring adjustments, necessary to present fairly the financial position at the
balance sheet dates and the results of operations for the thirteen-week periods and the forty and thirty-nine week periods then ended. Significant intercompany balances and transactions have been eliminated in consolidation. The Condensed
Consolidated Balance Sheet at June 24, 2006 presented in this report has been derived from the Companys audited balance sheet not included in this report.

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

The Companys fiscal year ends on the last Saturday in June, based on a fifty-two/fifty-three-week year. Fiscal years ending June 30, 2007 and June 24, 2006 contain fifty-three weeks and fifty-two weeks, respectively. The
period ended March 31, 2007 contains forty weeks while the period ended March 25, 2006 contains thirty-nine weeks. Accordingly, results for these periods may not be comparable.

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

Certain reclassifications have been made to the March 25, 2006 financial statements to conform
to the March 31, 2007, presentation. Such reclassifications had no effect on net income or net cash provided by operating activities, as originally reported. These reclassifications include the balance sheet presentation of fixed assets and
deferred gift card expenses and the related statement of cash flow presentation, as well as the statement of cash flow presentation of the amortization of favorable lease agreements.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



3. RESTATEMENT AND CORRECTION

During the quarter ended March 31, 2007, the Company concluded that its historical practice of reclassifying outstanding checks to accounts payable related to its main banking relationship was in error. The
Companys historical practice of reclassifying outstanding checks to accounts payable impacts the Companys fiscal 2005 and 2006 Form 10-K filings and each Form 10-Q filing in fiscal 2005, 2006, and 2007, except for the Form 10-Q filing
for the quarter ended March 31, 2007, which reflects the appropriate accounting treatment. The Company has reviewed the impact of this classification error on both the balance sheet and cash flows statement and has concluded that the error is
sufficiently material to prior year interim and annual financial statements to restate these historical balances in the Form 10-Q for the quarter ended March 31, 2007, and in future filings with the Securities and Exchange Commission.

The restatement had the following effect on the Companys historical balance sheets:

Fiscal 2007

|                          |  |                   |        |                  |   |        
|------------------------- |  | ----------------- | ------ | ---------------- | - | -------
|                          |  | September 30,2006 |        | December 30,2006
|                          |  | (Unaudited)       |        | (Unaudited)     
|Cash and cash equivalents |  |                   |        |                  |   |        
|As previously reported    |  | $                 | 4,004  |                  | $ | 164,049
|As restated               |  |                   | 2,811  |                  |   | 150,128
|Accounts payable          |  |                   |        |                  |   |        
|As previously reported    |  | $                 | 43,645 |                  | $ | 65,806 
|As restated               |  |                   | 42,452 |                  |   | 51,885 

Fiscal 2006



|                          |  |                   |        |                  |   |               |  |              |        |  |   |       
|------------------------- |  | ----------------- | ------ | ---------------- | - | ------------- |  | ------------ | ------ |  | - | ------
|                          |  | September, 242005 |        | December, 242005 |   | March 25,2006 |  | June 24,2006
|                          |  | (Unaudited)       |        | (Unaudited)      |   | (Unaudited)   |  |             
|Cash and cash equivalents |  |                   |        |                  |   |               |  |              |        |  |   |       
|As previously reported    |  | $                 | 13,708 |                  | $ | 147,141       |  | $            | 54,749 |  | $ | 23,802
|As restated               |  |                   | 7,544  |                  |   | 139,080       |  |              | 48,741 |  |   | 18,637
|Accounts payable          |  |                   |        |                  |   |               |  |              |        |  |   |       
|As previously reported    |  | $                 | 44,627 |                  |   | 74,249        |  | $            | 29,424 |  | $ | 26,455
|As restated               |  |                   | 38,463 |                  |   | 66,188        |  |              | 23,416 |  |   | 21,290
|                          |  |                   |        |                 
|Fiscal 2005               |  |                   |        |                  |   |               |  |              |        |  |   |       
|                          |  | September, 252004 |        | December, 252004 |   | March 26,2005 |  | June 25,2005
|                          |  | (Unaudited)       |        | (Unaudited)      |   | (Unaudited)   |  |             
|Cash                      |  |                   |        |                  |   |               |  |              |        |  |   |       
|As previously reported    |  | $                 | 12,874 |                  | $ | 155,166       |  | $            | 67,885 |  | $ | 24,854
|As restated               |  |                   | 9,208  |                  |   | 142,215       |  |              | 61,704 |  |   | 19,677
|Accounts payable          |  |                   |        |                  |   |               |  |              |        |  |   |       
|As previously reported    |  | $                 | 29,310 |                  |   | 46,838        |  | $            | 30,308 |  | $ | 18,759
|As restated               |  |                   | 25,644 |                  |   | 33,887        |  |              | 24,127 |  |   | 13,582



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



The restatement had the following effect on the Companys historical consolidated statements of cash flows (in
each case for the year-to-date period ended):

Fiscal 2007



|                                                    |  |                   |         |   |                  |   |        
|--------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | -------
|                                                    |  | September 30,2006 |         |   | December 30,2006
|                                                    |  | (Unaudited)       |         |   | (Unaudited)     
|Net cash provided by (used in) operating activities |  |                   |         |   |                  |   |        
|As previously reported                              |  | $                 | (78,465 | ) |                  | $ | 149,875
|As restated                                         |  |                   | (74,493 | ) |                  |   | 141,119
|Increase (decrease) in cash and cash equivalents    |  |                   |         |   |                  |   |        
|As previously reported                              |  | $                 | (19,798 | ) |                  | $ | 140,247
|As restated                                         |  |                   | (15,826 | ) |                  |   | 131,491

Fiscal 2006



|                                                    |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|--------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------ | -
|                                                    |  | September, 242005 |         |   | December, 242005 |   | March 25,2006 |  | June 24, 2006 |       
|                                                    |  | (Unaudited)       |         |   | (Unaudited)      |   | (Unaudited)   |  |               |       
|Net cash provided by (used in) operating activities |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|As previously reported                              |  | $                 | (71,163 | ) |                  | $ | 131,945       |  | $             | 44,580 |  | $ | 20,820 |  
|As restated                                         |  |                   | (72,150 | ) |                  |   | 129,061       |  |               | 43,749 |  |   | 20,832 |  
|Increase (decrease) in cash and cash equivalents    |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|As previously reported                              |  | $                 | (11,146 | ) |                  |   | 122,287       |  | $             | 29,895 |  | $ | (1,052 | )
|As restated                                         |  |                   | (12,133 | ) |                  |   | 119,403       |  |               | 29,064 |  |   | (1,040 | )
|                                                    |  |                   |         |  
|Fiscal 2005                                         |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|                                                    |  |                   |         |  
|                                                    |  | September, 252004 |         |   | December, 252004 |   | March 26,2005 |  | June 25,2005  |       
|                                                    |  | (Unaudited)       |         |   | (Unaudited)      |   | (Unaudited)   |  |               |       
|Net cash provided by (used in) operating activities |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|As previously reported                              |  | $                 | (58,822 | ) |                  | $ | 135,053       |  | $             | 70,882 |  | $ | 31,647 |  
|As restated                                         |  |                   | (62,488 | ) |                  |   | 122,102       |  |               | 64,701 |  |   | 26,470 |  
|Increase (decrease) in cash and cash equivalents    |  |                   |         |   |                  |   |               |  |               |        |  |   |        |  
|As previously reported                              |  | $                 | (10,755 | ) |                  |   | 131,537       |  | $             | 44,256 |  | $ | 1,225  |  
|As restated                                         |  |                   | (14,421 | ) |                  |   | 118,586       |  |               | 38,075 |  |   | (3,952 | )

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

Additionally, during the preparation and review of the Form 10-Q for the thirteen and forty week periods ended March 31, 2007, certain errors were
identified and were corrected in the third quarter of fiscal 2007 related to accounts payable and cost of sales due to the reconciliation of aged unmatched inventory receipts identified in the ERP conversion. As a result, we decreased our accounts
payable by $1.9 million and cost of sales by $1.9 million. The impact of these corrections on our financial position, results of operations, and cash flows for the fiscal years ended June 24, 2006 and June 25, 2005, were not material.
Although the correction of the errors is material to the third quarter of fiscal 2007, it is not material to fiscal 2007 taken as a whole.



8



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



4. RECENT ACCOUNTING PRONOUNCEMENTS

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

In September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value
measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is required to adopt
SFAS No. 157 for its fiscal year ending June 28, 2008. The Company is currently evaluating the potential effects of SFAS No. 157.

In
September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements (SAB 108). SAB 108 provides guidance on how cumulative errors in
the balance sheet should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in evaluating a current year
misstatement SAB No. 108 is effective for fiscal years ending after November 15, 2006. The Company does not expect the application of SAB 108 in the fourth quarter of fiscal 2007 to have a material effect on its consolidated financial
statements.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business
entity. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer without publicly traded
equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. The Company is required to adopt SFAS
No. 158 for its fiscal year ending June 30, 2007, and is currently evaluating the impact that adoption will have on its consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax
positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria, balance sheet classification, interim period accounting and significantly expands disclosure provisions for uncertain
tax positions taken or that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. The Company is required to adopt FIN 48 in the first
quarter of its fiscal year ending June 28, 2008 and is currently evaluating the impact that adoption will have on its consolidated financial statements.

In June 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes sales, use, value added and certain excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and
customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim
and annual periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have an impact on the Companys consolidated financial position, results of operation or cash flows. The Company presents sales taxes on a net basis.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



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

5. ASSETS AND RELATED LIABILITIES HELD FOR SALE

On April 10, 2007, the
Company completed the sale of its Jackson & Perkins business, including the direct marketing and wholesale businesses, the Jackson & Perkins®brand, catalog, e-commerce website and associated inventory, including premium rose plants, horticultural products and home and
garden décor, as well as its direct marketing and wholesale customer lists and relationships. The sale price was $21,000, consisting of $17,000 cash and approximately $4,000 comprised of a deferred note, product credits and deferred inventory
payments and is subject to a post-closing working capital adjustment. In connection with the sale, the Company entered into an agreement to provide certain transitional services, including agricultural and horticultural services through the end of
June 2007, certain wholesale operational during 2007, and certain direct marketing operational and rose fulfillment services through June 2008 (collectively, The Transitional Services Agreement). In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,the services rendered pursuant to the Transitional Services Agreement are considered continuing involvement and as such, the results of operations of the divested entities are
included in continuing operations. The assets and liabilities that were sold are classified as Assets Held for Sale and Liabilities Related to Assets Held for Sale in the consolidated balance sheet. The assets held for sale were written down to fair
value, resulting in a loss on divestiture of Jackson & Perkins Direct Marketing and Jackson & Perkins Operations of $7,406 included in Other (income) expense within the results of continuing operations in the consolidated income statement
for the thirteen and forty week-periods ended March 31, 2007.

On April 27, 2007, the Company completed the sale of approximately 3,200 acres of
land in Wasco, California and the associated buildings and equipment, for the sale price of $29,000 cash. The land assets were used primarily to support the rose growing operations of Jackson & Perkins and are classified within Assets Held
for Sale at March 31, 2007. During the fourth quarter of 2007, the Company recognized an estimated gain of $11,467 on the land sale and expects to recognize an estimated gain of $2,970 related to the sale of Jackson & Perkins Wholesale.

Assets and related liabilities held for sale consisted of the following:



|                                            |  |                      |        |                     |   |                      |  |   |       
|------------------------------------------- |  | -------------------- | ------ | ------------------- | - | -------------------- |  | - | ------
|                                            |  | As of March 31, 2007 |        | As of June 24, 2006 |   | As of March 25, 2006
|Assets held for sale                        |  |                      |        |                     |   |                      |  |   |       
|Trade accounts and other receivables, net   |  | $                    | 15,249 |                     | $ | 8,052                |  | $ | 18,691
|Inventories, net                            |  |                      | 7,427  |                     |   | 17,627               |  |   | 17,032
|Other assets                                |  |                      | 2,804  |                     |   | 1,710                |  |   | 5,343 
|Fixed assets, net                           |  |                      | 15,975 |                     |   | 17,090               |  |   | 17,509
|                                            |  |                      |        |                     |   |                      |  |   |       
|Total assets held for sale                  |  | $                    | 41,455 |                     | $ | 44,479               |  | $ | 58,575
|                                            |  |                      |        |                     |   |                      |  |   |       
|Liabilities related to assets held for sale |  |                      |        |                     |   |                      |  |   |       
|Accounts payable and accrued liabilities    |  | $                    | 5,482  |                     | $ | 5,250                |  | $ | 9,707 
|Deferred revenue                            |  |                      | 2,746  |                     |   | 751                  |  |   | 2,829 
|                                            |  |                      |        |                     |   |                      |  |   |       
|Total liabilities held for sale             |  | $                    | 8,228  |                     | $ | 6,001                |  | $ | 12,536
|                                            |  |                      |        |                     |   |                      |  |   |       



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



6. BALANCE SHEET INFORMATION

Short-term Investments

Short-term investments have an original maturity between three months and one year and a
remaining maturity of less than one year and are all classified as held-to-maturity. Held-to-maturity securities are stated at amortized cost as it is the intent of the Company to hold these securities until maturity. The amortized cost and fair
value were $37,363 and $37,382, respectively, as of March 31, 2007.

Inventories

Inventories consist of the following:



|                                                   |  |                    |        |               |   |                |  |   |       
|-------------------------------------------------- |  | ------------------ | ------ | ------------- | - | -------------- |  | - | ------
|                                                   |  | March 31, 2007 (1) |        | June 24, 2006 |   | March 25, 2006
|Finished goods                                     |  | $                  | 21,824 |               | $ | 20,382         |  | $ | 20,436
|Materials, packaging supplies, and work-in process |  |                    | 21,324 |               |   | 31,915         |  |   | 31,027
|Growing crops                                      |  |                    | 4,056  |               |   | 21,820         |  |   | 14,516
|                                                   |  |                    |        |               |   |                |  |   |       
|Total                                              |  | $                  | 47,204 |               | $ | 74,117         |  | $ | 65,979
|                                                   |  |                    |        |               |   |                |  |   |       



|(1) | Inventory held for sale as of March 31, 2007 was $7,427 and is not included in this table. See Note 5 for further information on amounts held for sale.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

Fixed Assets

Fixed assets consist of
the following:



|                                                |  |                    |         |   |               |   |         |                |  |   |         |  
|----------------------------------------------- |  | ------------------ | ------- | - | ------------- | - | ------- | -------------- |  | - | ------- | -
|                                                |  | March 31, 2007 (1) |         |   | June 24, 2006 |   |         | March 25, 2006 | 
|Land                                            |  | $                  | 19,607  |   |               | $ | 30,553  |                |  | $ | 30,902  |  
|Land improvements and orchard development costs |  |                    | 29,779  |   |               |   | 31,377  |                |  |   | 31,682  |  
|Buildings and improvements                      |  |                    | 55,190  |   |               |   | 56,459  |                |  |   | 56,954  |  
|Machinery and equipment                         |  |                    | 56,621  |   |               |   | 49,518  |                |  |   | 48,923  |  
|Leasehold improvements                          |  |                    | 9,252   |   |               |   | 7,610   |                |  |   | 7,427   |  
|Purchased and internally developed software     |  |                    | 21,675  |   |               |   | 20,353  |                |  |   | 15,447  |  
|Capital projects-in-progress(2)                 |  |                    | 7,813   |   |               |   | 8,451   |                |  |   | 8,216   |  
|                                                |  |                    |         |   |               |   |         |                |  |   |         |  
|                                                |  |                    | 199,937 |   |               |   | 204,321 |                |  |   | 199,551 |  
|Accumulated depreciation and amortization       |  |                    | (41,786 | ) |               |   | (30,311 | )              |  |   | (26,713 | )
|                                                |  |                    |         |   |               |   |         |                |  |   |         |  
|Total                                           |  | $                  | 158,151 |   |               | $ | 174,010 |                |  | $ | 172,838 |  
|                                                |  |                    |         |   |               |   |         |                |  |   |         |  



|(1) | Fixed assets held for sale with a net book value of $15,975 as of March 31, 2007 are not included in this table. See Note 5 for further information regarding the sale
transaction and the assets and liabilities classified as held for sale.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Capital projects-in-progress includes an Enterprise Resource Planning (ERP) software package acquired for $2,144 at March 31, 2007, which is being financed by a capital lease
agreement.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



Intangibles

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

The customer mailing and rental lists and favorable lease agreements are being amortized using the straight-line method over their estimated useful
lives. Amortization expense was $461 and $500, for the thirteen-week periods ended March 31, 2007 and March 25, 2006, respectively. For the forty-week period ended March 31, 2007 and the thirty-nine week period ended March 25,
2006, amortization expense was $1,447 and $1,654, respectively. Amortization expense of intangible assets is included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

The following is a summary of intangible assets:



|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|----------------------------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | ------------------- | - | ------ | - |  | - | ------
|                                          |  | March 31, 2007        |        | June 24, 2006           
|                                          |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net Carrying Amount
|Trade names and trademarks                |  | $                     | 28,437 |                          | $ |       |                     |  | $                     | 28,437 |                          | $ | 28,437 |                     | $ |       |   |  | $ | 28,437
|Harry and David customer and rental lists |  |                       | 6,728  |                          |   | (4,873 | )                   |  |                       | 1,855  |                          |   | 6,728  |                     |   | (3,702 | ) |  |   | 3,026 
|Favorable lease agreements                |  |                       | 1,971  |                          |   | (1,053 | )                   |  |                       | 918    |                          |   | 1,971  |                     |   | (777   | ) |  |   | 1,194 
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       
|                                          |  | $                     | 37,136 |                          | $ | (5,926 | )                   |  | $                     | 31,210 |                          | $ | 37,136 |                     | $ | (4,479 | ) |  | $ | 32,657
|                                          |  |                       |        |                          |   |        |                     |  |                       |        |                          |   |        |                     |   |        |   |  |   |       

The estimated amortization expense for the remainder of 2007 and for each of the next four years and thereafter is
as follows:

Fiscal Period:



|                              |  |                                           |       |                            |   |                           |  |   |      
|----------------------------- |  | ----------------------------------------- | ----- | -------------------------- | - | ------------------------- |  | - | -----
|                              |  | Harry and David Customer and Rental
Lists |       | Favorable Lease Agreements |   | Total AmortizationExpense
|Remainder of fiscal year 2007 |  | $                                         | 437   |                            | $ | 92                        |  | $ | 529  
|Fiscal year 2008              |  |                                           | 1,418 |                            |   | 288                       |  |   | 1,706
|Fiscal year 2009              |  |                                           |      |                            |   | 244                       |  |   | 244  
|Fiscal year 2010              |  |                                           |      |                            |   | 169                       |  |   | 169  
|Fiscal year 2011              |  |                                           |      |                            |   | 88                        |  |   | 88   
|Thereafter                    |  |                                           |      |                            |   | 37                        |  |   | 37   
|                              |  |                                           |       |                            |   |                           |  |   |      
|Total                         |  | $                                         | 1,855 |                            | $ | 918                       |  | $ | 2,773
|                              |  |                                           |       |                            |   |                           |  |   |      

7. INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated effective tax rate, adjusted to give effect to anticipated permanent differences. The effective tax rates for the third quarters of fiscal
2007 and fiscal 2006 were 40.1% and 32.4%, respectively.



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##### Table of Contents

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



8. 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 31, 2007, $3,497 remained in deferred financing costs.

On March 20, 2006, the Company replaced its existing credit facility with a new revolving credit agreement (the Credit Agreement) with a group of lenders that provides for $125,000 of revolving credit
secured by the assets of the Company. The Credit Agreement has a maturity date of March 20, 2011. Borrowings under the Credit Agreement may be used for the Companys general corporate purposes, including capital expenditures, subject to
certain limitations. The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. At March 31, 2007, the Company was in compliance with all of its covenants under
the Credit Agreement.

The Company has accounted for the new Credit Agreement pursuant to EITF Issue No. 98-14, Debtors Accounting for
Changes in Lines-of-Credit or Revolving-Debt Agreements, and accordingly has continued to defer $3,497 of unamortized deferred financing costs associated with the old credit agreement at March 31, 2007. Such deferred costs will be amortized
over the term of the Credit Agreement. In connection with this facility, the Company incurred additional debt issuance fees of $1,848, which are recorded as deferred financing costs. The costs are amortized over the remaining life of the Credit
Agreement and as of March 31, 2007, $1,473 of these costs remained as deferred financing costs.

For the thirty-nine weeks ended March 25, 2006,
the Company borrowed and repaid $104,000 under the prior credit facility. Interest on the borrowings was payable at a base rate or a Eurocurrency, plus an applicable margin and fees. For the forty weeks ended March 31, 2007, the Company
borrowed and repaid $108,500 under the Credit Agreement. Interest on the borrowings is payable at a base rate or a Eurocurrency rate, plus an applicable margin and fees.

As of March 31, 2007, unused borrowings under the revolving credit facility were $123,000, excluding $2,000 in letters of credit outstanding. The maximum available borrowing under the Credit Agreement is
determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at March 31, 2007 was approximately $14,500.

Long-Term Debt

In February 2005, the Company issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior
Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 10.36% and 10.23% at
March 31, 2007 and June 24, 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.

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 31, 2007, $7,833 remained on the balance sheet for all associated fees.

These Senior Notes represent the senior unsecured obligations of Harry & David Operations Corp., a wholly-owned subsidiary of Harry & David Holdings,
Inc., and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the Companys subsidiaries. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to,
limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. Harry & David Operations Corp. was in compliance with all of its
covenants under the indenture at March 31, 2007.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



9. STOCK OPTION PLAN

In February 2005, the Company adopted a Non-Qualified Stock Option Plan (Plan). The Company accounts for stock-based compensation using the fair-value method under Statement of Financial Accounting Standards (SFAS) No. 123(R) Share
Base Payment.The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. 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. An assumption of a ten percent pre-vesting forfeiture rate is utilized when arriving at the amount of
stock compensation expense recognized.



|                    |  |                                  |           |   |                               |   |           |  
|------------------- |  | -------------------------------- | --------- | - | ----------------------------- | - | --------- | -
|                    |  | Thirteenweeksended March 31,2007 |           |   | Fortyweeksended March 31,2007 |  
|Expected volatility |  |                                  | 38.8      | % |                               |   | 38.8      | %
|Expected dividends  |  | $                                | 0         |   |                               | $ | 0         |  
|Expected term       |  |                                  | 4.3 years |   |                               |   | 4.5 years |  
|Risk-free rate      |  |                                  | 4.45      | % |                               |   | 4.52      | %

A summary of option activity under the Plan for forty weeks ended March 31, 2007 is presented below:



|                              |  |                         |   |  |                                |        |                                           |          
|----------------------------- |  | ----------------------- | - |  | ------------------------------ | ------ | ----------------------------------------- | ---------
|                              |  | Number of Option Shares |   |  | Weighted-AverageExercise Price |        | Weighted-AverageRemainingContractual Term
|Outstanding at June 24, 2006  |  | 63,377                  |   |  | $                              | 82.60  |                                           | 8.6 years
|Granted                       |  | 18,675                  |   |  |                                | 190.00 |                                           | 9.7 years
|Exercised                     |  | (11,887                 | ) |  |                                | 82.60  |                                           |         
|Forfeited                     |  | (2,601                  | ) |  |                                | 82.60  |                                           |         
|                              |  |                         |   |  |                                |        |                                           |          
|Outstanding at March 31, 2007 |  | 67,564                  |   |  | $                              | 112.29 |                                           | 8.4 years
|                              |  |                         |   |  |                                |        |                                           |          

As of March 31, 2007, 67,564 options were outstanding, of which 13,403 were fully vested and exercisable. The
weighted average remaining contractual term of vested options was 7.9 years. The total fair value of all options outstanding at March 31, 2007 was $1,683.

A summary of the status of the Companys nonvested option shares as of March 31, 2007, and changes during the forty weeks ended March 31, 2007 is presented below:



|                              |  |                         |   |  |                                                 |      
|----------------------------- |  | ----------------------- | - |  | ----------------------------------------------- | -----
|Nonvested Option Shares       |  | Number of Option Shares |   |  | Weighted-AverageGrant-DateFair Value of Options
|Outstanding at June 24, 2006  |  | 49,874                  |   |  | $                                               | 30.04
|Granted options               |  | 18,675                  |   |  | $                                               | 11.50
|Vested                        |  | (12,039                 | ) |  | $                                               | 30.04
|Forfeited                     |  | (2,349                  | ) |  | $                                               | 30.04
|                              |  |                         |   |  |                                                 |      
|Outstanding at March 31, 2007 |  | 54,161                  |   |  | $                                               | 23.60
|                              |  |                         |   |  |                                                 |      

For the thirteen and forty-week periods ended March 31, 2007, the Company recognized stock compensation
expense, which represents the amortization of the estimated fair value of the stock options issued, of $128 and $437, respectively. The total



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



tax expense recognized for these periods was $73 and $30, respectively. As of March 31, 2007 there remained a total of $1,280 of total unrecognized
pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan and will be recognized over the remaining vesting period. The weighted-average period of the remaining cost is 1.4 years.

10. BENEFIT PROGRAMS

The following represents the components of net
periodic pension and postretirement costs in accordance with revised SFAS No. 132R, 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:



|                                   |  |                                     |       |   |                                     |   |       |                                  |  |   |                                        |   |  |   |        |  
|---------------------------------- |  | ----------------------------------- | ----- | - | ----------------------------------- | - | ----- | -------------------------------- |  | - | -------------------------------------- | - |  | - | ------ | -
|                                   |  | Thirteen weeks ended March 31, 2007 |       |   | Thirteen weeks ended March 25, 2006 |   |       | Forty weeks ended March 31, 2007 |  |   | Thirty-nine weeks ended March 25, 2006 |  
|Service cost                       |  | $                                   | 1,096 |   |                                     | $ | 1,140 |                                  |  | $ | 3,288                                  |   |  | $ | 3,420  |  
|Interest cost                      |  |                                     | 721   |   |                                     |   | 926   |                                  |  |   | 2,164                                  |   |  |   | 2,777  |  
|Expected return on plan assets     |  |                                     | (722  | ) |                                     |   | (688  | )                                |  |   | (2,167                                 | ) |  |   | (2,064 | )
|Amortization of prior service cost |  |                                     |      |   |                                     |   |      |                                  |  |   |                                       |   |  |   |       |  
|Settlement gain                    |  |                                     |      |   |                                     |   | 2     |                                  |  |   |                                       |   |  |   | 7      |  
|                                   |  |                                     |       |   |                                     |   |       |                                  |  |   |                                        |   |  |   |        |  
|Net periodic benefit expense       |  | $                                   | 1,095 |   |                                     | $ | 1,380 |                                  |  | $ | 3,285                                  |   |  | $ | 4,140  |  
|                                   |  |                                     |       |   |                                     |   |       |                                  |  |   |                                        |   |  |   |        |  

During the thirteen and forty weeks ended March 31, 2007, the Company made a $1,335 and $4,934 contribution
to its defined benefit plans, respectively.

On June 22, 2006, the board of directors approved a soft freeze of the Companys qualified
pension plan effective as of June 25, 2006, whereby no new participants will qualify to enter into the plan. A full freeze of the benefit accrual for the plan will become effective June 30, 2007. Under the provisions of SFAS
No. 88, Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88),these benefit changes resulted in the recognition of a non-cash net curtailment gain
of $13,959. The curtailment gain was recognized in the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007; however, no new participants will enter or qualify for the plan. After
July 1, 2007, the Company has a continuing obligation to fund the plan and will continue to recognize net periodic pension cost under SFAS 87, Employers Accounting for Pensions.

In addition, on August 1, 2006, the board of directors approved the adoption of a non-qualified pension plan, effective as of June 17, 2004, and approved a
hard freeze of this plan effective June 30, 2007. Under the provisions of SFAS No. 88,these benefit changes resulted in the recognition of a non-cash net curtailment gain of $1,885. The curtailment gain was recognized in
the first quarter of fiscal 2007. The accrual of benefits will continue through the end of fiscal 2007. After July 1, 2007, the Company will have a continuing obligation to pay plan participants and will continue to
recognize net periodic pension cost under SFAS 87.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



11. EARNINGS PER SHARE

Earnings per share is computed as net income 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 March 31, 2007 |           |   | Thirteen weeks ended March 25, 2006 |   |           | Forty weeksended March 31, 2007 |  | Thirty-nine weeks ended March 25, 2006
|Net income (loss)                           |  | $                                   | (16,836   | ) |                                     | $ | (19,546   | )                               |  | $                                      | 39,850    |  | $ | 12,245   
|                                            |  |                                     |           |   |                                     |   |           |                                 |  |                                        |           |  |   |          
|Weighted average common shares outstanding  |  |                                     |           |   |                                     |   |           |                                 |  |                                        |           |  |   |          
|Basic and diluted                           |  |                                     | 1,031,713 |   |                                     |   | 1,014,888 |                                 |  |                                        | 1,024,861 |  |   | 1,012,171
|                                            |  |                                     |           |   |                                     |   |           |                                 |  |                                        |           |  |   |          
|Basic and diluted earnings (loss) per share |  |                                     |           |   |                                     |   |           |                                 |  |                                        |           |  |   |          
|Basic and diluted                           |  | $                                   | (16.32    | ) |                                     | $ | (19.26    | )                               |  | $                                      | 38.88     |  | $ | 12.10    
|                                            |  |                                     |           |   |                                     |   |           |                                 |  |                                        |           |  |   |          

The number of incremental shares from the assumed exercise of stock options was calculated by applying the
treasury stock method. Common shares relating to the stock options were excluded from the diluted earnings per share calculation in periods of net loss and where the exercise price was greater than or equal to the average market price of the
Companys common shares or where the assumed exercise would have been anti-dilutive during these periods. The excluded option shares were 67,564 and 68,418 for the thirteen-week periods ended March 31, 2007 and March 25, 2006,
respectively, and 63,758 and 70,323 for the forty-week period ended March 31, 2007 and thirty-nine week period March 25, 2006, respectively.

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. Except for the matter set out below, 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.

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

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

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

Total rental expense for all operating leases was as follows:



|                        |  |                                     |       |                                     |   |                                 |  |                                        |        |  |   |       
|----------------------- |  | ----------------------------------- | ----- | ----------------------------------- | - | ------------------------------- |  | -------------------------------------- | ------ |  | - | ------
|                        |  | Thirteen weeks ended March 31, 2007 |       | Thirteen weeks ended March 25, 2006 |   | Fortyweeks ended March 31, 2007 |  | Thirty-nine weeks ended March 25, 2006
|Minimum rent expense    |  | $                                   | 5,235 |                                     | $ | 5,361                           |  | $                                      | 18,777 |  | $ | 18,823
|Contingent rent expense |  |                                     | 83    |                                     |   | 45                              |  |                                        | 355    |  |   | 183   
|                        |  |                                     |       |                                     |   |                                 |  |                                        |        |  |   |       
|Total rent expense      |  | $                                   | 5,318 |                                     | $ | 5,406                           |  | $                                      | 19,132 |  | $ | 19,006
|                        |  |                                     |       |                                     |   |                                 |  |                                        |        |  |   |       

On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior
management team who had received stock options under the 2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,197, or 7.5% of the portion of the proceeds from the sale of notes,



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



which were distributed on February 25, 2005, to the Companys equity sponsors as a return of capital. The amount of each award, as a percentage of
all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the award vested on June 17,
2006, and 5% will vest in the next twelve quarters. In each case, vesting occurs so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to
receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate net sales proceeds in such change of control plus certain other distributions received by the Companys equity
sponsors exceeds a certain level; (iii) the Company has available cash, or if applicable, non-cash consideration equal to the aggregate of all awards; and (iv) certain other conditions are met. Distributions in respect of the awards will
be payable in cash or, in some circumstances, the non-cash consideration received in the change of control either at the time of the change of control or, in some circumstances, at a later specified date. As of March 31, 2007, the Company has
concluded that it is not obligated to accrue a liability or recognize any expense for the forty weeks then ended.

In connection with the Acquisition, the
Company entered into an agreement with its shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under
this agreement. The fees are accrued to the extent that they are not paid in any such period. During the forty weeks ended March 31, 2007, and the thirty-nine weeks ended March 25, 2006, the Company paid $750 in each period in such
management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and administrative expenses  related party.

13. SEGMENT REPORTING

The Company has three reportable
segments, Harry and David Direct Marketing, Harry and David Stores and Jackson & Perkins. The Harry and David Direct Marketing segment markets premium gift-quality fruit, gourmet food products and gifts under the Harry and David®brand through the Harry and David catalog, Internet (harryanddavid.com), business-to-business and
consumer telemarketing operations. The Harry and David Stores segment sells similar products through retail locations (outlet stores, specialty stores and a Country Village store). The Jackson & Perkins segment markets horticultural
products and gifts through the Jackson & Perkins catalog, Internet (jacksonandperkins.com), consumer telemarketing and wholesale operations. These reportable segments are strategic business units that offer similar products. They are
managed separately because the business units utilize distinct marketing strategies. Performance of business units is evaluated considering revenue growth achieved and potential profitability, contribution to other units and capital investment
requirements. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting polices. Net intersegment sales originate in our manufacturing unit within the Other category, which
also includes the elimination of intercompany and intersegment transactions. Net intersegment sales were $27,582 and $26,794 for the thirteen-week periods ended March 31, 2007 and March 25, 2006, respectively. For the forty-week period
ended March 31, 2007 and the thirty-nine week period ended March 25, 2006, net intersegment sales were $161,243 and $155,863, respectively. Total assets in the Other category include corporate cash and cash equivalents, short-term
investments, the net book value of corporate facilities and related information systems, deferred income taxes, third-party and intercompany debt and other corporate long-lived assets, including manufacturing facilities. Business units not required
to be disclosed separately for segment reporting purposes are grouped in Other and include Harry and David wholesale, commercial sales of non-gift-quality fruit and business units that support the Companys operations, including
orchards, product supply, distribution, customer operations, facilities, information technology services and administrative and marketing support functions.



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Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)



|                                       |  |                                |         |   |                       |   |         |                      |  |   |         |   |  |       |         |   |  |   |         |  
|-------------------------------------- |  | ------------------------------ | ------- | - | --------------------- | - | ------- | -------------------- |  | - | ------- | - |  | ----- | ------- | - |  | - | ------- | -
|Dollars in thousands                   |  | Harry andDavid DirectMarketing |         |   | Harry andDavid Stores |   |         | Jackson &Perkins (1) |  |   | Other   |   |  | Total |        
|Thirteen weeks ended March 31, 2007    | 
|Net external sales                     |  | $                              | 47,630  |   |                       | $ | 20,488  |                      |  | $ | 24,858  |   |  | $     | 5,211   |   |  | $ | 98,187  |  
|Operating income                       |  |                                | (7,604  | ) |                       |   | (7,659  | )                    |  |   | (515    | ) |  |       | 124     |   |  |   | (15,654 | )
|Net interest expense                   |  |                                |        |   |                       |   |        |                      |  |   |        |   |  |       | 5,299   |   |  |   | 5,299   |  
|Loss before income taxes               |  |                                | (7,465  | ) |                       |   | (7,583  | )                    |  |   | (7,244  | ) |  |       | (5,797  | ) |  |   | (28,089 | )
|Net income (loss)                      |  |                                | (7,465  | ) |                       |   | (7,583  | )                    |  |   | (7,244  | ) |  |       | 5,456   |   |  |   | (16,836 | )
|Total assets                           |  |                                | 45,310  |   |                       |   | 32,667  |                      |  |   | 43,361  |   |  |       | 269,594 |   |  |   | 390,932 |  
|                                       |  |                                |         |   |                       |   |         |                      |  |   |         |   |  |       |         |   |  |   |         |  
|Thirteen weeks ended March 25, 2006    | 
|Net external sales                     |  | $                              | 45,468  |   |                       | $ | 21,449  |                      |  | $ | 23,497  |   |  | $     | 4,169   |   |  | $ | 94,583  |  
|Operating loss                         |  |                                | (12,791 | ) |                       |   | (7,654  | )                    |  |   | (4,392  | ) |  |       | (108    | ) |  |   | (24,945 | )
|Net interest expense (income)          |  |                                |        |   |                       |   |        |                      |  |   |        |   |  |       | 5,695   |   |  |   | 5,695   |  
|Loss before income taxes               |  |                                | (11,409 | ) |                       |   | (7,401  | )                    |  |   | (4,335  | ) |  |       | (5,781  | ) |  |   | (28,926 | )
|Net loss                               |  |                                | (9,902  | ) |                       |   | (4,879  | )                    |  |   | (2,259  | ) |  |       | (2,506  | ) |  |   | (19,546 | )
|Total assets                           |  |                                | 65,382  |   |                       |   | 37,189  |                      |  |   | 65,117  |   |  |       | 239,434 |   |  |   | 407,122 |  
|                                       |  |                                |         |   |                       |   |         |                      |  |   |         |   |  |       |         |   |  |   |         |  
|Forty weeks ended March 31, 2007       | 
|Net external sales                     |  | $                              | 345,849 |   |                       | $ | 117,471 |                      |  | $ | 55,125  |   |  | $     | 34,792  |   |  | $ | 553,237 |  
|Operating income (loss)                |  |                                | 68,898  |   |                       |   | 6,093   |                      |  |   | (3,643  | ) |  |       | 4,951   |   |  |   | 76,299  |  
|Net interest expense                   |  |                                |        |   |                       |   |        |                      |  |   | 1       |   |  |       | 19,991  |   |  |   | 19,992  |  
|Income (loss) before income taxes      |  |                                | 69,096  |   |                       |   | 6,182   |                      |  |   | (10,182 | ) |  |       | 186     |   |  |   | 65,282  |  
|Net income (loss)                      |  |                                | 69,096  |   |                       |   | 6,182   |                      |  |   | (10,182 | ) |  |       | (25,246 | ) |  |   | 39,850  |  
|Total assets                           |  |                                | 45,310  |   |                       |   | 32,667  |                      |  |   | 43,361  |   |  |       | 269,594 |   |  |   | 390,932 |  
|                                       |  |                                |         |   |                       |   |         |                      |  |   |         |   |  |       |         |   |  |   |         |  
|Thirty-nine weeks ended March 25, 2006 | 
|Net external sales                     |  | $                              | 329,419 |   |                       | $ | 109,677 |                      |  | $ | 55,197  |   |  | $     | 20,405  |   |  | $ | 514,698 |  
|Operating income (loss)                |  |                                | 43,977  |   |                       |   | 2,998   |                      |  |   | (8,786  | ) |  |       | 2,449   |   |  |   | 40,638  |  
|Net interest expense (income)          |  |                                |        |   |                       |   | (7      | )                    |  |   |        |   |  |       | 19,001  |   |  |   | 18,994  |  
|Income (loss) before income taxes      |  |                                | 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                           |  |                                | 65,382  |   |                       |   | 37,189  |                      |  |   | 65,117  |   |  |       | 239,434 |   |  |   | 407,122 |  
|                                       |  |                                |         |   |                       |   |         |                      |  |   |         |   |  |       |         |   |  |   |         |  



|(1) | As previously discussed in Note 5, the Company divested of its Jackson & Perkins business in the third quarter of fiscal 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------

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 8). The following consolidating financial statements present,
in separate columns, financial information for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry & David Operations Corp. (the subsidiary issuer) under
the equity method, (iii) Harry & David Holdings, Inc.s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the
information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of March 31, 2007, and June 24, 2006, and for the thirteen and forty weeks ended March 31, 2007, and the
thirteen and thirty-nine weeks ended 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.



18



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##### Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of March 31, 2007



|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|------------------------------------------ |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | -------------------------------- | ------- |  | ------------ | -------- | - |  | - | -------
|                                           |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  | EliminationsandReclassifications |         |  | Consolidated
|Assets                                     |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Current assets:                            |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Cash and cash equivalents                  |  | $                                          | 1,444   |   |                                | $ | 2,166    |                        |  | $                                | 37,970  |  | $            |         |   |  | $ | 41,580 
|Short-term investments                     |  |                                            |        |   |                                |   |         |                        |  |                                  | 37,363  |  |              |         |   |  |   | 37,363 
|Trade accounts receivable, net             |  |                                            |        |   |                                |   |         |                        |  |                                  | 5,328   |  |              |         |   |  |   | 5,328  
|Other receivables                          |  |                                            |        |   |                                |   | 2        |                        |  |                                  | 1,206   |  |              |         |   |  |   | 1,208  
|Inventories, net                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 47,204  |  |              |         |   |  |   | 47,204 
|Prepaid catalog expenses                   |  |                                            |        |   |                                |   |         |                        |  |                                  | 3,425   |  |              |         |   |  |   | 3,425  
|Income taxes receivable                    |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              |         |   |  |   |       
|Other current assets                       |  |                                            | 8       |   |                                |   | 2,339    |                        |  |                                  | 6,653   |  |              |         |   |  |   | 9,000  
|Current assets held for sale               |  |                                            |        |   |                                |   |         |                        |  |                                  | 41,455  |  |              |         |   |  |   | 41,455 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total current assets                       |  |                                            | 1,452   |   |                                |   | 4,507    |                        |  |                                  | 180,604 |  |              |         |   |  |   | 186,563
|Fixed assets, net                          |  |                                            |        |   |                                |   | 26,873   |                        |  |                                  | 131,278 |  |              |         |   |  |   | 158,151
|Intangibles, net                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 31,210  |  |              |         |   |  |   | 31,210 
|Investment in subsidiaries                 |  |                                            | 220,040 |   |                                |   | 211,859  |                        |  |                                  |        |  |              | (431,899 | ) |  |   |       
|Deferred financing costs, net              |  |                                            |        |   |                                |   | 12,803   |                        |  |                                  |        |  |              |         |   |  |   | 12,803 
|Deferred income taxes                      |  |                                            |        |   |                                |   |         |                        |  |                                  |        |  |              | 1,484    |   |  |   | 1,484  
|Other assets                               |  |                                            |        |   |                                |   | 526      |                        |  |                                  | 195     |  |              |         |   |  |   | 721    
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total assets                               |  | $                                          | 221,492 |   |                                | $ | 256,568  |                        |  | $                                | 343,287 |  | $            | (430,415 | ) |  | $ | 390,932
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Liabilities and stockholders equity       |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Current liabilities:                       |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Accounts payable                           |  | $                                          |        |   |                                | $ | 4,910    |                        |  | $                                | 10,091  |  | $            |         |   |  | $ | 15,001 
|Accrued payroll and benefits               |  |                                            |        |   |                                |   | 4,595    |                        |  |                                  | 9,100   |  |              |         |   |  |   | 13,695 
|Income taxes payable                       |  |                                            | 14      |   |                                |   |         |                        |  |                                  |        |  |              |         |   |  |   | 14     
|Deferred revenue                           |  |                                            |        |   |                                |   |         |                        |  |                                  | 22,100  |  |              |         |   |  |   | 22,100 
|Deferred income taxes                      |  |                                            | 43,485  |   |                                |   |         |                        |  |                                  |        |  |              |         |   |  |   | 43,485 
|Accrued interest                           |  |                                            |        |   |                                |   | 1,941    |                        |  |                                  |        |  |              |         |   |  |   | 1,941  
|Other accrued liabilities                  |  |                                            |        |   |                                |   | 432      |                        |  |                                  | 7,115   |  |              |         |   |  |   | 7,547  
|Capital lease obligation                   |  |                                            |        |   |                                |   | 1,571    |                        |  |                                  |        |  |              |         |   |  |   | 1,571  
|Current liabilities held for sale          |  |                                            |        |   |                                |   |         |                        |  |                                  | 8,228   |  |              |         |   |  |   | 8,228  
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total current liabilities                  |  |                                            | 43,499  |   |                                |   | 13,449   |                        |  |                                  | 56,634  |  |              |         |   |  |   | 113,582
|Long-term debt                             |  |                                            |        |   |                                |   | 245,000  |                        |  |                                  |        |  |              |         |   |  |   | 245,000
|Accrued pension liability                  |  |                                            |        |   |                                |   |         |                        |  |                                  | 18,128  |  |              |         |   |  |   | 18,128 
|Deferred income taxes                      |  |                                            | (1,484  | ) |                                |   |         |                        |  |                                  |        |  |              | 1,484    |   |  |   |       
|Intercompany debt                          |  |                                            | 168,658 |   |                                |   | (221,922 | )                      |  |                                  | 53,264  |  |              |         |   |  |   |       
|Other long-term liabilities                |  |                                            |        |   |                                |   | 1        |                        |  |                                  | 3,402   |  |              |         |   |  |   | 3,403  
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total liabilities                          |  |                                            | 210,673 |   |                                |   | 36,528   |                        |  |                                  | 131,428 |  |              | 1,484    |   |  |   | 380,113
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Stockholders equity:                      |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Common stock                               |  |                                            | 10      |   |                                |   | 1        |                        |  |                                  | 100     |  |              | (101     | ) |  |   | 10     
|Additional paid-in capital                 |  |                                            | 5,373   |   |                                |   | 222,422  |                        |  |                                  | 105,519 |  |              | (327,941 | ) |  |   | 5,373  
|Retained earnings (accumulated deficit)    |  |                                            | 5,436   |   |                                |   | (2,383   | )                      |  |                                  | 106,240 |  |              | (103,857 | ) |  |   | 5,436  
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total stockholders equity                 |  |                                            | 10,819  |   |                                |   | 220,040  |                        |  |                                  | 211,859 |  |              | (431,899 | ) |  |   | 10,819 
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                                          | 221,492 |   |                                | $ | 256,568  |                        |  | $                                | 343,287 |  | $            | (430,415 | ) |  | $ | 390,932
|                                           |  |                                            |         |   |                                |   |          |                        |  |                                  |         |  |              |          |   |  |   |        



19



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##### Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet

As of June 24, 2006



|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|---------------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | -------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                     |  | Harry & David Holdings, Inc. (Parent-Only)(1) |         |   | Harry & David Operations Corp.(1) |   |          | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(1) |   |  | Consolidated |         
|Assets                                               |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Current assets:                                      |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Cash and cash equivalents                            |  | $                                             | 463     |   |                                   | $ | 2,262    |                        |  | $ | 15,912                               |   |  | $            |         |   |  | $ | 18,637  |  
|Trade accounts receivable, net                       |  |                                               |        |   |                                   |   |         |                        |  |   | 8,926                                |   |  |              |         |   |  |   | 8,926   |  
|Other receivables                                    |  |                                               |        |   |                                   |   | 358      |                        |  |   | 2,701                                |   |  |              |         |   |  |   | 3,059   |  
|Inventories, net                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 74,117                               |   |  |              |         |   |  |   | 74,117  |  
|Prepaid catalog expenses                             |  |                                               |        |   |                                   |   |         |                        |  |   | 3,066                                |   |  |              |         |   |  |   | 3,066   |  
|Income taxes receivable                              |  |                                               | 259     |   |                                   |   |         |                        |  |   | 297                                  |   |  |              |         |   |  |   | 556     |  
|Other current assets                                 |  |                                               |        |   |                                   |   | 2,317    |                        |  |   | 8,244                                |   |  |              |         |   |  |   | 10,561  |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total current assets                                 |  |                                               | 722     |   |                                   |   | 4,937    |                        |  |   | 113,263                              |   |  |              |         |   |  |   | 118,922 |  
|Fixed assets, net                                    |  |                                               |        |   |                                   |   | 24,522   |                        |  |   | 149,488                              |   |  |              |         |   |  |   | 174,010 |  
|Intangibles, net                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 32,657                               |   |  |              |         |   |  |   | 32,657  |  
|Investment in subsidiaries                           |  |                                               | 153,778 |   |                                   |   | 124,429  |                        |  |   |                                     |   |  |              | (278,207 | ) |  |   |        |  
|Deferred financing costs, net                        |  |                                               |        |   |                                   |   | 14,813   |                        |  |   |                                     |   |  |              |         |   |  |   | 14,813  |  
|Deferred income taxes                                |  |                                               |        |   |                                   |   |         |                        |  |   |                                     |   |  |              | 9,293    |   |  |   | 9,293   |  
|Other assets                                         |  |                                               |        |   |                                   |   | 290      |                        |  |   | 198                                  |   |  |              |         |   |  |   | 488     |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total assets                                         |  | $                                             | 154,500 |   |                                   | $ | 168,991  |                        |  | $ | 295,606                              |   |  | $            | (268,914 | ) |  | $ | 350,183 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Liabilities and stockholders equity (deficit)       |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Current liabilities:                                 |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Accounts payable                                     |  | $                                             |        |   |                                   | $ | 2,316    |                        |  | $ | 18,974                               |   |  | $            |         |   |  | $ | 21,290  |  
|Accrued payroll and benefits                         |  |                                               |        |   |                                   |   | 3,524    |                        |  |   | 11,371                               |   |  |              |         |   |  |   | 14,895  |  
|Deferred revenue                                     |  |                                               |        |   |                                   |   |         |                        |  |   | 17,188                               |   |  |              |         |   |  |   | 17,188  |  
|Deferred income taxes                                |  |                                               | 14      |   |                                   |   | (7,519   | )                      |  |   | 33,947                               |   |  |              |         |   |  |   | 26,442  |  
|Accrued interest                                     |  |                                               |        |   |                                   |   | 5,604    |                        |  |   |                                     |   |  |              |         |   |  |   | 5,604   |  
|Other accrued liabilities                            |  |                                               |        |   |                                   |   | 921      |                        |  |   | 10,553                               |   |  |              |         |   |  |   | 11,474  |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total current liabilities                            |  |                                               | 14      |   |                                   |   | 4,846    |                        |  |   | 92,033                               |   |  |              |         |   |  |   | 96,893  |  
|Long-term debt                                       |  |                                               |        |   |                                   |   | 245,000  |                        |  |   |                                     |   |  |              |         |   |  |   | 245,000 |  
|Accrued pension liability                            |  |                                               |        |   |                                   |   |         |                        |  |   | 35,621                               |   |  |              |         |   |  |   | 35,621  |  
|Deferred income taxes                                |  |                                               | (196    | ) |                                   |   | (3,648   | )                      |  |   | (5,449                               | ) |  |              | 9,293    |   |  |   |        |  
|Intercompany debt                                    |  |                                               | 185,132 |   |                                   |   | (230,985 | )                      |  |   | 45,853                               |   |  |              |         |   |  |   |        |  
|Other long-term liabilities                          |  |                                               |        |   |                                   |   |         |                        |  |   | 3,119                                |   |  |              |         |   |  |   | 3,119   |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total liabilities                                    |  |                                               | 184,950 |   |                                   |   | 15,213   |                        |  |   | 171,177                              |   |  |              | 9,293    |   |  |   | 380,633 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Stockholders equity (deficit):                      |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Common stock                                         |  |                                               | 10      |   |                                   |   | 1        |                        |  |   | 100                                  |   |  |              | (101     | ) |  |   | 10      |  
|Additional paid-in capital                           |  |                                               | 3,954   |   |                                   |   | 221,440  |                        |  |   | 105,519                              |   |  |              | (326,959 | ) |  |   | 3,954   |  
|Retained earnings (accumulated deficit)              |  |                                               | (34,414 | ) |                                   |   | (67,663  | )                      |  |   | 18,810                               |   |  |              | 48,853   |   |  |   | (34,414 | )
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total stockholders equity (deficit)                 |  |                                               | (30,450 | ) |                                   |   | 153,778  |                        |  |   | 124,429                              |   |  |              | (278,207 | ) |  |   | (30,450 | )
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Total liabilities and stockholders equity (deficit) |  | $                                             | 154,500 |   |                                   | $ | 168,991  |                        |  | $ | 295,606                              |   |  | $            | (268,914 | ) |  | $ | 350,183 |  
|                                                     |  |                                               |         |   |                                   |   |          |                        |  |   |                                      |   |  |              |          |   |  |   |         |  



|(1) | Certain amounts related to the investment in subsidiaries, additional paid-in capital and retained earnings (accumulated deficit) captions have been revised to properly reflect the
application of the equity method, as required by Securities and Exchange Commission Rule 3-10 of Regulation S-X.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 31, 2007



|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | ------- | ---------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - |  | - | ------- | -
|                                            |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |        
|Net sales                                   |  | $                                          |        |   |                                | $ |        |                        |  | $ | 138,112                           |   |  | $            | (39,925 | ) |  | $ | 98,187  |  
|Cost of goods sold                          |  |                                            |        |   |                                |   |        |                        |  |   | 102,059                           |   |  |              | (39,925 | ) |  |   | 62,134  |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Gross profit                                |  |                                            |        |   |                                |   |        |                        |  |   | 36,053                            |   |  |              |        |   |  |   | 36,053  |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Selling, general and administrative         |  |                                            |        |   |                                |   |        |                        |  |   | 51,707                            |   |  |              |        |   |  |   | 51,707  |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|                                            |  |                                            |        |   |                                |   |        |                        |  |   | 51,707                            |   |  |              |        |   |  |   | 51,707  |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Operating loss                              |  |                                            |        |   |                                |   |        |                        |  |   | (15,654                           | ) |  |              |        |   |  |   | (15,654 | )
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Other (income) expense:                     |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Interest income                             |  |                                            |        |   |                                |   |        |                        |  |   | (1,205                            | ) |  |              |        |   |  |   | (1,205  | )
|Interest expense                            |  |                                            | (2      | ) |                                |   | 6,481   |                        |  |   | 25                                |   |  |              |        |   |  |   | 6,504   |  
|Loss on divestiture of business             |  |                                            |         |   |                                |   | 611     |                        |  |   | 6,795                             |   |  |              |         |   |  |   | 7,406   |  
|Other (income) expense                      |  |                                            |        |   |                                |   | 76      |                        |  |   | (346                              | ) |  |              |        |   |  |   | (270    | )
|Equity in loss of consolidated subsidiaries |  |                                            | 28,091  |   |                                |   | 20,923  |                        |  |   |                                  |   |  |              | (49,014 | ) |  |   |        |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|                                            |  |                                            | 28,089  |   |                                |   | 28,091  |                        |  |   | 5,269                             |   |  |              | (49,014 | ) |  |   | 12,435  |  
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Loss before income taxes                    |  |                                            | (28,089 | ) |                                |   | (28,091 | )                      |  |   | (20,923                           | ) |  |              | 49,014  |   |  |   | (28,089 | )
|Income tax benefit                          |  |                                            | (11,253 | ) |                                |   |        |                        |  |   |                                  |   |  |              |        |   |  |   | (11,253 | )
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  
|Net loss                                    |  | $                                          | (16,836 | ) |                                | $ | (28,091 | )                      |  | $ | (20,923                           | ) |  | $            | 49,014  |   |  | $ | (16,836 | )
|                                            |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |         |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 25, 2006



|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | ------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                            |  | Harry & David Holdings, Inc. (Parent-Only)(2) |         |   | Harry & David Operations Corp.(2) |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(2) |   |  | Consolidated |        
|Net sales                                   |  | $                                             |        |   |                                   | $ |        |                        |  | $ | 131,911                              |   |  | $            | (37,328 | ) |  | $ | 94,583  |  
|Cost of goods sold                          |  |                                               |        |   |                                   |   |        |                        |  |   | 109,773                              |   |  |              | (37,328 | ) |  |   | 72,445  |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Gross profit                                |  |                                               |        |   |                                   |   |        |                        |  |   | 22,138                               |   |  |              |        |   |  |   | 22,138  |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Selling, general and administrative         |  |                                               |        |   |                                   |   |        |                        |  |   | 47,083                               |   |  |              |        |   |  |   | 47,083  |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|                                            |  |                                               |        |   |                                   |   |        |                        |  |   | 47,083                               |   |  |              |        |   |  |   | 47,083  |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Operating loss                              |  |                                               |        |   |                                   |   |        |                        |  |   | (24,945                              | ) |  |              |        |   |  |   | (24,945 | )
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Other (income) expense:                     |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Interest income                             |  |                                               |        |   |                                   |   |        |                        |  |   | (1,027                               | ) |  |              |        |   |  |   | (1,027  | )
|Interest expense                            |  |                                               |        |   |                                   |   | 6,711   |                        |  |   | 11                                   |   |  |              |        |   |  |   | 6,722   |  
|Other income                                |  |                                               |        |   |                                   |   |        |                        |  |   | (1,714                               | ) |  |              |        |   |  |   | (1,714  | )
|Equity in loss of consolidated subsidiaries |  |                                               | 19,545  |   |                                   |   | 16,551  |                        |  |   |                                     |   |  |              | (36,096 | ) |  |   |        |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|                                            |  |                                               | 19,545  |   |                                   |   | 23,262  |                        |  |   | (2,730                               | ) |  |              | (36,096 | ) |  |   | 3,981   |  
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Loss before income taxes                    |  |                                               | (19,545 | ) |                                   |   | (23,262 | )                      |  |   | (22,215                              | ) |  |              | 36,096  |   |  |   | (28,926 | )
|Income tax provision (benefit)              |  |                                               | 1       |   |                                   |   | (3,717  | )                      |  |   | (5,664                               | ) |  |              |        |   |  |   | (9,380  | )
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  
|Net loss                                    |  | $                                             | (19,546 | ) |                                   | $ | (19,545 | )                      |  | $ | (16,551                              | ) |  | $            | 36,096  |   |  | $ | (19,546 | )
|                                            |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |         |   |  |   |         |  



|(2) | Amounts related to equity in loss of consolidated subsidiaries in the Condensed Consolidating Statement of Operations have been included as required by Securities and Exchange
Commission Rule 3-10 of Regulation S-X to properly reflect the application of the equity method.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



---

##### Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Operations

For the Forty Weeks Ended March 31, 2007



|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | ------- | ---------------------- |  | - | --------------------------------- | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications |   |  | Consolidated |         
|Net sales                                       |  | $                                          |        |   |                                | $ |        |                        |  | $ | 732,916                           |   |  | $            | (179,679 | ) |  | $ | 553,237 |  
|Cost of goods sold                              |  |                                            |        |   |                                |   |        |                        |  |   | 470,171                           |   |  |              | (179,679 | ) |  |   | 290,492 |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Gross profit                                    |  |                                            |        |   |                                |   |        |                        |  |   | 262,745                           |   |  |              |         |   |  |   | 262,745 |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                            |        |   |                                |   |        |                        |  |   | 186,446                           |   |  |              |         |   |  |   | 186,446 |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            |        |   |                                |   |        |                        |  |   | 186,446                           |   |  |              |         |   |  |   | 186,446 |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                            |        |   |                                |   |        |                        |  |   | 76,299                            |   |  |              |         |   |  |   | 76,299  |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Other (income) expense:                         |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                            |        |   |                                |   |        |                        |  |   | (1,642                            | ) |  |              |         |   |  |   | (1,642  | )
|Interest expense                                |  |                                            | (2      | ) |                                |   | 21,538  |                        |  |   | 98                                |   |  |              |         |   |  |   | 21,634  |  
|Pension curtailment gain                        |  |                                            |        |   |                                |   |        |                        |  |   | (15,844                           | ) |  |              |         |   |  |   | (15,844 | )
|Loss on divestiture of business                 |  |                                            |         |   |                                |   | 611     |                        |  |   | 6,795                             |   |  |              |          |   |  |   | 7,406   |  
|Other (income) expense                          |  |                                            |        |   |                                |   | 1       |                        |  |   | (538                              | ) |  |              |         |   |  |   | (537    | )
|Equity in earnings of consolidated subsidiaries |  |                                            | (65,280 | ) |                                |   | (87,430 | )                      |  |   |                                  |   |  |              | 152,710  |   |  |   |        |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|                                                |  |                                            | (65,282 | ) |                                |   | (65,280 | )                      |  |   | (11,131                           | ) |  |              | 152,710  |   |  |   | 11,017  |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Income before income taxes                      |  |                                            | 65,282  |   |                                |   | 65,280  |                        |  |   | 87,430                            |   |  |              | (152,710 | ) |  |   | 65,282  |  
|Income tax provision                            |  |                                            | 25,432  |   |                                |   |        |                        |  |   |                                  |   |  |              |         |   |  |   | 25,432  |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  
|Net income                                      |  | $                                          | 39,850  |   |                                | $ | 65,280  |                        |  | $ | 87,430                            |   |  | $            | (152,710 | ) |  | $ | 39,850  |  
|                                                |  |                                            |         |   |                                |   |         |                        |  |   |                                   |   |  |              |          |   |  |   |         |  

Condensed Consolidating Statement of Operations

For the Thirty-nine Weeks Ended March 25, 2006



|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|----------------------------------------------- |  | --------------------------------------------- | ------- | - | --------------------------------- | - | ------- | ---------------------- |  | - | ------------------------------------ | - |  | ------------ | -------- | - |  | - | ------- | -
|                                                |  | Harry & David Holdings, Inc. (Parent-Only)(2) |         |   | Harry & David Operations Corp.(2) |   |         | Guarantor Subsidiaries |  |   | Eliminations andReclassifications(2) |   |  | Consolidated |         
|Net sales                                       |  | $                                             |        |   |                                   | $ |        |                        |  | $ | 684,740                              |   |  | $            | (170,042 | ) |  | $ | 514,698 |  
|Cost of goods sold                              |  |                                               |        |   |                                   |   |        |                        |  |   | 470,454                              |   |  |              | (170,042 | ) |  |   | 300,412 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Gross profit                                    |  |                                               |        |   |                                   |   |        |                        |  |   | 214,286                              |   |  |              |         |   |  |   | 214,286 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Selling, general and administrative             |  |                                               |        |   |                                   |   |        |                        |  |   | 173,648                              |   |  |              |         |   |  |   | 173,648 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               |        |   |                                   |   |        |                        |  |   | 173,648                              |   |  |              |         |   |  |   | 173,648 |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Operating income                                |  |                                               |        |   |                                   |   |        |                        |  |   | 40,638                               |   |  |              |         |   |  |   | 40,638  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Other (income) expense:                         |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Interest income                                 |  |                                               | (12     | ) |                                   |   |        |                        |  |   | (1,273                               | ) |  |              |         |   |  |   | (1,285  | )
|Interest expense                                |  |                                               |        |   |                                   |   | 20,263  |                        |  |   | 16                                   |   |  |              |         |   |  |   | 20,279  |  
|Other expense                                   |  |                                               |        |   |                                   |   | 2,180   |                        |  |   | (1,714                               | ) |  |              |         |   |  |   | 466     |  
|Equity in earnings of consolidated subsidiaries |  |                                               | (12,238 | ) |                                   |   | (25,214 | )                      |  |   |                                     |   |  |              | 37,452   |   |  |   |        |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|                                                |  |                                               | (12,250 | ) |                                   |   | (2,771  | )                      |  |   | (2,971                               | ) |  |              | 37,452   |   |  |   | 19,460  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Income before income taxes                      |  |                                               | 12,250  |   |                                   |   | 2,771   |                        |  |   | 43,609                               |   |  |              | (37,452  | ) |  |   | 21,178  |  
|Income tax provision (benefit)                  |  |                                               | 5       |   |                                   |   | (9,467  | )                      |  |   | 18,395                               |   |  |              |         |   |  |   | 8,933   |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  
|Net income                                      |  | $                                             | 12,245  |   |                                   | $ | 12,238  |                        |  | $ | 25,214                               |   |  | $            | (37,452  | ) |  | $ | 12,245  |  
|                                                |  |                                               |         |   |                                   |   |         |                        |  |   |                                      |   |  |              |          |   |  |   |         |  



|(2) | Amounts related to equity in earnings of consolidated subsidiaries in the Condensed Consolidating Statement of Operations have been included as required by Securities and Exchange
Commission Rule 3-10 of Regulation S-X to properly reflect the application of the equity method.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



---

##### Table of Contents

14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Cash Flows

For the Forty Weeks Ended March 31, 2007



|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|--------------------------------------------------- |  | ------------------------------------------ | ------- | - | ------------------------------ | - | -------- | ---------------------- |  | - | -------------------------------- | - | ------------ | - | - |  | - | -------- | -
|                                                    |  | Harry & David Holdings, Inc. (Parent-Only) |         |   | Harry & David Operations Corp. |   |          | Guarantor Subsidiaries |  |   | EliminationsandReclassifications |   | Consolidated |  
|Operating activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) operating activities |  | $                                          | 17,455  |   |                                | $ | (4,406   | )                      |  | $ | 58,151                           |   |              | $ |  |  | $ | 71,200   |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Investing activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                            |        |   |                                |   | (5,168   | )                      |  |   | (6,399                           | ) |              |   |  |  |   | (11,567  | )
|Proceeds from the sale of fixed assets              |  |                                            |        |   |                                |   | 6        |                        |  |   | 70                               |   |              |   |  |  |   | 76       |  
|Purchases of short-term investments                 |  |                                            |        |   |                                |   |         |                        |  |   | (37,175                          | ) |              |   |  |  |   | (37,175  | )
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash used in investing activities               |  |                                            |        |   |                                |   | (5,162   | )                      |  |   | (43,504                          | ) |              |   |  |  |   | (48,666  | )
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Financing activities                                |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Borrowings of revolving debt                        |  |                                            |        |   |                                |   | 108,500  |                        |  |   |                                 |   |              |   |  |  |   | 108,500  |  
|Repayments of revolving debt                        |  |                                            |        |   |                                |   | (108,500 | )                      |  |   |                                 |   |              |   |  |  |   | (108,500 | )
|Repayments of capital lease obligation              |  |                                            |        |   |                                |   | (573     | )                      |  |   |                                 |   |              |   |  |  |   | (573     | )
|Proceeds from exercise of stock options             |  |                                            | 982     |   |                                |   |         |                        |  |   |                                 |   |              |   |  |  |   | 982      |  
|Net (payments) receipts on intercompany debt        |  |                                            | (17,456 | ) |                                |   | 10,045   |                        |  |   | 7,411                            |   |              |   |  |  |   |         |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Net cash provided by (used in) financing activities |  |                                            | (16,474 | ) |                                |   | 9,472    |                        |  |   | 7,411                            |   |              |   |  |  |   | 409      |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Increase (decrease) in cash and cash equivalents    |  |                                            | 981     |   |                                |   | (96      | )                      |  |   | 22,058                           |   |              |   |  |  |   | 22,943   |  
|Cash and cash equivalents, beginning of period      |  |                                            | 463     |   |                                |   | 2,262    |                        |  |   | 15,912                           |   |              |   |  |  |   | 18,637   |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                          | 1,444   |   |                                | $ | 2,166    |                        |  | $ | 37,970                           |   |              | $ |  |  | $ | 41,580   |  
|                                                    |  |                                            |         |   |                                |   |          |                        |  |   |                                  |   |              |   |   |  |   |          |  

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 cash provided by (used in) operating activities |  |                                            | (161   | ) |                                |   | 831      |                        |  |   | 43,156                           |   |  |              | (77 | ) |  |   | 43,749   |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Investing activities                                |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Acquisition of fixed assets                         |  |                                            |       |   |                                |   | (4,918   | )                      |  |   | (5,244                           | ) |  |              | 77  |   |  |   | (10,085  | )
|Proceeds from the sale of fixed assets              |  |                                            |       |   |                                |   |         |                        |  |   | 24                               |   |  |              |    |   |  |   | 24       |  
|Transfer of fixed assets                            |  |                                            |       |   |                                |   | (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    |  
|Dividend                                            |  |                                            | (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 | ) |                                |   | (5,847   | )                      |  |   | 36,270                           |   |  |              |    |   |  |   | 29,064   |  
|Cash and cash equivalents, beginning of period      |  |                                            | 1,405  |   |                                |   | 8,554    |                        |  |   | 9,718                            |   |  |              |    |   |  |   | 19,677   |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  
|Cash and cash equivalents, end of period            |  | $                                          | 46     |   |                                | $ | 2,707    |                        |  | $ | 45,988                           |   |  | $            |    |   |  | $ | 48,741   |  
|                                                    |  |                                            |        |   |                                |   |          |                        |  |   |                                  |   |  |              |     |   |  |   |          |  



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

FORWARD-LOOKING STATEMENTS

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

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

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

Unless otherwise indicated, as used in this report, the terms we, our, and
us refer to Harry and David Holdings, Inc. and its consolidated subsidiaries.

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

Divestiture of business

On April 10, 2007, we completed the sale of our Jackson & Perkins business, including the direct
marketing and wholesale businesses, the Jackson & Perkins®brand, catalog,
e-commerce website and associated inventory, including premium rose plants, horticultural products and home and garden décor, as well as its direct marketing and wholesale customer lists and relationships. The sale price was $21 million,
consisting of $17 million cash and approximately $4 million comprised of a deferred note receivable, product credits and deferred inventory payments and is subject to a post-closing working capital adjustment. In connection with the sale, we entered
into an agreement to provide certain transitional services, including agricultural and horticultural services through the end of June 2007, certain wholesale operational services during 2007, and



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certain direct marketing operational and rose fulfillment services through June 2008 (collectively, The Transitional Services Agreement). In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,the services rendered pursuant to the Transitional Services Agreement are considered continuing involvement and as such, the results of
operations of the divested entities are included in continuing operations. The assets and liabilities that were sold are classified as Assets Held for Sale and Liabilities Related to Assets Held for Sale in the consolidated balance sheet. The assets
held for sale were written down to fair value, resulting in a loss on divestiture of $7.4 million included in Other (income) expense within the results of continuing operations in the consolidated income statement for the thirteen and forty
week-periods ended March 31, 2007.

On April 27, 2007, we completed the sale of approximately 3,200 acres of land in Wasco, California and the
associated buildings and equipment, for the sale price of $29,000 cash. The land assets were used primarily to support the rose growing operations of Jackson & Perkins and are classified within Assets Held for Sale at March 31, 2007.
During the fourth quarter of 2007, we recognized an estimated gain on the land sale of $11.5 million and expect to recognize an estimated gain of $2.9 million related to the sale of Jackson & Perkins Wholesale.

For further information regarding the divestiture of the Jackson & Perkins business, refer to Note 5 to our Condensed Consolidated Financial Statements within
Part I of this Form 10-Q.

MATTERS AFFECTING COMPARABILITY

We report our financial statements using a 52/53-week year with our quarters ending on the last Saturday of September, December, March and June. Fiscal year 2007, beginning June 25, 2006 and ending June 30, 2007, includes 53 weeks
versus 52 weeks in fiscal year 2006, from June 26, 2005 through June 24, 2006. Therefore, the fiscal 2007 year-to-date period includes 40 weeks versus 39 weeks for fiscal 2006 year-to-date period. Accordingly, results for these periods may
not be comparable.



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RESULTS OF OPERATIONS

The following tables summarize certain information relating to our operating results that has been derived from our unaudited condensed consolidated financial statements for the thirteen weeks ended March 31, 2007 and March 25,
2006 as well the forty weeks ended March 31, 2007 and the thirty-nine weeks ended March 25, 2006. The amounts in the following table are in thousands.



|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|--------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | -------------------------------- |  | - | -------------------------------------- | - |  | - | ------- | -
|                                                    |  | Thirteen weeks ended March 31, 2007 |         |   | Thirteen weeks ended March 25, 2006 |   |         | Forty weeks ended March 31, 2007 |  |   | Thirty-nine weeks ended March 25, 2006 |  
|Net sales                                           |  | $                                   | 98,187  |   |                                     | $ | 94,583  |                                  |  | $ | 553,237                                |   |  | $ | 514,698 |  
|Cost of goods sold                                  |  |                                     | 62,134  |   |                                     |   | 72,445  |                                  |  |   | 290,492                                |   |  |   | 300,412 |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Gross profit                                        |  |                                     | 36,053  |   |                                     |   | 22,138  |                                  |  |   | 262,745                                |   |  |   | 214,286 |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Selling, general and administrative                 |  |                                     | 51,457  |   |                                     |   | 46,833  |                                  |  |   | 185,696                                |   |  |   | 172,898 |  
|Selling, general and administrative  related party |  |                                     | 250     |   |                                     |   | 250     |                                  |  |   | 750                                    |   |  |   | 750     |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|                                                    |  |                                     | 51,707  |   |                                     |   | 47,083  |                                  |  |   | 186,446                                |   |  |   | 173,648 |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Operating income (loss)                             |  |                                     | (15,654 | ) |                                     |   | (24,945 | )                                |  |   | 76,299                                 |   |  |   | 40,638  |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Other (income) expenses:                            |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Interest income                                     |  |                                     | (1,205  | ) |                                     |   | (1,027  | )                                |  |   | (1,642                                 | ) |  |   | (1,285  | )
|Interest expense                                    |  |                                     | 6,504   |   |                                     |   | 6,722   |                                  |  |   | 21,634                                 |   |  |   | 20,279  |  
|Pension curtailment gain                            |  |                                     |        |   |                                     |   |        |                                  |  |   | (15,844                                | ) |  |   |        |  
|Loss on divestiture of business                     |  |                                     | 7,406   |   |                                     |   |        |                                  |  |   | 7,406                                  |   |  |   |        |  
|Other (income) expense                              |  |                                     | (270    | ) |                                     |   | (1,714  | )                                |  |   | (537                                   | ) |  |   | 466     |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|                                                    |  |                                     | 12,435  |   |                                     |   | 3,981   |                                  |  |   | 11,017                                 |   |  |   | 19,460  |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Income (loss) before income taxes                   |  |                                     | (28,089 | ) |                                     |   | (28,926 | )                                |  |   | 65,282                                 |   |  |   | 21,178  |  
|Income tax provision (benefit)                      |  |                                     | (11,253 | ) |                                     |   | (9,380  | )                                |  |   | 25,432                                 |   |  |   | 8,933   |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Net income (loss)                                   |  | $                                   | (16,836 | ) |                                     | $ | (19,546 | )                                |  | $ | 39,850                                 |   |  | $ | 12,245  |  
|                                                    |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  

NET SALES

The following table summarizes our consolidated net sales and net sales by segment for the periods indicated (dollars in thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in the
narrative may not sum to the amounts presented in the table.



|                                 |  |                      |        |                 |                      |   |               |                   |                 |  |                        |               |  |                 |         |  |               |   |                 |   |         |  |       |  
|-------------------------------- |  | -------------------- | ------ | --------------- | -------------------- | - | ------------- | ----------------- | --------------- |  | ---------------------- | ------------- |  | --------------- | ------- |  | ------------- | - | --------------- | - | ------- |  | ----- | -
|                                 |  | Thirteen Weeks Ended |        |                 | Thirteen Weeks Ended |   |               | Forty Weeks Ended |                 |  | Thirty-nine WeeksEnded |              
|                                 |  | March 31,2007        |        | Percentof Total |                      |   | March 25,2006 |                   | Percentof Total |  |                        | March 31,2007 |  | Percentof Total |         |  | March 25,2006 |   | Percentof Total |  
|Harry and David Direct Marketing |  | $                    | 47,630 |                 | 48.5                 | % |               | $                 | 45,468          |  | 48.1                   | %             |  | $               | 345,849 |  | 62.5          | % |                 | $ | 329,419 |  | 64.0  | %
|Harry and David Stores           |  |                      | 20,488 |                 | 20.9                 | % |               |                   | 21,449          |  | 22.7                   | %             |  |                 | 117,471 |  | 21.2          | % |                 |   | 109,677 |  | 21.3  | %
|Jackson & Perkins                |  |                      | 24,858 |                 | 25.3                 | % |               |                   | 23,497          |  | 24.8                   | %             |  |                 | 55,125  |  | 10.0          | % |                 |   | 55,197  |  | 10.7  | %
|Other                            |  |                      | 5,211  |                 | 5.3                  | % |               |                   | 4,169           |  | 4.4                    | %             |  |                 | 34,792  |  | 6.3           | % |                 |   | 20,405  |  | 4.0   | %
|                                 |  |                      |        |                 |                      |   |               |                   |                 |  |                        |               |  |                 |         |  |               |   |                 |   |         |  |       |  
|Total Net Sales                  |  | $                    | 98,187 |                 | 100.0                | % |               | $                 | 94,583          |  | 100.0                  | %             |  | $               | 553,237 |  | 100.0         | % |                 | $ | 514,698 |  | 100.0 | %
|                                 |  |                      |        |                 |                      |   |               |                   |                 |  |                        |               |  |                 |         |  |               |   |                 |   |         |  |       |  



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Consolidated net sales of $98.2 million for the thirteen-week period ended March 31, 2007 increased $3.6 million, or
3.8%, from $94.6 million in the thirteen-week period ended March 25, 2006. The increase was primarily driven by higher sales in our Harry and David Direct Marketing segment, the Jackson and Perkins Wholesale division within our
Jackson & Perkins segment and the Harry and David Wholesale division within our Other category, partially offset by decreased sales within our Harry and David Stores segment.

In our Harry and David Direct Marketing segment and the Jackson & Perkins Direct Marketing division, we received approximately 0.4 million telephone, mail, fax and Internet orders and shipped
approximately 1.5 million packages during the thirteen weeks ended March 31, 2007, which was slightly below the prior fiscal year period for both orders and shipped packages.

Consolidated net sales of $553.2 million for the forty-week period ended March 31, 2007, increased $38.5 million, or 7.5%, from $514.7 million in the thirty-nine week period ended March 25, 2006. Net sales
increased approximately $30.8 million, or 6.0%, from fiscal 2006 to fiscal 2007, normalized for a thirty-nine week period. The increase was primarily driven by increased sales within our Harry and David Direct Marketing segment, the Harry and David
wholesale division within our Other category and our Harry and David Stores segment. Our Harry and David Direct Marketing segment increase was driven by higher revenue from shipping and handling and higher realized retail prices per shipped package.
The retail pricing improvement was attributable to reduced product markdowns and reduced promotional activity and selected price increases in the current year fiscal period compared to the prior year fiscal period. The growth in the Harry and David
wholesale division was due to continued marketing efforts, which resulted in an increase in order volume from national retailers over the prior year. Harry and David Stores segment growth over the prior fiscal year was attributable to higher revenue
per sales transaction due to less promotional activity in the current fiscal year, price increases on selected items and increased customer traffic.

Harry and David Direct Marketing

Harry and David Direct Marketing segment net sales, which include catalog, Internet, business-to-business
and outbound telemarketing sales, as well as revenue from shipping and handling, increased $2.1 million, or 4.6%, to $47.6 million in the thirteen-week period ended March 31, 2007, from $45.5 million in the thirteen-week period ended
March 25, 2006. The increase was primarily due to lower promotional product markdowns and increased shipping and handling revenue, which resulted in higher retail prices on a per package basis. The sales increase was also partially due to the
fact that the Easter holiday occurred closer to the end of the third fiscal quarter in the current year than in the prior year.

Harry and David Direct
Marketing segment net sales increased $16.4 million, or 5.0%, to $345.8 million in the forty-week period ended March 31, 2007, from $329.4 million in the thirty-nine week period ended March 25, 2006. Net sales increased approximately $12.6
million, or 3.8% from fiscal 2006 to fiscal 2007, normalized for a thirty-nine week period. Despite shipping fewer packages in the current year, sales increased due to a combination of lower markdowns and discounts due to our planned reduction in
promotional activity, increased income from shipping and handling revenue, increased retail prices, and fewer product returns and allowances.

Harry and
David Stores

Harry and David Stores segment net sales decreased $0.9 million, or 4.2%, to $20.5 million in the thirteen-week period ended
March 31, 2007, from $21.4 million in the thirteen-week period ended March 25, 2006. The decrease was largely due to poor weather conditions in many of our larger markets, predominantly in the Northeast, resulting in decreased customer
traffic in the current fiscal quarter compared to the prior fiscal quarter, as well as our strategic decision not to continue discounted gift card promotions, partially offset by an increase in net sales per transaction.

Sales for comparable stores were down 5.9% for the thirteen-week period ended March 31, 2007, compared to the thirteen-week period ended March 25, 2006. After
adjusting for the shift in comparative weeks due to the 53 weeks in fiscal 2007 and the seasonal shift of business associated with the Easter holiday, sales for comparable stores were up 0.3% for the thirteen-week period ended March 31, 2007
compared to the thirteen-week period ending March 25, 2006. As adjusted, the quarter ending March 31, 2007 marked the 14th consecutive quarter of positive comparable store sales. A store becomes comparable in the first fiscal month after
it has been open for a full twelve fiscal months, at which point its results are included in comparable sales comparisons. When a stores square footage has been changed as a result of reconfiguration or relocation in the same mall or retail
complex, the store continues to be treated as a comparable store. We had 134 and 129 stores in operation as of March 31, 2007 and March 25, 2006, respectively.



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Harry and David Stores segment net sales increased $7.8 million, or 7.1%, to $117.5 million in the forty-week period
ended March 31, 2007, from $109.7 million in the thirty-nine week period ended March 25, 2006. Harry and David Stores net sales increased approximately $5.6 million, or 5.1%, from fiscal 2006 to fiscal 2007, normalized for a thirty-nine
week period. The increase was primarily due to improved second quarter performance attributable to selected price increases, reduced promotional markdowns and fewer product discounts, the combination of which resulted in higher revenue per sales
transaction. We also experienced higher customer traffic in the current year, which we believe was partially attributable to an overall positive customer response to new Harry and David merchandising, marketing and packaging efforts. In addition, we
believe a portion of the increase was due to the economic impact of hurricanes in the United States that negatively affected sales in first quarter of the prior year. The year-to-date increase in net sales was partially offset by the decrease in the
thirteen week period ended March 31, 2007 due to the factors discussed above.

Jackson & Perkins

Jackson & Perkins segment net sales increased $1.4 million, or 6.0%, to $24.9 million in the thirteen-week period ended March 31, 2007, from $23.5 million
in the thirteen-week period ended March 25, 2006. The increase was primarily due to increased sales in the Jackson and Perkins wholesale division.

Jackson & Perkins wholesale division net sales increased $1.6 million, or 10.1%, to $17.4 million in the thirteen-week period ended March 31, 2007, from $15.8 million in the thirteen-week period ended March 25, 2006. The
increase was primarily due to increased packaged rose sales.

Jackson & Perkins direct marketing division net sales, which include catalog,
Internet, business-to-business and outbound telemarketing sales, as well as revenue from shipping and handling, decreased approximately $0.1 million, or 1.4%, to $7.1 million in the thirteen-week period ended March 31, 2007, from $7.2 million
in the thirteen-week period ended March 25, 2006. The decrease was primarily due to reduced catalog circulation and reduced product assortment.

Jackson & Perkins segment net sales decreased $0.1 million, or 0.2%, to $55.1 million in the forty-week period ended March 31, 2007, from $55.2 million in the thirty-nine week period ended March 25, 2006. Net sales
decreased approximately $1.8 million, or 3.3%, from fiscal 2006 to fiscal 2007, normalized for a thirty-nine week period. Net sales decreased primarily due to the decrease in sales from the Jackson & Perkins direct marketing division,
partially offset by a sales increase in the Jackson & Perkins wholesale division.

Jackson & Perkins wholesale division net sales
increased $1.2 million, or 5.1%, to $24.7 million in the forty-week period ended March 31, 2007, from $23.5 million in the thirty-nine week period ended March 25, 2006. The increase was primarily driven by higher packaged rose sales volume
partially offset by lower royalty income in the current fiscal period.

Jackson & Perkins direct marketing division net sales decreased $1.1
million, or 3.7%, to $28.8 million in the forty-week period ended March 31, 2007, from $29.9 million in the thirty-nine week period ended March 25, 2006 The primary driver of this decrease was a page reduction in our catalogs which
reflected an overall strategy to reduce the number of less profitable products offered in our catalogs. The decrease was partially offset by improved revenue from shipping and handling.

Other

Other net sales increased $1.0 million, or 23.8%, to $5.2 million in the thirteen-week period ended
March 31, 2007, from $4.2 million in the thirteen-week period ended March 25, 2006. Other net sales, which primarily consist of wholesale sales, increased $14.4 million, or 70.6%, to $34.8 million in the forty-week
period ended March 31, 2007, from $20.4 million in the thirty-nine week period ended March 25, 2006. The fortieth week for Harry and David wholesale did not have a material impact on net sales as most our wholesale customers purchase in
advance of the holidays.

For the quarter ended and for year-to-date period ended March 31, 2007, the increase was due to increase sales volume in our
Harry and David wholesale division, which was driven by sales to national retailers, whose programs expanded to include more retail locations and a broader assortment of Harry and David ® merchandise as compared to the prior year.



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GROSS PROFIT

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

The following table summarizes our consolidated gross profit, gross profit by segment, and gross profit as a percentage of consolidated and segment net sales for the
periods indicated (dollars in thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in the narrative may not sum to the amounts presented in the table.



|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | ------------------ | -------------------- | - | ------------- | ----------------- | ------------------ |  | ---------------------- | ------------- |  | ------------------ | ------- |  | ------------- | - | ------------------ | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |                    | Thirteen Weeks Ended |   |               | Forty Weeks Ended |                    |  | Thirty-nine WeeksEnded |              
|                                 |  | March 31,2007        |        | Percentof NetSales |                      |   | March 25,2006 |                   | Percentof NetSales |  |                        | March 31,2007 |  | Percentof NetSales |         |  | March 25,2006 |   | Percentof NetSales |  
|Harry and David Direct Marketing |  | $                    | 19,752 |                    | 41.5                 | % |               | $                 | 11,271             |  | 24.8                   | %             |  | $                  | 178,413 |  | 51.6          | % |                    | $ | 145,124 |  | 44.1 | %
|Harry and David Stores           |  |                      | 8,855  |                    | 43.2                 | % |               |                   | 7,892              |  | 36.8                   | %             |  |                    | 59,311  |  | 50.5          | % |                    |   | 52,825  |  | 48.2 | %
|Jackson & Perkins                |  |                      | 6,584  |                    | 26.5                 | % |               |                   | 2,563              |  | 10.9                   | %             |  |                    | 17,283  |  | 31.4          | % |                    |   | 11,892  |  | 21.5 | %
|Other                            |  |                      | 862    |                    | 16.5                 | % |               |                   | 412                |  | 9.9                    | %             |  |                    | 7,738   |  | 22.2          | % |                    |   | 4,445   |  | 21.8 | %
|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  
|Total Gross Profit               |  | $                    | 36,053 |                    | 36.7                 | % |               | $                 | 22,138             |  | 23.4                   | %             |  | $                  | 262,745 |  | 47.5          | % |                    | $ | 214,286 |  | 41.6 | %
|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  

Consolidated gross profit increased $14.0 million, or 63.3%, to $36.1 million in the thirteen-week period ended
March 31, 2007, from $22.1 million in the thirteen-week period ended March 25, 2006. Consolidated gross profit as a percentage of consolidated net sales was 36.7% in the thirteen-week period ended March 31, 2007 and 23.4% in the
thirteen-week period ended March 25, 2006. The improvement was driven by fewer markdowns and promotional discounts, lower manufacturing and fulfillment costs, reduced inventory write-offs related to roses and hardgoods in Jackson & Perkins,
reduced delivery expense and the correction of an inventory error that was favorable to cost of goods versus the fiscal third quarter of 2006. For further discussion on the inventory correction see Note 3, in our condensed consolidated financial
statements elsewhere in this Form 10-Q.

Consolidated gross profit increased $48.4 million, or 22.6%, to $262.7 million in the forty-week period ended
March 31, 2007, from $214.3 million in the thirty-nine week period ended March 25, 2006. Excluding the fortieth week, which contributed $6.0 million of gross profit, consolidated gross profit increased approximately $42.4 million, or
19.8%, from fiscal 2006 to fiscal 2007, normalized for a thirty-nine week period. Consolidated gross profit as a percentage of consolidated net sales was 47.5% in the forty-week period ended March 31, 2007, and 41.6% in the thirty-nine week
period ended March 25, 2006. The rate improvement was driven by the previously described increase in net sales per package, combined with lower variable manufacturing costs per package and reduced delivery expenses. The reduction in delivery
expenses resulted from a favorable mix of lower cost delivery methods and reduced fuel surcharges. The lower variable products costs were a result of the success of our cost reduction initiatives implemented earlier in the year.

Harry and David Direct Marketing

Harry and David Direct Marketing
segment gross profit increased $8.5 million, or 75.2%, to $19.8 million in the thirteen-week period ended March 31, 2007, from $11.3 million in the thirteen-week period ended March 25, 2006. On a rate basis, gross profit improved to 41.5%
in the current fiscal period compared to 24.8% in the prior fiscal period. The factors for the increase were primarily the same as those described below for the forty-week period.

Harry and David Direct Marketing segment gross profit increased $33.3 million, or 22.9%, to $178.4 million in the forty-week period ended March 31, 2007, from $145.1 million in the thirty-nine week period ended
March 25, 2006. Excluding the fortieth week, which accounted for $4.3 million, gross profit increased $29.0 million, or 20.0%. Harry and David Direct Marketing segment gross profit as a percentage of segment net sales was 51.6% in the
forty-week period ended March 31, 2007, and 44.1% in the thirty-nine week period ended March 25, 2006. The rate improvement was driven by improved revenue from shipping and handling revenue, higher net retail sales per package as
previously described, and lower variable manufacturing costs per package. Also contributing to the rate increase were lower delivery expenses and the correction of an inventory error both as described above.



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Harry and David Stores

Harry and David Stores segment gross profit increased $1.0 million, or 12.7 %, to $8.9 million in the thirteen-week period ended March 31, 2007, from $7.9 million in the thirteen-week period ended March 25, 2006. Harry and
David Stores segment gross profit as a percentage of segment net sales was 43.2% in the thirteen-week period ended March 31, 2007, compared to 36.8% in the thirteen-week period ended March 25, 2006. Gross profit improved on both a dollar
and a rate basis despite the decrease in sales, primarily due to lower inventory markdowns and fewer discounted gift card promotions.

Harry and David
Stores segment gross profit increased $6.5 million, or 12.3%, to $59.3 million in the forty-week period ended March 31, 2007, from $52.8 million in the thirty-nine week period ended March 25, 2006. Excluding the fortieth week, which
accounted for $1.3 million, gross profit increased $5.2 million, or 9.8%. Harry and David Stores segment gross profit as a percentage of segment net sales was 50.5% in the forty-week period ended March 31, 2007, compared to 48.2% in the
thirty-nine week period ended March 25, 2006. The rate improvement was driven by higher net sales attributable to selected price increases, reduced product markdowns as well as lower variable manufacturing costs as previously described.

Jackson & Perkins

Jackson & Perkins
segment gross profit increased $4.0 million, or 153.8%, to $6.6 million in the thirteen-week period ended March 31, 2007, from $2.6 million in the thirteen-week period ended March 25, 2006. Jackson & Perkins segment gross profit
as a percentage of segment net sales was 26.5% in the thirteen-week period ended March 31, 2007, and 10.9% in the thirteen-week period ended March 25, 2006. The increase was driven by improved margins in both our Jackson & Perkins
direct marketing division and our Jackson & Perkins wholesale division.

Jackson & Perkins direct marketing division gross profit
increased $1.4 million, or 77.8%, to $3.2 million in the thirteen-week period ended March 31, 2007, from $1.8 million in the thirteen-week period ended March 25, 2006 despite the net sales decrease of $0.1 million. The increase was
primarily due to lower variable costs, reduced delivery costs per package, and lower inventory write-offs.

Jackson & Perkins wholesale division
gross profit increased $2.6 million, or 325.0%, to $3.4 million in the thirteen-week period ended March 31, 2007, from $0.8 million in the thirteen-week period ended March 25, 2006. The increase was attributable to higher packaged rose
sales and lower rose write-offs.

Jackson & Perkins segment gross profit increased $5.4 million, or 45.4%, to $17.3 million in the forty-week
period ended March 31, 2007, from $11.9 million in the thirty-nine week period ended March 25, 2006. Excluding the fortieth week, which accounted for $0.4 million, gross profit increased $5.0 million, or 42.0%. Jackson & Perkins
segment gross profit as a percentage of segment net sales was 31.4% in the forty-week period ended March 31, 2007, and 21.5% in the thirty-nine week period ended March 25, 2006. The increase was driven by improved margins in both our
Jackson & Perkins direct marketing division and our Jackson & Perkins wholesale division.

Jackson & Perkins direct marketing
division gross profit increased $3.0 million, or 29.7%, to $13.1 million in the forty-week period ended March 31, 2007, from $10.1 million in the thirty-nine week period ended March 25, 2006, despite the net sales decrease of $1.1 million.
The improvement was a result of the increase in sales, as previously described, lower delivery costs per package and lower inventory writedowns in the current period.

Jackson & Perkins wholesale division gross profit increased $2.3 million, or 121.1% to $4.2 million in the forty-week period ended March 31, 2007, from $1.9 million in the thirty-nine week period ended
March 25, 2006. The increase was attributable to higher net sales, lower inventory reserves and lower royalty income, which was partially offset by lower royalty expense in the forty-week period ended March 31, 2007.

Other

Other gross profit increased $0.5 million, or 125.0%, to $0.9
million in the thirteen-week period ended March 31, 2007, from $0.4 million in the thirteen-week period ended March 25, 2006. Other gross profit as a percentage of segment net sales was 16.5% in the thirteen-week period ended
March 31, 2007, and 9.9% in the thirteen-week period ended March 25, 2006.

Other gross profit increased $3.3 million, or 75.0%, to $7.7 million
in the forty-week period ended March 31, 2007, from $4.4 million in the thirty-nine week period ended March 25, 2006. The dollar increase was driven by increased Harry



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and David wholesale division sales to national retailers, whose programs expanded to include more retail locations and a broader assortment of Harry and
David merchandise. The fortieth week for Harry and David wholesale did not have a material impact on the gross profit as most of our wholesale customers purchase in advance of the holidays. Other category gross profit as a percentage of segment net
sales was 22.2% in the forty-week period ended March 31, 2007, and 21.8% in the thirty-nine week period ended March 25, 2006.

SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses consist of occupancy costs associated with our stores and
corporate facility, advertising, credit costs, call center expenses, depreciation and amortization for store leasehold improvements and fixtures, corporate facilities, Information Technology (IT) equipment and software, and corporate administrative
functions. Occupancy costs associated with the stores and corporate facility include rent, common area maintenance, utilities and other general expenses. Corporate administrative functions include the costs of executive administration, legal, human
resources, finance, insurance, information technology services and other general expenses. Corporate overhead allocations described below consist of various corporate overhead functions that are incurred by our Other category and allocated to the
three other reportable segments. Accordingly, the fluctuation drivers for consolidated SG&A are generally the same for each reportable segment unless otherwise indicated.

The following table summarizes our consolidated SG&A expenses, SG&A expenses by segment, and SG&A expenses as a percentage of consolidated and segment net sales for the periods indicated (dollars in
thousands). The dollar amounts within the narrative are rounded to millions; as such, certain rounded amounts in the narrative may not sum to the amounts presented in the table.



|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  
|-------------------------------- |  | -------------------- | ------ | ------------------ | -------------------- | - | ------------- | ----------------- | ------------------ |  | ---------------------- | ------------- |  | ------------------ | ------- |  | ------------- | - | ------------------ | - | ------- |  | ---- | -
|                                 |  | Thirteen Weeks Ended |        |                    | Thirteen Weeks Ended |   |               | Forty Weeks Ended |                    |  | Thirty-nine WeeksEnded |              
|                                 |  | March 31,2007        |        | Percentof NetSales |                      |   | March 25,2006 |                   | Percentof NetSales |  |                        | March 31,2007 |  | Percentof NetSales |         |  | March 25,2006 |   | Percentof NetSales |  
|Harry and David Direct Marketing |  | $                    | 27,356 |                    | 57.4                 | % |               | $                 | 24,062             |  | 52.9                   | %             |  | $                  | 109,515 |  | 31.7          | % |                    | $ | 101,148 |  | 30.7 | %
|Harry and David Stores           |  |                      | 16,514 |                    | 80.6                 | % |               |                   | 15,547             |  | 72.5                   | %             |  |                    | 53,218  |  | 45.3          | % |                    |   | 49,827  |  | 45.4 | %
|Jackson & Perkins                |  |                      | 7,099  |                    | 28.6                 | % |               |                   | 6,954              |  | 29.6                   | %             |  |                    | 20,926  |  | 38.0          | % |                    |   | 20,677  |  | 37.5 | %
|Other                            |  |                      | 738    |                    | 14.2                 | % |               |                   | 520                |  | 12.5                   | %             |  |                    | 2,787   |  | 8.0           | % |                    |   | 1,996   |  | 9.8  | %
|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  
|Total SG&A                       |  | $                    | 51,707 |                    | 52.7                 | % |               | $                 | 47,083             |  | 49.8                   | %             |  | $                  | 186,446 |  | 33.7          | % |                    | $ | 173,648 |  | 33.7 | %
|                                 |  |                      |        |                    |                      |   |               |                   |                    |  |                        |               |  |                    |         |  |               |   |                    |   |         |  |      |  

Consolidated SG&A expenses increased $4.6 million, or 9.8%, to $51.7 million in the thirteen-week period ended
March 31, 2007, compared to $47.1 million in the thirteen-week period ended March 25, 2006. The increase was primarily driven by higher performance-based incentive compensation accrual, increased advertising related to our Spring
advertising campaign, and to a lesser extent, increased depreciation and amortization. Consolidated SG&A expenses as a percentage of consolidated net sales were 52.7% in the thirteen-week period ended March 31, 2007, compared to 49.8% in
the thirteen-week period ended March 25, 2006.

Consolidated SG&A expenses increased $12.8 million, or 7.4%, to $186.4 million in the forty-week
period ended March 31, 2007, compared to $173.6 million in the thirty-nine week period ended March 25, 2006. The increase was primarily associated with a higher performance-based incentive compensation accrual resulting from the
achievement of certain financial goals, as well as an increase in consulting expenses related to the planned implementation of an Enterprise Resource Planning (ERP) software package. Consolidated SG&A expenses as a percentage of consolidated net
sales were 33.7% in both the forty-week period ended March 31, 2007 and the thirty-nine week period ended March 25, 2006.

Harry and David
Direct Marketing

Harry and David Direct Marketing segment SG&A expenses increased $3.3 million, or 13.7%, to $27.4 million in the thirteen-week
period ended March 31, 2007, compared to $24.1 million in the thirteen-week period ended March 25, 2006. The increase was primarily due to increased advertising and higher corporate overhead allocations in the current fiscal quarter. Harry
and David Direct Marketing segment SG&A expenses as a percentage of segment net sales were 57.4% in the thirteen-week period ended March 31, 2007, compared to 52.9% in the thirteen-week period ended March 25, 2006.



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Harry and David Direct Marketing segment SG&A expenses increased $8.4 million, or 8.3%, to $109.5 million in the
forty-week period ended March 31, 2007, compared to $101.1 million in the thirty-nine week period ended March 25, 2006. This increase was primarily a result of higher corporate overhead allocations in the current period, as mentioned
above. Excluding the fortieth week, SG&A expenses increased $6.2 million or 6.1%. Harry and David Direct Marketing segment SG&A expenses as a percentage of segment net sales were 31.7% in the forty-week period ended March 31, 2007,
compared to 30.7% in the thirty-nine week period ended March 25, 2006.

Harry and David Stores

Harry and David Stores segment SG&A expenses increased $1.0 million, or 6.5%, to $16.5 million in the thirteen-week period ended March 31, 2007, compared to
$15.5 million in the thirteen-week period ended March 25, 2006. The increase was primarily due to higher corporate overhead allocations, increased advertising associated with the Easter holiday promotions, and increased depreciation and
amortization. The increase was partially offset by decreased payroll and benefits and outside service costs. Harry and David Stores segment SG&A expenses as a percentage of consolidated net sales were 80.6% in the thirteen-week period ended
March 31, 2007, compared to 72.5% in the thirteen-week period ended and March 25, 2006.

Harry and David Stores segment SG&A expenses
increased $3.4 million, or 6.8%, to $53.2 million in the forty-week period ended March 31, 2007, compared to $49.8 million in the thirty-nine week period ended March 25, 2006. Excluding the fortieth week, SG&A increased approximately
$2.1 million as compared to the thirty-nine week period in the prior fiscal year. This increase was primarily due to higher corporate overhead allocations, increased payroll expenses due to headcount increases for salaried and hourly employees to
support our increased store count, and higher depreciation. Harry and David Stores segment SG&A expenses as a percentage of segment net sales were 45.3% in the forty-week period ended March 31, 2007, compared to 45.4% in the thirty-nine
week period ended March 25, 2006.

Jackson & Perkins

Jackson & Perkins segment SG&A expenses increased $0.1 million, or 1.4%, to $7.1 million in the thirteen-week period ended March 31, 2007, compared to $7.0 million in the thirteen-week period ended
March 25, 2006. The increase was primarily due to higher payroll expense in the wholesale division partially offset by reduced advertising in the marketing division. Jackson & Perkins segment SG&A expenses as a percentage of
consolidated net sales were 28.6% in the thirteen-week period ended March 31, 2007, compared to 29.6% in the thirteen-week period ended March 25, 2006.

Jackson & Perkins segment SG&A expenses increased $0.2 million, or 1.0%, to $20.9 million in the forty-week period ended March 31, 2007, compared to $20.7 million in the thirty-nine week period ended March 25, 2006.
Excluding the fortieth week, which contributed approximately $0.5 million of expense, SG&A expenses were $0.3 million lower compared to last year. The decrease was primarily due to reduced advertising expense of $1.4 million in the
Jackson & Perkins direct marketing division driven primarily by savings from reduced catalog circulation and pages in our catalogs. This decrease was partially offset by an increase of $0.7 million in the Jackson & Perkins
wholesale division due to increased payroll expenses and an increased bad debt reserve. Jackson & Perkins segment SG&A expenses as a percentage of segment net sales were 38.0% in the forty-week period ended March 31, 2007, compared
to 37.5% in the thirty-nine week period ended March 25, 2006.

Other

Other SG&A expenses increased $0.2 million, or 40.0%, to $0.7 million in the thirteen-week period ended March 31, 2007, compared to $0.5 million in the thirteen-week period ended March 25, 2006. The
increase was primarily driven by slight increases in advertising expenses and bad debt reserves. Other SG&A expenses as a percentage of consolidated net sales were 14.2% in the thirteen-week period ended March 31, 2007, compared to 12.5% in
the thirteen-week period ended March 25, 2006.

Other SG&A expenses increased $0.8 million, or 40.0%, to $2.8 million in the forty-week period
ended March 31, 2007, compared to $2.0 million in the thirty-nine week period ended March 25, 2006 The increase was driven by increased advertising and trade show expenses in the Harry and David wholesale division. The fortieth week in
Harry and David wholesale did not have a material effect on the period.

Other SG&A expenses as a percentage of net sales were 8.0% in the forty-week
period ended March 31, 2007, compared to 9.8% in the thirty-nine week period ended March 25, 2006.



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OTHER (INCOME) EXPENSE

Other (income) expense consists of interest and other non-operating expense (income) and is primarily recognized within our Other category, unless otherwise noted.

Other expense increased by $8.4 million, to $12.4 million in the thirteen-week period ended March 31, 2007, from $4.0 million in the thirteen-week period ended March 25, 2006. The other expense for the
thirteen weeks ended March 31, 2007, was primarily comprised of $6.5 million interest expense and the $7.4 million loss on the divestiture of our Jackson and Perkins business. The expense was partially offset by $1.2 million in interest income.
Other expense for the thirteen weeks ended March 25, 2006, was primarily comprised of interest expense of $6.7 million partially offset by $1.7 million of legal settlement income and $1.0 million in interest income. For further discussion of
the divestiture of business, see Note 5 to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

Other expense decreased $8.5
million, to $11.0 million in the forty-week period ended March 31, 2007, compared to $19.5 million in the thirty-nine week period ended March 25, 2006. The other expense for the forty weeks ended March 31, 2007 was primarily comprised
of $21.6 million interest expense and the $7.4 million loss on the divestiture of business noted in the above paragraph, partially offset by the recognition of a one-time curtailment gain of $15.8 million associated with the freeze of our qualified
and non-qualified pension plans effective June 25, 2006, and interest income of $1.6 million. The other expense for the prior fiscal period was primarily comprised of interest expense of $20.3 million partially offset by $1.3 million interest
income. For further discussion of the freeze of our pension, see Note 10 to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated annual tax rate,
adjusted to give effect to anticipated permanent differences. The effective tax rates for the third quarter of fiscal 2007 and fiscal 2006 were 40.1% and 32.4%, respectively.



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##### Table of Contents

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 March 31, 2007 |         |   | Thirteen weeks ended March 25, 2006 |   |         | Forty weeks ended March 31, 2007 |  |   | Thirty-nine weeks ended March 25, 2006 |  
|Net income (loss)                                      |  | $                                   | (16,836 | ) |                                     | $ | (19,546 | )                                |  | $ | 39,850                                 |   |  | $ | 12,245  |  
|Interest expense, net                                  |  |                                     | 5,299   |   |                                     |   | 5,695   |                                  |  |   | 19,992                                 |   |  |   | 18,994  |  
|Provision (benefit) for income taxes                   |  |                                     | (11,253 | ) |                                     |   | (9,380  | )                                |  |   | 25,432                                 |   |  |   | 8,933   |  
|Depreciation and amortization                          |  |                                     | 5,055   |   |                                     |   | 4,730   |                                  |  |   | 14,748                                 |   |  |   | 14,788  |  
|                                                       |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|EBITDA                                                 |  | $                                   | (17,735 | ) |                                     | $ | (18,501 | )                                |  | $ | 100,022                                |   |  | $ | 54,960  |  
|Interest expense, net                                  |  |                                     | (5,299  | ) |                                     |   | (5,695  | )                                |  |   | (19,992                                | ) |  |   | (18,994 | )
|Provision (benefit) for income taxes                   |  |                                     | 11,253  |   |                                     |   | 9,380   |                                  |  |   | (25,432                                | ) |  |   | (8,933  | )
|Stock option compensation expense                      |  |                                     | 128     |   |                                     |   | 113     |                                  |  |   | 437                                    |   |  |   | 339     |  
|Write-off of deferred IPO costs                        |  |                                     |        |   |                                     |   |        |                                  |  |   |                                       |   |  |   | 2,180   |  
|Loss on disposal of fixed assets                       |  |                                     | (3      | ) |                                     |   | 400     |                                  |  |   | 218                                    |   |  |   | 704     |  
|Loss on divestiture of business                        |  |                                     | 7,406   |   |                                     |   |        |                                  |  |   | 7,406                                  |   |  |   |        |  
|Realized and unrealized gain on short-term investments |  |                                     | (188    | ) |                                     |   |        |                                  |  |   | (188                                   | ) |  |   |        |  
|Deferred income taxes                                  |  |                                     | (11,452 | ) |                                     |   | (9,640  | )                                |  |   | 24,852                                 |   |  |   | 8,712   |  
|Pension curtailment gain                               |  |                                     |        |   |                                     |   |        |                                  |  |   | (15,844                                | ) |  |   |        |  
|Amortization of deferred financing costs               |  |                                     | 658     |   |                                     |   | 657     |                                  |  |   | 2,010                                  |   |  |   | 1,823   |  
|Changes in operating assets and liabilities            |  |                                     | (54,687 | ) |                                     |   | (62,026 | )                                |  |   | (2,289                                 | ) |  |   | 2,958   |  
|                                                       |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  
|Net cash provided by (used in) operating activities    |  | $                                   | (69,919 | ) |                                     | $ | (85,312 | )                                |  | $ | 71,200                                 |   |  | $ | 43,749  |  
|                                                       |  |                                     |         |   |                                     |   |         |                                  |  |   |                                        |   |  |   |         |  

In the thirteen-week period ended March 31, 2007, net loss and EBITDA included:



| |  |  | $0.4 million of consulting fees associated with the implementation of our ERP software project, other IT strategy projects and, to a lesser extent, employee
executive recruiting charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | $0.4 million of net proceeds received from a one-time legal settlement;
| | - |  | -----------------------------------------------------------------------



| |  |  | $1.9 million favorable adjustment due to the reconciliation of aged unmatched inventory receipts identified in the ERP conversion process; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $7.4 million of loss on divestiture of business.
| | - |  | ------------------------------------------------

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



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



| |  |  | $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 of net proceeds from an insurance settlement.
| | - |  | ----------------------------------------------------------

In the forty-week period ended March 31, 2007, net income and EBITDA included:



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



| |  |  | $3.3 million of consulting fees associated with the implementation of our ERP software project, other IT strategy projects and, to a lesser extent, employee
executive recruiting charges;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.0 million severance;
| | - |  | -----------------------



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



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



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



| |  |  | $0.4 million of net proceeds received from a one-time legal settlement;
| | - |  | -----------------------------------------------------------------------



| |  |  | $1.5 million favorable adjustment due to the reconciliation of aged unmatched inventory receipts identified in the ERP conversion process; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $7.4 million of loss on divestiture of business.
| | - |  | ------------------------------------------------

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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | $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 of 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. At March 31, 2007, our primary sources of liquidity were cash, cash equivalents and short-term investments of $78.9 million and unused borrowings under our revolving credit facility of $123.0 million to the extent of our
current available borrowing base. As of March 31, 2007, we had $2.0 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit facility are determined in accordance
with our asset-based debt limitation formula. At March 31, 2007 total available borrowings were approximately $14.5 million and we had no borrowings outstanding. See further discussion of our revolving credit facility below under
Borrowing Arrangements. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit facility starting in the first quarter of each fiscal year to finance operations leading up to the December holiday
selling season. Our available cash and borrowings are used to fund general operating expenses, inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season. Generally, cash
provided by operations peaks during the fourth calendar quarter (our second fiscal quarter) because of the holiday selling season (see Seasonality below).

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

Cash Flows Provided by Operating Activities

Cash provided by
operating activities totaled $71.2 million in the forty-week period ended March 31, 2007, compared to $43.7 million in the thirty-nine week period ended March 25, 2006. The $27.5 million increase in cash provided by operating activities
was primarily attributable to our improved operating results.

Cash Flows Used in Investment Activities

Cash used in investment activities totaled $48.7 million in the forty-week period ended March 31, 2007, compared to $10.1 million in the thirty-nine week period
ended March 25, 2006. Included in the usage were $37.2 million purchases of short-term investments and capital expenditures of $11.6 million, as compared to $10.1 for the prior fiscal period. Capital expenditures in the first forty weeks of
fiscal 2007 included investment in an ERP system (excluding assets acquired by capital lease), additional manufacturing capacity, new stores and a new transportation and fulfillment management system to support distribution, and infrastructure
spending for our seasonal call center, which was relocated within the city of Eugene.



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We currently expect our capital investments to be approximately $24.5 million for fiscal 2007 (which includes
approximately $2.1 million obtained through capital leases), based primarily on spending for the implementation of the ERP system, manufacturing improvements, new store openings, and systems modernization. However, our actual capital expenditures
for fiscal 2007 may be different than currently anticipated depending upon the size and nature of new business opportunities, actual cash flows generated by our operations, and the timing of new project spending.

Cash Flows Provided by Financing Activities

Cash provided by
financing activities totaled $0.4 million for the forty weeks ended March 31, 2007, compared to a usage of $4.6 million in the thirty-nine weeks ended March 25, 2006. The increase was primarily driven by payments in the prior year
related to deferred financing costs and a dividend, neither of which occurred in the current year.

Borrowing Arrangements

Revolving Credit Facility

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

As of March 31, 2007, we had $2.0 million in letters of credit outstanding under the revolving credit facility. The
maximum available borrowings under the Credit Agreement are determined in accordance with our asset-based debt limitation formula. Total available borrowing capacity at March 31, 2007 was approximately $14.5 million.

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

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

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

The revolving credit facility contains customary events of default, including, but not limited to, failure to pay principal, interest or fees, failure of any
representation or warranty to be true in all material respects when made or deemed made,



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defaults under other debt instruments, including under the indenture governing the notes, loss of liens on collateral, invalidity of guarantees and
commencement of a bankruptcy or similar proceeding by or on behalf of a credit party and judgments against a credit party.

At March 31, 2007, we were
in compliance with all of our covenants under the Credit Agreement.

Long-term Debt

In February 2005, Harry & David Operations Corp., our wholly-owned subsidiary, issued $70.0 million in Senior Floating Rate Notes due March 1, 2012, and
$175.0 million of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest
rate was set at 10.36% and 10.23% at March 31, 2007, and June 24, 2006, respectively. The $175.0 million of Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments.

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

The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, engaging
in asset dispositions or acquisitions, making investments, Harry & David Operations Corp. and its subsidiaries ability to pay dividends and other restricted payments and their ability to incur liens and transactions with affiliates.
See Note 8 to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

Harry & David Operations Corp. and its
subsidiaries ability to comply with these covenants may be affected by events beyond their control, such as those described under Risk Factors in our Annual Report on Form 10-K as updated in Part II, Item 1A, herein. If
Harry & David Operations Corp. and its subsidiaries does not remain in compliance with these covenants, they may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes could
accelerate all amounts outstanding to be immediately due and payable.

At March 31, 2007, we were in compliance with all of our covenants under the
indenture governing our Senior Notes.

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

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

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



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Seasonality

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

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

CRITICAL ACCOUNTING POLICIES

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, which establishes
guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior
accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are required to adopt SFAS No. 157 for our fiscal year ending June 28, 2008. We are currently evaluating the
potential effects of SFAS No. 157.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108,
Quantifying Financial Statement Misstatements (SAB 108). SAB 108 provides guidance on how cumulative errors in the balance sheet should be considered from a materiality perspective and corrected. SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in evaluating a current year misstatement SAB No. 108 is effective for fiscal years ending after November 15, 2006. We
do not expect the application of SAB 108 in the fourth quarter of fiscal 2007 to have a material effect on our consolidated financial statements.

In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88,
106, and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and
to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as
of the date of its year-end statement of financial position, with limited exceptions. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of the fiscal year ending after June 15, 2007. We are required to adopt SFAS No. 158 for our fiscal year ending June 30, 2007, and we are currently evaluating the impact that adoption will have on
our consolidated financial statements.



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In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS No. 109. The Interpretation stipulates recognition and measurement criteria, balance
sheet classification, interim period accounting and significantly expands disclosure provisions for uncertain tax positions taken or that are expected to be taken in a companys tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006, with early adoption permitted. We are required to adopt FIN 48 for our fiscal year ending June 28, 2008, and we are currently evaluating the impact that adoption will have on our consolidated financial statements.

In June 2006, the FASBs Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of EITF 06-3 includes sales, use, value added and certain excise taxes that are assessed by a
governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in
revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have an impact on our consolidated financial position, results
of operation or cash flows. We present sales taxes on a net basis.

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

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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

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

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

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



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



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



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



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



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

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

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

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

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



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



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



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



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



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



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

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



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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 31, 2007. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that, as of March 31, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure.

While we are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and
are therefore not required to make an assessment of the effectiveness of our internal controls over financial reporting, during the third quarter of fiscal 2007 we identified two matters, as described in Note 3 to our condensed consolidated
financial statements elsewhere in this Form 10-Q, which we deemed to be significant deficiencies as defined in Statement of Auditing Standard 112, related to our controls and procedures surrounding the closing of aged, unmatched inventory receipts
and cash reporting. We believe we have taken steps to strengthen controls in both of these areas. We plan to continue to assess our internal controls and procedures and will take action as necessary 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
|------- | -----------------

Information required by this Item is contained
in Note 12 to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.



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

As noted previously in this filing, we completed the
sale of its Jackson & Perkins business in April 2007. In connection with the sale, we entered into an agreement to provide certain transitional services. Any number of risk factors previously disclosed in Item 1A of our Annual Report
on Form 10-K for the fiscal year ended June 24, 2006 could adversely impact our ability to perform our obligation under that agreement.



|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
|------- | --------





|     |  |                                                                                                                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.1  |  | Purchase Agreement, dated as of March 30, 2007, among Harry & David Operations Corp., Bear Creek Direct Marketing, Inc., Jackson & Perkins Operations, Inc., J&P
Acquisition Inc. and Donald Hachenberger and Glenda Hachenberger.*
|     | 
|2.2  |  | Purchase Agreement, dated as of April 10, 2007 between Bear Creek Operations, Inc. and J&P Acquisition Inc.*                                                                                                                       
|     | 
|2.3  |  | Asset Purchase Agreement, dated as of March 30, 2007, among Jackson & Perkins Operations, Inc., Wasco Real Properties I, LLC and Wasco Real Properties II,
LLC.*                                                                   
|     | 
|2.4  |  | First Amendment to Asset Purchase Agreement, dated as of April 17, 2007, among Jackson & Perkins Operations, Inc., Wasco Real Properties I, LLC and Wasco Real Properties II,
LLC.                                                 
|     | 
|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                                                                                                                                                  

---

|* | Pursuant to Regulation S-K, Item 601(b)(2), the Exhibits and Schedules have not been filed. The Registrant agrees to furnish, supplementally, a copy of any omitted Exhibit or
Schedule to the Securities and Exchange Commission upon request.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 15, 2007



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                            
|              | 
|2.1           |  | Purchase Agreement, dated as of March 30, 2007, among Harry & David Operations Corp., Bear Creek Direct Marketing, Inc., Jackson & Perkins Operations, Inc., J&P
Acquisition Inc. and Donald Hachenberger and Glenda Hachenberger.*
|              | 
|2.2           |  | Purchase Agreement, dated as of April 10, 2007 between Bear Creek Operations, Inc. and J&P Acquisition Inc.*                                                                                                                       
|              | 
|2.3           |  | Asset Purchase Agreement, dated as of March 30, 2007, among Jackson & Perkins Operations, Inc., Wasco Real Properties I, LLC and Wasco Real Properties II,
LLC.*                                                                   
|              | 
|2.4           |  | First Amendment to Asset Purchase Agreement, dated as of April 17, 2007, among Jackson & Perkins Operations, Inc., Wasco Real Properties I, LLC and Wasco Real Properties II,
LLC.                                                 
|              | 
|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                                                                                                                                                  

---

|* | Pursuant to Regulation S-K, Item 601(b)(2), the Exhibits and Schedules have not been filed. The Registrant agrees to furnish, supplementally, a copy of any omitted Exhibit or
Schedule to the Securities and Exchange Commission upon request.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44