United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 29, 2008

or

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

For the transition period from              to             

Commission File Number 333-127173

Harry & David Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

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

(541) 864-2362

(Registrant’s telephone number including area code)

None

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

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

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

Large accelerated  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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

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

Class	Outstanding as of May 2, 2008
Common stock $0.01 par value	1,032,614

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 29, 2008, June 30, 2007 and March 31, 2007	3
		Condensed Consolidated Statements of Operations – Thirteen Weeks ended March 29, 2008 and March 31, 2007, Thirty-nine Weeks ended March 29, 2008, and Forty Weeks ended March 31, 2007	4
		Condensed Consolidated Statements of Cash Flows – Thirty-nine Weeks ended March 29, 2008 and Forty Weeks ended March 31, 2007	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
	Item 4.	Controls and Procedures	39
Part II. Other Information
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults Upon Senior Securities	40
	Item 4.	Submission of Matters to a Vote of Security Holders	40
	Item 5.	Other Information	40
	Item 6.	Exhibits	40

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in Thousands, Except Share and per Share Data)

	March 29,     2008			June 30,     2007			March 31,     2007
	Unaudited						Unaudited
Assets
Current assets:
Cash and cash equivalents	$	90,132		$	49,408		$	41,580
Short-term investments		—			24,816			37,363
Trade accounts receivable, net		3,201			2,100			5,328
Other receivables		4,816			10,907			1,208
Inventories, net		48,293			62,406			47,204
Deferred catalog expenses		5,328			4,198			5,671
Deferred income taxes		2,771			—			—
Prepaid income taxes		—			774			—
Other current assets		10,234			9,852			6,754
Assets held for sale		—			—			41,455
Total current assets		164,775			164,461			186,563
Fixed assets, net		162,950			163,273			158,151
Goodwill		3,454			—			—
Intangibles, net		46,267			29,089			31,210
Deferred financing costs, net		9,914			12,144			12,803
Deferred income taxes		—			—			1,484
Other assets		4,005			1,551			721
Total assets	$	391,365		$	370,518		$	390,932
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	13,272		$	22,900		$	15,001
Accrued payroll and benefits		14,611			21,175			13,695
Income taxes payable		40,444			—			14
Deferred revenue		21,105			12,914			22,100
Deferred income taxes		—			18,670			43,485
Accrued interest		1,856			5,921			1,941
Other accrued liabilities		6,787			7,409			6,665
Current portion of capital lease obligations		318			1,366			1,571
Liabilities related to assets held for sale		—			—			8,228
Total current liabilities		98,393			90,355			112,700
Long-term debt and capital lease obligations		235,351			245,669			245,000
Deferred income taxes		1,528			8,422			—
Accrued pension liability		15,416			15,504			18,128
Other long-term liabilities		10,751			6,304			4,285
Total liabilities		361,439			366,254			380,113
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.01 par value, 1,500,000 shares authorized; issued and outstanding: 1,032,614, 1,032,241 and 1,031,816 shares at March 29, 2008, June 30, 2007 and March 31, 2007, respectively		10			10			10
Additional paid-in capital		5,996			5,548			5,373
Accumulated other comprehensive income (loss)		(2,004	)		1,119			—
Retained earnings (accumulated deficit)		25,924			(2,413	)		5,436
Total stockholders’ equity		29,926			4,264			10,819
Total liabilities and stockholders’ equity	$	391,365		$	370,518		$	390,932

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in Thousands, Except Share and per Share Data)

(Unaudited)

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008			Forty weeks     ended March 31, 2007
Net sales	$	68,315		$	73,329		$	487,747		$	498,112
Costs of goods sold		48,546			43,929			252,149			252,932
Gross profit		19,769			29,400			235,598			245,180
Operating expenses:
Selling, general and administrative		46,969			45,766			171,676			168,050
Selling, general and administrative – related party		250			250			750			750
		47,219			46,016			172,426			168,800
Operating income (loss)		(27,450	)		(16,616	)		63,172			76,380
Other (income) expense:
Interest income		(1,292	)		(1,205	)		(2,157	)		(1,642	)
Interest expense		6,059			6,504			19,363			21,634
Pension curtailment gain		—			—			—			(15,844	)
Gain on debt prepayment		—			—			(303	)		—
Other (income) expense		7			(270	)		55			(347	)
		4,774			5,029			16,958			3,801
Income (loss) from continuing operations before income taxes		(32,224	)		(21,645	)		46,214			72,579
Provision (benefit) for income taxes		(11,227	)		(8,671	)		17,333			28,330
Net income (loss) from continuing operations		(20,997	)		(12,974	)		28,881			44,249
Discontinued operations:
Gain (loss) on sale of Jackson & Perkins		42			(7,406	)		242			(7,406	)
Operating income (loss)		274			962			(28	)		109
Provision (benefit) for income taxes		110			(2,582	)		72			(2,898	)
Net income (loss) from discontinued operations		206			(3,862	)		142			(4,399	)
Net income (loss)	$	(20,791	)	$	(16,836	)	$	29,023		$	39,850
Basic net income (loss) per share (Note 10):
Continuing operations		(20.33	)		(12.58	)		27.97			43.18
Discontinued operations		0.20			(3.74	)		0.14			(4.29	)
Total basic net income (loss) per share	$	(20.14	)	$	(16.32	)	$	28.11		$	38.88
Diluted net income (loss) per share (Note 10):
Continuing operations		(20.33	)		(12.58	)		27.69			43.18
Discontinued operations		0.20			(3.74	)		0.14			(4.29	)
Total diluted net income (loss) per share	$	(20.14	)	$	(16.32	)	$	27.82		$	38.88
Weighted-average shares used in per share calculations:
Basic		1,032,576			1,031,713			1,032,455			1,024,861
Diluted		1,032,576			1,031,713			1,043,111			1,024,861

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Harry & David Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in Thousands)

(Unaudited)

	Thirty-nine     weeks ended     March 29, 2008			Forty     weeks ended     March 31, 2007
Operating activities
Net income	$	29,023		$	39,850
Less: Net income (loss) from discontinued operations		142			(4,399	)
Net income from continuing operations		28,881			44,249
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities from continuing operations:
Depreciation and amortization of fixed assets		13,464			12,702
Amortization of intangible assets		1,532			1,447
Amortization of deferred financing costs		1,956			2,010
Stock option compensation expense		414			437
Loss on disposal and impairment of fixed assets and other long-lived assets		1,700			218
Gain on short-term investments		(162	)		(188	)
Deferred income taxes		(27,362	)		27,750
Gain on debt prepayment		(303	)		—
Pension curtailment gain		—			(15,844	)
Changes in operating assets and liabilities:
Trade accounts receivable and other receivables		(1,978	)		(2,863	)
Inventories		15,791			8,565
Deferred catalog expenses and other assets		(785	)		(201	)
Accounts payable		(10,586	)		(3,759	)
Accrued liabilities		27,495			(7,342	)
Deferred revenue		7,910			5,663
Net cash provided by operating activities from continuing operations		57,967			72,844
Net cash provided by (used in) operating activities from discontinued operations		3,086			(1,644	)
Net cash provided by operating activities		61,053			71,200
Investing activities
Acquisition of fixed assets		(14,638	)		(11,389	)
Acquisition of Wolferman’s business		(23,104	)		—
Proceeds from the sale of fixed assets		21			76
Proceeds from the sale of short-term investments		24,978			—
Purchase of short-term investments		—			(37,175	)
Net cash used in investing activities from continuing operations		(12,743	)		(48,488	)
Net cash provided by (used in) investing activities from discontinued operations		3,161			(178	)
Net cash used in investing activities		(9,582	)		(48,666	)
Financing activities
Borrowings of revolving debt		63,000			108,500
Repayments of revolving debt		(63,000	)		(108,500	)
Repayments of capital lease obligations		(1,366	)		(573	)
Repayments of long-term debt		(9,405	)		—
Payments for deferred financing costs		(10	)		—
Proceeds from exercise of stock options		34			982
Net cash provided by (used in) financing activities from continuing operations		(10,747	)		409
Increase in cash and cash equivalents		40,724			22,943
Cash and cash equivalents, beginning of period		49,408			18,637
Cash and cash equivalents, end of period	$	90,132		$	41,580

See accompanying Notes to Condensed Consolidated Financial Statements.

5

Harry & David Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands)

(Unaudited)

NOTE 1—BUSINESS

Harry & David Holdings, Inc. (the Company, we, us and our) is a vertically integrated multichannel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and gifts marketed under the Harry and David ^® and Wolferman’s ^® brands. See “Note 4-Acquisition” for details regarding the Company’s acquisition of the Wolferman’s business during the third quarter of fiscal 2008. The Company markets its products through catalogs distributed through the mail, the Internet, business-to-business and consumer telemarketing, Harry and David stores and wholesale distribution to other retailers.

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

NOTE 2—BASIS OF PRESENTATION

These financial statements include the consolidated results of the Company and its wholly-owned subsidiaries. The Condensed Consolidated Balance Sheets as of March 29, 2008 and March 31, 2007, the Condensed Consolidated Statements of Operations for the thirteen-week periods ended March 29, 2008 and March 31, 2007, the thirty-nine week period ended March 29, 2008 and the forty week period ended March 31, 2007, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine week period ended March 29, 2008 and the forty week period ended March 31, 2007 have been prepared from the Company’s unaudited Condensed Consolidated Financial Statements. In management’s opinion, the Condensed Consolidated Financial Statements include all adjustments, which include those typically recurring adjustments, necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen-week periods and the thirty-nine and forty week periods then ended. Significant intercompany balances and transactions have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at June 30, 2007 presented in this report has been derived from the Company’s audited balance sheet not included in this report.

The results of operations for the interim periods shown are not necessarily indicative of results to be expected for the full fiscal year. In the second quarter of each fiscal year, the Company typically realizes its highest sales for the fiscal year as it includes the most significant holidays that drive the largest portion of the gift-giving component of the Company’s sales. It is also the period where the Company incurs significant cost of goods sold in connection with the increased sales. Sales in the third fiscal quarter can also be impacted by the timing of Easter each year as either a third or fourth quarter holiday. In fiscal year 2008, Easter occurred in the third quarter while in fiscal year 2007, Easter occurred in the fourth quarter. The Company’s fiscal year ends on the last Saturday in June, based on a fifty-two/fifty-three-week year. Fiscal years ending June 28, 2008 and June 30, 2007 contain fifty-two weeks and fifty-three weeks, respectively. The period ended March 29, 2008 contains thirty-nine weeks while the period ended March 31, 2007 contains forty weeks. Accordingly, results for these two periods may not be comparable.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles accepted in the United States for comparable annual financial statements. Certain notes and other information have been condensed or omitted from the interim condensed consolidated financial statements presented in this Quarterly Report. For further information, refer to the consolidated financial statements and the notes thereto for the year ended June 30, 2007, not included in this report.

Certain reclassifications and revisions have been made to prior years to conform to the current year presentation. These reclassifications and revisions had no impact on the consolidated statement of operations for any period. These changes include the restatement of the consolidated statement of operations and cash flows for discontinued operations and the reclassification of asset retirement obligations from current liabilities to non-current liabilities, and capitalized catalog costs, which were previously classified as prepaid catalog expenses or within other current assets, have been reclassified to deferred catalog expenses on the consolidated balance sheets.

6

Comprehensive income (loss) for the respective periods was as follows:

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008			Forty     weeks ended     March 31, 2007
Comprehensive income (loss):
Net income (loss)	$	(20,791	)	$	(16,836	)	$	29,023		$	39,850
Deferred pension adjustment, net of tax		(3,123	)		—			(3,123	)		—
Comprehensive income (loss)	$	(23,914	)	$	(16,836	)	$	25,900		$	39,850

NOTE 3—NEW ACCOUNTING PRONOUNCEMENTS AND ADOPTIONS

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

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

In September 2006, the SFAS No. 157, Fair Value Measurements, which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and to allow additional time to resolve certain issues, the FASB delayed the effective date for one year for certain types of nonfinancial assets and nonfinancial liabilities, via FSP No. FAS 157-2, Effective Date of FASB Statement No.157. The Company does not expect adoption of this statement to have a material impact on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) which clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 was adopted by the Company as of July 1, 2007 and required a cumulative adjustment to equity upon adoption for the accounting differences for uncertain tax positions under FIN 48 as opposed to FASB Statement No. 5, Accounting for Contingencies. For further information, see “Note 7 – Income Taxes.”

In June 2006, the Emerging Issues Task Force (“EITF”) ratified the consensus reached on Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to Financial Accounting Standards Board Statement No. 43, ‘Accounting for Compensated Absences’ (“EITF 06-2”). EITF 06-2 concludes that companies should accrue for employee sabbatical leave over the service period in which employees earn the right to sabbatical leave. The Company adopted EITF 06-2 in the first quarter of fiscal year 2008. The impact on the Company’s financial statements was a cumulative adjustment to retained earnings totaling $256, net of taxes of $164. In addition, for the thirty-nine weeks ended March 29, 2008, a net charge of $13, or $0.01 per share on basic and diluted pre-tax basis, was recorded in payroll expense, classified within selling, general and administrative expenses in the condensed consolidated statement of operations pursuant to EITF 06-2.

NOTE 4—ACQUISITION

On January 15, 2008, the Company completed the acquisition of Wolferman’s, LLC, a direct-marketing company specializing in English muffins and other breakfast products sold primarily under the Wolferman’s ^® brand, from Williams Foods, Inc., for a net purchase price of $22,799, which included $634 of transaction related expenses and also reflects $361

7

due from Williams Foods, Inc. related to the final working capital adjustment. The Company paid for the acquisition of Wolferman’s with available cash. Williams Foods, Inc. has agreed to provide certain transitional services, as needed, through September 2008.

The results of operations of Wolferman’s are included in the consolidated statements of operations for the periods which include January 15, 2008 through March 29, 2008.

The allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management utilizing established valuation techniques appropriate for the retail industry. The following table presents the preliminary allocation of the purchase price of the acquisition, including professional fees and other related acquisition costs, to the net assets acquired based on their fair values (in thousands):

Current assets	$	2,513
Fixed assets		84
Intangible assets		18,850
Goodwill		3,454
Total assets acquired		24,901
Current liabilities		(2,102	)
Net assets acquired	$	22,799

The acquired intangible assets are comprised of Wolferman’s trademarks and proprietary recipe totaling $13,550 and customer lists of $5,300. The trademarks and proprietary recipe have indefinite lives, while the customer lists will be amortized on a weighted basis over a six year period. The $3,454 of goodwill is allocated to the Direct Marketing segment and is expected to be fully deductible for tax purposes. While goodwill represents the excess purchase over the fair value of net assets purchased, the Company anticipates the acquisition will leverage its existing infrastructure and generate operating and marketing synergies and productivity improvements for both its Harry and David and Wolferman’s businesses.

In accordance with Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the Company recorded a liability of $377 for severance costs related to management’s plan for a reduction in force that will occur within twelve months from the acquisition date. The reduction in force plan is dependant on the transition of certain functions to our existing personnel and fulfillment locations and is expected to be complete by the first quarter of fiscal 2009.

The purchase price allocation will be completed when certain management estimates are finalized based on actual amounts paid. These estimates are primarily related to severance payments and transaction costs.

The following unaudited pro forma consolidated results of operations have been prepared as if the Wolferman’s acquisition had occurred at the beginning of the respective periods below (in thousands, except per share data):

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008		Forty     weeks ended     March 31, 2007
Net sales	$	68,739		$	75,175		$	507,883	$	518,753
Gross profit		19,871			29,544			246,602		255,542
Operating income (loss)		(27,465	)		(17,705	)		63,526		75,537
Income (loss) from continuing operations before income taxes		(32,239	)		(22,731	)		46,570		71,739
Net income (loss)		(20,800	)		(17,504	)		29,233		39,333
Basic net income (loss) per share	$	(20.14	)	$	(16.97	)	$	28.31	$	38.38
Diluted net income (loss) per share	$	(20.14	)	$	(16.97	)	$	28.02	$	38.38

Prior to the acquisition, Wolferman’s utilized a fifty-two week fiscal year ending on December 31 and, as such, the pro forma fiscal 2007 results above contain thirty-nine weeks of Wolferman’s activity. Additionally, Wolferman’s fiscal quarters ended on the last day of March, June and September. No adjustments have been made to conform the activity to the Company’s historical fiscal calendar as any conforming adjustments are not expected be material.

8

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

NOTE 5—DISCONTINUED OPERATIONS

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

In connection with the sale of the business, the Company entered into an agreement with the buyers to provide certain transitional services through June 2008 (“the Transitional Services Agreement”). In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the services rendered pursuant to the Transitional Services Agreement are not considered significant continuing involvement and, as such, the results of operations of the sold entities, as well as the revenues and expenses associated with the Transitional Services Agreement, are separately accounted for as discontinued operations for the thirteen and thirty-nine weeks ended March 29, 2008 and the forty weeks ended March 31, 2007, respectively.

Assets and held for sale and liabilities related to assets held for sale associated with the sale of the business are included on the consolidated balance sheet as of March 31, 2007.

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

	Thirteen     weeks ended     March 29, 2008		Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008		Forty     weeks ended     March 31, 2007
Net sales	$	1,241	$	24,858		$	4,549	$	55,125
Gain (loss) on sale of Jackson & Perkins		42		(7,406	)		242		(7,406	)
Provision (benefit) for income taxes on discontinued operations		110		(2,582	)		72		(2,898	)
Net income (loss) from discontinued operations		206		(3,862	)		142		(4,399	)

Net sales for the thirteen and forty week periods ended March 31, 2007 reflect sales activity that occurred prior to the completion of the sale of the Jackson & Perkins business on April 10, 2007. Included in net sales from discontinued operations for the thirteen and thirty-nine week periods ended March 29, 2008 are revenues associated with the Transitional Services Agreement and residual farm crop sales.

NOTE 6—BALANCE SHEET INFORMATION

Inventories

Inventories consist of the following:

	March 29,     2008		June 30,     2007		March 31,     2007
Finished goods	$	22,260	$	19,540	$	21,824
Materials, packaging supplies, and work-in process		21,994		36,056		21,324
Growing crops		4,039		6,810		4,056
Total	$	48,293	$	62,406	$	47,204

Inventory held for sale related to the Jackson & Perkins sale as of March 31, 2007 was $7,427 and is not included in this table.

9

Fixed Assets

Fixed assets consist of the following:

	March 29,     2008			June 30,     2007			March 31,     2007
Land	$	19,607		$	19,607		$	19,607
Land improvements and orchard development costs		30,490			29,749			29,779
Buildings and improvements		55,686			55,309			55,190
Machinery and equipment		63,147			55,734			56,621
Leasehold improvements		12,730			9,509			9,252
Purchased and internally developed software		31,554			22,129			21,675
Capital projects-in-progress		6,561			15,611			7,813
		219,775			207,648			199,937
Accumulated depreciation and amortization		(56,825	)		(44,375	)		(41,786	)
Total	$	162,950		$	163,273		$	158,151

Fixed assets held for sale related to the Jackson & Perkins sale with a net book value of $15,975 as of March 31, 2007 are not included in this table.

As of March 29, 2008 and June 30, 2007, purchased and internally developed software included software licenses acquired for $968 which was obtained through a capital lease agreement. See “Note 8 – Borrowing Arrangements.” Accumulated depreciation and amortization includes accumulated amortization of purchased and internally developed software costs of $12,360, $9,652 and $8,920 as of March 29, 2008, June 30, 2007 and March 31, 2007, respectively.

During the thirty-nine weeks ending March 29, 2008 the Company determined that 14 underperforming stores were impaired and recorded a non-cash charge for the impairment of certain fixed assets and other long-lived assets in the amount of $1,190, of which $192 was recorded in the Company’s second fiscal quarter, reported in selling, general and administrative expenses in the condensed consolidated statement of operations.

Intangibles

Intangible assets primarily consist of trade names, trademarks, recipes, customer mailing and rental lists and favorable lease agreements. The trade names, trademarks and recipe have indefinite lives. The customer mailing and rental lists have remaining estimated useful lives ranging from less than one year to six years. The favorable lease agreements have estimated useful lives, which equal the remaining lives of the underlying leases, ranging from two to five years. Goodwill and intangible assets with indefinite lives are tested for impairment annually using the guidance and criteria described in SFAS No. 142, Goodwill and Other Intangible Assets. The impairment testing compares carrying values to fair values, and generally, if the carrying value of these assets is in excess of fair value, an impairment loss would be recognized. The Company does not consider there to be any indication of impairment of its goodwill, trade names, trademarks, recipe, and customer lists at this time, however, formal annual impairment testing will be performed in the last quarter of the fiscal year. Analysis of individual store division performance resulted in impairment of fixed assets and the impairment of favorable lease agreements of $108, and, in addition, $32 of favorable lease agreements were written off upon store closure. Both amounts are included in selling, general and administrative expenses in the condensed consolidated statement of operations and in the loss on disposal and impairment of long-lived assets in the consolidated statement of cash flows for the thirteen and thirty-nine weeks ended March 29, 2008.

The customer mailing lists and rental lists and favorable lease agreements are being amortized using methods which include the straight-line method and a weighted method over the remaining estimated useful lives. Amortization expense was $671 and $461 for the thirteen weeks ended March 29, 2008 and the thirteen weeks ended March 31, 2007, respectively, $1,532 and $1,447 for the thirty-nine weeks and forty weeks ended March 29, 2008 and March 31, 2007, respectively, and is included within selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

The following is a summary of goodwill and intangible assets:

	March 29, 2008							June 30, 2007
	Gross     Carrying     Amount		Accumulated     Amortization			Net     Carrying     Amount		Gross     Carrying     Amount		Accumulated     Amortization			Net     Carrying     Amount
Trade names, trademarks and recipe	$	40,471	$	—		$	40,471	$	26,921	$	—		$	26,921
Goodwill		3,454		—			3,454		—		—			—
Direct marketing customer and rental lists		11,952		(6,619	)		5,333		6,652		(5,311	)		1,341
Favorable lease agreements		1,805		(1,342	)		463		1,971		(1,144	)		827
	$	57,682	$	(7,961	)	$	49,721	$	35,544	$	(6,455	)	$	29,089

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Goodwill and intangible assets as of March 29, 2008 include those assets acquired in the Company’s acquisition of the Wolferman’s business. See “Note-4 Acquisition” for further information.

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

Fiscal Period:	Customer and     Rental Lists		Favorable Lease     Agreements		Total     Amortization     Expense
Remainder of 2008	$	539	$	51	$	590
2009		3,559		187		3,746
2010		1,026		127		1,153
2011		174		70		244
2012		29		28		57
2013		5		—		5
Thereafter		1		—		1
Total	$	5,333	$	463	$	5,796

NOTE 7—INCOME TAXES

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

As of March 29, 2008, the gross amount of unrecognized tax benefits is $4,441, excluding penalty and interest accrued, reflecting a decrease during the third fiscal quarter of $21, while a net amount of $4,787, including penalty and interest, is recorded in other long-term liabilities. Of these amounts, if recognized, $2,405 would favorably impact the effective tax rate.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Interest and penalties, net of tax, of $16, or $0.02 per share, and $151, or $0.15 per share, were accrued for the thirteen weeks and thirty-nine weeks ended March 29, 2008, respectively. The Company had accrued interest and penalties, net of tax, of approximately $1,381 and $1,230 at March 29, 2008 and July 1, 2007, respectively.

The Company defines the federal jurisdiction as well as various multi-state jurisdictions as “major” jurisdictions (within the meaning of FIN 48). As of March 29, 2008, the Company is not subject to federal and state examinations for years prior to 2004. Tax years subsequent to June 17, 2004 remain open to examination by these “major” jurisdictions.

The Company’s effective tax rate for the third quarter of fiscal 2008 was 34.8%. The difference in the effective rate and the federal statutory rate is primarily due to state income taxes.

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NOTE 8—BORROWING ARRANGEMENTS

Revolving Credit Facilities

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

In connection with this facility and related amendments, the Company has remaining deferred financing costs of $3,727 and $4,659 on its condensed consolidated balance sheets as of March 29, 2008 and June 30, 2007, respectively.

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

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

As of March 29, 2008, there were no outstanding borrowings and unused borrowings under the revolving credit facility were $123,800, excluding $1,200 in letters of credit outstanding. The maximum available borrowing under the Credit Agreement is determined in accordance with an asset-based debt limitation formula. Total available borrowing capacity at March 29, 2008 was $4,991. The Company is required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitments fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the Consolidated Statement of Operations.

The terms of the Credit Agreement include customary representations and warranties, affirmative and negative covenants and events of default. The Credit Agreement requires the Company to comply with certain covenants, which primarily include a minimum cash balance and limits to capital expenditures. At March 29, 2008, the Company was in compliance with these covenants.

Long-Term Debt

In February 2005, the Company’s subsidiary, Harry & David Operations, Inc., issued $70,000 in Senior Floating Rate Notes due March 1, 2012, and $175,000 of Senior Fixed Rate Notes due March 1, 2013 (collectively, the Senior Notes). In fiscal 2006, Harry & David Operations Corp. completed the public exchange offer for the Senior Notes. The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 8.08% and 10.36% at March 29, 2008 and June 30, 2007, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first day of March and December. Subsequent to the debt prepayment described below, there were $68,000 in Senior Floating Rate Notes and $167,000 in Senior Fixed Rate outstanding as of March 29, 2008.

The fees associated with original issuance and public exchange costs are being amortized over the remaining life of the associated Senior Notes. As of March 29, 2008 and June 30, 2007, respectively, $6,187 and $7,485 remained on the balance sheet as deferred financing costs. As described below in “Long-Term Debt Prepayment” the Company wrote-off $284 of deferred financing costs associated with a partial prepayment of the Senior Notes during the second quarter of fiscal 2008.

In the fourth quarter of fiscal 2007, the Company completed the sale of the Jackson & Perkins businesses, including the direct marketing and wholesale business, the Jackson & Perkins ^® brand, catalog, e-commerce website and associated inventories and in a separate transaction, completed the sale of the land and assets used by the Jackson & Perkins rose growing operations. As the Company has applied the net proceeds from the sale of Jackson & Perkins businesses and assets to pay down the Company’s revolver for working capital and for capital expenditures and for the purchase of Wolferman’s, LLC as described in “Note 4—Acquisition,” the Company has complied with the asset sale covenant under the indenture and is not required to make an offer to repurchase the Senior Notes.

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

The Senior Notes represent the senior unsecured obligations of Harry and David, and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of the Company’s current subsidiaries. Refer to “Note 14—Condensed Consolidating Financial Statements” for additional information related to the Company’s internal re-organization in November of fiscal 2008. The indentures governing the Senior Notes contains various restrictive covenants including, but not

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limited to, limitations on the incurrence of indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and transactions with affiliates. The Company was in compliance with all of the covenants contained in the indenture under the Senior Notes at March 29, 2008.

Long-Term Debt Prepayment

During the thirteen and thirty-nine weeks ended March 29, 2008, the Company prepaid $9,405 of its fixed and floating rate Senior Notes in open market purchases. The debt prepayment resulted in a net gain of $303, comprised of a $595 discount on the repayment of $10,000 of outstanding principal of the Senior Notes, partially offset by the write-off of $284 of unamortized deferred financing costs and third-party expenses of $8 in connection therewith.

Amortization of Deferred Financing Costs

Total amortization expense of all deferred financing costs was $645 and $658 for the thirteen weeks ended March 29, 2008 and the thirteen weeks ended March 31, 2007, respectively, and $1,956 and $2,010 for the thirty-nine weeks ended March 29, 2008 and the forty weeks ended March 31, 2007, respectively, and are included within interest expense in the accompanying Condensed Consolidated Statements of Operations.

Capital Lease Obligations

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

Also in fiscal 2007, the Company acquired a software license for $968, financed by a capital lease agreement. The interest rate on the agreement is 10.36% due in three annual installments of principal and interest. The current and non-current portions of the remaining obligation in the consolidated balance sheet as of March 29, 2008 were $318 and $351, respectively.

NOTE 9—STOCK OPTION PLAN

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

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

	Thirty-nine     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Forty     weeks ended     March 31, 2007
Expected volatility		41.0	%		38.8	%		38.8	%
Expected dividends	$	0		$	0		$	0
Expected term (in years)		6.1 years			4.3 years			4.5 years
Risk-free rate		3.93	%		4.45	%		4.52	%

There were no stock options granted in the Company’s third fiscal quarter of 2008.

A summary of option activity under the Plan for the thirty-nine weeks ended March 29, 2008 is presented below:

Options	Option     Shares		Weighted-Average     Exercise Price		Weighted-Average     Remaining Contractual Term
Outstanding at June 30, 2007	66,251		$	112.94	8.2 years
Granted	1,539			300.00	9.6 years
Exercised	(373	)		92.10	—
Forfeited	(3,700	)		155.95	—
Outstanding at March 29, 2008	63,717		$	115.01	7.4 years

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As of March 29, 2008, 63,717 options were outstanding, of which 30,448 were fully vested and exercisable. The weighted average remaining contractual term of vested options was 7.1 years. The total fair value of all options outstanding at March 29, 2008 was $1,617.

A summary of the status of the Company’s nonvested option shares as of March 29, 2008, and changes during the thirty-nine weeks ended March 29, 2008, are presented below:

	Option     Shares		Weighted-Average     Grant-Date Fair Value of Options
Nonvested option shares at June 30, 2007	45,694		$	23.98
Granted options	1,539			31.67
Vested	(11,445	)		30.04
Forfeited	(2,519	)		15.10
Nonvested option shares at March 29, 2008	33,269		$	22.92

For the thirteen and thirty-nine week periods ended March 29, 2008, the Company recognized stock compensation expense, which represents the amortization of the estimated fair value of the stock options issued, of $130 and $414, respectively, and total tax benefit recognized was $57 and $169 respectively. For the thirteen and forty week periods ended March 31, 2007, stock option compensation expense was $128 and $437, respectively, and total tax benefit was $73 and $30, respectively. As of March 29, 2008 there remained a total of $759 of total unrecognized pretax compensation cost related to nonvested share-based compensation arrangements granted under the Plan and will be recognized over the remaining vesting period. The weighted-average period of the remaining cost is 2.0 years.

NOTE 10—EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated using the weighted-average common shares outstanding for the period. Diluted earnings per share is calculated using the weighted-average common shares outstanding for the period, including the dilutive effect of stock options as determined under the treasury stock method. For the thirty-nine weeks ended March 29, 2008, weighted-average common shares outstanding for the period include the dilutive effect of stock options of 10,656 for the calculation of diluted earnings per share. For the thirteen and thirty-nine weeks ended March 29, 2008 and for the thirteen and forty weeks ended March 31, 2007, common shares relating to the stock options of 63,717, 17,950, 67,564 and 63,758, respectively, are excluded from the diluted earnings per share calculation as the related impact would have been anti-dilutive. The calculations are as follows (amounts are in thousands except share and per share data):

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008		Forty     weeks ended     March 31, 2007
Net income (loss) from continuing operations	$	(20,997	)	$	(12,974	)	$	28,881	$	44,249
Net income (loss) from discontinued operations		206			(3,862	)		142		(4,399	)
Net income (loss)	$	(20,791	)	$	(16,836	)	$	29,023	$	39,850
Basic net income (loss) per share:
Continuing operations	$	(20.33	)	$	(12.58	)	$	27,97	$	43.18
Discontinued operations		0.20			(3.74	)		0.14		(4.29	)
Total basic net income (loss) per share	$	(20.14	)	$	(16.32	)	$	28.11	$	38.88
Diluted net income (loss) per share:
Continuing operations	$	(20.33	)	$	(12.58	)	$	27.69	$	43.18
Discontinued operations		0.20			(3.74	)		0.14		(4.29	)
Total diluted net income (loss) per share	$	(20.14	)	$	(16.32	)	$	27.82	$	38.88
Weighted-average shares used in per share calculations:
Basic		1,032,576			1,031,713			1,032,455		1,024,861
Diluted		1,032,576			1,031,713			1,043,111		1,024,861

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

NOTE 11—BENEFIT PROGRAMS

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

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008			Forty     weeks ended     March 31, 2007
Service cost	$	—		$	1,096		$	—		$	3,288
Interest cost		753			721			2,259			2,164
Expected return on plan assets		(766	)		(722	)		(2,298	)		(2,167	)
Net periodic pension (benefit) expense	$	(13	)	$	1,095		$	(39	)	$	3,285

During the thirteen weeks and the thirty-nine weeks ended March 29, 2008, and the thirteen and forty weeks ended March 31, 2007, the Company contributed $1,329, $5,405, $1,335 and $4,934, respectively, to its defined benefit pension plans.

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

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

The Company recorded a non-cash settlement charge of $55 in the thirteen and thirty-nine weeks ended March 29, 2008 related to lump sum distributions from our benefit pension plans. Statement No. 88 “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (“SFAS 88”), requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan’s projected benefit obligation. Immediately prior to the calculation of the settlement charge, the Company re-measured the funded status of the associated pension liabilities, in light of the unfavorable performance of its pension plan assets, and recorded an adjustment to other comprehensive income (loss) of $3,123, net of taxes in the amount of $2,157, as allowed under guidance in Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”).

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NOTE 12—COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

Total rental expense for all operating leases was as follows:

	Thirteen     weeks ended     March 29, 2008		Thirteen     weeks ended     March 31, 2007		Thirty-nine     weeks ended     March 29, 2008		Forty     weeks ended     March 31, 2007
Minimum rent expense	$	5,501	$	5,235	$	19,174	$	18,777
Contingent rent expense		64		83		236		355
Total rent expense	$	5,565	$	5,318	$	19,410	$	19,132

On February 18, 2005, the Company established a Liquidity Event Award Program for each member of its senior management team who had received stock options under the 2004 Stock Option Plan as of that date. The aggregate amount of all potential awards to senior management is equal to $6,197, or 7.5% of the portion of the proceeds from the sale of notes which were distributed on February 25, 2005 to the Company’s equity sponsors as a return of capital. The amount of each award, as a percentage of all awards, is proportional to the percentage of all of the options such member was awarded as of February 18, 2005. The right to receive 20% of the award vested on June 17, 2005, an additional 20% of the award vested on June 17, 2006, and 5% vest in the next twelve quarters.

As of March 29, 2008, 75% of the award was vested. In each case, vesting occurs so long as the award recipient is an employee of Harry & David Holdings, Inc. or its affiliates on the vesting date. Award recipients will not be entitled to receive any vested portion of their awards unless: (i) a change of control (as so defined) occurs; (ii) the aggregate net sales proceeds 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 29, 2008, the Company has concluded that it is not obligated to accrue a liability or recognize any expense for the Liquidity Event Award Program for the thirteen weeks then ended.

16

The Company has entered into an agreement with its principal shareholders, Wasserstein and Highfields, for financial management, consulting, and advisory services. The Company has agreed to pay fees of $1,000 annually (excluding out-of-pocket reimbursements) under this agreement. The fees are accrued to the extent that they are not paid in any such period. During both the thirteen weeks ended March 29, 2008 and March 31, 2007, the Company paid $250 and during both the thirty-nine weeks ended March 29, 2008 and the forty weeks ended March 31, 2007, the Company paid $750 in such management fees to Wasserstein and Highfields in connection with this agreement. These amounts were charged to selling, general and administrative expenses – related party.

NOTE 13—SEGMENT REPORTING

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

The results of the Jackson & Perkins business are included as discontinued operations in the consolidated statement of operations and footnotes for all periods presented. General corporate overhead expenses, which were previously allocated to the Jackson & Perkins business, but will remain after the disposal, have been reclassified to the continuing segments in the consolidated financial statements for all periods presented. See “Note 4 – Discontinued Operations.”

The Harry and David Direct Marketing segment generates net sales of premium gift-quality fruit, gourmet food products and gifts under the Harry and David ^® and Wolferman’s ^® brands by marketing through the Harry & David and Wolferman’s catalogs, Internet (harryanddavid.com and wolfermans.com), business-to-business and consumer telemarketing operations. The Company’s catalogs reach customers throughout the United States and, to a lesser extent, in Canada. The Harry and David Stores segment generates net sales of Harry and David merchandise at various retail locations (outlet stores, specialty stores, and a Country Village Store). As of March 29, 2008, the Company operated 145 Harry and David Stores in 38 states in the United States. The Harry and David Wholesale segment generates net sales by selling Harry and David ^® brand and Wolferman’s ^® brand wholesale products to national retailers. Business units not disclosed separately for segment reporting purposes are grouped in the “Other” category and include commercial sales of surplus, non-gift quality fruit grown in the Company’s orchards surrounding Medford, Oregon, and business units that support the Company’s operations, including orchards, product supply, distribution, customer operations, facilities, information technology services, and administrative and marketing support functions. Net intersegment sales originate in our manufacturing unit within the Other category, which also includes the elimination of intercompany and intersegment transactions. For the thirteen weeks ended March 29, 2008 and March 31, 2007, the thirty-nine weeks ended March 29, 2008, and the forty weeks ended March 31, 2007, net intersegment sales were $18,750, $27,583, $149,002 and $161,243, respectively. Total assets in the Other category include corporate cash and cash equivalents, short-term investments, the net book value of corporate facilities and related information systems, third-party and intercompany debt and other corporate long-lived assets, including manufacturing facilities.

17

Dollars in thousands	Harry and     David Direct     Marketing			Harry and     David Stores			Harry and     David Wholesale			Other			Total
Thirteen weeks ended March 29, 2008
Net external sales	$	43,544		$	21,917		$	2,639		$	215		$	68,315
Operating loss from continuing operations		(16,491	)		(9,587	)		(1,332	)		(40	)		(27,450	)
Interest expense, net from continuing operations		30			1			—			4,736			4,767
Income from continuing operations before income taxes		(16,525	)		(9,590	)		(1,333	)		(4,776	)		(32,224	)
Total assets		63,588			36,048			2,818			288,911			391,365
Thirteen weeks ended March 31, 2007
Net external sales	$	47,630		$	20,488		$	4,824		$	387		$	73,329
Operating income (loss) from continuing operations		(9,082	)		(7,659	)		115			10			(16,616	)
Interest expense, net from continuing operations		—			—			—			5,299			5,299
Income (loss) from continuing operations before income taxes		(8,878	)		(7,583	)		108			(5,292	)		(21,645	)
Total assets		43,338			32,667			4,102			310,825			390,932
Thirty-nine weeks ended March 29, 2008
Net external sales	$	338,470		$	117,484		$	30,159		$	1,634		$	487,747
Depreciation and amortization expense (1)		1,315			2,983			—			10,698			14,996
Operating income (loss) from continuing operations		60,921			121			2,168			(38	)		63,172
Interest expense, net from continuing operations		30			3			—			17,173			17,206
Income (loss) from continuing operations before income taxes		61,030			147			2,170			(17,133	)		46,214
Capital expenditures (2)		9			5,278			—			9,351			14,638
Total assets		63,588			36,048			2,818			288,911			391,365
Forty weeks ended March 31, 2007
Net external sales	$	345,849		$	117,471		$	33,163		$	1,629		$	498,112
Depreciation and amortization expense (1)		1,174			2,704			—			10,271			14,149
Operating income from continuing operations		65,335			6,093			4,942			10			76,380
Interest expense, net from continuing operations		—			—			—			19,992			19,992
Income (loss) from continuing operations before income taxes		65,599			6,182			4,936			(4,138	)		72,579
Capital expenditures (2)		—			1,410			—			9,979			11,389
Total assets		43,338			32,667			4,102			310,825			390,932

(1) Depreciation and amortization expense from discontinued operations was $0 and $599 for fiscal 2008 and 2007, respectively.

(2) Capital expenditures from discontinued operations were $0 and $178 for fiscal 2008 and 2007, respectively.

18

NOTE 14—CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

The following consolidating financial information presents financial information which reflects the Reorganization, in separate columns, for (i) the Company (on a parent-only basis) with its investment in its subsidiaries recorded under the equity method, (ii) Harry and David under the equity method, (iii) Harry & David Holdings, Inc.’s (guarantor) subsidiaries of the Company that guarantee the Senior Notes on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company and its subsidiaries on a consolidated basis, and (v) the Company on a consolidated basis, as of March 29, 2008, and June 30, 2007, and for the thirteen and thirty-nine weeks ended March 29, 2008 and the thirteen and forty weeks ended March 31, 2007. 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.

19

Condensed Consolidating Balance Sheet

As of March 29, 2008

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor Subsidiaries			Eliminations and Reclassifications			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	1,514		$	9,220		$	79,398		$	—		$	90,132
Trade accounts receivable, net		—			3,199			2			—			3,201
Other receivables		—			1,101			3,715			—			4,816
Inventories, net		—			21,867			26,426			—			48,293
Deferred catalog expenses		—			5,328			—			—			5,328
Deferred income taxes		2,771			—			—			—			2,771
Other current assets		30			3,955			6,249			—			10,234
Total current assets		4,315			44,670			115,790			—			164,775
Fixed assets, net		—			16,206			146,744			—			162,950
Goodwill		—			3,454			—			—			3,454
Intangibles, net		—			46,267			—			—			46,267
Investment in subsidiaries		233,895			(58,862	)		—			(175,033	)		—
Deferred financing costs, net		—			9,914			—			—			9,914
Other assets		2,424			475			1,106			—			4,005
Total assets	$	240,634		$	62,124		$	263,640		$	(175,033	)	$	391,365
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	—		$	6,659		$	6,613		$	—		$	13,272
Accrued payroll and benefits		—			7,358			7,253			—			14,611
Deferred revenue		—			21,105			—			—			21,105
Income taxes payable		40,458			(14	)		—			—			40,444
Accrued interest		—			1,802			54			—			1,856
Other accrued liabilities		—			5,960			827			—			6,787
Current portion of capital lease obligation		—			318			—			—			318
Total current liabilities		40,458			43,188			14,747			—			98,393
Long-term debt and capital lease obligations		—			235,351			—			—			235,351
Deferred income taxes		1,528			—			—			—			1,528
Accrued pension liability		—			—			15,416			—			15,416
Other long-term liabilities		4,787			4,889			1,075			—			10,751
Intercompany debt		163,935			(455,199	)		291,264			—			—
Total liabilities		210,708			(171,771	)		322,502			—			361,439
Stockholders’ equity (deficit):
Common stock		10			1			—			(1	)		10
Additional paid-in capital		5,996			232,462			53,784			(286,246	)		5,996
Accumulated other comprehensive loss		(2,004	)		—			(2,004	)		2,004			(2,004	)
Retained earnings (accumulated deficit)		25,924			1,432			(110,642	)		109,210			25,924
Total stockholders’ equity (deficit)		29,926			233,895			(58,862	)		(175,033	)		29,926
Total liabilities and stockholders’ equity (deficit)	$	240,634		$	62,124		$	263,640		$	(175,033	)	$	391,365

20

Condensed Consolidating Balance Sheet

As of June 30, 2007

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor Subsidiaries		Eliminations and Reclassifications			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	1,480		$	9,953		$	37,975	$	—		$	49,408
Short-term investments		—			—			24,816		—			24,816
Trade accounts receivable, net		—			1,788			312		—			2,100
Other receivables		—			2,375			8,532		—			10,907
Inventories, net		—			17,818			44,588		—			62,406
Deferred catalog expenses		—			3,840			358		—			4,198
Prepaid income taxes		774			—			—		—			774
Other current assets		7			5,248			4,597		—			9,852
Total current assets		2,261			41,022			121,178		—			164,461
Fixed assets, net		—			44,981			118,292		—			163,273
Intangibles, net		—			29,089			—		—			29,089
Investment in subsidiaries		198,762			109,832			—		(308,594	)		–
Deferred financing costs, net		—			12,144			—		—			12,144
Other assets		—			505			1,046		—			1,551
Total assets	$	201,023		$	237,573		$	240,516	$	(308,594	)	$	370,518
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	—		$	12,710		$	10,223	$	(33	)	$	22,900
Accrued payroll and benefits		—			13,012			8,163		—			21,175
Deferred revenue		—			12,914			—		—			12,914
Deferred income taxes		18,670			—			—		—			18,670
Accrued interest		—			5,921			—		—			5,921
Other accrued liabilities		—			6,362			1,047		—			7,409
Current portion of capital lease obligation		—			1,366			—		—			1,366
Total current liabilities		18,670			52,285			19,433		(33	)		90,355
Long-term debt and capital lease obligations		—			245,669			—		—			245,669
Accrued pension liability		—			—			15,504		—			15,504
Deferred income taxes		8,422			—			—		—			8,422
Intercompany debt		168,626			(263,418	)		94,759		33			–
Other long-term liabilities		1,041			4,275			988		—			6,304
Total liabilities		196,759			38,811			130,684		—			366,254
Stockholders’ equity:
Common stock		10			1			100		(101	)		10
Additional paid-in capital		5,548			232,428			94,114		(326,542	)		5,548
Accumulated other comprehensive income		1,119			—			1,119		(1,119	)		1,119
Retained earnings (accumulated deficit)		(2,413	)		(33,667	)		14,499		19,168			(2,413	)
Total stockholders’ equity		4,264			198,762			109,832		(308,594	)		4,264
Total liabilities and stockholders’ equity	$	201,023		$	237,573		$	240,516	$	(308,594	)	$	370,518

21

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 29, 2008

(in thousands)

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

22

Condensed Consolidating Statement of Operations

For the Thirteen Weeks Ended March 31, 2007

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor subsidiaries			Eliminations and Reclassifications			Consolidated
Net sales	$	—		$	72,942		$	27,969		$	(27,582	)	$	73,329
Cost of goods sold		—			43,545			27,967			(27,583	)		43,929
Gross profit		—			29,397			2			1			29,400
Selling, general and administrative		—			46,022			(7	)		1			46,016
Operating income (loss)		—			(16,625	)		9			—			(16,616	)
Other (income) expense:
Interest income		—			—			(1,205	)		—			(1,205	)
Interest expense		(3	)		6,481			26			—			6,504
Other (income) expense, net		—			(270	)		—			—			(270	)
Equity in earnings of consolidated subsidiaries		28,092			4,645			—			(32,737	)		—
Total other (income) expense		28,089			10,856			(1,179	)		(32,737	)		5,029
Income (loss) from continuing operations before income taxes		(28,089	)		(27,481	)		1,188			32,737			(21,645	)
Benefit for income taxes		(8,671	)		—			—			—			(8,671	)
Net income (loss) from continuing operations		(19,418	)		(27,481	)		1,188			32,737			(12,974	)
Discontinued operations:
Loss on sale of Jackson & Perkins		—			(611	)		(6,795	)		—			(7,406	)
Operating income		—			—			962			—			962
Benefit for income taxes		(2,582	)		—			—			—			(2,582	)
Net income (loss) from discontinued operations		2,582			(611	)		(5,833	)		—			(3,862	)
Net loss	$	(16,836	)	$	(28,092	)	$	(4,645	)	$	32,737		$	(16,836	)

23

Condensed Consolidating Statement of Operations

For the Thirty-nine Weeks Ended March 29, 2008

(in thousands)

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

24

Condensed Consolidating Statement of Operations

For the Forty Weeks Ended March 31, 2007

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor subsidiaries			Eliminations and Reclassifications			Consolidated
Net sales	$	—		$	496,483		$	162,871		$	(161,242	)	$	498,112
Cost of goods sold		—			251,304			162,871			(161,243	)		252,932
Gross profit		—			245,179			—			1			245,180
Selling, general and administrative		—			168,808			(9	)		1			168,800
Operating income		—			76,371			9			—			76,380
Other (income) expense:
Interest income		—			—			(1,642	)		—			(1,642	)
Interest expense		(3	)		21,539			98			—			21,634
Pension curtailment gain		—			—			(15,844	)		—			(15,844	)
Other (income) expense, net		—			(347	)		—			—			(347	)
Equity in earnings of consolidated subsidiaries		(65,279	)		(10,711	)		—			75,990			—
Total other (income) expense		(65,282	)		10,481			(17,388	)		75,990			3,801
Income from continuing operations before income taxes		65,282			65,890			17,397			(75,990	)		72,579
Provision for income taxes		28,330			—			—			—			28,330
Net income from continuing operations		36,952			65,890			17,397			(75,990	)		44,249
Discontinued operations:
Loss on sale of Jackson & Perkins		—			(611	)		(6,795	)		—			(7,406	)
Operating income		—			—			109			—			109
Benefit for income taxes		(2,898	)		—			—			—			(2,898	)
Net income (loss) from discontinued operations		2,898			(611	)		(6,686	)		—			(4,399	)
Net income	$	39,850		$	65,279		$	10,711		$	(75,990	)	$	39,850

25

Condensed Consolidating Statement of Cash Flows

For the Thirty-nine Weeks Ended March 29, 2008

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor subsidiaries			Eliminations and Reclassifications		Consolidated
Operating activities
Net cash provided by (used in) operating activities	$	(826	)	$	44,217		$	17,662		$	—	$	61,053
Investing activities
Acquisition of fixed assets		—			(8,947	)		(5,691	)		—		(14,638	)
Acquisition of Wolferman’s		—			(23,104	)		—			—		(23,104	)
Proceeds from the sale of fixed assets		—			—			21			—		21
Proceeds from the sale of business		—			—			3,161			—		3,161
Proceeds from the sale of short-term investments		—			—			24,978			—		24,978
Net cash provided by (used in) investing activities	$	—		$	(32,051	)	$	22,469		$	—	$	(9,582	)
Financing activities
Borrowings of revolving debt		—			63,000			—			—		63,000
Repayments of revolving debt		—			(63,000	)		—			—		(63,000	)
Repayments of capital lease obligation		—			(1,366	)		—			—		(1,366	)
Repayments of long-term debt		—			(9,405	)		—			—		(9,405	)
Payments for deferred financing fees		—			(10	)		—			—		(10	)
Proceeds for exercise of stock options		34			—			—			—		34
Net (payments) receipts on intercompany debt		826			(2,118	)		1,292			—		—
Net cash provided by (used in) financing activities	$	860		$	(12,899	)	$	1,292		$	—	$	(10,747	)
Increase (decrease) in cash and cash equivalents		34			(733	)		41,423			—		40,724
Cash and cash equivalents, beginning of period		1,480			9,953			37,975			—		49,408
Cash and cash equivalents, end of period	$	1,514		$	9,220		$	79,398		$	—	$	90,132

26

Condensed Consolidating Statement of Cash Flows

For the Forty Weeks Ended March 31, 2007

(in thousands)

	Harry & David Holdings, Inc. (Parent-Only)			Harry and David			Guarantor subsidiaries			Eliminations and Reclassifications		Consolidated
Operating activities
Net cash provided by operating activities	$	17,456		$	37,456		$	16,288		$	—	$	71,200
Investing activities
Acquisition of fixed assets		—			(6,116	)		(5,451	)		—		(11,567	)
Proceeds from the sale of fixed assets		—			2			74			—		76
Proceeds from the sale of short-term investments		—			—			(37,175	)		—		(37,175	)
Net cash used in investing activities	$	—		$	(6,114	)	$	(42,552	)	$	—	$	(48,666	)
Financing activities
Borrowings of revolving debt		—			108,500			—			—		108,500
Repayments of revolving debt		—			(108,500	)		—			—		(108,500	)
Repayments of capital lease		—			(573	)		—			—		(573	)
Proceeds for exercise of stock options		982			—			—			—		982
Net (payments) receipts on intercompany debt		(17,457	)		(29,742	)		47,199			—		—
Net cash provided by (used in) financing activities	$	(16,475	)	$	(30,315	)	$	47,199		$	—	$	409
Increase in cash and cash equivalents		981			1,027			20,935			—		22,943
Cash and cash equivalents, beginning of period		463			4,381			13,793			—		18,637
Cash and cash equivalents, end of period	$	1,444		$	5,408		$	34,728		$	—	$	41,580

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project” and similar terms and phrases, including references to assumptions, in this Quarterly Report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to risks relating to market demand for the Company’s products, production capabilities, relationships with customers, implementation of the Company’s business and marketing strategies, competition, continued rising fuel energy cost, financial leverage, postal rate increases, increase in labor costs and the availability of a seasonal workforce and changes in federal and state tax laws. The risks, uncertainties and assumptions referred to above could cause our results to differ materially from the results expressed or implied by such forward-looking statements.

Risk factors that may affect our results include the Risk Factors set forth in Harry and David’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007, and those risks which may be described from time to time in Harry and David’s other filings with the Securities and Exchange Commission.

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

OVERVIEW

General

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

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

Acquisition of Wolferman’s business

On January 15, 2008, we completed the acquisition of Wolferman’s, LLC, a direct-marketing company specializing in English muffins and other breakfast products sold primarily under the Wolferman’s ^® brand from Williams Foods, Inc., for a net purchase price of approximately $22.8 million, which included $0.6 million of transaction related expenses and also reflect $0.4 million due from Williams Foods, Inc. related to the final working capital adjustment. We paid for the acquisition of Wolferman’s with available cash balances. We anticipate this acquisition will leverage our infrastructure and generate operating and marketing synergies and productivity improvements for both the Harry and David ^® and Wolferman’s ^® brands. In connection with the acquisition, Williams Foods, Inc., has agreed to provide certain transitional services, as needed, through September 2008. The operating results of Wolferman’s are included in our Direct Marketing and Wholesale segments according to the nature of the operating activity. For further information see “Note 4-Acquisition” in the notes to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q. The acquisition was a permitted under the terms of our credit agreement.

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Sale of the Jackson & Perkins business

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

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

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

MATTERS AFFECTING COMPARABILITY

We report our financial statements using a 52/53-week year with our quarters ending on the last Saturday of September, December, March and June. Fiscal year 2008, beginning July 1, 2007 and ending June 28, 2008, includes 52 weeks versus 53 weeks in fiscal year 2007, from June 25, 2006 through June 30, 2007. Therefore, the fiscal 2008 year-to-date period includes 39 weeks versus 40 weeks for fiscal 2007 year-to-date period. Accordingly, results for these two periods may not be comparable.

Sales in the third fiscal quarter can also be impacted by the timing of Easter each year, with the date of Easter falling in either the third or fourth quarter each year. In fiscal year 2008, Easter occurred in the third quarter, while in fiscal year 2007 Easter occurred in the fourth quarter. Additionally, a portion of our Direct Marketing sales are derived from Fruit-of-the-Month Club ^® product shipments. As such, results in this segment may vary between periods due to variations in fruit availability year- to-year, as well as other factors.

RESULTS OF OPERATIONS

NET SALES

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

	Thirteen Weeks Ended				Thirteen Weeks Ended				Thirty-nine Weeks Ended				Forty Weeks Ended
	March 29,     2008		Percent     of Total		March 31,     2007		Percent     of Total		March 29,     2008		Percent     of Total		March 31,     2007		Percent     of Total
Direct Marketing	$	43.6	63.8	%	$	47.6	64.9	%	$	338.5	69.4	%	$	345.8	69.4	%
Stores		21.9	32.1	%		20.5	28.0	%		117.5	24.1	%		117.5	23.6	%
Wholesale		2.7	4.0	%		4.9	6.7	%		30.2	6.2	%		33.2	6.7	%
Other		0.1	0.1	%		0.3	0.4	%		1.5	0.3	%		1.6	0.3	%
Total Net Sales	$	68.3	100.0	%	$	73.3	100.0	%	$	487.7	100.0	%	$	498.1	100.0	%

Net sales from continuing operations for the thirteen weeks ended March 29, 2008, decreased $5.0 million, or 6.8%, over the thirteen weeks ended March 31, 2007 and decreased $10.4 million, or 2.1%, over the forty weeks ended March 31, 2007. Net sales decreased $7.2 million, or 1.5 %, from fiscal 2007 to fiscal 2008, normalized for the thirty-nine week period. The net sales decrease in both periods was driven by reduced sales volumes in our Direct Marketing and Wholesale segments, partially offset by volume increases in our Stores segment due to sales generated from new (non-comparable) stores.

Direct Marketing

Our Direct Marketing segment net sales decreased $4.0 million, or 8.4%, to $43.6 million in the thirteen-week period ended March 29, 2008, from $47.6 million in the thirteen-week period ended March 31, 2007, primarily due to reduced order volume in the current fiscal period, partially offset by higher average selling prices. The shift in Easter and the addition of Wolferman’s sales activity favorably impacted sales in the current fiscal period; however, we still experienced a net decline in order volume and dollars driven by the timing of Fruit-of-the-Month Club ^® product shipments and lower customer demand.

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For the year-to-date comparable periods, after taking into account the extra week in fiscal 2007, which represented $1.4 million in sales, our Direct Marketing segment net sales decreased $5.9 million, or 1.7%, for the thirty-nine weeks ended March 29, 2008 compared to the prior fiscal year. The factors for the decrease are primarily due to the factors described above for the thirteen-week period.

Stores

Our Stores segment net sales increased $1.4 million, or 6.8%, to $21.9 million in the thirteen-week period ended March 29, 2008, from $20.5 million in the thirteen-week period ended March 31, 2007. The sales increase was driven by new (non-comparable) stores activity and the Easter shift. Comparable store sales for the same period were down 0.2% which was driven by a decline in customer traffic, partially offset by higher average unit retail sales. Adjusted for the Easter shift, comparable store sales declined approximately 4%.

For the year-to-date comparable periods, after taking into account the fortieth week in fiscal 2007, which impacted sales by $1.6 million, our Stores segment net sales increased $1.6 million, or 1.4%, driven by sales generated from new (non-comparable) stores and higher average sales per unit, offset by lower customer traffic as compared to last year.

As of March 29, 2008, we had 145 stores in operation, as compared to 134 stores in operation as of the same period last fiscal year, representing the impact of 11 net new stores, which represents 14 new stores and 3 closed stores in period. A store becomes comparable in the first fiscal month after it has been open for a full twelve fiscal months, at which point its results are included in comparable sales comparisons. If a store’s square footage has been changed as a result of reconfiguration or relocation in the same mall or retail complex, the store continues to be treated as a comparable store.

Wholesale

Our Wholesale segment net sales decreased $2.2 million, or 44.9%, to $2.7 million, in the thirteen weeks ended March 29, 2008, as compared to the prior year. The decrease was primarily due to lower repeat volumes with certain customers, partially offset by Wolferman’s wholesale activity.

For the year-to-date comparable periods, after taking into account the fortieth week in fiscal 2007, which impacted sales by $0.2 million, our Wholesale segment net sales declined $2.8 million, or 8.5%, from fiscal 2007 to fiscal 2008. The decline was driven by the same factors discussed above for the thirteen-week period.

Other

Other category net sales, which primarily consist of commercial fruit products, were down $0.2 million and $0.1 million for the thirteen and thirty-nine weeks ended March 29, 2008, respectively, as compared to the prior year.

GROSS PROFIT

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

	Thirteen Weeks Ended					Thirteen Weeks Ended				Thirty-nine Weeks Ended				Forty Weeks Ended
	March 29,     2008			Percent     of Net Sales		March 31,     2007		Percent     of Net Sales		March 29,     2008		Percent     of Net Sales		March 31,     2007		Percent     of Net Sales
Direct Marketing	$	11.9		27.3	%	$	19.8	41.6	%	$	173.8	51.3	%	$	178.2	51.5	%
Stores		8.7		39.7	%		8.8	42.9	%		56.9	48.4	%		59.3	50.5	%
Wholesale		(0.8	)	(29.6	)%		0.8	16.3	%		4.9	16.2	%		7.7	23.2	%
Other		0.0		0.0	%		0.0	0.0	%		0.0	0.0	%		0.0	0.0	%
Total Gross Profit	$	19.8		29.0	%	$	29.4	40.1	%	$	235.6	48.3	%	$	245.2	49.2	%

Gross profit from continuing operations decreased $9.6 million, or 32.7%, to $19.8 million in the thirteen-week period ended March 29, 2008, from $29.4 million in the thirteen-week period ended March 31, 2007. Consolidated gross profit as a percentage of consolidated net sales was 29.0% in the thirteen-week period ended March 29, 2008, and 40.1% in the thirteen-week period ended March 31, 2007.

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Excluding the fortieth week, which accounted for $1.2 million of gross profit in fiscal 2007, gross profit decreased $8.4 million, or 3.4% in the year-to-date period ended March 29, 2008. Consolidated gross profit as a percentage of consolidated net sales was 48.3% in the twenty six-week period ended March 29, 2008, and 49.2% in the twenty seven-week period ended March 31, 2007.

Direct Marketing

Our Direct Marketing segment gross profit decreased $7.9 million, or 39.9%, to $11.9 million in the thirteen-week period ended March 29, 2008, from $19.8 million in the thirteen-week period ended March 31, 2007, while gross margin declined to 27.3% in the current fiscal period compared to 41.6% in the prior fiscal period. Several factors our gross margin to fall compared to the same to the same period last year. Gross margin was lower than last year due to a favorable inventory adjustment to prior year cost of goods sold. However, this favorable adjustment was largely attributable to prior periods, as highlighted in the footnotes that follow our EBITDA table below. The decline in gross profit was also caused by increased freight and fixed costs and increased inventory reserves and adjustments, which was largely related to the conversion to our new ERP system. Additionally, gross margin declined due to the deleveraging of fixed overhead costs on reduced sales.

In addition to the factors driving the gross margin decline, gross profit was negatively impacted by the timing of the Fruit-of-the-Month Club ^® product shipments, partially offset by the favorable shift in Easter as well as the addition of Wolferman’s direct marketing activity.

For the year-to-date period, after taking into account the extra week in fiscal 2007, which impacted gross profit by $0.5 million, our Direct Marketing segment gross profit decreased $3.9 million, or 2.2%. On a rate basis, gross margin declined slightly from 51.5% to 51.3%. The gross profit decrease for the year-to-date period was primarily due to the inventory correction mentioned above and the timing of the Fruit-of-the-Month Club ^® product shipments, partially offset by the shift in Easter as well as Wolferman’s direct marketing activity.

Stores

Our Stores segment gross profit decreased $0.1 million, or 1.1%, to $8.7 million in the thirteen-week period ended March 29, 2008, from $8.8 million in the thirteen-week period ended March 31, 2007 and gross profit as a percentage of Stores segment net sales was 39.7% in the thirteen weeks ended March 29, 2008, compared to 42.9% in the prior year quarter. The decrease in gross profit was driven by higher freight costs as well as higher fixed expenses in the current fiscal period, largely offset by the net sales increase from our new stores. The gross margin decline was attributable to higher allocated costs, increased promotional expense and markdowns, and higher freight costs, partially offset by higher average selling prices.

Excluding the fortieth week, which contributed $0.6 million of gross profit, the decrease in the thirty-nine weeks ended March 29, 2008 versus the same period in the prior fiscal year was $1.8 million, or 3.1%, and the rate declined to 48.4% as compared to 50.5% in the prior fiscal year. The drivers for the decreases in the year-to-date period were primarily the same as those discussed above for the third fiscal quarter.

Wholesale

Our Wholesale segment gross profit decreased $1.6 million, or 200.0%, to $(0.8) million in the thirteen-week period ended March 29, 2008, from $0.8 million in the thirteen-week period ended March 31, 2007. On a rate basis, gross profit declined to (29.6)% in the current fiscal quarter, compared to 16.3% in the prior fiscal quarter. For the year-to-date comparable periods, after taking into account the fortieth week, which contributed $0.1 million of gross profit, the decrease versus last year was $2.7 million, or 35.5%, and gross margin declined to 16.2% from 23.2% in the prior year. The gross profit and rate declines for both the thirteen and thirty-nine week-periods ended March 29, 2008 were primarily due to lower sales volume and a shift in product mix coupled with higher inventory write-offs and higher fixed costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

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

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	Thirteen Weeks Ended				Thirteen Weeks Ended				Thirty-nine Weeks Ended				Forty Weeks Ended
	March 29,     2008		Percent     of Net Sales		March 31,     2007		Percent     of Net Sales		March 29,     2008		Percent     of Net Sales		March 31,     2007		Percent     of Net Sales
Direct Marketing	$	28.3	64.9	%	$	28.8	60.5	%	$	112.9	33.4	%	$	112.8	32.6	%
Stores		18.3	83.6	%		16.5	80.5	%		56.8	48.3	%		53.2	45.3	%
Wholesale		0.6	22.2	%		0.7	14.3	%		2.7	8.9	%		2.8	8.4	%
Other		0.0	0.0	%		0.0	0.0	%		0.0	0.0	%		0.0	0.0	%
Total Selling, General, & Administrative	$	47.2	69.1	%	$	46.0	62.8	%	$	172.4	35.3	%	$	168.8	33.9	%

Selling, general and administrative expenses from continuing operations increased $1.2 million during the thirteen-week period ended March 29, 2008 as compared to the thirteen-week period ended March 31, 2007. The increase in selling, general and administrative expenses for the quarter was driven by a combination of higher advertising costs in our Direct Marketing segment, higher payroll and related benefit expenses tied to merit and personnel increases, higher lease and operating costs related to new stores, store impairment charges, and higher outside consulting costs. These increases were largely offset by a decrease in incentive compensation expenses and lower pension expense caused by the freeze of our defined benefit plans as compared to the prior fiscal period.

In the year-to-date comparable periods, after taking into account the fortieth week, selling, general and administrative expenses were approximately $6.3 million or 3.8% higher in fiscal 2008, as compared to fiscal 2007. The increase was primarily attributable to the factors discussed above in the thirteen-week period, with the exception of outside consulting costs, which were lower on a year-to-date basis as compared to the prior fiscal period.

Consolidated selling, general and administrative expenses as a percentage of consolidated net sales were 69.1% in the current quarter as compared to 62.8% in the prior quarter and 35.3% in the current year thirty-nine week period as compared to 33.9% in the prior year forty week period.

OTHER (INCOME) EXPENSE

Other expense from continuing operations decreased by $0.2 million, to $4.8 million in the thirteen-week period ended March 29, 2008, compared to $5.0 million in the thirteen-week period ended March 31, 2007. The other expense for the thirteen weeks ended March 29, 2008 was primarily comprised of $4.8 million in net interest expense. The other expense for the thirteen weeks ended March 31, 2007, was primarily comprised of net interest expense of $5.3 million, partially offset by $0.3 million in other income related to legal settlements.

Other expense from continuing operations increased by $13.2 million, to $17.0 million in the thirty-nine week period ended March 29, 2008 compared to $3.8 million in the forty week period ended March 31, 2007. The other expense for the current fiscal period was primarily comprised of net interest expense of $17.2 million, partially offset by $0.3 million of net gain on our debt prepayment (as discussed in “Note 8-Borrowing Arrangements” in Item I in this Form 10-Q) and $0.1 million of net other expense. The other expense for the forty weeks ended March 31, 2007 was primarily comprised of net interest expense of $20.0 million, partially offset by the recognition of a non-cash curtailment gain of $15.8 million associated with the freeze of our defined benefit plans and $0.3 million of other income related to legal settlements.

The decrease in net interest expense is due to a combination of lower borrowings on our revolving credit facility, lower variable interest rates on our floating rate senior notes and lower amounts outstanding on our senior notes.

INCOME TAXES

For interim financial reporting purposes, tax expense or benefit is calculated based on the estimated annual effective tax rate, adjusted to give effect to anticipated permanent differences. For fiscal 2008, the difference in the effective rate and the federal statutory rate is primarily due to state income taxes.

EBITDA

Our earnings before income taxes, interest, and depreciation and amortization (EBITDA) from continuing operations for the thirteen-week period ended March 29, 2008 decreased $10.6 million from the prior year, primarily due to a decline in operating performance, as described above. EBITDA from continuing operations for the thirty-nine weeks ended March 29, 2008 decreased $28.3 million from the prior year primarily due to lower operating income as well as the prior year non-cash pension curtailment gain, which resulted in a $15.8 million benefit to EBITDA in fiscal 2007.

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For an explanation of why management believes EBITDA is a useful measure for understanding our results of operations and a reconciliation of EBITDA to the most comparable GAAP measure, see note below, Non-GAAP Financial Measure: EBITDA. The following table reconciles EBITDA from continuing operations to net cash provided by operating activities, which we believe to be the closest GAAP liquidity measure to EBITDA, and net income, which we believe to be the closest GAAP performance measure to EBITDA. Certain rounded amounts below have been adjusted in order to agree to net income (loss) from continuing operations or year-to-date amounts (dollars are in millions).

	Thirteen     weeks ended     March 29, 2008			Thirteen     weeks ended     March 31, 2007			Thirty-nine     weeks ended     March 29, 2008			Forty     weeks ended     March 31, 2007
Net income (loss) from continuing operations	$	(21.0	)	$	(13.0	)	$	28.9		$	44.2
Interest expense, net from continuing operations		4.8			5.3			17.2			20.0
Provision (benefit) for income taxes from continuing operations		(11.3	)		(8.7	)		17.3			28.3
Depreciation and amortization from continuing operations		5.4			4.9			15.0			14.2
EBITDA from continuing operations	$	(22.1	)	$	(11.5	)	$	78.4		$	106.7
Interest expense, net from continuing operations		(4.8	)		(5.3	)		(17.2	)		(20.0	)
Provision for income taxes from continuing operations		11.3			8.7			(17.3	)		(28.3	)
Amortization of deferred financing costs		0.7			0.6			2.0			2.0
Stock option compensation expense		0.1			0.1			0.4			0.4
Loss on disposal and impairment of fixed assets and other long-lived assets		1.2			—			1.7			0.2
Gain on short-term investments		—			(0.2	)		(0.2	)		(0.2	)
Deferred income taxes		(0.6	)		(8.9	)		(27.4	)		27.7
Gain on debt prepayment		—			—			(0.3	)		—
Pension curtailment gain		—			—			—			(15.8	)
Changes in operating assets and liabilities from continuing operations		(50.7	)		(54.6	)		37.9			0.1
Net cash provided by (used in) discontinued operations		1.2			1.2			3.1			(1.6	)
Net cash provided (used in) by operating activities	$	(63.7	)	$	(69.9	)	$	61.1		$	71.2

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

• $1.5 million of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;

• $0.1 million of employee executive recruiting charges;

• $1.2 million loss on disposal and impairment of fixed assets and long-lived assets;

• $0.3 million of fees paid to Wasserstein and Highfields under the management agreement;

• $0.3 million of severance and re-organization payroll and benefits;

• $0.2 million income from the application of FIN 48;

• $0.4 million expense for certain inventory adjustments related to our ERP conversion in the third quarter; and

• $0.2 million in inventory step-up purchase accounting adjustments.

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

• $0.4 million of consulting fees associated with the implementation of our ERP software project, and other information technology projects;

• $0.3 million of fees paid to Wasserstein and Highfields under our management agreement;

• $0.2 million of income recognized from vendor settlements; and

• $1.9 favorable adjustment due to the reconciliation of aged unmatched inventory receipts identified in the ERP conversion process.

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

• $3.3 million of consulting fees associated with certain corporate strategic initiatives including acquisitions and information technology projects;

• $0.2 million of employee executive recruiting charges;

• $1.7 million loss on disposal and impairment of fixed assets and long-lived assets;

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

• $0.8 million of fees paid to Wasserstein and Highfields under the management agreement;

• $0.3 million of costs associated with legal settlements;

• $0.7 million of severance and re-organization payroll and benefits;

• $0.2 million income from the application of FIN 48;

• $0.4 million expense for certain inventory adjustments related to our ERP conversion; and

• $0.2 million in inventory step-up purchase accounting adjustments.

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

• $15.8 million non-cash pension curtailment gain

• $2.8 million of consulting fees associated with the implementation of our ERP software project, other information technology projects;

• $0.5 million of employee executive recruiting charges;

• $0.8 million of severance;

• $0.8 million of fees paid to Wasserstein and Highfields under our management agreement;

• $0.2 million loss on disposal of fixed assets;

• $0.5 million of income recognized from vendor settlements; and

• $1.5 favorable adjustment due to the reconciliation of aged unmatched inventory receipts identified in the ERP conversion process.

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 29, 2008, our primary sources of liquidity were cash and cash equivalents of $90.1 million and unused borrowings under our revolving credit facility of approximately $123.8 million to the extent of our current available borrowing base. As of March 29, 2008, we had no borrowings outstanding and $1.2 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the revolving credit facility are determined in accordance with our asset-based debt limitation formula. Total available borrowings at March 29, 2008, were approximately $5.0 million. Due to the highly seasonal nature of our business, we rely heavily on our revolving credit facility to finance operations leading up to the holiday selling season. Our available cash and borrowings are used to fund inventory and inventory related purchases, catalog advertising and marketing initiatives leading up to the holiday selling season. Generally, cash provided by operations peaks during the fourth calendar quarter (our second fiscal quarter) because of the holiday selling season (see “Seasonality” below).

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

Cash Flows Provided by Operating Activities from Continuing Operations

Cash provided by operating activities from continuing operations totaled $58.0 million in the thirty-nine week period ended March 29, 2008, compared to $72.8 million in the forty week period ended March 31, 2007. The $14.8 million decrease over prior year was primarily attributable to a decline in operating income in the period.

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Cash Flows Used in Investing Activities from Continuing Operations

Cash used in investing activities from continuing operations totaled $12.7 million in the thirty-nine week period ended March 29, 2008, compared to $48.5 million in the forty week period ended March 31, 2007. Investing activities in fiscal 2008 consisted primarily of cash used to acquire the Wolferman’s business, as well as capital expenditures used to fund the development of new stores, our new optical defect pear sorter, and our ERP system implementation, partially offset by proceeds from short-term investments.

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

Cash used in financing activities from continuing operations totaled $10.7 million for the thirty-nine weeks ended March 29, 2008, compared to $0.4 million provided in the forty weeks ended March 31, 2007. Financing activities in fiscal 2008 primarily consisted of borrowings and repayments on our revolving credit facility, $9.4 million used to buyback our senior notes and $1.4 million in repayments for our capital lease obligations. The financing activities in the prior fiscal period were primarily comprised of borrowings and repayments on our revolving credit facility and $1.0 million in cash provided by proceeds from stock option exercises, partially offset by $0.6 million repayments for our capital lease obligations.

Cash Flows from Discontinued Operations

Cash flows provided by operating activities from discontinued operations totaled $3.1 million for the thirty-nine weeks ended March 29, 2008, compared to a cash usage of $1.6 million in the forty weeks ended March 31, 2007. The increase in operating cash for the thirty-nine weeks ended March 29, 2008 compared to the forty weeks ended March 31, 2007, was due to cash payments made to us for transitional services we provided to the buyers of the Jackson & Perkins business.

Cash flows provided by investing activities were $3.2 million for the thirty-nine weeks ended March 29, 2008 and were primarily comprised of the proceeds received for certain amounts due in connection with the sale of Jackson & Perkins in the fourth quarter of fiscal 2007. Cash flows used by investing activities were $0.2 million in the forty weeks ended March 31, 2007, consisting primarily of capital expenditures in the prior year period.

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

Borrowing Arrangements

Revolving Credit Facility

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

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

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

As of March 29, 2008, we had no outstanding borrowings and $1.2 million in letters of credit outstanding under the revolving credit facility. The maximum available borrowings under the credit agreement are determined in accordance with our asset-based debt limitation formula. Total additional available borrowings at March 29, 2008, were approximately $5.0 million. We are required to pay a commitment fee equal to 0.375% per annum on the daily average unused line of credit. The commitments fees are payable on the last day of each calendar year quarter and the associated expense is included within interest expense in the consolidated statement of operations.

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

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

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

Our ability to comply with these covenants and to meet and maintain such financial ratios and tests may be affected by events beyond our control, such as those described under “Item 1A – Risk Factors” in our Annual Report on Form 10-K. If we do not meet and maintain these financial ratios, we may not be able to borrow and the lenders could accelerate all amounts outstanding to be immediately due and payable which could also trigger a similar right under other agreements, including our indenture. At March 29, 2008, we were in compliance with all of our covenants under the credit agreement.

Long-term Debt

In February 2005, Harry & David Operations Corp. issued $70.0 million in Senior Floating Rate Notes due March 1, 2012, and $175.0 million of Senior Fixed Rate Notes due March 1, 2013 (collectively, the “Senior Notes”). In fiscal 2006, Harry & David Operations Corp. completed the public exchange offer for the Senior Notes. The Senior Floating Rate Notes accrue interest at a rate per annum equal to LIBOR plus 5%, calculated and paid quarterly. The interest rate was set at 8.08% and 10.36% at March 29, 2008, and June 30, 2007, respectively. The Senior Fixed Rate Notes accrue interest at an annual fixed rate of 9.0%, with semiannual interest payments due on the first of March and December.

During the thirty-nine weeks ended March 29, 2008, we prepaid $9.4 million of our fixed and floating rate Senior Notes in open market purchases. The debt prepayment resulted in a net gain of $0.3 million, comprised of a $0.6 million discount on the repayment of $10.0 million of outstanding principal of the Senior Notes, partially offset by the write-off of $0.3 million of unamortized deferred financing costs and third-party expenses of less than $0.1 million relating to the debt prepayment. Subsequent to our debt prepayment, we had $68.0 million in Senior Floating Rate Notes and $167.0 million in Senior Fixed Rate outstanding as of March 29, 2008.

In the fourth quarter of fiscal 2007, we completed the sale of the Jackson & Perkins businesses, including the direct marketing and wholesale business, the Jackson & Perkins ^® brand, catalog, e-commerce website and associated inventories and in a separate transaction, completed the sale of the land and assets used by the Jackson & Perkins rose growing operations. As we have applied the net proceeds from the sale of Jackson & Perkins businesses and assets to pay down our revolver for working capital and for capital expenditures and for the purchase of Wolferman’s, LLC as described in “Note 4—Acquisition,” we have complied with the asset sale covenant under the indenture and are not required to make an offer to repurchase the Senior Notes.

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

The Senior Notes represent the senior unsecured obligations of Harry and David and are guaranteed on a senior unsecured basis by Harry & David Holdings, Inc. and all of our subsidiaries. See “Note 14—Condensed Consolidating Financial Statements” in Item I in this Form 10-Q. The indenture governing the Senior Notes contains various restrictive covenants including, but not limited to, limitations on the incurrence of indebtedness, engaging in asset dispositions or acquisitions, making investments, and our subsidiaries’ ability to pay dividends and other restricted payments, our ability to incur liens and transactions with affiliates. Our ability to comply with these covenants may be affected by events beyond our control, such as those described under “Item 1A – Risk Factors” in our Annual Report on Form 10-K. If we do not remain in compliance with these covenants, we may not be able to borrow additional funds when and if it becomes necessary, and the holders of the Senior Notes and lenders under the credit facility could accelerate all amounts outstanding to be immediately due and payable.

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At March 29, 2008, we were in compliance with all of our covenants under the indenture. Our debt service requirements consist primarily of interest expense on the Senior Notes and on any current and future borrowings under our revolving credit facility. Our other short-term cash requirements are expected to consist mainly of cash to fund our operations, capital expenditures, cash payments under various operating leases and repayment of any borrowings under our revolving credit facility.

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

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

Seasonality

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

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

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, except as described below. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

Income Taxes

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

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

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

NON-GAAP FINANCIAL MEASURE: EBITDA

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

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

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

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

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

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

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

• EBITDA is not a measure of discretionary cash available to us to pay down debt;

• 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.

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

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

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

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

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

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 $1.9 million corresponding effect on our interest expense on an annual basis.

COMMODITY RISK

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

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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 29, 2008. Based upon this evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that, as of March 29, 2008, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

We are assessing our internal controls and procedures over financial reporting and will take action as necessary or appropriate to address any matters we identify to effect compliance with Section 404 of the Sarbanes-Oxley Act when we are required to make an assessment of our internal controls under Section 404 for fiscal 2008.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For details regarding our legal proceedings, see Footnote 12 – “Commitments and Contingencies” within Part I of this Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed under “Risk Factors” in Item 1.A. of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, and updated in our Form 10-Q for the second fiscal quarter ended December 29, 2007.

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

During the thirteen and thirty-nine week periods ending March 29, 2008, we issued and sold an aggregate amount of 44 and 373 shares of common stock, respectively, par value $0.01 per share, upon exercise of employee stock options under our Amended and Restated 2004 Stock Option Plan for an aggregate consideration of less than $0.1 million in cash. These issuances of common stock were made in reliance on Section 4(2) of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1 Certification of Principal Executive Officer

31.2 Certification of Principal Financial Officer

32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

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SIGNATURES

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

HARRY & DAVID HOLDINGS, INC.
By:	/s/ WILLIAM H. WILLIAMS
	William H. Williams
	President and Chief Executive Officer
By:	/s/ STEPHEN V. O’CONNELL
	Stephen V. O’Connell
	Chief Financial Officer and Chief Administrative Officer

Date: May 9, 2008

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